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Earnings
The classroom as a community of management
interpretation practices

Discussing earnings management practices as

more than solely purposeful interventions 491
Therèse de Groot and Arco van de Ven
Received 1 October 2017
TIAS Business School – Tilburg University, Tilburg, The Netherlands Revised 30 September 2018
3 March 2019
30 March 2019
23 April 2019
Accepted 2 May 2019
Abstract
Purpose – The purpose of this paper is to use qualitative research findings to describe and analyze the use
of a new teaching approach for a better understanding of earnings management.
Design/methodology/approach – Three classroom workshop designs with finance professionals were
performed as an experiment to discuss the underlying assumptions of mainstream earnings management
research. The outcome of the experiment is analyzed and serves as a basis for reflection on the new teaching
approach.
Findings – The teaching experiment revealed the value to participants in discussing the complexity of
the accounting choice process. The workshops provided insights into the wide range of accounting choices
that finance professionals are confronted with and into the differences in perception of the participants
relating to the accounting choices to be made. These insights contradict the assumptions of a “neutral
reporting process” and solely “purposeful interventions” used in mainstream earnings management
research. Analyzing the elements of the different workshop settings in relation to the outcome of the
discussion identified strengths and weaknesses of each setting and generated ideas for further
development of the teaching approach.
Practical implications – This research note adds to the understanding on how qualitative research can
be used in teaching and shows that it is also coherent with using teaching as a site for qualitative research.
Originality/value – The discussions relating to the limitations of mainstream accounting research are
predominantly of a general nature. This research note takes these discussions into consideration by exploring
the subject of earnings management, offering an alternative teaching approach.
Keywords Qualitative research, Earnings management, Accounting choices, Accounting teaching,
Research note
Paper type Conceptual paper

1. Introduction
Researchers (Hopwood, 2008; Lukka, 2010; Malmi, 2010) signal an increasing narrowness of
accounting research. Lukka (2010, p. 112) states:
The economics-based research agenda is widely viewed (particularly in the North America but
also elsewhere) as the premier type of accounting research, forming the so-called mainstream. In
practice, such research is based on large archival data sets or analytical modeling (“hard-core
accounting research”).
Earnings management research is a good example of this type of mainstream research.
Qualitative Research in
Mainstream earnings management research focuses on identifying determinants affecting Accounting & Management
earnings management, by analyzing (trends in) financial statements. A popular method for Vol. 16 No. 4, 2019
pp. 491-516
identifying earnings management in financial statements is by trying to isolate the © Emerald Publishing Limited
1176-6093
discretionary part of the accrual component and identifying “abnormal accruals”. Based on DOI 10.1108/QRAM-10-2017-0095
QRAM this research, a number of individual, organizational and situational factors influencing
16,4 earnings management behavior are identified.
Earnings management is defined by Schipper (1989, p. 92) as a “purposeful intervention
in the external financial reporting process, with the intent of obtaining some private gain (as
opposed to, say, merely facilitating the neutral operation of the process)”. An important
element in the definition of earnings management is “management intent” (Dechow and
492 Skinner, 2000). The question is how management intent can be identified by analyzing large
data sets of financial statements of organizations. Correlation between determinants and
accruals does not infer managerial intent that earnings were managed. And even if earnings
management can be identified by using this method, what do these large data sets really tell
us about the underlying motives and background of earnings management behavior?
Academic research addressing this “management intent” in preparing the financial
statements of organizations is difficult to find. De Groot (2015) also identified this “gap in the
literature” in her PhD study. Her research into accounting choices of controllers was based
on an interpretive approach, the “lived experience of the reality” of individuals being the
object of research. This field research among business unit controllers revealed the complex
nature of the accounting choice process and also the large extent of professional judgment
that controllers have to use in their accounting choices. This sharply contrasted the
straightforward “black and white” approach and findings of mainstream earnings
management research. This finding was consistent with the few field studies relating to
earnings management that were identified in the literature review of the PhD research. The
two case studies of Kepsu (2012) and Jorissen and Otley (2010) that were identified, revealed
a wide range of accounting choices that can enlarge the discretion of management to
influence the numbers. They also illustrate the complexity of “managerial intent” and the
differences of opinion relating to “true earnings”.
Finance professionals are being taught on the basis of the mainstream research approach
and learn about determinants affecting earnings management based on the assumption that
interventions in the reporting process are solely purposeful actions. This does not involve
reflecting on the subject and understanding the complex nature of the accounting choice
process. Empirical qualitative research findings could be helpful to provide better insight
into the complexity of earnings management practices for financial professionals. This
research note describes and analyzes a new teaching approach to make the students better
understand the concept of earnings management. We show how “bringing qualitative
research into the classroom” stimulates students to reflect on earnings management
interventions in their contextual settings. Since only limited qualitative research material is
available on this subject, one of the authors experimented with this concept in various
settings and recorded the classroom discussions. The analysis of these discussions in
relation to existing research outcomes was used to reflect on this approach and develop
suggestions to further develop the teaching approach. In that sense, the workshops became
sites of qualitative research.
Baldvinsdottir et al. (2010) state that “accounting behaviour involves the interaction of
people and accounting techniques” (p. 80) and propose that accounting research can add
value in this specific area. The subject of earnings management is very suitable for this
purpose since it comprises both elements: behavior and (financial) accounting techniques.
Qualitative research trying to understand the “lived experience” (Ahrens and Khalifa, 2013;
Chua and Mahama, 2012) of the actors in the financial reporting process can provide
insights into the concept of earnings management. A qualitative research approach of this
subject does not only contribute to academic knowledge, it can also contribute to awareness
and development of finance professionals. Communicating about the subject in a classroom Earnings
setting forces finance professionals to reflect on their accounting choice process. management
The outline of this research note is as follows. The theoretical basis of “earnings
management” is analyzed in Section 2. In this section three important components of the
practices
definition – and their underlying assumptions – are identified as they are useful for a
classroom discussion. Furthermore, the contributions of qualitative research in questioning
the assumptions of earnings management are presented. Section 3 describes the research
approach, providing insights into the background of the development of the teaching 493
approach outlined in this research note. Section 4 outlines the results of three workshops of
discussing practices of financial reporting focused on the more complex practice derived
from the qualitative research. This is followed by the conclusion in paragraph 5.

2. An analysis of the definition of earnings management

As outlined in the first section earnings management is defined as a “purposeful
intervention in the external financial reporting process, with the intent of obtaining some
private gain (as opposed to, say, merely facilitating the neutral operation of the process)”
(Schipper, 1989, p. 92). This definition comprises three elements that will be further analyzed
in this section: the external financial reporting process, the intervention and the intention or
purpose of this intervention.

