FSR Forum 14-02 by Eefke van der Meer

14th Volume January 2012 issue #2

Earnings Management Interview prof News Update H.P.A.J. Langendijk The Olympus case

CleanTech Challenge

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p53

Expert in Earnings Management

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Grow your green ideas!

Ondernemers helpen groeien met jouw cijfermatig inzicht?

Financieel talent Sta jij aan het begin van een carriĂ¨re als accountant of fiscalist? Dan is het goed om jezelf af te vragen waar jouw financieel inzicht het best tot zijn recht komt. Bij Baker Tilly Berk controleer je niet alleen het verleden, maar adviseer je ook over de toekomst van een bedrijf. Baker Tilly Berk combineert een landelijke aanwezigheid en een internationaal netwerk met kleinschalige kantoren dichtbij onze klanten. Die jij al snel persoonlijk kunt adviseren. Je werkt bijvoorbeeld mee aan de uitbreiding van een transportonderneming, de fusie van twee bedrijven of een audit in de publieke sector. Om ondernemers te helpen groeien zoeken we medewerkers die zelf ook ondernemend zijn en zich continu willen ontwikkelen. Denk jij dat de rol van adviseur bij jou past? Dan hebben we voor jou ook een goed advies: werkenbijbakertillyberk.nl.

www.werkenbijbakertillyberk.nl

ACCOUNTANTS EN BELASTINGADVISEURS

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fsrforum • volume 14 • issue #2

Earnings Management

Preface

Dear readers, Halfway through the year we present to you the second edition of this year, but the first edition in 2012. I would like to use this moment to wish you all the best in the further development of your career! In this edition the theme ‘Earnings Management’ plays a central role. Earnings management is a strategy that can be applied in financial accounting. The earnings are altered in order to meet the targets. Usually earnings management is used for income smoothing. When applied in an aggressive way earnings management can lead to fraud. After reading this edition you will have a better understanding of the process of earnings management. Questions such as when and why do managers apply earnings management will be answered. Three scientific articles in this edition contribute to the creation of a better understanding of the topic earnings management. The first article is from Cintia Mendez Easterwood. This article investigates the effect of a takeover on managers’ incentive to increase reported earnings. The second article is from John Jiang, Kathy R. Petroni and Isabel Yanyan Wang. The research examines whether CFO incentives are associated with earnings management. Previous research only focused on the incentives of CEOs, because CFOs are believed to be the agents of CEOs. In other words CFOs behave in a way that pleases CEOs. This research will validate whether this assumption is correct. The last article from Frank G. H. Hartmann and Victor S. Maas investigate which variables increase the likelihood of business unit controllers creating budgetary slack. They test the following variables: the degree to which the business unit controller is involved in management, social pressure and Machiavellianism. In this edition you will also find an interview with a true expert on the field of earnings management. Not only has prof. dr. Henk Langendijk done extensive research on this field but also on relating topics such as creative accounting and fraudulent reporting. Professor Langendijk is the chairman of the Financial Accounting & Reporting department at Nyenrode School of Accountancy & Controlling. The interview links the theory of the research papers to practical examples. Besides professor Langendijk, professor Knoops from our own university has devoted his time to this FSR Forum. This edition professor Knoops has written the teachers’ column in which he shares his experiences on the field of earnings management. Last edition I explained to you the essence of our new column ‘News Update’. As we want to keep on improving the quality of the magazine we have decided to change the column. From now on we are not going to make a difference between news updates for finance or accounting, but we are going to relate the news update to the theme. So in this edition you will find a news update about earnings management. Only recently one of the largest earnings management cases came to the surface: the Olympus case. Read more about this case in our News Update.

2 • Preface

In the remainder of this FSR Forum you will find the column of sir Groeneveld, who has written a column about the risk free Triple-A rating. Sir Groeneveld discusses how useful this rating is, because according to him the rating agencies adjust the rates too late. As usual the edition ends with an overview of our activities that took place and that are going to take place. I would strongly recommend you to pay attention to the CleanTechChallenge. The CleanTech Challenge is one of our new events. We organize this event in cooperation with YES!Delft and the Delft Energy Club. The event is an innovation competition for green ideas. It is your opportunity to develop an idea and to build a diverse team of entrepreneurial technology and finance students. An opportunity you do not want to miss out on! Before I let you to read and enjoy this FSR Forum, I would like to make you aware of the fact that from now on we are going to look for our predecessors. So if you are interested or if you want to know more about a board year at the FSR, please do not hesitate to contact us and know that you are always welcome to drink a coffee at our office. I am now halfway through my board year and I can guarantee you that this is a true valuable experience in the development of your career! I hope you will enjoy reading this FSR Forum and that it will provide you with a good understanding of earnings management!

Sincerely, Anne van Driesum Editor in Chief FSR Forum FSR board 2011-2012

Preface â&#x20AC;˘ 3

fsrforum • volume 14 • issue #2

Earnings Management

Table of contents

Takeovers and incentives for earnings management: An empirical analysis. C. Mendez Easterwood

This study tests the hypothesis that managers of firms that are targets of takeovers, especially hostile ones, systematically increase reported earnings in the quarters immediately preceding and following initiation of the takeover attempt. Results for the quarter ended prior to initiation support the hypothesis. 8

CFOs and CEOs: Who have the most influence on earnings management? John Jiang, Kathy R. Petroni and Isabel Yanyan Wang

This article examined the association between CFO equity incentives and earnings management. Prior research mainly focuses on the relationship between CEO equity incentives and accruals management. The authors find the earnings management response of CFOs to equity incentives is even stronger than that of CEOs. 15

Why Business Unit Controllers Create Budget Slack: Involvement in Management, Social Pressure, and Machiavellianism Frank G. H. Hartmann, Victor S. Maas

This paper investigates business unit (BU) controllers’ inclination to engage in the creation of budgetary slack. In particular, we explore whether controllers who are involved in BU decision making are more susceptible to social pressure to engage in slack creation than controllers who are not. 22

Colofon FSR FORUM appears five times a year and is an edition of the Financial Study Association Rotterdam KvK Rotterdam no: V 40346422 VAT no: NL 805159125 B01 ISSN no: 1389-0913 14th volume, number 2, circulation 1550 copies

4 • Table of contents

Editor in chief Anne van Driesum Editorial department Jeroen van Oerle Editorial advisory Dr. M. B. J. Schauten Dr. W. F. C. Verschoor Drs. R. Van der Wal RA

With the cooperation of C.M. Easterwood J. Jiang K.R. Petroni I.Y. Wang G.H. Hartmann V.S. Maas H.P.A.J. Langendijk Drs. J. G. Groeneveld RA RV C.D. Knoops D. Smits

Editorial address Editiorial office FSR Forum, Erasmus Universiteit Rotterdam Room H14-06 Postbus 1738, 3000 DR Rotterdam Tel. 010 408 1830 E-mail: forum@fsr.nu

Interview H.P.A.J. Langendijk

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Expert in Earnings Management Column Joost Groeneveld PhD

Baker Tilly Berk www.werkenbijbakertillyberk.nl NIBC www.careeratnibc.com KPMG www.gaaan.nu Deloitte www.werkenbijdeloitte.nl Grand Thornton www.carrierebijgt.nl Mazars www.werkenbijmazars.nl PWC www.werkenbijpwc.nl Ernst & Young www.ey.nl/carriere

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News update

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Company Presentations Deloitte www.werkenbijdeloitte.nl Mazars www.werkenbijmazars.nl Ministerie van Financiën www.werkenvoornederland.nl/minfin KPMG www.gaaan.nu accon avm www.werkenbijacconavm.nl Subscription EUR Students through membership FSR; costs e 5,00. Others through subscription. To obtain information, contact the editorial department; costs e 27.50 (including VAT and postage). Bank

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Table of contents • 5

fsrforum • volume 14 • issue #2

Deloitte

Company presentation

Je hebt bijna je titel op zak. En staat voor een van de belangrijkste beslissingen in je leven. Wordt het een luchtvaartmaatschappij, internationale bierbrouwer of retailketen? Als jij droomt van een topbaan bij een multinational, is er maar één antwoord mogelijk: Deloitte.

