Earnings management and participation in accounting standard-setting

  • Roland Königsgruber
  • Stefan Palan
Original Paper


Recent economic and political science research suggests that the way public policy is set, and in particular the participation of those affected by it, impacts upon the outcome of the policy. Accounting standard setting has long offered such a possibility to participate via the due process approach followed by major standard setters. We review the literature on areas close to financial reporting and find arguments for why the possibility to participate in standard setting may have a positive effect on diminishing distortion of financial reporting. We also discuss reasons why such a compliance effect may be less pronounced in financial reporting. We conclude that the existence of this effect is an open question and conduct a lab experiment to examine whether the possibility to participate in accounting standard setting leads to reduced earnings management. Our results indicate that this is not the case. We interpret this result in light of recent evidence that enforcement and incentives are better predictors of accounting quality than financial reporting standards.


Accounting standard setting Participation Compliance  Experimental research 



Our thanks for the funding of this research project go to the Austrian Financial Reporting and Auditing Committee. We furthermore thank audiences at the 7th EIASM Workshop on Corporate Governance 2010 and at a research seminar of the Thurgau Institute of Economics 2011 for valuable comments.

Supplementary material

10100_2013_326_MOESM1_ESM.docx (25 kb)
Supplementary material 1 (docx 25 KB)


  1. Armstrong MS (1977) The politics of establishing accounting standards. J Account 143:76–79Google Scholar
  2. Ball R, Kothari SP, Robin A (2000) The effect of international institutional factors on properties of accounting earnings. J Account Econ 29(1):1–51CrossRefGoogle Scholar
  3. Ball R, Robin A, Wu JS (2003) Incentives versus standards: properties of accounting income in four East Asian countries. J Account Econ 36(1–3):235–270CrossRefGoogle Scholar
  4. Bardhan P (2000) Irrigation and cooperation: an empirical analysis of 48 irrigation communities in South India. Econ Dev Cult Chang 48(4):847–863CrossRefGoogle Scholar
  5. Beresford DR (1993) Frustrations of a standards setter. Account Horiz 7(4):70–76Google Scholar
  6. Beresford DR (2001) Congress looks at accounting for business combinations. Account Horiz 15(1):73–86CrossRefGoogle Scholar
  7. Bhattacharya U, Daouk H, Welker M (2003) The world price of earnings opacity. Account Rev 78(3): 641–678Google Scholar
  8. Bird RM, Martinez-Vazquez J, Torgler B (2008) Tax effort in developing countries and high income countries. The impact of corruption, voice and accountability. Econ Anal Policy 38(1):55–71CrossRefGoogle Scholar
  9. Brownell P, McInnes M (1986) Budgetary participation, motivation, and managerial performance. Account Rev 61(4):587–600Google Scholar
  10. Burlaud A, Colasse B (2011) International accounting standardisation. Is politics back? Account Eur 8(1):23–47CrossRefGoogle Scholar
  11. Callahan CM, Ann Gabriel E, Sainty BJ (2006) A review and classification of economics research in accounting. J Account Lit 25:59–126Google Scholar
  12. Christensen HB (2012) Why do firms rarely adopt IFRS voluntarily? Academics find significant benefits and the costs appear to be low. Rev Account Stud 17(3):518–525CrossRefGoogle Scholar
  13. Christensen HB, Hail L, Leuz C (2013) Mandatory IFRS reporting and changes in enforcement. Working paper, ChicagoGoogle Scholar