2.1 The financial reporting process: true earnings and a neutral financial reporting process
Financial reporting has to be performed within the guidance provided by Generally
Accepted Accounting Principles (GAAP). GAAP provides instructions and guidelines
that are used to ensure a true and fair presentation of the financial position, the results
and the cash flows of an organization. Ronen and Yaari (2008) refer in their definition of
earnings management to (not reporting) the true short-term, value maximizing earnings.
A neutral presentation of earnings reveals the short-term true performance, according to
Ronen and Yaari. Schipper (1989) also refers to a (deviance of a) neutral operation of the
reporting process in her definition of earnings management. This suggests that there is a
reality which is to be represented by financial statements disclosing the true earnings of
this reality.
This type of wording reflects a positivist philosophy, which is the underlying philosophy
of mainstream earnings management research. Any debate around the notion of paradigm
is typically regarded as a non-issue (Lukka, 2010). Research based on this approach focuses
on the formation of theories and “law-like generalizations”. Researchers with a positivist
perspective believe that there is a “reality” external to social actors which can be researched
by observing this reality. Although it can be argued that physical objects in an organization
are reality, it can be questioned if the valuation of these objects is reality or a phenomenon
which is socially constructed. Shapiro (1997, p. 167) argues for a pragmatic view on
objectivity in (financial) accounting and states that “social phenomena are ontologically
subjective, but just as real as ontologically objective physical phenomena”. Accounting
standards are such a socially constructed reality: they are the agreed upon rules of the game
that organizations have to follow in their financial reporting procedures.
These agreed upon accounting principles however do not lead to “one right amount” of
earnings, but there is a range of acceptable earnings. Dechow and Skinner (2000) divide
accounting choices in two subcategories: “within GAAP”- and “violating GAAP” accounting
choices. They indicate that within-GAAP accounting choices can vary from conservative to
aggressive, but there is a border. If accounting choices cross this border, they are considered
to be violating-GAAP choices. The words of Hines (1988, p. 256) “As I said, there is no truth
QRAM as such, but there is such a thing as stretching it too far – that is when you get caught out”
16,4 strikingly express the grey area of accounting choices. Preparers of financial statements,
hereafter referred to as Chief Financial Officers (CFOs)/controllers have to take a position in
this grey area, and act within the boundaries of within GAAP earnings. It may well be the
case that there is a difference in perception amongst CFOs/controllers relating to accounting
choices, for example due to different risk attitudes. One CFO/controller may find a reported
494 provision for restructuring a neutral amount whereas another CFO/controller may find the
same amount (too) conservative and consider it as an earnings management intervention. In
mainstream earnings management research, there is limited research on these issues.
One of the few qualitative studies on this subject is a case study of Kepsu (2012). This
research provides additional insights into the complexity of this subject. Kepsu studied the
process of preparing corporate financial reports within a Finnish organization from an
earnings management perspective. He found that a wide range of accounting choices were
under discussion within the organization. The choices related to various reporting items and
the type of choices also varied, ranging from changing an accounting method to determining
the amount for an impairment or a provision. Kepsu also provides with his research insight
in the different perception of the actors: some accounting choices, such as capitalization of
R&D expense and impairment decisions, were subject of intense discussion within the case
organization. Top management played an important role in the final accounting choice:
It was especially emphasized that the CFO decides whether or not something will be activated in
the balance sheet or not. However, it was widely highlighted that such issues are almost always
highly interpretative and that there is no unambiguous or objective truth, instead they are
subjective and actor-dependent opinions. (p. 121)
The field research of de Groot (2015) confirms these findings. The participants in this
research reflect on the “grey area” of the accounting choices and differences of opinion. The
research showed that controllers made different choices, which could not be explained by
the differences in background, knowledge of accounting standards and interpretation of the
accounting rules. There were differences of opinion between the controllers on what some
regarded as applying straight forward accounting rules that had to be followed and others
that saw it as a grey area: “Controllers thus set different boundaries: what is ‘black and
white’ for some, is a ‘grey area’ for others” (p. 110). This is consistent with the findings of
Kepsu (2012) relating to the different perceptions of the actors both regarding the
interpretation of accounting rules and the valuation of certain balance sheet items.
The above findings reflect the ambiguity of the concept of “true earnings”. It might be
even argued that there is no “generally agreed upon socially constructed reality” but that
actors in the field create their own “reality”. In combination with the line of thought of
Hines (1988) in her article “Financial accounting: In communicating reality, we construct
reality” this would indeed call for more attention in discussing contextual financial
accounting issues. By facilitating critical discussions among finance professional in a
classroom session, the participants learn to realize that the accounting world is not
always “black and white”. In this way they are also stimulated to reflect upon specific
reporting situations and learn the advantage and necessity to broaden their horizon and
discuss personal professional judgments in accounting issues with fellow professionals,
thereby “constructing reality”.
The next component of the definition of earnings management is “a purposeful
intervention in the reporting process”. In what ways do finance professionals intervene in
the reporting process? And how can we identify these interventions?
2.2 The action of intervention Earnings
Healy and Wahlen (1999, p. 368) provide a detailed definition of earnings management by management
also describing the action of intervention:
practices
Earnings management occurs when managers use judgment in financial reporting and in
structuring transactions to alter financial reports to either mislead some stakeholders about the
underlying economic performance of the company or to influence contractual outcomes that
depend on reported accounting numbers. 495
They thus identify two categories of intervening actions “judgment in financial reporting”
and “structuring transactions”. Other academics identify the same categories using different
wording, such as “accounting choices” and “cash flow choices”(Dechow and Skinner, 2000),
“accounting earnings management” and “real earnings management” (Libby and Seybert,
2009) and “within-GAAP accounting choices” and “sacrificing economic value” (Graham
et al., 2005). In this paper the terminology “accounting choices” and “transaction
structuring” is used. Examples of accounting choices are estimates of provisions for
restructuring charges or for bad debts: earnings can be managed by an overstatement or
understatement of the required provision (conservative or aggressive accounting).
Transaction structuring actions which are often associated with earnings management in
academic literature are decreasing expenses (R&D, maintenance, promotion) and
postponing investments or projects.
With respect to these two types of earnings management intervention, most of the
mainstream studies focus on the category accounting choices and to a far lesser extent on
transaction structuring. To identify earnings management, some researchers perform an
analysis of one specific financial statement item such as the provision for bad debts
(McNichols and Wilson, 1988) or restructuring charges (Bens and Johnston, 2009). Others
analyze working capital fluctuations and use sophisticated models to identify “abnormal
accruals” as an indication of earnings management. Both working capital analysis and the
analysis of specific financial statement items, however, are only “part of the story”.
Management is likely to focus on all available discretionary items. If earnings are managed,
both judgment relating to provisions and the discretionary components of working capital
will likely to be used.
It should also be noted that working capital fluctuations are not necessarily due to
earnings management. Other determinants may also play a role in the working capital
fluctuations, such as changes in product mix with different working capital characteristics,
new major contracts with different payment conditions, acquisitions, etc. CFOs/controllers
who have tried to forecast their working capital know how difficult this is and how
accidental timing issues, administrative processes and many other factors can have a major
impact on the working capital position at the end of the period. Moreover, accounting for
specific financial statement items, such as provisions for bad debt or restructuring
provisions requires estimates and professional judgement. The more estimates are involved,
the more difficult it is to establish a true or neutral amount for a provision or reserve.
Identified fluctuations are therefore not necessarily a result of earnings management
behavior but are most likely also influenced by a number of personal factors such as risk
attitude, knowledge and ethical orientation.
Qualitative studies allow researchers to study the process of preparing the financial
statements and observe the underlying line of thinking of the preparers. Jorissen and Otley
(2010) studied the underlying processes triggering misstatements in the financial reporting
of two connected major European airlines that went bankrupt. They used the investments in
foreign airlines as an accounting item of their study. They conclude:
QRAM The manipulation of accounting numbers can be achieved by many mechanisms which
traditional methods based on accruals would not detect. The use of a wider range of research
16,4 methods is therefore desirable. (p. 3)
The field study of de Groot (2015) among business unit controllers of a Dutch organization did
not focus on earnings management behavior but studied all types of accounting choices that
controllers within an organization are confronted with. This study reveals the important role of
496 the controller deliberations in this process. Interestingly, controllers can also be perceived to be
engaging in earnings management by not intervening in the reporting process. One controller
reflected on a revenue recognition accounting choice. He/she considered changing the revenue
recognition method for a combined product/service, but finally decided to postpone this change
of method to the next year. The reason for postponing the change of method was “because I did
not want even more revenues in the last year. That is definitely an example of earnings
management, I completely admit that” (p. 93). Doing nothing therefore can also involve an
active choice, based on the deliberations of the controller. The “do nothing” choice is not
revealed in the financial statements and does not comply with the definition of earnings
management for the element “an intervention in the reporting process”. In the abovementioned
field research, a total of 98 accounting choices were identified; 21 choices were categorized as
“do nothing”. These choices related for example to discussions of controllers with business
management about valuation- or timing issues and reflections of controllers reconsidering their
system of calculating provisions. The “do nothing” choice cannot be identified by the
mainstream approach using archival research analyzing trends in financial statements. Yet, a
“do nothing” decision relating to changes in provisions can have a material impact. Discussing
the situational context of a business considering how current developments possibly impact the
assets and liabilities, the perceived likelihood of various future scenario’s is thus very valuable
and can lead to identify these types of “do nothing choices”.
Finally, the 98 accounting choices identified by de Groot (2015) confirm the findings of
Kepsu (2012), relating to the wide range of accounting choices that are available within one
organization and thus the limitation of studying one type of accounting choice. Table I (de
Groot, 2015, p. 94) below summarizes the 98 choices identified and categorized by reporting
line item.
Table I demonstrates the wide variety of accounting choices that finance professionals
are confronted with when preparing financial reports.
The last component of the definition of earnings management to be discussed is “the
intention of the intervention”. This will be further elaborated in the next section.