Dat je eerste baan tegenwoordig niet je laatste is, hoeven we je niet te vertellen. Dat veel bestuurders in de top van het bedrijfsleven hun carrière zijn begonnen bij Deloitte, misschien wel. Bij ons werk je voor én met de grote namen uit de wereld van multinationals, snelgroeiende nationale ondernemingen en maatschappelijke organisaties en overheidsinstanties. Samen met ambitieuze, hoogopgeleide collega’s werk je in multidisciplinaire en vaak internationale teams aan innovatieve oplossingen. En ondertussen aan je eigen groeispurt. Dus als jij wilt dat de topbedrijven straks voor jou in de rij staan, kun je nu het beste bij ons beginnen.

Ontdek jouw mogelijkheden bij Deloitte Consultancy: strategische oplossingen bedenken voor (inter)nationale organisaties in alle branches. De waarde van CFO’s helpen verbeteren. Human Resource vraagstukken integreren in de business strategie. Software applicaties implementeren of cliënten adviseren op het snijvlak van business en IT. Financial Advisory Services: professionals en bestuurders adviseren over complexe financiële transacties, kapitaalmarktvraagstukken, vastgoed en risicobeheersing. Financieel advies uitbrengen bij grote bedrijfsovernames of het realiseren van financiering. Maar ook IFRS, financial modelling, strategisch vastgoedadvies, gebiedsontwikkeling, waardebepaling van contracten, financial risk management en advisering op het gebied pensioenen en verzekeringen. Tax: multinationals adviseren over vennootschaps- of dividenbelasting. Of belastingadvies verzorgen aan Nederlandse, niet-beursgenoteerde ondernemingen. Tax, technologie en consulting oplossingen bieden aan de fiscale afdelingen van onze klanten. Of adviseren over omzetbelasting en douane. Loonbelastingzaken en arbeidsrechtelijke vraagstukken voor expats en medewerkers van multinationals behandelen, of vermogende particulieren adviseren over de groei van hun vermogen. Accountancy: RA en AA gerelateerde dienstverlening, zoals het beoordelen van complexe jaarrekeningposten, advisering bij interim controles, verdieping in de administratieve organisatie, samenstellen van jaarrekeningen en financiële rapportages. Maar ook onderzoek naar fraude en corruptie, en risicomanagement onderzoek naar de betrouwbaarheid van bedrijfsprocessen, informatie en technologie. Voor multinationals, non-profit organisaties, grote nationale ondernemingen en het hogere MKB-segment. Met kantoren in heel Nederland en ruim 4500 medewerkers is Deloitte Nederlands grootste organisatie op bovenstaande vakgebieden. Natuurlijk is groter niet automatisch beter, maar dankzij onze professionele organisatie, onze zelfstandige Innovation BV die organisaties helpt duurzaam te groeien en vooral de betrokkenheid van onze medewerkers geldt dat wel voor Deloitte. En dus ook voor de start van jouw carrière. Meer info over onze uitgebreide dienstverlening en ervaringen van Deloitte-medewerkers vind je op werkenbijdeloitte.nl of neem contact op met Merette Schuurman (06 83 555 201 / mschuurman@deloitte.nl)

6 • Companypresentation

Wil jij straks die topbaan? Kom dan nu bij ons werken.

Carrière Paul Seegers Mijn carrière bij Deloitte is inmiddels al zo’n 20 jaar geleden gestart op een regionaal kantoor in Breda. Ik was net terug in Nederland na een periode van 9 jaar in het Verenigd Koninkrijk te hebben doorgebracht. De keuze voor Deloitte was voor mij snel gemaakt. Ik kwam door middel van een doorverwijzing in contact met een senior manager, die als partner zou toetreden en verantwoordelijk was voor de internationale controlepraktijk van Deloitte in Breda. Het eerste kennismakingsgesprek met deze aankomende partner duurde 2,5 uur. Je kunt dus wel stellen dat er sprake was van een klik! ‘Fast forward’ van 1992 naar 2002. Andersen was ondertussen onderdeel geworden van Deloitte in Nederland en op 1 oktober 2002 eindigde een periode van 10 jaar werkzaam zijn op kantoor Breda. Samen met een 16-tal andere collega’s is een belangrijke stap gezet. De internationale controle-afdelingen van Deloitte zijn toen samengevoegd met de Andersen kantoren in Amsterdam, Rotterdam en Eindhoven. Ik had veel zin in die overstap. Mijn studie was immers afgerond en met de RA-titel op zak en een tiental jaren werkervaring, was ik wel toe aan de volgende uitdaging en die kwam ook…

Paul Seegers

Inmiddels zit mijn tweede decennium bij Deloitte er al bijna op. Wat is die tijd gevlogen! Maar ik kan met volle overtuiging zeggen dat ik nog steeds met enorm veel plezier mijn vak uitoefen. Terugkijkend heb ik veel mooie dingen meegemaakt. Het tot in de puntjes leren van het vak van een uitstekende leermeester in Breda, het afstuderen als Registeraccountant, de uitdaging van een integratie met Andersen, het bijna 4 jaar lang mogen optreden als Director of Independence, de benoeming tot partner en HR portefeuillehouder van de internationale auditpraktijk in Rotterdam en natuurlijk een prachtige selectie ‘blue chip clients’. Waar komt mijn energie en passie voor het vak en Deloitte vandaan? Dat is erg simpel. Ik kom continu nieuwe uitdagingen tegen, leer nieuwe dingen en beleef vooral heel veel plezier in het leiden van een groep enthousiaste jonge professionals die ook met veel passie en energie het vak van accountant willen leren. En hoe zit het dan met de begeleiding van jonge professionals bij Deloitte? Oordeel zelf: de partner die mij circa 20 jaar geleden heeft aangenomen is, tot het moment dat ik zelf partner werd, mijn coaching partner en mentor geweest. Hij nam afscheid van Deloitte op 31 mei en ik trad mede dankzij zijn begeleiding en coaching aansluitend toe op 1 juni.

Companypresentation • 7

fsrforum â&#x20AC;˘ volume 14 â&#x20AC;˘ issue #2

Takeovers and incentives for earnings management: An empirical analysis C. Mendez Easterwood

INTRODUCTION A common view among accounting researchers and practitioners, financial analysts and investors is that management deliberately selects accounting procedures and accruals in order to increase or decrease reported earnings. Previous researchers have hypothesized that certain economic and contracting variables as well as certain specific events provide management with incentives to maximize its own self-interest by increasing or decreasing reported earnings.1 This study investigates the impact of a specific event - a takeover - on management's incentives to increase reported earnings. Managers faced with the threat of a takeover (especially a hostile one) have incentives to manage reported earnings because they face potentially significant welfare losses if the takeovers are successful. Upon completion of the takeover, target managers often lose some or all of their control over the firm [Walkling and Long (1984)]. Previous empirical evidence indicates that managers adopt takeover defenses to entrench themselves and maintain control.2 Accordingly, managers of firms that are targets of takeovers have incentives to increase reported earnings to convince shareholders that managers are performing efficiently. These incentives are likely to be greater for managers who contest takeovers. Previous research suggests that, while friendly takeovers are synergistic, the purpose of hostile takeovers is to replace or change the policies of managers who do not maximize firm value [Morck, Schleifer and Vishny (1988) and Morck, Schleifer and Vishny (1989)]. Previous research also provides evidence that: 1) managers systematically increase reported earnings to convince shareholders that

8 â&#x20AC;˘ Takeovers and incentives for earnings management: An empirical analysis

they are performing efficiently and avoid losing their jobs [DeAngelo (1988)]; and 2) managers of target firms adopt income-increasing accounting methods [Groff and Wright (1989) and Christie and Zimmerman (1994)] This study differs from the Groff and Wright (1989) and Christie and Zimmerman (1994) studies in several ways. These differences relate to how earnings management is measured, the length of time that is examined, and how the sample is split between hostile and friendly takeovers. The results of this study are consistent with the hypothesis that managers of firms that are targets of hostile takeover attempts adopt income-increasing accruals during the quarter ended prior to initiation of the takeover attempt, but not during the first quarter following initiation. These findings suggest that managers believe they can convince shareholders that they are performing efficiently early on in the takeover attempt; however, as the takeover attempt progresses, they feel they can no longer benefit from adopting income-increasing accruals.