  14. Coffee JC (2002) Racing towards the top? The impact of cross-listings and stock market competition on International Corporate Governance. Columbia Law Rev 102(7):1757–1831CrossRefGoogle Scholar
  15. Coglianese C, Healy TJ, Keating EK, Michael ML (2004) The role of government in corporate governance. N Y Univ J Law Bus 1(1):219Google Scholar
  16. Dal Bó P, Foster A, Putterman L (2010) Institutions and behavior: experimental evidence on the effects of democracy. Am Econ Rev 100(5):2205–2229CrossRefGoogle Scholar
  17. Daske H, Hail L, Leuz C, Verdi R (2008) Mandatory IFRS reporting around the world: early evidence on the economic consequences. J Account Res 46(5):1085–1142Google Scholar
  18. Dechow PM, Sloan RG, Sweeney AP (1995) Detecting earnings management. Account Rev 70(2):193–225Google Scholar
  19. Dechow PM, Skinner DJ (2000) Earnings management. Reconciling the views of accounting academics, practitioners, and regulators. Account Horiz 14(2):235–250CrossRefGoogle Scholar
  20. Dechow PM, Ge W, Schrand C (2010) Understanding earnings quality. A review of the proxies, their determinants and their consequences. J Account Econ 50(2/3):344–401CrossRefGoogle Scholar
  21. Doidge C (2004) U.S. cross-listings and the private benefits of control: evidence from dual-class firms. J Financ Econ 72(3):519–553Google Scholar
  22. Doidge C, Karolyi GA, Stulz RM (2004) Why are foreign firms listed in the US worth more? J Financ Econ 71(2):205–238Google Scholar
  23. Druckman JN, Kam CD (2011) Students as experimental participants. A defense of the “Narrow Database”. In: Druckman JN, Green DP, Kuklinski JH, Lupia A (eds) Cambridge handbook of experimental political science. Cambridge University Press, Cambridge, pp 41–57CrossRefGoogle Scholar
  24. Durocher S, Fortin A, Côté L (2004) Pouvoir et normalisation. La Perception des utilisateurs Canadiens. Comptabilité Contrôle Audit 10(3):193–212CrossRefGoogle Scholar
  25. Durocher S, Fortin A, Côté L (2007) Users’ participation in the accounting standard-setting process. A theory-building study. Account Organ. Soc. 32(1):29–59Google Scholar
  26. Engel C (2010) The behaviour of corporate actors: how much can we learn from the experimental literature? J Inst Econ 6(4):445–475Google Scholar
  27. Ertan A, Page T, Putterman L (2009) Who to punish? Individual decisions and majority rule in mitigating the free rider problem. Eur Econ Rev 53(5):495–511CrossRefGoogle Scholar
  28. Fehr E, Fischbacher U (2004) Third-party punishment and social norms. Evol Hum Behav 25(2):63–87CrossRefGoogle Scholar
  29. Fehr E, Gächter S (2000) Cooperation and punishment in public goods experiments. Am Econ Rev 90(4):980–994CrossRefGoogle Scholar
  30. Fehr E, Gächter S (2002) Altruistic punishment in humans. Nature 415:137–140CrossRefGoogle Scholar
  31. Feld LP, Frey BS (2002) Trust breeds trust: how taxpayers are treated. Econ Gov 3(2):87–99CrossRefGoogle Scholar
  32. Feld LP, Frey BS (2007) Tax compliance as the result of a psychological tax contract: the role of incentives and responsive regulation. Law Policy 29(1):102–120CrossRefGoogle Scholar
  33. Fischbacher U (2007) z-Tree: Zurich toolbox for ready-made economic experiments. Exp Econ 10:171–178. doi: 10.1007/s10683-006-9159-4 CrossRefGoogle Scholar
  34. Foundation IFRS (2013) IASB and IFRS interpretations committee due process handbook. IFRS Foundation, LondonGoogle Scholar
  35. Fréchette GR (2011) Laboratory experiments: professionals versus students. SSRN Working Paper No. 1939219Google Scholar
  36. Frey BS (1997) A constitution for knaves crowds out civic virtues. Econ J 107(443):1043–1053Google Scholar
