Social-psychological analysis of accounting manipulation : A study of US and Australian companies

This study examines the circumstances of accounting manipulation in the United States of America (USA) and Australia during the period 1998-2010. It is argued that academics mostly undertake research within the confines of positive accounting in which accounting manipulation is viewed narrowly as earnings manipulation, and, as a consequence, a wide range of social-psychological factors remain unexplored. That research gap prompted this study to appraise accounting manipulation from a broader perspective, considering earnings and balance sheet manipulation by using an interpretive research paradigm and explicitly incorporating the social-psychological factors. The theoretical framework of this study is premised on the fraud triangle theory and a composite model devised as the institutional analysis and development/fraud triangle framework. The analysis and interpretation of findings are based on four banking and financial institutions, namely Fannie Mae and Lehman Brothers Inc. from the USA, and Heath International Holdings Limited and Allco Finance Group Limited from Australia. The study relies upon companies’ annual reports, various investigation reports and other public documents. An interpretive text analysis approach was used for analysing the data. The study finds that accounting manipulation is an intentional activity engendered by individuals’ subjective use, misinterpretation or violation of accounting standards. It arises from multiple realities constructed by the interaction of socialpsychological factors, including the macro-economic environment, a company’s financial conditions, and accountability and ethical factors resulting from dysfunctional corporate governance, agency failure, audit failure and regulatory failure. The findings of the study have practical implications for senior executives and boards of directors who need to establish effective corporate governance by discharging active stewardship roles with financial expertise. It is expected that auditors of high-risk clients would prudently scrutinise going concern issues, regulatory compliance, and misstatements to provide quality assurance. The bodies that set accounting standards need to be independent of industry capture so that they can set high quality standards that reduce the scope for subjective (mis)interpretation. Governments should remedy regulatory overlaps and expedite enforcement. It is imperative that educational institutions re-engineer their curricula to provide ethical education to students who will lead business firms, audit firms and regulatory bodies in the future. Furthermore, the study offers several contributions and suggestions. It proposes a broader lens to view accounting manipulation by covering both earnings and balance sheet manipulation. As positive accounting research, based on large samples, is not designed to holistically address questions relevant to multiple factors of accounting manipulation unique to individual companies, it is suggested that future researchers conduct more case studies using an interpretive research paradigm to explore and examine interactions of the accounting and relevant other social-psychological factors.