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Recruiting Dark Personalities for Earnings Management

Journal of Business Ethics volume 178, pages 193–218 (2022)Cite this article

Abstract

Prior research indicates that managers’ dark personality traits increase their tendency to engage in disruptive and unethical organizational behaviors including accounting earnings management. Other research suggests that the prevalence of dark personalities in management may represent an accidental byproduct of selecting managers with accompanying desirable attributes that fit the stereotype of a “strong leader.” Our paper posits that organizations may hire some managers who have dark personality traits because their willingness to push ethical boundaries aligns with organizational objectives, particularly in the accounting context where ethical considerations are especially important. Using several validation studies and experiments, we find that experienced executives and recruiting professionals favor hiring a candidate with dark personality traits into an accounting management position over an otherwise better-qualified candidate when the hiring organization faces pressure to manage earnings. Our results help to illuminate why individuals with dark personality traits may effectively compete for high-level accounting positions.

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Fig. 1
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Notes

  1. Our research instruments vary whether the job candidates are referred to as Candidate A or Candidate B (see “Instrument Validation Studies” section). For expositional simplicity, we refer to the job candidate who has more dark personality traits as Candidate A and the job candidate who has fewer dark personality traits as Candidate B.

  2. As we discuss later, the role of the chosen candidate in the organization does not extend beyond the accounting function. As a result, the perceived capability of a job candidate to engage in business activities that create firm value are only relevant insofar as those capabilities translate into managing the accounting function.

  3. Examples of earnings-related objectives include, but are not limited to, avoiding negative earnings surprises (Brown and Caylor 2005), avoiding losses and earnings decreases (Burgstahler and Dichev 1997), and reporting smooth earnings (Graham et al. 2005).

  4. Participants in our second validation study rate Candidate A as worse at managing people, managing the work environment, work habits, and interpersonal traits. Although our particular personality profile appears to convey negative information about Candidate A’s overall managerial qualities, our studies cannot rule out that some leaders with dark personalities have other desirable attributes in certain organizational contexts.

  5. See, for example, the websites of two large executive recruitment firms—Lucas Group and Korn Ferry International. Lucas Group states that “Our detailed interviewing process enables Lucas Group’s HR recruiters to precisely match qualifications, cultural fit and long-term compatibility, and they ensure lasting and successful placements…” Korn Ferry states that “…behavior-based approaches to interviewing consistently lead to better results in identifying the right talent for the job.”

  6. An alternative approach would be to overtly state that the job candidate does or does not manage earnings. This approach seems problematic because there is no evidence that job candidates and employers talk about earnings management in such an overt way.

  7. We use this same database in Instrument Validation Study A and Experiment 1, each time randomly selecting a new, non-overlapping sample of business professionals.

  8. The demographics for participants in this instrument validation study are very similar to those in Experiment 1 (see Table 2 for Experiment 1 demographics). For brevity, we do not tabulate demographic information for Instrument Validation Study A.

  9. The instrument informs participants that as part of the company’s employment application process, each candidate was required to complete a personality assessment questionnaire designed to elicit the behaviors, beliefs, and values that the job candidate is most likely to exhibit on the job.

  10. In our Instrument Validation Studies and Experiments 1 and 2, participants view the job candidate personality profiles side-by-side. When presenting the profiles, we vary the order in which they are presented. For half of the participants, the candidate with more dark personality traits is presented in the first column and the other candidate is presented in the second column (and vice-versa). The first candidate is always labeled Candidate A and the second candidate is always labeled Candidate B. There are no order effects in any study (all p > 0.20).

  11. The concept of a response rate is not relevant in this study. We sought 100 participants and once that threshold number of participants was met, the study was closed. There was one individual who requested payment but did not complete the study, which is why the study has 99 qualified participants rather than 100.

  12. The financial objectives presented to participants are common objectives of public companies, which may create pressure to manage earnings (Graham et al. 2005).

  13. These questions did not specify whether “courses” refers to college courses or continuing professional education courses. These means may be lower if the questions specified formal college courses.

  14. It is noteworthy that these financial objectives are neither extreme nor stylized. Rather, they are drawn from prior research documenting earnings-related pressures experienced by managers of many companies (e.g., Burgstahler and Dichev 1997, Brown and Caylor 2005, Graham et al. 2005). Presenting participants with an ecologically valid set of financial objectives improves the external validity of this experiment.

  15. We could have fully crossed organizational type and financial objectives in a 2 × 2 design (instead of identifying the two cells in the 2 × 2 design that allow us to most efficiently test our hypothesis). We chose not to pursue a 2 × 2 design for two reasons. First, the two organizational types (for-profit and non-profit) are paired with appropriate financial objectives in the two cells we consider. If we used a 2 × 2 design we would have to, for example, pair a non-profit organization with for-profit financial objectives and vice-versa, which would reduce the ecological validity of our manipulations. Second, we would have to populate twice the number of cells with highly experienced practicing managers, which are generally difficult participants to recruit.