  37. Frey BS (1998) Institutions and morale: the crowding-out effect. In: Ben-Ner A, Putterman L (eds) Economics, values and organization. Cambridge University Press, CambridgeGoogle Scholar
  38. Frey BS, Benz M, Stutzer A (2004) Introducing procedural utility: not only what, but also how matters. J Inst Theor Econ 160(3):377–401Google Scholar
  39. Frey BS, Benz M, Stutzer A (2005) Beyond outcomes: measuring procedural utility. Oxf Econ Pap 57(1): 90–111Google Scholar
  40. Frey BS, Torgler B (2007) Tax morale and conditional cooperation. J Comp Econ 35(1):136–159CrossRefGoogle Scholar
  41. Fülbier RU, Hitz J, Sellhorn T (2009) Relevance of academic resarch and researchers’ role in the IASB’s financial reporting standard setting. Abacus 45(4):455–492CrossRefGoogle Scholar
  42. Gächter S (2010) (Dis)advantages of student subjects. What is your research question? Behav Brain Sci 33(2–3):92–93. doi: 10.1017/S0140525X10000099 CrossRefGoogle Scholar
  43. Georgiou G (2002) Corporate non-participation in the ASB standard-setting process. Eur Account Rev 11(4):699–722CrossRefGoogle Scholar
  44. Georgiou G (2004) Corporate lobbying on accounting standards: methods, timing and perceived effectiveness. Abacus 40(2):219–237CrossRefGoogle Scholar
  45. Georgiou G (2005) Investigating corporate management lobbying in the U.K. accounting standard-setting process: a multi-issue/multi-period approach. Abacus 41(3):323–347CrossRefGoogle Scholar
  46. Gintis H, Bowles S, Boyd R, Fehr E (2003) Explaining altruistic behavior in humans. Evol Hum Behav 24(3):153–172CrossRefGoogle Scholar
  47. Graham JR, Harvey CR, Rajgopal S (2005) The economic implications of corporate financial reporting. J Account Econ 40(1–3):3–73Google Scholar
  48. Greiner B (2004) An online recruitment system for economic experiments. In: Kremer K, Macho V (eds) Forschung und wissenschaftliches Rechnen 2003. GWDG Bericht 63. Gesellschaft für Wissenschaftliche Datenverarbeitung, Göttingen, pp 79–93Google Scholar
  49. Gross C, Königsgruber R (2012) What you measure is what you get. The effects of accounting standards effects studies. Account Eur 9(2):171–190CrossRefGoogle Scholar
  50. Grossman G, Baldassarri D (2012) The impact of elections on cooperation. Evidence from a lab-in-the-field experiment in Uganda. Am J Polit Sci 56(4):964–985CrossRefGoogle Scholar
  51. Hail L, Leuz C (2006) International differences in the cost of equity capital: do legal institutions and securities regulation matter? J Account Res 44(3):485–531CrossRefGoogle Scholar
  52. Hamman JR, Weber RA, Woon J (2011) An experimental investigation of electoral delegation and the provision of public goods. Am J Polit Sci 55(4):737–751CrossRefGoogle Scholar
  53. Hartner M, Rechberger S, Kirchler E, Schabmann A (2008) Procedural fairness and tax compliance. Econ Anal Policy 38(1):137–152CrossRefGoogle Scholar
  54. Horngren CT (1985) Institutional alternatives for regulating financial reporting. J Comp Bus Cap Mark Law 7(3/4):267–289Google Scholar
  55. Huck S, Müller W, Normann H (2001) Stackelberg beats Cournot. On collusion and efficiency in experimental markets. Econ J 111(474):749–765CrossRefGoogle Scholar
  56. Huck S, Müller W, Normann H (2002) To commit or not to commit. Endogenous timing in experimental duopoly markets. Games Econ Behav 38(2):240–264CrossRefGoogle Scholar
  57. Huck S, Wallace B (2002) Reciprocal strategies and aspiration levels in a Cournot-Stackelberg experiment. Econ Bull 3(3):1–7Google Scholar
  58. Johnson SB, Solomons D (1984) Institutional legitimacy and the FASB. J Account Public Policy 3(3): 165–183Google Scholar
