When Executives Pledge Integrity: The Effect of the Accountant’s Oath on Firms’ Financial Reporting

Author:

Heese Jonas1ORCID,Pérez-Cavazos Gerardo2,Peter Caspar David3ORCID

Affiliation:

1. Harvard University

2. University of California, San Diego

3. Erasmus University Rotterdam

Abstract

ABSTRACT We study the effect of executives’ pledges of integrity on firms’ financial reporting outcomes by exploiting a 2016 regulation that requires holders of Dutch professional accounting degrees to pledge an integrity oath. We identify chief executive officers (CEOs) and chief financial officers (CFOs) required to take the integrity oath and find that firms reduce income-increasing discretionary accruals after executives took the oath. These firms also reduce discretionary expenditures, indicating that oath-taking executives reduce overall earnings management and do not merely substitute accruals-based with real-activities earnings management. These effects are concentrated in firms where the CFO took the oath. Overall, our results indicate that integrity oaths for executives improve firms’ financial reporting quality. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M40; M41.

Publisher

American Accounting Association

Subject

Economics and Econometrics,Finance,Accounting

Reference89 articles.

1. Accountant. 2017. 98 percent have taken a professional oath. The Accountant (May 3). https://www.accountant.nl/nieuws/2017/5/98-procent-heeft-beroepseed-afgelegd/

2. Theory, research design assumptions, and causal inferences;Armstrong;Journal of Accounting and Economics,2018

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