by Cydney Posner

Yes, according to a study from academics at the University of South Carolina, reported by Reuters.   The study showed that U.S. public companies tend to favor hiring accountants “who show a willingness to flatter corporate profits by massaging the numbers.”

In the study, which surveyed 41 executive recruiters and 57 finance and accounting executives, participants were asked to fill a hypothetical accounting job opening by choosing between two candidates.  While the candidates had similar backgrounds, they also  had “sharply contrasting values.” The result? Almost 88% of participants chose those  candidates considered “more congenial to bending the rules to achieve corporate goals, such as smoother earnings, according to the study.”  The study found that participants  often selected candidates “who were inferior in just about every aspect of management, except their ability to remove roadblocks to reporting profit….” Consequently, the study concluded, the “selection process in firms may populate accounting positions with individuals who are predisposed to manage earnings….No amount of regulation may significantly curtail earnings management under such circumstances.”

Earnings management has a long been the scourge of regulators.  A typical example of earnings management might occur if a company books an excessive reserve (takes a “big bath”) in connection with a restructuring or inventory write-down, and then treats those reserves as a “cookie jar” that the company can raid when necessary to smooth earnings or to achieve its own or analysts’ estimates.  The  study “provided the first evidence that hiring contributes to persistent earnings management.”  According to one of the study authors, the research “’tells an important story about how the culture of earnings management perpetuates itself through the employee selection process….’

Posted by Cydney Posner