  59. Johnston D, Jones DA (2006) How does accounting fit into a firm’s political strategy? J Account Public Policy 25(2):195–228CrossRefGoogle Scholar
  60. Jorissen A, Lybaert N, van de Poel, Katrien (2006) Lobbying towards a global standard setter—Do national characteristics matter? An analysis of the comment letter written to the IASB. In: Gregoriou GN, Gaber MKA (eds) International accounting. Standards, regulations, and financial reporting. Elsevier, Oxford & Burlington, pp 2–40Google Scholar
  61. Jorissen A, Lybaert N, Orens R, Der Tas Van, Leo (2012) Formal participation in the IASB’s due process of standard setting. A multi-issue/multiperiod analysis. Eur Account Rev 21(4):693–729CrossRefGoogle Scholar
  62. Kachelmeier SJ, King RR (2002) Using laboratory experiments to evaluate accounting policy issues. Account Horiz 16(3):219–232CrossRefGoogle Scholar
  63. Kessler JB, Leider S (2012) Norms and contracting. Manag Sci 58(1):62–77CrossRefGoogle Scholar
  64. Kirchgässner G (2007) Direkte Demokratie, Steuermoral und Steuerhinterziehung. Erfahrungen aus der Schweiz. Perspektiven der Wirtschaftspolitik 9(1):38–64CrossRefGoogle Scholar
  65. Königsgruber R (2010) A political economy of accounting standard setting. J Manag Gov 14(4):277–295CrossRefGoogle Scholar
  66. Lang M, Raedy JS, Yetman MH (2003) How representative are firms that are cross-listed in the United States? An analysis of accounting quality. J Account Res 41(2):363–386CrossRefGoogle Scholar
  67. Larson RK (1997) Corporate lobbying of the international accounting standards committee. J Int Financ Manag Account 8(3):175–203CrossRefGoogle Scholar
  68. Larson RK (2007) Constituent participation and the IASB’s international financial reporting interpretations committee. Account Eur 4(2):207–254CrossRefGoogle Scholar
  69. Leftwich R (1980) Market failure fallacies and accounting information. J Account Econ 2(3):193–211CrossRefGoogle Scholar
  70. Libby T (1999) The influence of voice and explanation on performance in a participative budgeting setting. Account Organ Soc 24(2):125–137CrossRefGoogle Scholar
  71. Libby T (2001) Referent cognitions and budgetary fairness: a research note. J Manag Account Res 13(1): 91–105Google Scholar
  72. Luft J, Shields MD (2009) Psychology models of management accounting. Found Trends Account 4(3–4):199–345Google Scholar
  73. Mazar N, Amir O, Ariely D (2008) The dishonesty of honest people. A theory of self-concept maintenance. J Mark Res 45(6):633–644CrossRefGoogle Scholar
  74. McCubbins MD, Schwartz T (1984) Congressional oversight overlooked. Police patrols versus fire alarms. Am J Polit Sci 28(1):165–179CrossRefGoogle Scholar
  75. Muehlbacher S, Kirchler E (2010) Tax compliance by trust and power of authorities. Int Econ J 24(4): 607–610Google Scholar
  76. Murphy K (2005) Regulating more effectively. The relationship between procedural justice, legitimacy, and tax non-compliance. J Law Soc 32(4):562–589CrossRefGoogle Scholar
  77. Murphy K, Tyler T (2008) Procedural justice and compliance behaviour. The mediating role of emotions. J Soc Psychol 38(4):652–668Google Scholar
  78. Normann H, Ricciuti R (2009) Laboratory experiments for economic policy making. J Econ Surv 23(3): 407–432Google Scholar
  79. Ong Q, Riyanto YE, Sheffrin SM (2012) How does voice matter? Evidence from the ultimatum game. Exp Econ 15(4):604–621CrossRefGoogle Scholar
  80. Ostrom E, Walker J, Gardner R (1992) Covenants with and without a sword: self-governance is possible. Am Polit Sci Rev 86(2):404–417CrossRefGoogle Scholar
  81. Ostrom E (1999) Coping with tragedies of the commons. Am Polit Sci Rev 2:493–535CrossRefGoogle Scholar
