Ethical Perceptions of Earnings Management: the Effect of Gender and Experience

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1 Technical Journal of Engineering and Applied Sciences Available online at TJEAS Journal / ISSN TJEAS Ethical Perceptions of Earnings Management: the Effect of Gender and Experience Maryam Shahri *, Mohamadreza Abdoli, Mohsen Rahmani Department of Accounting, Shahrood branch, Islamic Azad University, Shahrood, Iran Corresponding author: Maryam Shahri ABSTRACT: In this study, the effect of students gender and their level of experience on their ethical perception concerning earnings management concept have been investigated. The subjects of this investigation included 165 students who were studying master of accounting at Islamic Azad University. The students viewpoints were collected using a standardized written questionnaire. To compare the means and variances of two populations, T and F statistics were used. The results showed that the students ethical viewpoint on earnings management concept was not affected by the level of their experience. Furthermore, there was no significant difference between the standpoints and perceptions of the students who just studied at the university and those who worked as professional employees. In addition, there was no significant difference between the standpoints of the male and female students with regard to their perception of ethical concepts. Therefore, gender cannot explain any differences among people s ethical standpoints. However, males and females showed significant differences in some cases, including the Rial threshold considered as significant by subjects with regards to manipulating profit figures; both groups agreed with earnings manipulation for approaching to budgets. Keywords: Earnings Management, Ethics, Experience, Gender (male/female) INTRODUCTION Earnings management is defined as a conscious and deliberate action for reducing the earnings fluctuations reported during consecutive periods revolving around a level of profit called the company s normal profit. It is believed that corporations which proceed to manipulate earnings may identify income and expenditure figures during different periods and report and disclose growth rates of profits and losses in a preplanned manner. This kind of smoothing financial figures is not possible without taking behavioral-cultural components of individuals and corporation into consideration (Hosieni and Abdoli, 2012). Among the factors affecting the ethical perception and understanding of individuals are their nationality and gender. Nationality affects people s perception and deduction, since it is associated with cultural, economic and legal context of the countries. Gender also affects individuals perception and deduction due to genetic differences between men and women. Men emphasize achievement of materialistic achievements, whereas women focus more on helping their fellows. Literature Review Elias (2002) believes that idealists consider earnings management as an unethical practice, while it is an ethical action for relativists.in their study titled as Is managing earnings ethically acceptable or not? Rosenweig and Fischer (1994) concluded that the mangers of companies disagree with the notion that earnings manipulation is ethically acceptable. They also found that the managers consider the earnings manipulation made by operational decisions more ethical than those made by accounting procedures. In their study conducted in the United States, Paul M. Clikeman, Marshall A. Geiger and Brendan T. O'connell investigated students perception of earnings management. The results of their investigation confirmed the existence of a nonsignificant difference between the standpoint and perception of the male and female students. Such a nonsignificant difference existed between American students and those born in Southeast Asia too. Belsky et al (2008) concluded in their study that mangers who pursued opportunistic goals with respect to earnings management, show more unethical behaviors and, on the contrary, the managers whose purpose of earnings management is to increase the company s value, have less