  16. Research by Chen (2016) and Yetman and Yetman (2012, 2013) suggests that non-profit entities face some pressure to manage financial reports. As a result, it is possible that there may be no difference in hiring decisions between the for-profit public company condition and the non-profit foundation condition. At the same time, there is no indication in the extant literature that the intensity of pressure to manage financial reports in the non-profit sector matches the intensity of the pressure to manage financial reports in the for-profit sector.

  17. Efforts to equalize education and work experience between the job candidates were extensive. Both candidates (1) worked at a Big 4 accounting firm, (2) achieved the rank of manager, and (3) have undergraduate and graduate degrees in accounting from respected public universities. Participants also respond to a series of salience checks which take the form of true/false questions. For example, one true/false question states that “Both candidates received excellent recommendations from previous employers” while another question states that “Both candidates possess similar qualifications for the senior accounting manager position.” Participants correctly respond to the salience check questions between 85 and 100% of the time. The inferences and conclusions of this experiment are unaffected by removing participants who missed salience checks.

  18. For all of the questions using the 100-point sliding scale, the slider starts at the midpoint of the scale. Participants must move the slider in either direction to continue. Once the slider is moved in either direction, the midpoint of the scale cannot be selected. Participants do not see numerical values on the scale, but we translate their scale position to a numerical value between 1 and 100, inclusive. In the instructions, participants are informed that moving the slider closer to one end of the scale or the other indicates the strength of their response.

  19. Participants may respond to questions in ways that they believe are “correct” or socially acceptable (Fisher 1993). Social desirability bias may influence variable means and relationships among variables (Zerbe and Paulhus 1987). However, indirect questioning may reduce the effect of social desirability bias (Fisher 1993). Thus, we phrase the candidate selection question using indirect questioning.

  20. All hypothesized statistical tests, as indicated in our main tables, are reported with one-tailed p values.

  21. The concept of a response rate is not relevant in this experiment. We sought 110 participants and once that threshold number of participants was met, the experiment was closed.

  22. Responses are provided on a 10-point scale with higher responses indicating greater familiarity.

  23. We have one manipulation check, and 97 percent of our participants respond to it correctly.

  24. The job candidate profiles are amalgamations of different personality traits as shown in Appendix A. On the surface, one might speculate that a single trait could be a dominant consideration when making an employee selection or referral decision. To address this issue, we ask participants in Experiment 3 whether they considered the candidate’s overall personality profile or they considered only a specific personality trait. Only four of the 41 participants indicated that they focused on a specific personality trait.

  25. We have a single manipulation check question that has three parts, each of which focuses on a different dimension of the job candidate’s personality. Approximately 85 percent of our participants characterize the job candidate’s personality in a manner consistent with the intended message of the personality profile.

  26. The two job candidates are both perceived to be qualified for a senior accounting manager position, but they are very different in terms of their personalities (see “Instrument Validation Studies” section). At the same time, both of the candidates are reasonable representations of job candidates who might pursue a senior accounting manager position. One of the post-experimental questions asks participants in Experiment 3 to indicate whether someone like the job candidate described would actually apply for a senior accounting manager position. Participants respond on a 10-point scale with the left endpoint labeled “Definitely not” and the right endpoint labeled “Definitely yes.” The mean response for Candidate A is 8.29 and the mean response for Candidate B is 8.81. Thus, while we have created job candidates whose personality profiles seem very different, they are not extreme in terms of the types of individuals who might pursue a senior accounting manager position.

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Acknowledgements

We are grateful to Sheila Killian (editor), three anonymous reviewers, Stephen Asare, Jeremy Bentley, Charles Boster, Joe Brazel, Michael Campion, Ben Commerford, John Core, Adrienne DePaul, Marcus Doxey, Mike Ettredge, Laura Feustel, Gary Fleischman, Brent Garza, Shawn Gordon, Emerald Harris, Rick Hatfield, Erin Hawkins, Kevin Jackson, Noah Jackson, Elena Klevsky, Ethan LaMothe, Justin Leiby, Brad Lindsey, Marlys Lipe, Tom Lopez, Michael Majerczyk, Mary Marshall, Adi Masli, Ed O’Donnell, Derek Oler, Don Pagach, Linda Parsons, Rob Ployhart, Linda Quick, Lynn Rees, Kathy Rupar, Manuel Sanchez, John Sweeney, Brad Tuttle, Nate Waddoups, Devin Williams, Yi-Jing Wu, conference participants at the 2015 AAA Annual Meeting, and workshop participants at Beijing Institute of Technology, Miami University, Nankai University, North Carolina State University, Texas Tech University, the University of Alabama, University of Florida, University of Kansas, University of Nebraska-Lincoln, University of North Texas, and the University of South Carolina for providing many insightful comments and suggestions. We also thank the business professionals who generously participated in our studies. Funding was provided by the Darla Moore School of Business Research Grant Program.