RESEARCH DESIGN AND SAMPLE SELECTION Approaches to Testing for Earnings Management Two approaches are used to test for earnings management among takeover targets. Both approaches use the discretionary accrual to measure earnings management. The first approach compares the discretionary accruals of all takeover targets to those of an industry- and size-matched sample of nontargets. Using an industry-matched sample of nontargets, however, can bias the results against finding support for earnings management among takeover targets because takeovers tend to be concentrated in specific industries. Nontargets in the

industry may have incentives to increase reported earnings to avoid becoming takeover targets. The second approach involves splitting the sample between hostile and friendly takeover targets and examining the discretionary accruals of each group separately. Managers of firms that are targets of friendly takeovers may have less incentive to systematically adopt income-increasing measures because they are not actively resisting the takeover attempt. Additionally, if friendly takeovers are synergistic [Morck, Shleifer, and Vishny (1988)], managers of these firms are less likely to be afraid of losing their jobs. These managers, however, are still likely to be concerned with increasing reported earnings to increase the takeover premium demanded by investors.

Selection of Sample of Target Firms The initial sample of target firms is composed of all AMEX and NYSE companies, except financial companies, that were targets of tender offers (both friendly and hostile) between 1985 and 1989. This sample, which includes both successful and unsuccessful takeover attempts, is obtained from Securities Data Company's Merger and Corporate Transactions Database. To remain in the sample, the target firm must have made at least one quarterly earnings announcement between initiation and completion of the takeover attempt. The initiation date must either precede or be the same as the quarter-end date to which the earnings announcement pertains. Initiation for both hostile and friendly takeover attempts is defined as the date of the first Wall Street Journal report or Dow Jones News Wire of takeover or acquisition activity. A takeover bid is considered hostile if the initial bid was not conditional upon target board approval and one or more of the following occurred subsequent to initiation of the takeover bid: 1) target management expressed verbal opposition; 2) target management sought a white knight; 3) target management filed court action; 4) target management adopted one of the following types of takeover defenses: a poison pill plan, a supermajority provision (except for fair-price amendments), and/or a classified-board provision; and 5) target management proposed a dual-class recapitalization or a management buyout. A takeover bid that is not considered hostile is classified as friendly. If the takeover attempt is classified as friendly, completion is defined as the date of the first Wall Street Journal report stating one of the following: 1) over 90% of the target firm's shares had been tendered; or 2) the acquisition was complete. If the takeover attempt is hostile, completion is defined as the date of the first Wall Street Journal report stating that the battle was over. Financial information for each target firm in the sample is obtained from Compustat. The final sample of firms is reduced to 110 targets because financial data is not available to compute accruals. Table 1 includes a description of the sample. Fifty-seven of these firms were hostile targets and 53 were friendly targets at the quarter-end date of the last fiscal quarter prior to initiation (denoted quarter t-1). The year with the largest number of takeover initiations is 1988 with 34 takeovers. Average total assets for the full sample of targets in quarter t-2 is $1,085.52 million.

Table 1: Description of Entire Sample of Takeover Targetsa Hostileb

Friendly

Total

Avg. Total Assets ($million)

1985

Year of Initiation

1,644.86

1986

936.42

1987

1,278.50

1988

599.29

1989

1,553.26

Total

110

1,085.52

Sample sizes used in each statistical test vary due to missing observations. b Includes 9 firms that are classified as friendly takeover targets at quarter t. These firms were initially hostile takeover targets. By the time quarter t ended, however, the takeover attempt had turned friendly. a

COMPUSTAT Quarterly file which meet the following criteria: 1) The control firm must be in the same three-digit SIC industry as the target firm. 2) At quarters t and t-1, the control firm must have had either the same fiscal year-end date as the target firm or a fiscal year-end within two months of the target firm's fiscal year-end. 3) The control firm had total assets at quarter t-2 within 25% of the target firm's total assets at quarter t-2. 4) The control firm must not have been either a target or bidder in a takeover attempt during the year before and after quarter t. The control firm must also not have gone through bankruptcy or a financial restructuring during this period. In cases where more than one firm on the COMPUSTAT tape meets the above criteria, all the firms (maximum of 5) are used as matches. If the above procedure yielded no match, then the closest size firm was used. This procedure yields a sample of 186 nontarget control firms. Table 2 presents descriptive statistics for the samples of target and nontarget firms. T-tests and Wilcoxon Rank Sum tests are used to test for differences between target and nontarget firms. Panel A reports quarterly data and Panel B reports annual data for the fiscal year ended immediately prior to initiation. All variables are measured for each nontarget firm using the quarter or fiscal year-end closest in calendar time to the matched target firm's quarter or fiscal year-end of interest. Discussion of the descriptive statistics reported in Table 2 focuses on differences between hostile targets and their matches and differences between friendly targets and their matches. Emphasis is placed on a comparison of medians and Wilcoxon Rank Sum tests to minimize the impact of outliers. Results in Panel A indicate that the hostile targets are less profitable than their matches as measured by return on assets (ROA). Test results indicate that the friendly targets are also less profitable than their matches. Panel A indicates that hostile targets have similar size, similar leverage, and similar changes in ROA for quarters t and t-1. Additionally, friendly targets have similar size, similar leverage, and similar changes in ROA for quarters t and t-1. Panel B uses annual data to compare ROA, sales over assets, and operating margin for hostile targets and their matches and friendly targets and their matches. Panel B shows that the friendly targets are less profitable than their matches, but in other dimensions there are no differences. The hostile targets are not different from their matches using annual data. In conclusion, targets are typically less profitable than their matches in quarter t-1.

Selection of Matched Sample of Nontargets

Measurement of Earnings Management Quarterly Earnings Announcements

To control for industry and size effects, at least one matched nontarget firm is found for each of the 110 targets. The matched sample consists of AMEX or NYSE firms from the

This study focuses on earnings for two quarters: the first quarter ended subsequent to initiation of the takeover attempt (quarter t) and the quarter preceding quarter t

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Takeovers and incentives for earnings management: An empirical analysis â&#x20AC;˘ 9

fsrforum • volume 14 • issue #2

Table 2: Descriptive Statistics for Sample of Takeover Targets and Control Group of Nontargets Descriptive Variables: mean (median)

Full Sample

Hostile Targets and their Matches

All Targets N=110

All Matches N=186

t-statistic (Wilcox. Z) for diff. in:

Hostile Targets Matches for Hostile N=57 Targets N=95 Panel A. Quarterly Data

Size - Total Assets for Quarter t-2

1085.52 (387.34)

1714.52 (355.02)

-1.23 (0.01)

1260.55 (564.68)

Return on Assets for Quarter t-1 (%)a

0.70 (1.08)

1.33 (1.48)

-1.79* (-2.46**)

Long-term Debt/Total Assets - Quarter t-1 (%)

25.18 (23.58)

21.61 (20.89)

1.58 (1.21)

Change in Return on Assets for Quarter t-1b

-0.0028 (-.0005)

0.0023 (0.0008)

-1.40 (-1.27)

Change in Return on Assets for Quarter tb,c

0.0022 (-.0019)

-0.0026 (0.0001)

0.66 (-1.37)