2 unethical behaviors. Greenfield (2008) examined the relationship between occupational obligations and ethical ideologies of individuals with earnings management and concluded that there is a negative relationship between ethical obligations and earnings management. On the other hand, a negative relationship exists between idealistic ethical ideology and earnings management and a positive one between relativistic ethical ideology and earnings management. Pedro Augusto (2007) believes that experienced accountants are more interested in relativistic ideology than those with low experience. He also found that male accountants are less likely to adhere to ethics in their ethical judgments and trained accountants are more likely to adhere to it in such judgments. Rafik Elias (2008) found in his investigation that individuals with high-level idealistic ideology are more adhere to ethics in earnings management than those with low levels of idealistic ideology. People with high levels of relativistic ideology in earnings management are less likely to adhere to ethics than those with low levels of relativistic ideology. Individuals believing that social accountability influences the short-term success of the company are less likely to adhere to the ethics in earnings management than other individuals. Rafik Elias (2004) showed also that the perception of earnings management is different in people in terms of gender, age and job title and these are important factors. Furthermore, earnings management and ethical values are considered as alarming signs in accounting profession and accountants believe that earnings management in organizations with high ethical standards is deemed unethical. Abia Pearson (2009) found in his study that there is a positive effect of the relationship between the female gender, job title and ethics training course with the student s attitude towards ethical issues; it may be considered useful for students, instructors and corporates. Marshall et al (2006) concluded that culture of every country can greatly explain any difference in dealing with any scenario of earnings management. They also found that the perception of earnings management depends heavily on the timing of operational decisions, which is closely related to power distance and sexism discussed in Hofsted theory. Cyriak Keller et al (2007) showed in their investigation that individuals personal standards and criteria, like their gender, level of college education, level of religious beliefs and experiences, significantly influence their ethical perception. Lung et al (2010) found that religious beliefs do not affect individuals ethical behaviors, but religious environment may help to show ethical behavior. They found the impact of gender as insignificant, but the effect of the level of training on the ethical behavior appeared to be very significant.jean and Drezdenko (2010) concluded in their investigation on the relationship between ethics, social accountability and organizational performance that the managers of systematic organizations have a higher level of social accountability and ethics compared to machine-based organizations. Research Hypotheses H1: there is a difference between the ethical standpoint of experienced people and that of inexperienced ones. H2: there is a difference between the ethical standpoint of men and that of women about earnings management. MATERIALS AND METHODS Research Model Considering the review of literature and the relationship among the variables as well as the research hypotheses, the following research model is formulated: Earnings management = α0 + β1 Work Experience + β2 Gender + e Statistical Population and Sample The statistical population includes graduate students of accounting of Islamic Azad Universities of Shahrood, Gorgan and Neyshabur who have passed the course of Accounting Theory (II) and are familiar with earnings management concept. It has been attempted to select a population that includes both groups of men and women as well as experienced and employed individuals. Accordingly, a stratified sampling method was used to select the statistical sample. RESULTS OF DESCRIPTIVE STATISTICS In this study, it is attempted to investigate the effect of the students gender and level of experience on their level of ethical perception of earnings management concept. The statistical examination of the students showed that 56 percent of the subjects were males and the rest were females. 65 percent of the employed people were 2427

3 males and the rest were females. The sample included 32 percent females and 53% males. The men s level of experience was averagely 6.5 years and that of women was 2.5 years. The 41% of men who were merely studying believed in the practice of earnings management in corporations; this was 68% for the employed men. 46% of the employed women accepted the presence of this practice, whereas 29% of the women who were merely studying acknowledged the practice. In addition, both men and women believed that mangers manipulate the earnings figures in order to achieve budget targets of their corporation. However, the significance threshold for the figures to be considered as earnings manipulation was lower for women than that for men. Research First Hypothesis There is a difference between the ethical standpoint of experienced people and that of inexperienced ones about earnings management. Here, it is investigated whether the ethical standpoint of experienced people about the earnings management is different from that of inexperienced ones or not. At first, equality of variances of both populations and then, the mean difference of the two groups of respondents were statistically compared. Considering the statistical results of comparing the variances of the two populations, sig was calculated in Levine Test (F test) as larger than 5%, sig= Therefore, the hypothesis of equality of variances is confirmed; it means there is a possibility of that the difference between the variances in the population is zero. Thus, the results of comparing the means using T-test are then employed. Std. Error Mean Table 1. Mean of the Groups Std. Deviation Mean N Variables Equal Variances assumed Equal Variances not assumed Levene's Test for Equality of Variances Table 2. Comparison of Means and t-test F Sig. t df t-test for Equality of Means Sig. (2- tailed) Mean Std. Error 95% Confidence Interval of the Equal variances assumed Equal variances not assumed With regard to the results in the first row of the table where sig > 0.05 (SIG=0.973), the claim that there is a difference between the experienced and profitability standpoints about the earnings management is not verified. Research Second Hypothesis There is a difference between the ethical standpoints of men and that of women about the earnings management. Here, it is investigated whether the ethical standpoints of men about the earnings management is different from that of women or not. Firstly, the equality of variances for two populations and then the difference between the means of the two groups of respondents are statistically compared. Since Levine test (F test) sig is greater than 5%, sig = 0.768, the assumption of the equality of variances is accepted. This means that there is a probability of that the difference between the variances is zero. Thus, the means of the two populations is compared by T-test. Lower Upper Std. Error Mean Table 3. Mean of the Groups Std. Deviation Mean N Variables men women 2428