Funding

All funding for this research was provided by the Darla Moore School of Business (University of South Carolina) Research Grant Program.

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  1. University of Nebraska-Lincoln, Lincoln, NE, USA

    Ling L. Harris

  2. University of South Carolina, Columbia, SC, USA

    Scott B. Jackson

  3. Portland State University, Portland, OR, USA

    Joel Owens

  4. University of Maryland, College Park, MD, USA

    Nicholas Seybert

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  1. Ling L. Harris
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  2. Scott B. Jackson
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  3. Joel Owens
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Correspondence to Joel Owens.

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Appendices

Appendix 1: Job Candidate Personality Profiles

More dark personality traits (Candidate A) Fewer dark personality traits (Candidate B)
High moral disengagement Low moral disengagement
1 Is results-oriented and believes that the end results are more important than the process by which one pursues those results 1 Is process-oriented and believes that the process by which one pursues results is more important than the results themselves
2 Believes that rules must be flexible enough to be adapted to different situations and will rewrite the rules if necessary to achieve goals 2 Believes that rules are established purposefully, should not be circumvented to achieve goals, and should be changed only after significant deliberation
3 Quickly assesses the norms of the organization and looks to those norms to determine what behavior is acceptable 3 Has rigid beliefs about what constitutes acceptable behavior and rarely deviates from those beliefs
High Machiavellianism Low Machiavellianism
4 Believes that subordinates should only be privy to the specific information needed to do their jobs effectively 4 Believes that subordinates should be privy to available information
High narcissism Low narcissism
5 Responds well to flattery and compliments 5 Is embarrassed by flattery and compliments
6 Likes to be the center of attention when in the presence of important people 6 Is uncomfortable being in the spotlight when in the presence of important people
Ethical orientation—low idealist, high relativist Ethical orientation—high idealist, low relativist
7 Makes decisions by comparing the benefits and costs of each decision, and accepts that some decisions might negatively impact others in some way 7 Avoids decisions that might negatively impact others, even if that harm is insignificant
8 Believes that ideas about what constitutes moral or immoral behavior vary from person to person and from situation to situation 8 Believes that ideas about what constitutes moral or immoral behavior should not vary from person to person and from situation to situation
High self-monitor Low self-monitor
9 Can change behaviors and opinions to suit different people and different situations 9 Does not change behaviors or opinions to suit different people and different situations
Locus of control—powerful others Locus of control—chance
10 Believes that leadership achievements require the ability to please those in positions of power 10 Believes that leadership achievements are chiefly due to being in the right place at the right time
High ability to rationalize behavior Low ability to rationalize behavior
11 Will take actions that feel right at the moment even if those actions seem inconsistent with values 11 Will take actions only after deliberation to avoid actions that are inconsistent with values
12 Can find justifications for actions after the fact 12 Prefers to avoid having to justify actions after the fact

Headings are not included in the actual instruments completed by participants in our studies and experiments (they are shown here for informational purposes only). See “Instrument Validation Studies” section and Appendix 2 for a discussion of the job candidate personality profiles and their development.