2.3 Purpose of intervention

The purpose of the intervention in the financial reporting process within the earnings
management definition is, according to Schipper (1989), to obtain some private gain. Fields
et al. (2001) give a different perspective on the purpose of the intervention. They state that
the discretion that managers exercise over the accounting numbers can be either firm value
maximizing or opportunistic. The purpose of an intervention is therefore not necessarily to
mislead stakeholders. An intervention by managers can also be intended to communicate
private information about future earning, thereby increasing the value relevance of the
information. Scott (2003, p. 369) defines the purpose even broader as “to achieve a specific
objective”.
Most empirical earnings management studies do not address the behavioral aspect of
earnings management but focus on identifying determinants affecting earnings management
using archival analysis. The underlying theories are not always explicitly stated. The
 Total
Earnings
Reporting item Do nothing Timing Valuation Classification adjustments Total choices management
practices
Expense accrued 4 11 2 13 17
Expense prepaid 2 8 8 10
Income accrued 2 6 1 7 9
Income deferred 3 1 2 3 6
Suspense account 1 0 1 497
Accrual 12 26 5 0 31 43
Financial fixed assets 1 1 1 2
Material fixed assets 2 1 7 8 10
Immaterial fixed assets 3 3 3
Fixed assets 3 1 11 0 12 15
Debtors provision 2 12 12 14
Receivables provision 2 2 2
Inventory provision 1 7 7 8
Work in progress 2 2 2
Onerous contracts provision 1 1 1 2
Other provision 1 5 5 6
Restructuring provision 2 2 2
Other assets and liabilities 5 0 31 0 31 36
Classification 1 1 1 2
Intercompany 1 1 2 2
Other 1 1 1 1 3 4
Total 21 28 48 1 77 98

Note: The italic lines and numbers are the subtotals of the reporting categories of the reporting lines above Table I.
(i.e. Accrual refers to the subtotal Accrual choices: Expense accrued and Income accrued) Summary of
Source: Reprinted from de Groot (2015) accounting choices

majority of studies that do address the underlying theory, however, uses agency theory to
explain the relationship between earnings management and the variables researched.
These studies have identified earnings management in specific situations such as just
before and after initial public offering (Ball and Shivakumar, 2008), and before and after the
introduction of specific financial or other regulatory aspects (Bens and Johnston, 2009). Other
examples of specific situations are frequencies of reported small profits compared to small
losses (Burgstahler and Dichev, 1997) or situations of unusual high or low income (McNichols
and Wilson, 1988). There is also a large number of studies analyzing the relation between
earnings management and organization specific characteristics such as the characteristics of
the board of directors (Osma, 2008), audit characteristics (Piot and Janin, 2007), ownership
structure (Givoly et al., 2010), incentive compensation (Guidry et al., 1999) and financing
structure (Jelinek, 2007). This similarity in methods and underlying theory used by
mainstream research can result in relatively marginal contributions to the existing theories
(Lukka, 2010) while an extensive possibly interesting research area remains unstudied
(Malmi, 2010). Given the central concept of “managerial intent” in the definition of earnings
management, more focus could be on the behavioral aspect of the purpose of the intervention.
What are the deliberations of the preparers of financial statements: why do they intervene in
the reporting process and do they perceive to be engaging in earnings management? Students
could benefit from reading and reflecting on these deliberations, which can help them when
they prepare (or audit) financial statements in their professional life.
QRAM Studies into the behavioral aspects of earnings management are difficult to find. One
16,4 study addressing the purpose of the intervention is the research of Graham et al. (2005). They
performed a survey among more than 400 CFOs, followed up by interviews and found that
78 per cent of the CFOs were prepared to sacrifice long-term value to smooth earnings. CFOs
believed that smooth earnings are thought to be perceived as less risky by investors and
make it easier for analysts to predict future earnings. Interestingly the survey of Graham
498 et al. revealed the following: “Surprisingly, executives are more reluctant to employ within-
GAAP accounting discretion, such as accrual management, to meet earnings targets,
although accrual management is likely cheaper than giving up economic value” (p. 66). And
yet “big bath accounting” (Walsh et al., 1991) is a well-known phenomenon among
practitioners. Big bath accounting refers to very conservative accounting behavior that
often occurs within organizations that have substantial losses: since a loss is expected
anyway, the thought is that one might as well be very conservative in estimating accruals
and provisions to have some “reserves” for the future. These reserves can then be released to
meet the earnings targets in the year(s) after. Does the outcome of the study by Graham et al.
mean that the CFOs participating in their survey are reluctant to use this type of accounting
choice? A possible explanation is that the use of accounting discretion is not considered as
being socially accepted and therefore CFOs are less inclined to admit this kind of behavior.
Another possible explanation is that the use of more conservative accrual estimates in loss
situations is not perceived by CFOs as the use of accounting discretion. This would again
reflect the ambiguous nature of “true earnings” discussed in Section 2.1.
The findings of Graham et al. (2005) were confirmed by a study of Merchant and Rockness
(1994) who performed a survey among managers, controllers and internal auditors. They
researched the ethical perception of various earnings management choices and also found that
accounting choices were perceived to be less acceptable than transaction structuring. Moreover,
their study revealed significant disagreement among the respondents for most of the earnings
management choices. They also found, to their surprise, that the difference of within-GAAP or
GAAP-violating choices did not seem to affect the perceived acceptability of the intervention. The
authors give two possible explanations for this phenomenon. Either respondents find the
underlying ethical issue more important than GAAP compliance or the respondents do not all
have this specific GAAP knowledge. Elias (2002) used the same earnings management choices as
Merchant and Rockness for a survey among controllers, auditors, accounting faculty members
and accounting students. Elias found that accounting students were more lenient in their
judgment on accounting choice earnings management activities than practitioners and faculty.
The study of de Groot (2015) also revealed that sometimes controllers made non-
intentional interventions, so-called choices out of habit. They did not always realize that they
had an accounting choice, and, in some instances, they thought they had a choice whereas
actually the accounting rules did not allow them a choice. These habits were based on their
previous work experience. Discussing controller deliberations about accounting choices
(within contextual their setting) among professionals may trigger critical professional
thinking and broaden the frame of reference of these professionals.
To understand reporting behavior, it is therefore necessary to study the underlying
deliberations of finance professionals in a new teaching approach.

2.4 Summary
Mainstream earnings management research has provided interesting insights into the
possible deliberate interventions in the financial reporting process and the determinants
affecting these interventions. Qualitative research as discussed in the previous section
shows that financial reporting practices are more complex than the underlying assumptions
of mainstream earnings management literature suggest. Discussing the practices of Earnings
assessing “true and fair view”, (non) intentionality and (non) neutrality of the reporting management
process in a classroom setting can enrich the understanding of earnings management.
practices
3. Research approach
One of the authors had the opportunity to experiment with bringing this subject into different
classroom settings in 2017. The Dutch Accounting Association (Nederlandse 499
Beroepsorganisatie van Accountants) was interested in the subject and proposed using the
outcome of the qualitative research as a basis for teaching finance professionals in the field.
Two workshops were organized, and the author obtained agreement of the participants to
make an audio recording of the workshop to use this input for further research on the subject.
Moreover, the organization of one of the authors showed interest. Accordingly, a follow-up
workshop was also given to a group of controllers within this organization. This workshop
was also recorded on audio and analyzed. A short summary of the workshop approach,
participants and length of recording time is summarized in the table below (Table II).
The teaching “experiment” of the above three workshops is the subject of this paper. The
audio recordings of the group discussions were transcribed and analyzed to reflect on the
possibilities of using and enhancing this type of teaching approach. The experiment had a
set up to take the results on how to use the research findings in to account for the next
workshop. This resulted in different characteristics of each workshop setting. The
workshop settings were differentiated:
(1) by the characteristics of the participants:
 finance professionals (mixed group) or financial controllers; and
 belonging to different organizations or to one organization.
(2) by the size of the groups: small or large groups; and
(3) by the accounting choices discussed: predefined accounting choices or participants’
own accounting choices.

