Does ethical behavior of management influence financial reporting quality?

Abstract

This paper aims to examine the relationship between managerial ethics level and financial reporting quality mainly focusing on accounting conservatism. Recently, there has been evidence to support the argument that managerial ethics level can affect reporting quality in the business world. Hence, this paper seeks to compare both fraud and non-fraud firms in terms of their ethical practice in the business. Furthermore, this study provides a more realistic perspective by making a comparison with previous studies. To test the hypotheses, we chose 243 fraud firms and compared them with the same number of non-fraud firms listed in the KOSPI and KOSDAQ from 2005 to 2012. The analysis using two groups across the time horizon reveals that the measured values of accounting conservatism do not show any meaningful difference between fraud and non-fraud firms. Additionally, fraud firms have greater absolute discretionary accruals than their counterparts. This result suggests that fraud firms are more likely to manipulate their earnings than the non-fraud firms. Also, accruals quality of fraud firms is lower than that of non-fraud firms. The significance of the paper lies in the fact that we used different criteria to judge a company's comparative ethics level.