Friendly Targets and their Matches

t-statistic (Wilcox. Z) for diff. in:

Friendly Targets N=53

Matches for Friendly t-statistic (Wilcox. Z) Targets N=91 for diff. in:

1344.33 (550.71)

-0.26 (0.14)

897.28 (241.93)

2100.99 (253.86)

-1.22 (0.02)

1.30 (1.13)

1.33 (1.58)

-0.08 (-1.95**)

0.07 (0.90)

1.34 (1.42)

-2.11** (-1.74*)

22.99 (24.00)

23.27 (22.30)

-0.12 (0.36)

27.54 (21.91)

19.89 (18.45)

1.93* (1.41)

0.0003 (-.0007)

-0.0010 (0.0008)

0.55 (-0.63)

-0.0062 (-.0004)

0.0057 (0.0011)

-1.69* (-1.25)

-0.0021 (-.0017) (N=48)

-0.0030 (0.0004) (N=82)

0.32 (-1.06)

0.0056 (-.0021) (N=62)

-0.0023 (-.0008) (N=104)

0.61 (-0.89)

* Significant at the 0.10 level (two-tailed). ** Significant at the 0.05 level (two-tailed). Return on Assets=Net Income before Extraordinary Items/Total Assets. b Change in Return on Assets for Quarters t(t-1)=Return on Assetst(t-1)-Return on Assetst-4(t-5). c N for the firms classified as hostile or friendly changes at quarter t because 9 takeover targets that are classified as hostile at quarter t-1 are classified as friendly at quarter t. d Operating Margin=Operating Income before Depreciation/Sales. a

Descriptive Variables: mean

Full Sample

Hostile Targets and their Matches

Friendly Targets and their Matches

All Targets N=110

All Matches N=186

t-statistic for diff. in:

Hostile Targets Matches for Hostile t-statistic (Wilcox. Z) N=57 Targets N=95 for diff. in: Panel B. Annual Data for the Year Ended Immediately Prior to Initiation

Friendly Targets N=53

Matches for Friendly t-statistic (Wilcox. Z) Targets N=91 for diff. in:

Return on Assets (%)a

2.03

5.24

-2.07**

4.54

5.43

-0.83

-0.66

5.05

Sales/Assets

1.56

1.49

0.65

1.64

1.63

0.06

1.47

1.34

1.15

Operating Margin (%)d

9.18

12.43

-1.43

11.00

12.53

-1.08

7.23

12.33

-1.13

-1.92*

(quarter t-1). If managers manipulate reported earnings when threatened by a takeover attempt, the quarters closest in calendar time to initiation of the takeover attempt are hypothesized to exhibit the greatest amount of income management. This is based on the argument that the earnings announcement which is likely to have the most influence over shareholders' beliefs is the one closest to the start of the takeover attempt. Likewise, as the takeover attempt approaches completion, managers are less likely to be able to influence the outcome by increasing reported earnings. Managers might also prefer to increase quarter t-1 earnings because shareholders are less likely to suspect that earnings for quarters prior to initiation are managed. Table 3 presents a summary of the number of days between events such as fiscal quarter-ends, earnings announcements, initiation, and completion for the sample of takeover targets. This table shows that the event closest in time to initiation is the earnings announcement for quarter t-1. If managers manipulate earnings close to initiation, then quarter t-1 earnings will exhibit the greatest amount of income management. Although the quarter t-1 earnings announcement

10 • Takeovers and incentives for earnings management: An empirical analysis

usually occurs prior to initiation, the accrual at quarter t-1 is subject to manipulation by managers because managers often learn of a takeover attempt before the information becomes public.

Definition of the Discretionary Accrual The total quarterly accrual is computed as follows: QACCi,t = (CTCAi,t - CCASHi,t) - (CTCLIAi,t - CCDEBTi,t) - DEPRi,t where: QACCi,t = total quarterly accrual for firm i at quarter t, CTCAi,t = change in total current assets for firm i at quarter t, CCASHi,t = change in cash for firm i at quarter t, CTCLIAi,t = change in total current liabilities for firm i at quarter t, CCDEBTi,t = change in short-term notes and current maturities of long-term debt for firm i at quarter t, and DEPRi,t = depreciation expense for firm i at quarter t.

The year with the largest number of takeover initiations is 1988 with 34 takeovers.

Table 3: Summary of the Number of Days Between Events Mean (Median) Number of Days between:

All Takeover Targets (N=110)

Hostile Targets (N=57)

Friendly Targets (N=53)

Quarter-end t-1 and Initiation

55.9 (60.5)

52.2 (51)

59.8 (66)

-1.63

Earnings Announcement f or Quarter t-1 and Initiationa

30.8 (27.5)

27.4 (21)

34.5 (32)

-1.73*

Initiation and Quarter-end t

35.1(30.5)

38.6 (40)

31.2 (25)

1.56

Initiation and Earnings Announcement for Quarter t

63.9 (58)

66.1 (64)

61.5 (52)

0.77

162.8 (137.5)

177.3 (136)

147.2 (142)

1.34

33.7 (29)

30.7 (27)

37.0 (32)

-2.00**

28.8 (25.5)

27.4 (25)

30.3 (26)

-1.18

Initiation and Completion Quarter-end t-1 and the Earnings Announcement for Quarter t-1 Quarter-end t and the Earnings Announcement for Quarter t

t-statistic for difference in:

* Significant at the 0.10 level (two-tailed). ** Significant at the 0.05 level (two-tailed). a Computed using absolute values because the quarter t-1 earnings announcement can occur before or after initiation.

The total quarterly accrual is composed of a nondiscretionary component and a discretionary component. The discretionary component is the measure of earnings management. It is computed as follows: DQACCi,t = QACCi,t - NQACCi,t where: DQACCi,t = discretionary accrual for firm i at quarter t, NQACCi,t = nondiscretionary accrual for firm i at quarter t. NQACCi,t is an estimate of what QACCi,t would be absent earnings management.

where: TAi,q-4 = total assets for firm i at quarter q-4 (prior year total assets),

The Modified Jones Approach to Estimating the Discretionary Accrual

FDIFFi,q-1 = (QACCi,q-1 - QACCi,q-2),

Two methods are used to estimate NQACCi,t. The first method, based on the model developed by Jones (1991), consists of computing a separate time-series regression for each firm in the sample. The total actual accrual is regressed on variables such as gross fixed assets and changes in revenues that proxy for economic conditions and firm-specific factors. The parameters obtained from the estimation period regressions are used to compute the nondiscretionary accrual for the period of interest. The number of target firms that both meet the criteria for inclusion in the modified Jones approach and have a matched nontarget firm that meets the criteria for inclusion in the time-series approach is 48 (42 of these at quarter t and 47 at quarter t-1).3 To be included in the sample, enough data must be available to compute the accrual for quarter t (or quarter t-1) and to compute a minimum of 10 quarterly accruals prior to quarter t-1. Ordinary least squares is used to estimate the following model for each firm:

FOURQi,q = a dummy variable set equal to 1 if quarter q is firm i's fiscal fourth quarter and set equal to 0 otherwise,

QACCi,q/TAi,q-4 = αi[1/TAi,q-4] + β1i[(CHGREVi,q-CHGARi,q)/TAi,q-4] + β2i[GPPEi,q/TAi,q-4] + β3i[FDIFFi,q-1/TAi,q-4] + β4iFOURQi,q + μi,q

CHGREVi,q = the change in revenues for firm i during quarter q, CHGARi,q = the change in accounts receivable for firm i during quarter q, GPPEi,q = gross fixed assets for firm i at quarter q,