The argumentation of changing the workshop design and the identified strength and
weaknesses of each setting is discussed in the results section.

Workshop No. of Date and

No. Approach participants Type of participants recording time

1 General teaching session and 2 8 Finance professionals April 9, 2017

assignments in small groups, identifying from various 195 minutes
the participants’ accounting choices and organizations
their contextual setting. Feedback of
assignment in group discussion
2 General teaching session and 3 33 Finance professionals Sept 1, 2017
assignments in small groups, discussing from various 126 minutes
accounting choices based on the outcome organizations
of a questionnaire that was sent in
advance to the participants. Feedback of
the assignment in a group discussion
3 General teaching session and a group 7 Financial controllers Sept 26, 2017
discussion of the outcome of a within one 77 minutes
questionnaire that was sent in advance to organization Table II.
the participants Workshop setup
QRAM The theoretical basis of this research note, section two, is based on the literature review of de
16,4 Groot (2015) and is not intended to provide a complete overview of the earnings
management subject but serves as a basis for illustrating and discussing how qualitative
research could be used in a classroom setting. The empirical section with the analysis of the
discussion during the three workshops is not intended as a full qualitative research project,
but rather to explore the use of this type of teaching/research in a classroom setting for the
500 purpose of this research note.

4. Results
Accounting standards can be seen as a “generally agreed upon social construction of
reality”. Qualitative research discussed in the literature review reveals that there are
sometimes intense discussions among preparers of financial statements about the “right”
accounting choice. In line with Hines’ reasoning we are continuously creating reality by
communicating “our version of reality”. By discussing accounting choices of practitioners
within a classroom setting, we thus create a community of interpretation.
As explained in the introduction, one of the authors had the opportunity to experiment
with bringing this subject into a classroom setting. The first workshop was based on
discussing the participant’s own accounting choices. This is discussed in Section 4.1. Due to
a suggestion in the first workshop to use a prequestionnaire, the larger number of
participants (Workshop Number 2) and the limited time available (Workshop Number 3) the
other workshops were based on “predefined accounting choices”. These workshops are
discussed in Section 4.2 and 4.3. Finally, Section 4.4 summarizes the findings and reflects on
further opportunities of bringing research into the classroom.
The sections discussing the workshops are structured as follows. First the setup of the
workshop will be described, then the discussion in the workshop will be analyzed based on
the three elements of the definition of earnings management. Finally, the setup of the
workshop will be reflected upon.

4.1 Workshop 1: finance professionals’ own accounting choices

The first workshop was attended by eight finance professionals from various organizations.
The workshop started with a short introduction of each participant and his/her motivation
for doing the workshop. In this workshop the participants were lectured briefly about
agency theory and mainstream accounting research and about the outcome of qualitative
research. The lecture was interactive, with questions being asked by the participants. In two
assignments of half an hour each, they reflected in small groups of two to three members on
their own accounting choices and on “the setting” in which they work. The outcome was
discussed in the group. The analysis of the audio recording of the workshop provided
insights relating to all three elements of the definition of earnings management.
4.1.1 True earnings and a neutral reporting process. In the introductory session, the
participants explained their motivation to subscribe for the workshop. The participants
were interested in “the story behind the numbers” and in exploring how to best use the
accounting rules to reflect a “true and fair view”. The introduction already revealed a
colorful picture of the complexity of financial accounting.
One participant (Participant 2) reflected on past experience:
Forecasts were provided. and then the final result appeared to be different. So, within the rules,
choices were made in order to try to arrive at the result of the forecast. And then I saw this course
and thought: that is interesting, what is the story behind it and how far can you stretch it. What
are the grey areas.
The above reflection “fits” with the assumptions of mainstream research: intervening in a Earnings
“neutral reporting process” making use of the so-called grey area. It also reflects the management
eagerness of finance professionals to discuss and “discover” the boundaries of this grey area.
Another participant (Participant 4) explained how choices relating to new products or
practices
business models are not always straight forward:
I notice that the various subsidiaries have different perceptions about reporting. I would like to
learn what is, so to speak, the grey area and what is the best way to deal with this. 501
This participant has signaled within his/her organization different perceptions relating to
reporting. The ambition of this participant is, however, similar to Participant 2: they both
want to learn “what the grey area is”. In other words, they seem to assume that the definition
of the grey area is straightforward. This assumption is in line with assumptions of
mainstream research but is contradicted by the findings of de Groot (2015) and Kepsu (2012)
as explained in Section 2.1. They found that finance professionals set different boundaries
for the same accounting choice.
The difficulty of presenting a true and fair view in the financial statements was reflected on
by another participant. This participant (Participant 3) explained how he/she struggled to reflect
a “true and fair view” in the financial statements of his/her organization due to a combination of
commercial and governmental activities. For reporting purposes this organization was
restricted to the governmental reporting rules. These types of “non-standard” organizations are
unlikely to be included in the archival data of mainstream earnings-management research. Yet,
especially in these types of complex settings it is important to create a “community of
interpretation” to reflect on how a true and fair view is presented in the financial statements. A
workshop with participants of one organization would be a good setting for this purpose.
4.1.2 The action of intervention. The participants discussed their own accounting
choices in small groups of two to three participants. After the session in small groups, the 14
identified accounting choices in the groups were mentioned/discussed in the plenary
session. These choices are summarized in the table below (Table III).
Comparison of the above accounting choices to the accounting choices in Table I of
Section 2.2 reveals new accounting choices, mainly in the category “other”. It demonstrated
that not only the “bottom line” net result is important when making reporting choices.
One participant (Participant 4) explained for example the difficulties with growing
organizational complexities and dynamics:
Allocation of revenue and expenses to the various entities, including reclassifications. With these
choices you can influence the perception of the viability of an entity. Organizational structures are
becoming increasingly complex. Various entities are responsible for part of the process and it is
difficult to maintain a complete overview. And then organizational structures are changed, and
everything has to be restated. Then you have to be able to “interpret”: how is this entity doing in
relation to the others.
Participant 8 also explained that determining transfer pricing is a complex process within
his/her organization. Changes in transfer pricing result in changes of performance of the
entities within the organization, which can lead to different operational decisions.
Also, the importance of allocating the expenses to the categories was reflected upon by a
participant (Participant 2):
Allocation of expenses: to which category do you allocate them. That is not earnings related, but
margin related. Do you allocate expenses to cost of sales or general expenses.
Participant 2 explained that this allocation of expenses was not always straightforward for
new products or business models.
QRAM Total
16,4 Reporting item Do nothing Timing Valuation Classification adjustments Total choices

Expense accrued 1 1 1
Income accrued 1 1 1
Accrual 0 2 0 0 2 2
502 Material fixed assets 1 1 1
Fixed assets 0 1 0 0 1 1
Receivables provision 1 1 1
Work in progress 1 1 1
Restructuring provision 1 1 1
Reserves 1 1 1
Other assets and liabilities 0 0 3 1 4 4
Classification p&l categories 2 2 2
Transfer pricing 1 1 1
Considering corrections 2 0 2
Disclosure 1 1 1
Comparative figures 1 1 1

Table III. Other 2 0 1 4 5 7

Accounting choices Total 2 3 4 5 12 14
identified in Note: The italic lines and numbers are the subtotals of the reporting categories of the reporting lines above
Workshop 1 (i.e. Accrual refers to the subtotal Accrual choices: Expense accrued and Income accrued)