  82. Perry J, Nölke A (2005) International accounting standard setting. A network approach. Bus Polit 7(3): Article 5Google Scholar
  83. Pommerehne WW, Weck-Hannemann H (1996) Tax rates, tax administration and income tax evasion in Switzerland. Public Choice 88(1–2):161–170CrossRefGoogle Scholar
  84. Potters J, Suetens S (2013) Oligopoly experiments in the current millenium. J Econ Surv 27(3):439–460CrossRefGoogle Scholar
  85. Raab P, Schipper BC (2009) Cournot competition between teams. An experimental study. J Econ Behav Organ 72(2):691–702CrossRefGoogle Scholar
  86. Ramanna K (2008) The implications of unverifiable fair-value accounting. Evidence from the political economy of goodwill accounting. J Account Econ 45(2–3):253–281CrossRefGoogle Scholar
  87. Schipper K (1989) Commentary on earnings management. Account Horiz 3(4):91–102Google Scholar
  88. Schipper K (2010) How can we measure the costs and benefits of changes in financial reporting standards? Account Bus Res 40(3):309–327CrossRefGoogle Scholar
  89. Schmidt M (2002) On the legitimacy of accounting standard setting by privately organized institutions in Germany and Europe. Schmalenbach Bus Rev 54(2):171–193Google Scholar
  90. Shields JF, Shields MD (1998) Antecedents of participative budgeting. Account Organ Soc 23(1):49–76CrossRefGoogle Scholar
  91. Sprinkle GB, Williamson MG (2007) Experimental research in managerial accounting. In: Chapman CS, Hopwood AG, Shields MD (eds) Handbook of management accounting research. Elsevier, Amsterdam, pp 415–444Google Scholar
  92. Stulz RM (1999) Globalization, corporate finance, and the cost of capital. J Appl Corp Financ 12(3):8–25CrossRefGoogle Scholar
  93. Sutter M, Haigner S, Kocher MG (2010) Choosing the carrot or the stick? Endogenous institutional choice in social dilemma situations. Rev Econ Stud 77(4):1540–1566CrossRefGoogle Scholar
  94. Sutton TG (1984) Lobbying of accounting standard-setting bodies in the UK and the USA: a Downsian analysis. Account Organ Soc 9(1):81–95Google Scholar
  95. Tandy PR, Wilburn NL (1992) Constituent participation in standard-setting: the FASB’s first 100 statements. Account Horiz 6(2):47–58Google Scholar
  96. Tiller MG (1983) The dissonance model of participative budgeting: an empirical exploration. J Account Res 21(2):581–595CrossRefGoogle Scholar
  97. Torgler B (2005) Tax morale and direct democracy. Eur J Polit Econ 21(2):525–531CrossRefGoogle Scholar
  98. Torgler B, Demir IC, Macintyre A, Schaffner M (2008) Causes and consequences of tax morale. An empirical investigation. Econ Anal Policy 38(2):331–339Google Scholar
  99. Tyran J, Feld LP (2006) Achieving compliance when legal sanctions are non-deterrent. Scand J Econ 108(1):135–156CrossRefGoogle Scholar
  100. Valdesolo P, DeSteno D (2007) Moral hypocrisy social groups and the flexibility of virtue. Psychol Sci 18(8):689–690CrossRefGoogle Scholar
  101. Walczyk JJ, Roper KS, Seemann E, Humphrey AM (2003) Cognitive mechanisms underlying lying to questions: response time as a cue to deception. Appl Cogn Psychol 17(7):755–774CrossRefGoogle Scholar
  102. Wallace RSO (1990) Survival strategies of a global organization: the case of the international accounting standards committee. Account Horiz 4(2):1–22Google Scholar
  103. Zeff SA (2002) “Political” lobbying on proposed standards. A challenge to the IASB. Account Horiz 16(1):43–54CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.Department of AccountingVrije Universiteit AmsterdamAmsterdamThe Netherlands
  2. 2.Institute of Banking and FinanceUniversity of InnsbruckInnsbruckAustria
  3. 3.Institute of Banking and FinanceKarl-Franzens-University GrazGrazAustria

Personalised recommendations