μi,q = error term for firm i at quarter q, i = 1,...,N, firm index, and q = 1,...,Qi, quarter index for the quarters included in the estimation period for firm i (Qi ranges from 9 to 55 quarters). The model is estimated using the longest time series of observations available prior to quarter t-1 for each firm. Coefficient estimates obtained from the above regression are used to calculate DQACCi,t, the prediction error, as follows:4 DQACCi,t = QACCi,t/TAi,t-4 - (ai[1/TAi,t-4] + b1i[(CHGREVi,tCHGARi,t)/TAi,t-4] +b2i[GPPEi,t/TAi,t-4] + b3i[FDIFFi,t-1/TAi,t-4] + b4iFOURQi,t) To test the significance of DQACCi,t, it must be standardized by dividing it by its estimated standard deviation.5 The discretionary accrual model used in this study differs from the model used by Jones (1991). Quarterly data are used in this study instead of annual data. This study includes addi-

Takeovers and incentives for earnings management: An empirical analysis • 11

fsrforum • volume 14 • issue #2

Managers might also prefer to increase quarter t-1 earnings because shareholders are less likely to suspect that earnings for quarters prior to initiation are managed.

tional variables to control for: 1) managerial discretion over sales revenue (CHGAR); 2) the tendency of increases (decreases) in accruals in one period to be followed by decreases (increases) in accruals in a subsequent period (FDIFF); and 3) the effect that bonus plans and auditor scrutiny may have on managerial discretion over fiscal fourth quarter earnings (FOURQ). The average R-squared for the 124 estimation period multiple regressions run for the target and nontarget firms (48 targets and 76 nontargets) is 0.527. The average adjusted R-squared is 0.354. In addition, Table 4 reports descriptive statistics related to the independent variables in the estimation period regressions. Table 4 shows that the independent variable that is significant in the greatest number of regressions is (CHGREV-CHGAR). It is significant at the 10% level in 52 of the 124 regressions. Table 4: Descriptive Statistics for the 124 Estimation Period Regressions Included in the Modified Jones Approach Variable

Mean Coefficient

Mean t-statistica

Number of Coefficients Significant at the Following Levels 1% 5% 10%

Intercept

-31.4

0.84

CHGREV - CHGAR

-0.248

2.02

GPPE

0.045

1.01

FDIFF

0.042

1.06

-0.011

1.52

FOURQ a

Computed using the absolute value of each individual t-statistic.

The DeAngelo Approach to Estimating the Discretionary Accrual The second approach – the DeAngelo approach - to estimating the discretionary accrual is based on a simple random walk model that allows for seasonality in the data. The unmanaged accrual is assumed to equal the actual prior-year accrual. A problem with this approach is that it assumes that the nondiscretionary accrual does not vary in response to economic conditions. An advantage of this approach is that fewer firms are dropped from the initial sample due to missing observations. The standardized DeAngelo discretionary accrual is computed as follows: DQACCi,t = [QACCi,t - QACCi,t-4]/TOTAL ASSETSi,t-4 The DeAngelo DQACCi,t is calculated for 92 takeover targets at quarter t and 101 takeover targets at quarter t-1. It is also calculated for each nontarget control firm for the quarter closest in calendar time to the quarter t (or t-1) of its matched target firm.

12 • Takeovers and incentives for earnings management: An empirical analysis

EMPIRICAL RESULTS Comparison of All Takeover Targets to All Nontargets The first approach to testing for earnings management among targets of takeovers compares the discretionary accruals of the takeover targets to those of a control group of nontargets. The following hypothesis is tested: HO: mean DQACCTARG < mean DQACCNONTARG; HA: mean DQACCTARG > mean DQACCNONTARG. The results of bivariate tests for quarter t are reported in Table 5. Panel A presents results using the modified Jones approach and Panel B presents results using the DeAngelo approach. The modified Jones DQACC’s presented in the tables are not standardized; however, all test results presented in the tables are computed using standardized modified Jones DQACC’s. The results reported in Table 5 do not provide support for the hypothesis that managers of takeover targets systematically adopt income-increasing accruals during quarter t. Both the modified Jones DQACC and the DeAngelo DQACC for the takeover targets are positive and greater than the modified Jones and DeAngelo DQACC's for the control group. Differences between the two groups, however, are not statistically significant. Table 6 presents results for quarter t-1. In contrast to the results reported in Table 5, those reported in Table 6 provide support for the earnings management hypothesis. As shown in Panel A, the modified Jones DQACC for the takeover targets is greater than and significantly different from the modified Jones DQACC for the control group of nontargets. In addition, the mean and median modified Jones DQACC's for the takeover targets are income-increasing, while the mean and median modified Jones DQACC's for the nontargets are income-decreasing. Panel B of Table 6 shows that the DeAngelo DQACC for the takeover targets is greater than and significantly different from the DeAngelo DQACC for the control group of nontargets. In addition, the mean and median DeAngelo DQACC's for the takeover targets are income-increasing, while those for the control group of nontargets are income-decreasing.

Table 5: Bivariate Results for Quarter t Using Both the Modified Jones and DeAngelo Mean

Median

Mean

Median

t-statistic (Wilcoxon Z) for difference in:a,b

Panel A. The Modified Jones Approach All takeover targets 0.0035

0.0024

Control group of nontargets 42

-0.0065

-0.0012

-0.0108

Hostile takeover targets -0.0011

0.0047 0.0013

Mean

Median

0.47 (0.6408)

0.60 (0.5459)

Mean

Median

-0.55 (0.5847)

0.00 (0.9999)

Mean

Median

1.16 (0.2531)

0.83 (0.4038)

Mean

Median

Control group of nontargets

Friendly takeover targets 0.0072

-0.0041 -0.0030 Control group of nontargets -0.0109

Panel B. The DeAngelo Approach All takeover targets 92

-0.0061

Control group of nontargets -0.0003

Hostile takeover targets 41

-0.0016 -0.0097

0.79 (0.4277)

Control group of nontargets 0.0035

Friendly takeover targets 51

1.54 (0.1252) 0.91 (0.3646)

0.33 (0.7385)

Control group of nontargets -0.0005

1.25 (0.2146)

0.60 (0.5469)

Text

Mean

Median

Text

Mean

Median

Text

Approaches to Computing the Discretionary Accrual a

p-values are in parentheses. Test results are based on standardized measure of the modified Jones discretional accrual.

Table 6: Bivariate Results for Quarter t-1 Using Both the Modified Jones and DeAngelo Mean

Median

Mean

Median

t-statistic (Wilcoxon Z) for difference in:a,b

Panel A. The Modified Jones Approach All takeover targets 0.0028

0.0063

Control group of nontargets 47

-0.0179

-0.0201

-0.0151

Hostile takeover targets 0.0033

0.0080 -0.0072

Mean

Median

2.29 (0.0246)

1.88 (0.0597)

Mean

Median

1.94 (0.0580)

1.73 (0.0837)

Mean

Median

1.23 (0.2250)

0.65 (0.5131)

Mean

Median

101

1.94 (0.0538)

2.08 (0.0373)

Mean

Median

2.29 (0.0242)

2.35 (0.0188)

Mean

Median

0.60 (0.5480)

0.64 (0.5225)

Control group of nontargets

Friendly takeover targets 0.0021

-0.0095 -0.0101 Control group of nontargets -0.0095

Panel B. The DeAngelo Approach All takeover targets 0.0049

0.0020

Control group of nontargets 101

-0.0102

-0.0151

-0.0050

Hostile takeover targets 0.0072

0.0021

Control group of nontargets

Friendly takeover targets 0.0024

0.0018

-0.0097 -0.0088 Control group of nontargets -0.0103

Approaches to Computing the Discretionary Accrual p-values are in parentheses. Test results are based on standardized measure of the modified Jones discretional accrual.

Comparison of Hostile and Friendly Takeover Targets to their Matched Nontargets If managers of firms that are targets of hostile takeovers have greater incentives to manage reported earnings, then examining the discretionary accruals of hostile takeover targets separately from those of friendly takeover targets will produce stronger results. Thus, the following hypotheses are tested: 1) HO: mean DQACCHOSTARG < mean DQACCNONTARG; HA: mean DQACCHOSTARG > mean DQACCNONTARG. 2) HO: mean DQACCFRNTARG < mean DQACCNONTARG; HA: mean DQACCFRNTARG > mean DQACCNONTARG.