Appendix 2: Summary of the Development of the Job Candidate Personality Profiles

The starting point in the development of the job candidate personality profiles in Appendix 1 was to identify dark personality traits that plausibly signal an individual’s predisposition to manage earnings. Although there are numerous validated personality scales that meet this criterion, six particular scales stood out as being suitable for our purpose. In addition, we develop one scale ourselves (a scale designed to measure an individual’s ability to rationalize questionable behavior). To determine whether the items comprising the scales signal information about an individual’s predisposition to manage earnings, we conduct a survey using 102 participants from Amazon’s Mechanical Turk platform (results not tabulated)
The survey defines “earnings management” using a composite, non-technical definition from the accounting literature (see Instrument Validation Study A for our definition of earnings management). The survey then expresses the items comprising the scales as a series of independent statements about the beliefs of an individual. After each statement, participants rate how likely an individual who holds a particular belief is to manage earnings. Participants respond on an 11-point scale ranging from − 5 to + 5, with the left endpoint labeled “Unlikely to manage earnings,” the right endpoint labeled “Likely to manage earnings,” and the midpoint labeled “Neutral.” Each of the personality scales is discussed below
Moral disengagement (Shu et al. 2011). Moral disengagement occurs when individuals try to persuade themselves that their own questionable behavior is morally permissible. The mean of the moral disengagement items are significantly above zero (mean = 1.61, t = 5.56, p < 0.01), which indicates that individuals who morally disengage are perceived to be predisposed to manage earnings
Machiavellianism and narcissism (Paulhus and Jones 2011). Machiavellianism is characterized by manipulation and exploitation of others, and narcissism is characterized by self-focus and an undue sense of self-importance. The means of Machiavellianism items (mean = 1.19, t = 5.22, p < 0.01) and the narcissism items (mean = 1.04, t = 6.29, p < 0.01) are both significantly above zero, which indicates that individuals who measure high on these personality traits are perceived to be predisposed to manage earnings
Ethical orientation (Forsyth 1980). Ethical orientation describes an individual’s moral philosophies. Idealism and relativism are two dimensions of ethical orientation. The mean of the idealist items are significantly below zero (mean = − 0.75, t = − 2.71, p < 0.01), indicating that idealists are not perceived to be predisposed to manage earnings. The mean of the relativist items are significantly above zero (mean = 1.25, t = 5.44, p < 0.01), indicating that relativists are perceived to be predisposed to manage earnings
Self-monitoring (Snyder and Gangestad 1986). Self-monitoring is a personality trait characterized by concern about managing one’s behavior to accommodate social situations. The mean of the self-monitoring items is significantly above zero (mean = 0.99, t = 5.18, p < 0.01), indicating that high self-monitors are perceived to be predisposed to manage earnings
Locus of control (Levenson 1973). Locus of control refers to the extent to which an individual believes he/she can control events in their lives. The means of the internal locus of control items (mean = 1.72, t = 9.02, p < 0.01) and the powerful others locus of control items (mean = 0.82, t = 3.71, p < 0.01) are both significantly above zero, which indicates that individuals who score high on these dimensions are perceived to be predisposed to manage earnings. The mean of the chance locus of control items is significantly below zero (mean = − 0.73, t = − 3.59, p < 0.01), which indicates that individuals who score high on this dimension are not perceived to be predisposed to manage earnings
Ability to rationalize behavior. Earnings management is often considered to be questionable behavior, and some individuals can readily rationalize such behavior. The mean of the ability to rationalize behavior items is significantly above zero (mean = 1.27, t = 4.39, p < 0.01), indicating that those individuals who can readily rationalize questionable behavior are perceived to be predisposed to manage earnings

Appendix 3: PO Fit Questions

1 Which candidate’s attitude is most compatible with the culture of the Company (Foundation)?
2 Which candidate’s value system is most compatible with the culture of the Company (Foundation)?
3 Which candidate’s belief system is most compatible with the culture of the Company (Foundation)?
4 Which candidate's personality is most compatible with the culture of the Company (Foundation)?
5 Which candidate has priorities that are most similar to the priorities of the Company (Foundation)?
6 Which candidate is most likely to clash with the culture of the Company (Foundation)?
7 Which candidate’s behaviors, beliefs, and values will be valued most by the Company (Foundation)?
8 Which candidate will find the senior accounting manager position most personally and professionally rewarding?
9 Which candidate is most likely to have to do something they do not like in order to meet the Company’s (Foundation’s) expectations?

See “Experiment 1” section for a discussion of the PO fit questions. Participants in Experiment 1 respond to these questions on a 100-point sliding scale, with the left endpoint labeled “Definitely Candidate A” and the right endpoint labeled “Definitely Candidate B.” Responses to questions 6 and 9 are reverse coded for analysis.

Appendix 4: Accounting-Related PO Fit Questions

1 Candidate A (B) will make accounting decisions to bolster reported profits
2 Candidate A (B) will make accounting decisions to achieve desired profit goals
3 Candidate A (B) will find a way to report the smoothest possible earnings to keep borrowing costs low
4 Candidate A (B) will push boundaries to meet analysts’ earnings forecasts for the company
5 Candidate A (B) will portray financial performance in the most favorable light possible

See “Experiment 3” section for a discussion of the accounting-related PO fit questions. The organizational behavior and human resources literature does not provide direct guidance in the formulation of the accounting-related PO fit questions. When formulating these questions, we drew upon our knowledge of the intersection between PO fit and accounting. Participants in Experiment 3 respond to these questions on a 100-point sliding scale, with the left endpoint labeled “Definitely not” and the right endpoint labeled “Definitely yes.”

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Harris, L.L., Jackson, S.B., Owens, J. et al. Recruiting Dark Personalities for Earnings Management. J Bus Ethics 178, 193–218 (2022). https://doi.org/10.1007/s10551-021-04761-z

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Keywords

  • Earnings management
  • Employee selection
  • Dark personalities