Managers' Ethical Evaluations of Earnings Management and Its Consequences

Current research on the ethics of earnings management has generally not examined the specific ethical dilemma that arises when a choice to engage in earnings management results in positive organizational consequences. In this study, we address this issue by examining the question: Do the ends of positive organizational consequences justify the means of earnings management? To test this question, we analyzed the responses of 264 experienced managers who evaluated scenarios in which an employee made a choice about whether or not to engage in earnings management behavior, with consequences that were either favorable or unfavorable to the organization. The results indicate that, although the ethical nature of an act has the greatest influence on ethical judgment, managers tended to discount the ethical impact of earnings management behavior when the consequences were favorable to the organization-implying that the ends do justify the means. This finding highlights the importance of establishing an ethical "tone at the top'' to avoid employee rationalization of ethically questionable behaviors and situations where minor ethical lapses may become more serious. This research advances the ethics of earnings management literature and also provides empirical evidence about how managers actually respond to an earnings management ethical dilemma rather than simply stating what they should do. Implications of these findings for corporate governance and future research are also discussed.