The quarter t results reported in Table 5 for the modified Jones DQACC (Panel A) and the DeAngelo DQACC (Panel B) show no statistically significant difference between (1) the discretionary accruals of hostile targets and their matched nontargets and (2) the discretionary accruals of friendly targets and their matched nontargets. In all cases, however, the mean DQACC's for the target firms are greater than the mean DQACC's for the nontarget firms. These results, therefore, are similar to the results obtained in the previous section. In contrast to the quarter t results, the quarter t-1 results presented in Table 6 provide support for the hypothesis that managers of hostile takeover targets adopt income-increas-

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Takeovers and incentives for earnings management: An empirical analysis â&#x20AC;˘ 13

fsrforum • volume 14 • issue #2

Managers of firms that are targets of hostile takeovers have greater incentives to manage reported earnings.

ing accruals during the quarter ended prior to initiation. The results presented in Panel A for the modified Jones approach indicate that DQACC for the hostile takeover targets is positive and significantly different from the DQACC for the nontargets. This difference is significant at the 10% level. The results presented in Panel A, however, for the friendly takeover targets show that the modified Jones DQACC for the friendly targets is greater than, but not significantly different from, the modified Jones DQACC for the matched sample of nontargets. The results presented in Panel B of Table 6 are consistent with those in Panel A of Table 6. At quarter t-1, the DeAngelo DQACC for the hostile takeover targets is positive and significantly different from the DeAngelo DQACC for the matched nontargets. This difference is significant at the 5% level. The DeAngelo DQACC for the friendly takeover targets is positive but not significantly different from the DeAngelo DQACC for the control group of nontargets.

SUMMARY AND CONCLUSIONS This study tests the hypothesis that managers of firms that are targets of takeovers systematically adopt income-increasing accounting accruals during the quarters immediately preceding and following initiation of the takeover attempt. Discretionary quarterly accruals are computed for a sample of 110 firms that were targets of tender offers between 1985 and 1989 and for a matched sample of nontargets. The discretionary accruals of all takeover targets are compared to those of the nontargets for both the sample as whole and a sample split between hostile and friendly takeover targets. The empirical results indicate that managers of firms that are targets of takeovers systematically adopt income-increasing accruals during the quarter ended prior to initiation of the takeover attempt but not during the quarter ended subsequent to initiation of the takeover attempt. The test results also indicate that the income-increasing accruals are primarily due to the hostile takeover targets. These findings are consistent with the argument that managers of firms that are targets of hostile takeovers have greater incentives to manage reported earnings.

14 • Takeovers and incentives for earnings management: An empirical analysis

References 1. Christie, A. A., and J. L. Zimmerman, “Efficient and Opportunistic Choices of Accounting Procedures: Corporate Control Contests,” The Accounting Review 69, October, pp. 539-566, 1994. 2. DeAngelo, L. E., “Accounting Numbers as Market Valuation Substitutes: A Study of Management Buyouts of Public Stockholders,” The Accounting Review 61, July, pp. 400-420, 1986. 3. DeAngelo, L. E., “Managerial Competition, Information Costs, and Corporate Governance: The Use of Accounting Performance Measures in Proxy Contest,” Journal of Accounting and Economics 10, January, pp. 3-36, 1988. 4. Groff, J. E., and C. J. Wright, “The Market for Corporate Control and Its Implications for Accounting Policy Choice,” Advances in Accounting 7, pp. 3-21, 1989. 5. Jarrell, G. A. and A. B. Poulsen, “Shark Repellents and Stock Prices: The Effects of Antitakeover Amendments since 1980,” Journal of Financial Economics 19, September, pp, 127-168, 1987. 6. Jones, J. J., “Earnings Management during Import Relief Investigations,” Journal of Accounting Research 29, Autumn, pp. 193-228, 1991. 7. Morck, R., A. Shleifer, and R. W. Vishny, “Characteristics of Targets of Hostile and Friendly Takeovers,” Corporate Takeovers; Causes and Consequences, Edited by A. J. Auerbach, pp 101-134, University of Chicago Press, Chicago, IL., 1988. 8. Morck, R., A. Shleifer, and R. W. Vishny, “Alternate Mechanisms for Corporate Control,” The American Economic Review 79, No. 4, September, pp. 842-852, 1989. 9. Patell, J. M., “Corporate Forecasts of Earnings Per Share and Stock Price Behavior: Empirical Tests,” Journal of Accounting Research 14, Autumn, pp. 246-276, 1976. 10. Ryngaert, M., “The Effect of Poison Pill Securities on Shareholder Wealth,” Journal of Financial Economics 20, January/March, pp.377-417, 1988. 11. Theil, H., Principles of Econometrics, John Wiley & Sons, Inc., New York, N. Y., 1971. 12. Walkling, R. A., and M. S. Long, “Agency Theory, Managerial Welfare, and Takeover Bid Resistance,” Rand Journal of Economics, Spring, pp. 54-68, 1984.

fsrforum • volume 14 • issue #2

CFOs and CEOs: Who have the most influence on earnings management? By John Jiang, Kathy R. Petroni and Isabel Yanyan Wang, 2010

1. Introduction: This study investigated whether CFO equity incentives are associated with earnings management. Prior research has mainly focused on CEOs. The main tools used to measure earnings management have been accruals and the likelihood of beating analyst forecasts. Despite the position of CFOs in companies, no in depth research has been done that considers their effect on earnings management. Some, however, have recently raised concerns that the actions of the CFO should be examined. As described by Katz (2006) some have argued that those who are in charge of “minding the cookie jars” like CFOs should not be paid in stock options, but by “generous but fixed compensation for specified contract periods.” The SEC has made the focus on CFO behavior mandatory in that CFOs now have to disclose their pay (as was already the case for CEOs). Users of financial statements also indicate the importance of disclosure by means of praising the related SEC regulation. The reason why other research has mainly focused on CEOs instead of CFOs is because CFOs are believed to be the agents of CEOs and in analogy to this statement, CFOs are supposed to behave in a way that pleases CEOs. If not, the CEO simply replaces the CFO. Prior research has taken this argument as a justification to leave out research with regard to CFOs while this article in fact finds that the common belief that CFOs are simply followers of CEOs does not hold. In order to examine the role of CFO equity incentives in earnings management relative to those of CEOs, this article separately and jointly examines the association between CFO and CEO equity incentives and earnings management. In

addition, the article further considers two settings (pre- and post SOX 2002) and utilizes methodologies similar to those used in prior research that show an association between CEO equity incentives and earnings management. The article concentrates first on accruals management by reexamining in the CFO setting a study by Bergestresser and Philippon (2006) who find that CEO equity incentive ratios explain firm’s accruals management. Next, the article considers the relation between CFO equity incentives and the likelihood of meeting or beating analysts’ consensus forecasts, which is collectively referred to as beating analyst forecasts, by reexamining in the CFO setting Cheng and Warfield’s (2005) study on CEOs.

2 Descriptive statistics of CEO and CFO compensation and equity incentives. This article bases the analysis on S&P 1500 companies which are covered by ExecuComp with both CEO and CFO compensation data available. In the period of 1993 to 2006 there are a total of 17,542 firm-years with compensation data available which suit the needs for this article. Table 1 shows the descriptive statistics on the data. Panel A focuses on CEO and CFO descriptives. The findings for the CEO compensation data are in line with earlier research. The CFO compensation sample data is new and was generated following the same principles as prior CEO compensation related articles. Panel B of table 1 shows the correlation matrix between CEO and CFO compensation. As can be seen there is a large correlation between CEO and CFO cash and total pay.