4 Table 4. A Comparison between the Means and T-Test Levene's Test for Equality of Variances t-test for Equality of Means F Sig. t df Sig. (2- tailed) Mean Std. Error 95% Confidence Interval of the Equal variances assumed Equal variances not assumed Lower Upper Considering the results in the first row of the table where sig > 0.05 (SIG=0.204), the claim that there is a difference between the ethical standpoint of men and that of women is not verified. In the second row where µ1 - µ2 < 0 (one from positive range and the other from the negative one), the mean difference between the two populations is not significant and accordingly, the equality of means of the two populations is accepted. RESULTS AND DISCUSSION We expected that classification of students in terms of experience level and gender could influence their standpoint and thinking and accordingly, there would be a significant difference between the two groups with respect to earnings management concept and how to deal with it. Studying the significance of the difference between the students standpoints based on their level of prior and professional experience and current situation of their employment, we expected these two groups to have different perceptions of the scenarios about the earnings management. It is believed that prior and practical knowledge and experience of the individuals about a subject have an impact different from theoretical issues and may affect their standpoint. In other words, individuals act more maturely in dealing with such issues. The results show that there is a difference between these two groups of individuals in the statistical population under study in terms of their perception of the earnings management and dealing with such matters. The investigations also indicate that these two groups have different significance threshold for the amounts related to the earnings management. There is even a significant difference between them in terms of religious beliefs, such that more inexperienced individuals were instigated when dealing with a completely unethical issue in each proposed scenario, accounting for 69% of all concerned cases. However, this rate for experienced individuals was 38%. From the standpoints of these two groups, the intensity of violations was also significantly different; the experienced individuals considered 54% of the cases suggested in the questionnaire and scenarios as slight and small violations. However, inexperienced individuals agreed with this issue in 15% of cases. The experienced individuals considered a high share for budget in unethical behavior, while inexperienced ones believed in the moderate significance of this issue. There was a significant difference between professional employed people and the studying ones with respect to budget, evaluation of asset items as well as identification of income and expenditure items. The only similarity between these two groups was their attitudes toward the cases in the questionnaire, which according to them were trivial and unimportant. Moreover, the approach of the two groups with respect to the intensity in dealing with lawbreakers was significantly different. The employed subjects did not agree with harsh treatment, while studying ones did strongly agree with harsh treatment with the offenders. The results of investigating the difference between the ethical standpoint and perception of the two student subjects in terms of their gender showed no difference. The groups had similar standpoints. Other examinations indicated that the perception of both groups regarding the ethical or unethical intensity of an issue was similar to each other and both of them considered the budget effect as significant and as a factor contributing to earnings manipulation. Furthermore, both groups believed that assets evaluation could be considered as a factor for manipulating earning figures by calculating depreciation. In addition, both groups believed that another method used by mangers to manipulate earning figures was to identify and shift the income and expenditure items to the next years. The only difference between men and women with respect to their evaluation of the cases proposed for earnings management was the intensity of their standpoint about the violation committed such that women did not accept minor and trivial violations in most cases, while the men mostly considered the suggested violations as insignificant. Examining the results of the study conducted by Paul et al (2001) which used an analytical-descriptive method, and which provided the basis for this study, shows that the means of all responses to all questions of the questionnaire and the scenarios suggested in it in Iran is different from those values obtained from Asian and American students. 2429

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