Earnings management and corporate social responsibility: An in-class exercise to illustrate the short-term and long-term consequences

Carol M. Fischer; Michael J. Fischer

doi:10.1108/S1085-4622(2009)0000010003

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Advances in Accounting Education

ISSN: 1085-4622
Series editor(s): Dorothy Feldmann and Timothy Rupert

Subject Area: Accounting and Finance

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Earnings management and corporate social responsibility: An in-class exercise to illustrate the short-term and long-term consequences

Document Information:
Title:	Earnings management and corporate social responsibility: An in-class exercise to illustrate the short-term and long-term consequences
Author(s):	Carol M. Fischer, Michael J. Fischer
Volume:	10 Editor(s): Bill N. Schwartz, Anthony H. Catanach ISBN: 978-1-84855-882-3 eISBN: 978-1-84855-883-0
Citation:	Carol M. Fischer, Michael J. Fischer (2009), Earnings management and corporate social responsibility: An in-class exercise to illustrate the short-term and long-term consequences, in Bill N. Schwartz, Anthony H. Catanach (ed.) 10 (Advances in Accounting Education, Volume 10), Emerald Group Publishing Limited, pp.1-25
DOI:	10.1108/S1085-4622(2009)0000010003 (Permanent URL)
Publisher:	Emerald Group Publishing Limited
Article type:	Chapter Item
Abstract:	This chapter describes an in-class exercise to illustrate the implications associated with earnings management and corporate social responsibility (CSR). Student teams act as senior managers, evaluating scenarios in which they must decide whether to engage in earnings management and socially responsible actions. All decisions have the potential to change the firm's net operating income. The “auditor” reviews earnings management decisions based on accounting choices, imposing a penalty if the auditor disallows a decision. Earnings management decisions also affect the firm's earnings quality, operationalized through adjustments to the price–earnings (P/E) ratio. Several decisions affect the firm's social responsibility rating, which ultimately affects the P/E ratio (reflecting the long-term effects of CSR). The class discusses the implications of engaging in earnings management and practicing social responsibility, as well as the ethical issues associated with these decisions. Survey results indicate that this is an effective pedagogical tool, as students are highly engaged in the exercise. Data analysis also suggests that propensity to engage in accounting manipulations decreases over the course of the exercise.