CFOs and CEOs: Who have the most influence on earnings management? • 15

fsrforum • volume 14 • issue #2

3. Test on the relation between CFO equity incentives and earnings management. This paper first examines the relation between CFO equity incentives and earnings management. This analysis is based on two measures for earnings management as discussed before. First, the effects of earnings management through the absolute values of total accruals and discretionary accruals are examined. Next, the likelihood of beating analyst forecasts is used to specify the relationship between CFO equity incentives and earnings management. The tests are first done in the CEO setting to confirm by prior research and then redone with the CFO data. In this way the methodology is in line with papers concentrated on the effects of CEOs while also making a strong case for the CFO scenario.

3.1 Accruals management Following the methodology of the CEO related papers it was determined that firms with higher CEO equity incentive ratios have more accruals management. The estimation model looks as follows:

Two proxies for accruals management are used for equation 1. First the absolute value of total accruals scaled by lagged total assets is used. Secondly, discretionary accruals are calculated using the forward looking discretionary accruals model developed by Dechow, Richardson and Tuna (2003) using the following regression to estimate nondiscretionary accruals:

Where k is the slope coefficient from a regression of changes

16 • CFOs and CEOs: Who have the most influence on earnings management?

in accounts receivables on changes in sales. The total accruals are scaled by average total assets and future sales is added to the equation. The forward looking discretionary accruals are calculated as the difference between total accruals and the estimated nondiscretionary accruals. The absolute value of forward looking discretionary accruals are also used in the analysis and are referred to as absolute discretionary accruals. In terms of control variables size, firm age, volatility of sales growth, firm leverage and a proxy for the level of corporate governance are used as well as the market to book ratio, year indicators, exchange indicators and the Fama French industry indicators. Model 1 makes a distinction between pre and post SOX implementation in order to see if there are differences between the two periods. The pre sox period runs from 1993 until 2001 and the post SOX sample period runs from 2002 until 2006. Table 2 shows the results of the analysis. Accruals could be a noisy proxy for detecting earnings management so next the study considers the impact of CFO incentives on beating analyst forecasts. Cheng and Warfield (2005) find that firms with higher CEO equity incentives are more likely to report positive earnings surprises over analysts’ earnings forecast. In line with prior research on CEO behavior with respect to this type of good news, the incentives of CFOs are tested.

The dependent variable equals 1 if a firm’s actual annual earnings per share is greater than or equal to the latest analyst consensus earnings forecast and zero otherwise. The equity incentive ratio is the main focus point of this test. The controls are equal to those in prior models. Table 3 shows the results based on the earnings management test in relation to beating the forecasts. As can be concluded

from the table, CFO equity based incentives are positively associated with the likelihood of reporting good news in the form of positive earnings surprises. The total effects of CFO influences with respect to earnings management as measured by the focus on beating the forecasts is larger and more significant than the effect of CEOs. When focusing on pre and post sox regulation, the impact of the new SOX regulation can clearly be observed as for CEO’s behavior. CFO’s initiation of earnings management is still present though, despite the fact that full disclosure on both CEOs and CFOs is mandatory in the post SOX period.

equity incentives on earnings management relative to the equity incentives of CEOs. The equity incentives were estimated by using a measure of the sensitivity of compensation to changes in stock price. As an alternative approach to assessing the sensitivity of a manger’s pay to meeting various earnings targets, this paper considers the sensitivity of a firm’s stock return to accounting earnings as well. The new model includes earnings per share and the 12 month stock return.

3.3 Additional analysis

The estimate on beta1 captures the sensitivity of a firm’s stock return to earnings. The model is corrected for AR(1)

The study primarily concentrates on the impact of CFO’s

CFOs and CEOs: Who have the most influence on earnings management? • 17

fsrforum • volume 14 • issue #1

deficiencies via the Yule-Walker method. Beta1 is estimated for each firm over the period of 1980-2001 in the absolute total accruals and the absolute discretionary accruals analyses. For beating the forecast analysis the full sample period is used (1980-2006). Table 4 shows the results of this additional analysis.

Conclusion In this study it was investigated whether CFO equity incentives are associated with earnings management and the incremental role of CFO equity incentives in earnings management relative to those of the CEOs. The inspiration for this paper came from the increased regulation on the disclosure of CFO and CEO compensation packages. Based on prior research it should not be expected that the CFO has an impact on earnings management that goes beyond the impact of CEOs. However, this paper expects that CFOs have independent influences on a firm’s earnings management and that this influence may even be greater than that of CEOs. This hypothesis is put to the test via a dual measurement of earnings management. First the accruals are looked

18 • CFOs and CEOs: Who have the most influence on earnings management?

at and secondly the likelihood of beating analyst forecasts. This paper finds that CFO influences on earnings management indeed go beyond those of CEOs. CFO equity incentives play an independent role in firm’s earnings management activities, even after controlling for CEO equity incentives. The results from this paper support the SEC’s recent disclosure requirement on the compensation package of all CFOs for two important reasons. First CFOs indeed have the power and incentives to manage earnings and secondly, there are large consequences of CFO equity based compensation on the likelihood of earnings management behaviour by CFOs.

CFOs and CEOs: Who have the most influence on earnings management? â&#x20AC;˘ 19

fsrforum • volume 14 • issue #2

Mazars, een organisatie waar Rules don’t Rule ! Company presentation

Regels. In de accountancy heb je ermee te maken. Maar dat betekent niet dat wij ons door regels laten regeren. Bij Mazars vinden we dat ze geen rem mogen zijn op onze inventiviteit. Integendeel. Wij helpen bedrijven zich verder te ontwikkelen. Vooruitkijken vinden we even zinvol als achteruitkijken. Creëren is net zo belangrijk als controleren. We verschuilen ons niet achter regels, maar gebruiken ze. Rules don’t rule staat voor onze mentaliteit. Onze accountants en fiscalisten durven over grenzen te kijken. In welke functie je bij ons ook aan de slag gaat, je werkt altijd samen met andere disciplines. In teamverband ga je verder dan het geijkte. Dat maakt je werk boeiend en inspirerend.

Onze ontwikkeling Het daadkrachtige en breed opererende Paardekooper & Hoffman fuseerde met het internationale Mazars-netwerk. Hieruit ontstond Mazars, nu uitgegroeid tot een van de meest markante spelers in accountancy. Mazars heeft niet de ambitie de grootste accountantsorganisatie te worden, maar wil zich onderscheiden door zijn actieve opstelling, brede dienstverlening, hoogwaardige kennis en effectieve, inventieve oplossingen. Als netwerkorganisatie zijn we een vertrouwde partner voor een toenemend aantal cliënten die Europa als hun thuismarkt zien en behoefte hebben aan een andere mentaliteit in accountancy. Wereldwijd werken er 13.000 professionals bij Mazars in 61 verschillende landen. In Nederland hebben we 12 kantoren.

Bij de klant… met Dayene Faneyte Mijn naam is Dayene Faneyte, 23 jaar oud, geboren op Curaçao en getogen in Rotterdam. Op dit moment ben ik met mijn bachelor opleiding aan de Nyenrode Universiteit te Breukelen bezig en werk ik met veel plezier bij Mazars in Rotterdam.

Dayenne Faneyte

20 • Companypresentation

Ik wil graag de vooroordelen over accountants uit de wereld helpen door kort te vertellen hoe een weekje bij de klant eruit kan zien. Ik heb een zeer gevarieerd klantenpakket. Van een kleine stichting zonder winstoogmerk tot aan een enorme financiële instelling waar voor miljoenen aan omzet wordt gegenereerd. Het fijne van bij Mazars werken is dat je veel mogelijkheden hebt. Rules don’t rule! Als je erg geïnteresseerd bent in klanten binnen een bepaalde sector, kun je je klantenpakket daar naar inrichten. Het is zelfs mogelijk om internationale klanten in jouw klantenpakket te krijgen. Zolang je er zelf maar werk van maakt.