These reflections confirm the findings of Kepsu (2012) and de Groot (2015) relating to the
wide variety of accounting and reporting choices that finance professionals are confronted
with. Discussing these choices in a classroom setting increases awareness of finance
professionals of the available choices and the possible consequences of the choices.
The realization that the production of financial statements is not as “black and white” as
it is portrayed in theory was worded by one participant (Participant 7) as follows:
I have worked for a short time at [name of audit firm]. Well, then you only realize half of what is
going on. Then I worked at central staff within my organization and then you think: Ah [. . .] so
this is happening. And then, when you are working in the business [within the same organization]
then you think: Ah, does it work this way? And sometimes I see things happening and I think:
how is this represented in my numbers?
The iterative process of analyzing the financial statements and observing how the business
activities and – setting are reflected in these financial statements is strikingly expressed in
the above quote of Participant 7. This type of reflection may also identify “do nothing”
choices of preparers of financial statements, for example not aligning valuations and
estimates with the latest business developments and identified threats.
4.1.3 Purpose of intervention. The next sub session of the workshop was used to discuss
in small groups the impact of the different setting and context of the participants. The
participants were allocated in groups with “similar settings” (governmental organizations,
smaller organizations, multinationals). The discussion in subgroups were lively. The
purpose of this assignment was to make the participants aware of the contextual influence
on the accounting choices.
In the general feedback session one participant (Participant 1) explained how his/her
organization was cash-driven to meet the ratios required by the bank. This resulted in specific
year-end actions: all the customers were called and offered a discount if they would pay their Earnings
invoice before the year-end. This confirms findings of mainstream research, having identified management
bank covenants and finance structure as a determinant for earnings management.
Participant 2 reflected on the influence of the structure of the organization. Within his/her
practices
organization there was a strict distinction between the business departments producing the
operational performance reports and the reporting departments producing the financial reports.
Another participant (Participant 5) commented on this by stating that he/she considered it
important that business is also involved in financial reporting. Participant 5 used the example 503
of providing for bad debts; if the business is not involved in this process this may result in a
primary focus on sales at the expense of a focus on cash. This discussion shows the complexity
of the influence of a contextual setting. A strict division of the business and financial reporting
function can reduce earnings management interventions by the business. It can, however, also
impact business behavior resulting in higher revenues but also higher debtor write-offs.
Besides interventions to increase cashflow and/or net earnings, the discussion of the
accounting choices in the previous section revealed interventions that affect business
decisions. Interventions in transfer pricing methods affect the performance of entities.
Decisions relating to expense allocation to cost of sales affect the profitability of products
and services, based on gross margin analyses. Interestingly, these types of interventions
reflect the behavior of stakeholders within the organization trying to increase the
performance of their business unit or product/service range by classification choices within
the profit and loss statement of the organization. This sheds a new perspective on the
possible stakeholders in earnings management. The research of Graham et al. (2005) focuses
on CFO’s and investors’ perceptions. The aforementioned observation demonstrates that
earnings management is not necessarily used to influence net earnings in order to manage
investors’ perceptions. Earnings management interventions can also be used to influence
business decisions within organizations.
A topic that was recognized by all the particpants was the importance of culture and how
culture differences can impede communication. These culture difference can be
“international” but can also be “organizational”:
One participant (Participant 8) reflects on the communication with the French subsidiaries:
I recognize what is being said about culture. I work a lot with French colleagues and find that
very tricky. [Lecturer] Hierarchical? [Participant 8] Yes very hierarchical. And then they say
something, but you have to interpret by their tone of voice if they agree with you or not. And the
Dutch are of course very direct: Yes, No. [Participant 1] Or: yes, but not in your way.
Another participant explained how there were different cultures within the organization:
We cooperate a lot with another subsidiary. This subsidiary has a different culture; they have to
get used to us. Our organization is dynamic and commercial: the customer requests something,
then we deliver it. So, we need technical information from this other subsidiary for the customer
product. And then you can’t cope with a 9 to 5 mentality. Then I think: ooooohhh [laughter].
How these cultural differences affect the accounting choices did, however, not become clear
in the discussion.
The group discussion also revealed two “do nothing” choices. Participant 7 referred to an
immaterial error that was identified after closing the accounts. In agreement with the
auditor it was decided not to make a correction. The other “do nothing” choice related to an
analysis of credit notes after year end. Participant 1 reflected on whether or not to make an
adjustment based on such an analysis.
4.1.4 Reflection on the setup of Workshop 1. The workshop revealed new insights for each
of the components of the definition of earnings management. Having participants of different
QRAM organizations offered the opportunity to identify a broad range of accounting choices and a
16,4 variety of contextual settings. This creates awareness of the complexity of the accounting
reporting process and obtain insight into different contextual settings. Participants became also
aware of the difficulty of defining a “true and fair” view. The findings from qualitative research
relating to the ambiguity of the concept “grey area” (different controllers setting different
boundaries for the same accounting choice) were less reflected in the discussions. The author
504 concluded that the setup of this workshop did not facilitate the identification of these different
boundaries for the same accounting choice. The participants explained their own perspective
on their accounting choices and the fellow participants did not have the (business and technical)
background knowledge to challenge this perspective.
The feedback of the participants on the workshop was positive on gaining a better
understanding of the complexity of financial reporting. Some of the participants would,
however, have liked to go further into depth with discussing accounting choices and
examples of grey areas. These remarks were taken into account to alter the teaching
approach and include a prequestionnaire and specific reporting topics. This allows for more
in-depth analysis and discussion during the workshop.

4.2 Workshop 2: finance professionals reflecting on questionnaire accounting choices

The second course was attended by 33 finance professionals and was part of a full week
course consisting of various other subjects/lectures. The participants were requested to fill
out a questionnaire preliminary to the course. In this questionnaire they were asked to give
their opinion on a number of earnings management interventions and assess whether they
thought these choices were ethical or not. Possible answers to the questions could vary from
an ethical practice, questionable practice, minor infraction, serious infraction to unethical
practice. The interventions in the questionnaire were partly based on the questionnaire of
Merchant and Rockness (1994) and partly based on practical experience of the author/
teacher. The questions are included in the Appendix.
4.2.1 True earnings and a neutral reporting process. The outcome of the questionnaire
showed considerable differences of opinion between the group members. To illustrate this,
the outcome of the first question (transaction structuring) and the fifth question (accounting
choice) are presented in the figures below Figures 1 and 2.
Similar to the first workshop, this second workshop started with a theoretical
introduction, lecturing the participants briefly about agency theory and mainstream

Figure 1.
Responses of
participants in
Workshop 2 to
Question No. 1
 Earnings
management
practices

505
Figure 2.
Responses of
participants in
Workshop 2 to
Question No. 5

accounting research and about the outcome of qualitative research. Probably due to the
larger size of the group (33 participants) this part of the session was less interactive than the
first workshop (Section 4.1) where the participants immediately discussed the theory in
relation to their own practice.
After the theoretical introduction, the outcome of the questionnaire was presented. The
participants were then instructed to discuss the findings and different outcomes of the
survey and their choices in small groups. They were told they had to come to a “group
consensus” and report this in the plenary session. The plenary discussion was audio
recorded. The plenary session revealed the lively discussions within the subgroups. Group 4
reflected on question number 1: To pull sales forward the division manager decides to
implement a sales program offering liberal payment terms to pull some sales that would
normally occur next year into the current year, customers accepting delivery on the fourth
quarter will not have to pay the invoice for 120 days:
We discussed intensely if this sales program would really be a one-off action or if this would
result in a real disruption and in a structural deterioration, yes. And it can become even worse:
now you start in December, next year you might be forced to this type of sales program already in
November, and at the end this completely disrupts everything.
The participants of Group 4 had not been able to come to a consensus. This discussion confirms
the findings from qualitative research relating to the ambiguity of the concept “true and fair
view” and the “grey area” revealing that different finance professionals set different boundaries.
Interestingly the deliberations between the groups were also different. Group 3 reflected
on their discussion:
We thought it was important to differentiate: does the action result in more sales for the period, at
the expense of the competitors? Or are the products so specialized, if there is no competition [. . .]
that sales in this period are at the expense of sales next year. Yes, in that case we thought the
boundaries were crossed.

We also had a discussion “I do not know:” how bad is the 120 days payment term. Because if your
regular payment term is 110 days, then 120 days is not a problem. However, if it is 30 days then
120 days is a serious increase.
The deliberations of Group 3 included other arguments than the deliberations of Group 4. These
different arguments lead to different conclusions. Therefore, presenting the subgroup results in
the plenary session emphasized the differences of opinions and deliberations even more.
QRAM 4.2.2 The action of intervention. The group discussions did not reveal new accounting
16,4 choices. This is partly due to the use of the questionnaire with predefined accounting choices
and transaction structuring decisions. The group size, 33 participants, was too large to
facilitate individual members to reflect on their own accounting choices. This limitation was
taken into consideration by the author in the setup of Workshop 3.
4.2.3 Purpose of intervention. The purpose of the earning management interventions
506 which were the subject of the group discussions was outlined in the questionnaire.
The discussion of the earnings management interventions also revealed deliberations
relating to other purposes. Group 1 explained in the plenary session that they felt they
needed more contextual information:
We all thought it was an ethical decision. However, we concluded that we missed background
information relating to the cause of the decision. It makes a difference if it is decided by an
individual in order to obtain a bonus or if it served a group [purpose] eh well there we did not
quite agree with each other.
This deliberation may be the result of their practical experience of business behavior in
relation to bonus schemes, confirming the findings of mainstream research identifying
bonus schemes as a determinant for earnings management interventions.
Group 2 introduced another element in their deliberations:
It depends if the company really has to work hard for the “going concern”. And well, providing
discounts in order to generate more sales is not forbidden.
Again, this confirms mainstream research findings, revealing that the financial situation
and finance structures are determinants for earnings management interventions.
The increased awareness of the participants as a result of these discussions was
confirmed in their feedback at the end of the course during the plenary session. One
participant was surprised at the differences of opinions:
The nice things is, we have to a large extent the same background, don’t we? A lot of us are
accountants [Dutch CPA’s] And although we have the same profession, we do think very different
on certain subjects.
Another participant reflected on how the discussions broadened his/her mindset:
I found it very instructive that the group brings you to a totally other point of view. I thought 40
thousand euro, so what. But then someone else says, if one sheep leaps over the ditch, all the rest
will follow. Discussing it with others makes you more conscious of your deliberations. We often
are man and women in cubicles, so I found it useful.
This reflection confirms the finding from qualitative research that controllers do not always
make purposeful decisions but make also decisions out of habit. Discussing decisions is a
means of making finance professionals aware of their own habits and frames of reference.
4.2.4 Reflection on the setup of Workshop 2. Workshop 2 facilitated in-depth discussions
of earnings management interventions. It revealed the differences of perspective of actors
relating to earnings management actions and the value of discussing this in a classroom
setting and creating a community of interpretation. This setup was therefore an
improvement in relation to Workshop 1, where this awareness was less reflected in the
discussion.
This setup had, however, also drawbacks. The use of predefined earnings management
interventions does not necessarily facilitate participants to reflect on their own reporting
behavior. As a result, the analysis of the component “action of intervention” of the earnings
management definition did not reveal new insights.
 Also, not all group members participated in the plenary discussion. The author felt that a Earnings
group of 33 professionals was too large to make sure that all members were actively management
engaged in the reflection and the group discussions. Interestingly, the feedback on the
evaluation form of a number of participants was that the choices were “too easy” which
practices
might suggest that some participants, despite the lively discussions, still perceived the
answers in terminology of “right and wrong” using their own perspective. This contradicts
the evaluation of the participants at the end of the workshop confirming that they had
learned to broaden their mindset.
507
Based on the experienced limitation of this workshop with a larger group, the author
decided to organize a workshop with a similar setup, based on the same prequestionnaire,
with a small number of attendees.

4.3 Workshop 3: finance professionals reflecting on questionnaire accounting choices

The setup of the second workshop was thus repeated in a third workshop. This time there
were only seven participants, all employees within one organization. The organization has
introduced in 2015 two types of controller functions. The business controller, being the
partner of the business, and the financial controller, ensuring the reliability of the reporting
and financial processes. The participants were all financial controllers.
Due to limited time available for the workshop – this session lasted only 2 hours – it was
decided to spend less time on “theory lecturing” and to focus on discussing the earnings
management interventions of the questionnaire.
4.3.1 True earnings and a neutral reporting process. Six participants had completed the
questionnaire before attending the workshop. Again, the outcome of the questionnaire
showed considerable differences of opinion between the group members. The outcome of
Workshop 3 and Workshop 2 for Question 1 (transaction structuring) and Question 5
(accounting choice) is presented below Figures 3 and 4.
Comparing the outcome of the two questions, the respondees of both groups seemed to be
more lenient with respect to transaction structuring (Question 1) than with respect to
accounting choices (Question 5). This confirms the outcome of study of Merchant and
Rockness (1994) who found that accounting choices were perceived to be less acceptable
than transaction structuring.
The majority of the participants thought the decision in question number one, about
transaction structuring, was not completely ethical. The participants had, again different
arguments to come to their decision. Participant 1 was concerned about bad debts:

Figure 3.
Responses of
participants in
Workshops 2 and 3 to
Question No. 1
QRAM I don’t know if this is desirable. The risk is that customers will not pay. When these are regular
customers, then I don’t think [pauses] However, if you attract new customers with these liberal
16,4 payment terms, you might incur losses.
This deliberation shows that transaction structuring interventions can affect accounting
choices: introducing liberal payment terms in order to pull sales forward possibly increases
revenues but may also lead to a higher provision for bad debt. Participant 3 had another
508 perspective:
I was wondering: if you approve this type of actions, so to speak. What else is going on within the
business to manage the earnings.
Both participants tried to answer the question in a broader context. This might be a because
of their financial controller background. The financial controllers are responsible for the
quality of the financial reports and are thus focusing on all the reporting consequences. Yet,
although the participants thought the decision was slightly doubtful, none of the controllers
considered it a serious infraction. Two participants thought the decision was ethical and
strongly disagreed with the others. Participant 6 worded this as follows:
This is just sales, the goods are delivered, that’s it.
Being financial controllers, preoccupied with the reliability of the reporting, these
participants were more inclined to view the decisions from a reporting perspective. Hence,
they might be more lenient towards business decisions (transaction structuring).
4.3.2 The action of intervention. Similar to Workshop 2, this group discussed the
predefined earnings management interventions. This workshop also did not reveal new
accounting choices. The analysis of the reflection does, however, reveal that the participants
use their own experience to judge the intervention. This was revealed in their reflection on
Question 5: accounting for consulting expenses in the next year. The participants put this
question in a broader context and reflected on situations when expenses are purposeful not
recorded in the right period. The reflections of Participant 2 and Participant 6 were as
follows:
(Participant 2) “Because you are actually continuously in touch with the business in order to have
these expenses complete and you put a lot of effort and time in this. And therefore when they
purposefully not do this, that is, well it touches. . .” (Participant 6) “That is, I find it inclining
towards fraud, this type of behavior”.

# 5 Account for consultancy expense in the next year

5. Totally unethical

4. Serious infracon

3. Minor infracon

Figure 4. 2. Quesonable pracce

Responses of
1. Ethical decision
participants in
Workshops 2 and 3 to 0 2 4 6 8 10 12 14 16 18
Question No. 5
Workshop 3 Workshop 2
These deliberations demonstrate that considerable time and effort is spend on determining the Earnings
accruals for the period. This possibly confirms the findings of de Groot (2015) who identified 98 management
accounting choices, 43 of these relating to accruals. Due to the time constraint of the workshop
it was not possible to further explore other accounting choices of the participants.
practices
4.3.3 Purpose of intervention. The discussion revealed how questions in a questionnaire
can be interpreted in a different way by respondees. The discussion of Participant 2 and
Participant 5 shows the difference in interpretation:
509
(Participant 2) “I think: does the company benefit or does the manager benefit?” (Participant 5) “I
don’t agree at all. I see it as a sales promotion. I hear [Participant 2] referring to the manager
benefitting. That is not what I read in the question. It is just a business decision”.
Another participant (Participant 1) reflected on the wording of question 10 in the
questionnaire where the division manager orders the controller to release the provision for
obsolete inventory since he is convinced he will sell the goods at full price:
Because the decision is worded as follows: “The division manager orders the controller” I was
triggered by that wording. He could have asked: “Can you recalculate the provision?’ but here it
says literally ‘orders to adjust”.
The other participants were surprised of the abovementioned deliberation of Participant 1
and had not considered this aspect. Respondees read different things into the same question,
which lead to different answers. This emphasizes the importance of understanding the
underlying deliberations when interpreting the outcome surveys into judgments on
earnings management ethics. By discussing the outcome of surveys in a classroom setting
these deliberations were revealed.
4.3.4 Reflection on the setup of Workshop 3. Similar to Workshop 2 the group discussion
revealed the differences of perspective of actors relating to earnings management actions. The
small size of the group facilitated the inclusion of all participants in the discussion. The
participants were enthusiastic about the workshop; they were surprised to learn the different
perspectives that could be adopted when considering the earnings management actions.
Organizing the workshop for participants who work in the same organizational setting and
function has the advantage that they are all working in the same contextual setting. This
allows for more in-depth discussions and possibly also more open discussions. Due to the time
constraint of this workshop it was not possible to elaborate on the controllers’ own accounting
choices. Including open questions in the questionnaires, asking the participants to reflect on
their own accounting choices might have provided useful material to discuss in this setting.
The participants of the workshop suggested to give a similar workshop to the business
controllers of the organization. Analyzing the outcome of a discussion of business
controllers and comparing this to the outcome of Workshop 3 might provide insights into
the difference or similarity of deliberations of these two groups.

4.4 Summary
The experiment on bringing qualitative research into the classroom provided new insights
for each component of the earnings management definition.
4.4.1 True earnings and a neutral reporting process. In Workshop 1 some participants
explained their motivation for attending the workshop as an interest in exploring how to use
accounting rules to reflect “a true and fair view”. During the discussions the limitations of the
concept of “a neutral process” and “a true and fair view” were recognized and discussed. The
setup of the Workshop 1 did not facilitate in-depth discussions of the individual accounting
choices because the participants did not have enough business- and reporting knowledge of the
QRAM specific contextual settings of other participants to challenge their accounting choices. In the
16,4 following workshops a questionnaire with earnings management interventions was used and
participants had to assess whether they thought these choices were ethical or not.
The group discussions in Workshops 2 and 3 demonstrated the differences in opinion
relating “a true and fair view” and in “setting boundaries”. The presentations of the four groups
in Workshop 2 showed different types of deliberations and arguments and led to different
510 boundaries of acceptable behavior according to the groups. The reflection of the participants of
the workshop was that, although they shared the same educational background, they thought
very different on these subjects. The experiment made them more aware of their own frames of
references. The participants of Workshop 3 were all financial controllers and were working for
the same company. Even though they shared the same organizational background there were
still differences of opinion on what the boundaries for a “true and fair” view were.
4.4.2 The action of intervention. The analysis of the Workshop 1 discussion confirms the
findings of qualitative research revealing the numerous choices that finance professionals are
confronted with. The workshop revealed 14 accounting choices which provided new insights into
the action of intervention, such as profit and loss classification choices which impact the gross
margin of products and services and transfer pricing methods which impact the performance of
entities.
The analysis of the workshops also confirmed the different types of choices identified in
qualitative research. Given the changed set-up of the following workshops, using predefined
earnings management interventions in the questionnaire, there was no systematic discussion of
possible different accounting choices that participants faced in their organizations. The
deliberations in Workshop 3 demonstrated that accounting choices relating to determination of
accruals were being recognized as important.
4.4.3 Purpose of intervention. Findings of mainstream research relating to determinants
affecting accounting choices or transaction structuring were confirmed in the workshops, for
example the influence of bonus schemes, bank covenants and organizational structure on
reporting decisions. Workshop 1 provided additional insights that revealing the purpose of the
intervention in the complex context of an organization is important. Influencing performance of
business entities by intervening in transfer pricing was mentioned as an example.
Besides the purposeful intervention participants reflected in Workshop 1 on “do nothing
choices”. In Workshop 2, a discussion took place about choices made out of habit.
Participants realized that accounting choices are not always purposeful interventions in the
reporting process.
4.4.4 Reflection on workshop settings. The workshop settings were differentiated:
(1) by the characteristics of the participants:
 finance professionals (mixed group) or financial controller; and
 belonging to different organizations or to one organization.
(2) by the size of the groups: small or large groups; and
(3) by the accounting choices discussed: predefined accounting choices or participants’
own accounting choices.

The analysis of the discussions revealed that each setting had strengths and weaknesses.
The identified strengths and weaknesses of each setting are outlined in the table below
(Table IV).
The experiment with the different workshop settings revealed that it is important to have
a limited number of participants in the workshop to make sure that all participants are
involved in the “reflection process”.
Characteristics Workshop 1 Workshop 2 Workshop 3
Earnings
management
Finance professional Finance professional Finance professional Financial controller practices
Financial controller (mixed group) (mixed group)
Participants from one Different Different One
organization or from
different
organizations 511
Group size Small Large Small
Accounting choices Participants’ own Predefined accounting Predefined accounting choices
discussed accounting choices choices
Strengths Awareness of the In-depth deliberations In-depth deliberations on the
variety of accounting on the assumption assumption “neutral process
choices; “neutral process and and fair view”;
Identifying purpose of fair view” Triggered to discuss
intervention based on accounting choices within their
own accounting choices organization
Weaknesses No in-depth No elaboration on the No elaboration on the variety of
deliberations on the variety of accounting accounting choices;
Table IV.
assumption “neutral choices; Limited insight into purposes
process and fair view” Deliberations more of transaction interventions Workshop
theoretical and not (are regarded as business characteristics and
based on own daily decisions by participants) identified strengths
practice and weaknesses

The authors felt that none of the workshops facilitated in in-depth discussion of all the elements of
the definition of earnings management. Workshop 1 provided rich material with respect to the
action of intervention and the purpose of intervention but did not facilitate in-depth discussions of
individual accounting choices. Workshop 2 and 3 facilitated this in-depth discussion of individual
accounting choices, due to the use of predefined earnings management interventions. These
workshops provided, however, less insight into the action of intervention and the purpose of
intervention. In Workshop 2 participants did not reflect on their own accounting choices, but in
Workshop 3 a discussion of participants’ own accounting choices was triggered.
Workshop 3, with participants of the same organization, provided a setting where participants
can discuss their own accounting choices with each other. All participants, being financial
controller, had the same contextual setting. During the discussion the financial controllers seemed
more lenient towards transaction structuring than accounting interventions, probably due to the
nature of their function. During the evaluation of the workshop, the participants suggested to
organize the same workshop for the business controllers within the organization.
The abovementioned suggestion would be a next step in further developing the teaching
approach: providing workshops for different functions within one organization. Such a
setting would also allow to discuss and analyze the impact of cultural differences within an
organization on accounting choices. Cultural differences within an organization were
addressed by the participants in Workshop 1 as an important contextual setting. The
discussions of Workshop 1 did, however, not reveal how these cultural differences impact
accounting choices.
The teaching approach could be further improved by using an adjusted pre-
questionnaire. Adding open questions relating to participants’ own accounting choices,
stimulates participants to reflect on their own contextual setting. It also enables the teacher
of the workshop to include (anonymized) accounting choices of the participants in the group
discussion.
QRAM 5. Conclusion
16,4 The purpose of this research note is to describe and analyze a new teaching approach for a better
understanding of earnings management by bringing qualitative research into the classroom. The
authors intend to advance the idea that financial accounting courses can be taught not as a
matter of knowledge transfer, but as reflecting in a community on accounting choices that are
actually made and understanding the complexity of accounting choices. The proposed teaching
512 approach is constructed by experimenting with different workshop settings and analyzing the
classroom discussions in relation to findings from earnings management research. The analysis
is based on three assumptions of earnings management that are identified: the neutral external
financial reporting process, the action of intervention and the purpose of intervention.
The experiment showed that participants appreciate when they are not provided with
solutions or best practices, but rather frameworks that grasp the complexity of the issues they
face. The workshops revealed the value to participants in discussing the complexity of the
accounting choice process. The analysis of the workshop discussions confirms findings from
qualitative research relating to the ambiguity of the concept of “a true and fair view”. These
insights contradict the assumption of a “neutral reporting process” used in quantitative
research. It also revealed the wide range of accounting choices that finance professionals are
confronted with, including accounting choices that were not yet identified in extant research.
The group discussions included “do nothing choices” and “choices made out of habit”, which
made participants realize that accounting choices are not always purposeful interventions in
the reporting process. The experiment demonstrates that discussions among finance
professionals creates awareness of the differences of perceptions among actors. The three
identified assumptions of the earnings management definition turned out to be a basis for
reflection rather than factual knowledge. The groups of professionals discussing these
assumptions based on earnings management research, and relating this to their own
experience, can be regarded as “communities of interpretation”. This approach leads to
“knowledge creation” (van Helden et al., 2010) for both academics and practitioners.
The proposed teaching approach can provide rich qualitative background information
relating to accounting choices of finance professionals. The course itself becomes the site of
qualitative research. Using the outcome of these group discussions provides an insight into
the social constructed reality of “true earnings” that fall within the boundaries of GAAP
according to the participants. It can also contribute to users of financial statements by
creating awareness of the different perceptions of preparers of financial statements. Finally,
it can contribute to the awareness of auditors: how can they confirm that the financial
statements represent a true and fair view if different actors have different perceptions about
this concept? Furthermore, an analysis of the reflections of these groups of stakeholders can
be used to identify new areas of earnings management research.
The findings from the experiment demonstrate the limitations of mainstream research
using quantitative archival research methods to identify earnings management
intervention. Qualitative research helps to understand the complex nature of earnings
management practices. First, it provides insights in the wide variety of accounting choices.
The group discussions confirmed the findings of qualitative research relating to the
different type of accounting choices. The “do nothing choice” can be perceived by a finance
professional as an earnings management intervention yet is not revealed in the financial
statements. At the other hand, accounting choices can be made out of habit instead of being
purposeful interventions. Second, qualitative research reveals the underlying deliberations
of the accounting choices or transaction structuring interventions, whereas mainstream
earnings management archival research has to make assumptions relating to management
intent. Finally, the findings of the experiment revealed the different perceptions of the
participants relating to the predefined earnings management interventions in the Earnings
questionnaire they were asked to assess. Analyzing the underlying deliberations for management
assessing earnings management interventions enriches studies that use a survey method for
this subject.
practices
The teaching approach as developed during the experiment still needs refinement. The
three settings all showed strengths and weaknesses. The authors concluded that, in order to
have full participation of the whole group, it is important to have a limited number of
participants in the group. The use of a prequestionnaire including predefined earnings 513
management intervention facilitated in-depth discussion of individual interventions but did
not stimulate participants to discuss their own accounting choices. Including open questions
in the questionnaire, asking participants to describe some of their own accounting choices
can possibly solve this limitation.
The challenge in further developing this approach is in stimulating participants to reflect
on their own accounting choices and discussing each other’s accounting choices. This
provides a learning opportunity for finance professionals to become aware of their own
habitual behavior and reflect on the different perceptions of their colleague-professionals.
Another challenge in refining the teaching approach is making participants aware of their
contextual setting and the influence of this setting on accounting choices. A series of
workshops within one organization with different participants (business controllers,
financial controllers, managers) would be an interesting next step in this light.

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Appendix. Questionnaire
515
Part 1 – Choices of a division manager.
General managers make all kinds of decisions that influence short-term operating results. Some
of their decisions are beyond reproach. Others are clearly wrong. Many fall into an ethical gray area:
there is no clear “right” or “wrong”.
The following questions reflect these everyday ethical choices of two division managers who
are in charge of divisions, both generating a revenue of e100 million and are part of a quoted
company with approximately e1 milliard revenue.
We would like your opinion for each individual choice. Use the following scale to indicate how
you judge their acceptability:
 Ethical practice.
 Questionable practice. I would not say anything to the manager, but it makes me
uncomfortable.
 Minor infraction. The manager should be warned not to do it again.
 Serious infraction. The manager should be severely reprimanded.
 Totally unethical. The manager should be fired.

Division X is not meeting budget target 2016

September 2016, division manager of division X realizes that the division needs a strong performance
in the fourth quarter to meet the budget target 2016. He decides on the following actions: (Please give
your opinion on each individual action)
 He decides to implement a sales program offering liberal payment terms to pull some
sales that would normally occur next year into the current year, customers accepting
delivery on the fourth quarter will not have to pay the invoice for 120 days. (based on
Merchant and Rockness)
 He orders manufacturing to work overtime in December so that everything possible can
be shipped by the end of the year. (based on Merchant and Rockness)
 He orders his employees to defer all discretionary expenditures (e.g. travel, advertising,
hiring, maintenance) into the next accounting period. Expected amount of deferrals:
e150.000. (based on Merchant and Rockness)
 He sells some excess assets and realizes a profit of e40.000. (based on Merchant and
Rockness)
 The division manager contacts the engagement partner of a consultancy firm who
performed an assignment in December 2016 and asked not to send his invoice until 2017
so that the costs would be incurred in 2017. Estimated amount e40.000. (based on
Merchant and Rockness)
QRAM Division Y is exceeding budget target 2016
16,4 Division Y has an excellent performance in 2016; the September 2016 cumulative earnings are
considerably exceeding budget and expectations. As a result, the management team allocated an
ambitious 2017 target to division Y.
In the fourth quarter of 2016 Division manager Y decides on the following actions: (Please give
your opinion on each individual action)
516  Division Y has planned an important new product introduction in February 2017. The
division manager orders his employees to accelerate the purchase of advertising material
for his new product. The advertising and promotion material are delivered and invoiced
in 2016. He orders his controller to allocate the expenses to the book year 2016. Amount
e50.000.
 He charges an invoice of e75.000 office furniture to the profit and loss statement. The
invoice relates to various items of office furniture, each representing a value of less than
e2.500. The accounting manual of the organization states that amounts below e2.500 are
not to be capitalized.
 He orders his controller to develop the rationale for increasing the reserve for inventory
obsolence. By taking a pessimistic view of future market prospects, the controller is able
to identify e700.000 worth of finished goods that conservative accounting would say
should be fully reserved (i.e. written off) even though the division manager is fairly
confident the inventory will still be sold at a later date at close to full price. (based on
Merchant and Rockness)

In 2017 division Y is not meeting budget

In 2017 Division Y is performing well. The division will, however, not be able to realize its ambitious
2017 budget target. If this continues, it is likely that the division has to cut expenses. Reduction of
expenses will jeopardize the product development and cost reductions have to take place. These cost
reductions would endanger some important product developments which are crucial for future
divisional growth. That’s why the Division manager Y makes the following actions. (Please give your
opinion on each individual action)
 Related to divisional growth of activities a wing of the headquarter had to be
refurbished for division Y. Total expenditures amount to e100.000. The invoice relates
to various items of office furniture, each representing a value of less than e2.500. The
accounting manual of the organization states that amounts below e2.500 are not to be
capitalized. The DM regards the project as one investment and orders to capitalize the
total amount.
 The division has sold 70 per cent of the inventory that was reserved in 2016. The DM
orders his controller to adjust the rationale into decreasing the reserve for inventory
obsolesces with de e210.000 (the remaining 30 per cent). The DM is fairly confident the
inventory will be sold at a later date at full price. (based on Merchant and Rockness)

Corresponding author
Therèse de Groot can be contacted at: degroot.therese@gmail.com

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