Een voorbeeld van een leuke klant van mij is een bedrijf dat aan recyclen doet. Ik kan natuurlijk geen namen noemen, maar dit bedrijf koopt afval in, haalt daar kostbare grondstoffen uit en verkoopt dit dan weer door. Om het vooroordeel weg te nemen dat we in een stoffige bezemkast onze werkzaamheden verrichten: het pand van het bedrijf waar ik kwam is één van de meest chique en moderne bedrijfspanden waar ik ooit in ben geweest. We werden in een mooie vergaderkamer geplaats om onze werkzaamheden te verrichten. In september heb ik samen met nog zes andere collega’s een week bij deze klant gewerkt. Je kunt je wel voorstellen dat het gezellig kan zijn met zo een grote club (natuurlijk wordt er ook wel keihard gewerkt). Eén van de leuke dingen die ik in die week heb mogen doen is het bespreken van de financiële bedrijfsprocessen met de klant. Dit gaat zoals je zelf al kan bedenken totaal niet alleen om cijfertjes, maar is onder andere nodig om AO/IB maatregelen te identificeren. Denk hierbij aan het verkoopproces, het personeelsproces en het inkoop- en betalingsproces. Het leuke hiervan is dat je een bedrijf goed leert kennen en niet alleen de activiteiten van het bedrijf maar ook de mensen die daar werken. Wat minder leuk in die week was dat ik te maken had met een medewerker die de maandag niet met zijn beste been uit bed was gestapt en dat duidelijk liet merken, ook aan mij. Aan het einde van de week waren we gelukkig wel weer beste maatjes. Al met al is het werk van een accountant uitdagend en divers. Vooral als je bij Mazars werkt is het vak van accountancy top door de Rules don’t rule mentaliteit die er heerst.

Rules don´t rule volgens Kristianne Vlasblom De slogan van Mazars is Rules don’t rule. Een marketingcampagne waar veel over wordt gepraat in de accountancy. Want accountants moeten zich aan veel weten regelgeving houden. Hierop wordt dan ook streng gecontroleerd door de AFM (Autoriteit Financiële Markten). Als de regels niet nageleefd worden dan kan een accountantskantoor zelfs zijn vergunning verliezen om controleopdrachten uit te voeren. Maar waarom heeft Mazars dan voor deze slogan gekozen? Als je het voor het eerst leest, denk je dat Mazars de regels niet zo nauw neemt. Er zit echter een achterliggende gedachte achter. Doordat er zoveel regelgeving is, is het makkelijk om je hier achter te verstoppen. Het staat in het handboek van de Raad van de Jaarverslaggeving, dus moeten we het zo doen... Zelf blijven nadenken en passende oplossingen

vinden voor de klanten is alleen nog veel belangrijker. Klanten en hun onderneming zijn blij met zo’n passende oplossing. Er is bij Mazars dus veel vrijheid in het bepalen van de insteek van de controle en de manier waarop klanten geadviseerd worden. En juist die vrijheid maakt het zo leuk en uitdagend om bij Mazars te werken, de vrijheid om je te blijven ontwikkelen. Daarnaast heeft Mazars een gezellige en gevarieerde groep met collega’s. Ik ben Kristianne Vlasblom en werk nu iets meer dan 5 jaar bij Mazars in Rotterdam. Ik werk hier met veel plezier. En heb voldoende uitdaging in mijn werk. Er zijn goede doorgroeimogelijkheden binnen de controlepraktijk. Daarnaast bestaat onze afdeling uit heel veel leuke en gezellige mensen. Dit maakt het werken veel plezieriger! Ook de klanten van Mazars zijn heel divers. Zo hebben we Stichtingen die welzijnswerk verrichten, maar ook de grotere onder nemingen op de markt zijn klant bij Mazars. Er is ook voldoende mogelijkheid om klanten in het buitenland te controleren.

Kristianne Vlasblom

Wat ik zo leuk vind aan Mazars is het feit dat het een middelgroot accountantskantoor is. Zo ken je al je collega’s. De deuren staan altijd voor iedereen open. Ook bij de partners kun je gewoon binnenlopen. De diversiteit in het klantenpakket is ook een pluspunt. Zo hoef je niet voor een bepaalde branche te kiezen, maar kan je van allerlei soorten ondernemingen iets meepikken. Hierdoor valt er veel te leren. Wat ook heel belangrijk is om de sfeer op de afdeling goed te houden, zijn de personeelsuitjes. Ieder jaar wordt door Mazars een Mazars Games georganiseerd. Dit is een sportdag waarbij teams vanuit het hele land tegen elkaar strijden. En tot slot zijn er ook de afdelingsuitjes. Zo zie je je collega’s eens van een andere kant! Al met al zorgt Mazars voor een goede leerschool en een gezellige werkomgeving!

Durf jij verder te gaan met Mazars? Vind jij dat regels nooit het excuus mogen zijn om niet meer na te denken? Ben jij klaar om je te ontplooien in een organisatie waarin niet alles vastligt en wil jij persoonlijk kennis maken met Mazars en haar collega´s in de vorm van bijvoorbeeld een meeloopdag of een oriënterend gesprek. Neem dan contact op met Antonet Lajqi via 088 2771 390. Kijk voor meer informatie op www.mazars.nl.

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Why Business Unit Controllers Create Budget Slack: Involvement in Management, Social Pressure, and Machiavellianism Frank G. H. Hartmann Erasmus University Victor S. Maas University of Amsterdam

22 • Why Business Unit Controllers Create Budget Slack: Involvement in Management, Social Pressure, and Machiavellianism

INTRODUCTION The role of business unit (BU) controllers typically comprises two sets of responsibilities. On the one hand, BU controllers contribute to corporate control by reporting about the activities and performance of their unit to higher-level management. On the other hand, BU controllers contribute to their unit’s performance by supporting BU managers’ strategic and operational decision making (Indjejikian and Matfjka 2006; Maas and Matfjka 2009). The literature suggests a limited compatibility of these two sets of responsibilities, as controllers’ involvement in their BU’s strategic and operational decision making may reduce their independence from unit management, which could weaken corporate control (e.g., Sathe 1982). Consistent with this view, Indjejikian and Matfjka (2006) provide survey evidence, which suggests that organizational slack is higher in firms in which BU controllers focus relatively more on providing decision-making information to BU managers than on providing information for corporate control to higher-level management. Despite this potential downside to BU controller involvement in managerial decision making, there is evidence that such involvement is increasing (e.g., Siegel and Sorenson 1999; Järvenpää 2007), which in turn suggests that the downside risk of controller involvement in management may also be increasing. We perform an experiment among 136 professional management accountants to explore whether and when BU controllers’ involvement in their unit’s management affects their inclination to allow slack in BU budgetary reports. We propose that controllers are faced with a conflict of interest when they see a possibility to create budgetary slack, as slack creation may be beneficial to their unit but run against the interests of the organization as a whole. We expect and find that involvement in BU management influences the extent to which BU controllers perceive this conflict of interest to constitute an ethical dilemma, but that involvement does not necessarily increase the likelihood that BU controllers engage in budgetary slack creation. Instead, our results suggest that involvement in management influences BU controllers’ reactions to social pressure from other unit managers to create budget slack in a way that depends on their personality. More specifically, it appears that the personality construct Machiavellianism, the tendency of an individual “to detach from considerations of ethics and perform actions that profit the self” (Schepers 2003, 341), determines controllers’ reactions to various combinations of involvement and pressure. Whereas controllers scoring high on Machiavellianism are more likely to give in to pressure to create budgetary slack when involved in decision making, less Machiavellian controllers are less prone to create slack under this condition.

HYPOTHESIS DEVELOPMENT

sible (Fisher et al. 2000; Indjejikian and Matfjka 2006). To mitigate such budget-related agency problems, organizations typically engage BU controllers to act as independent monitors in the process. Controllers are made responsible for collecting, organizing, and reporting the data that are used in budget negotiations and performance evaluations. These tasks require substantial professional judgment, for example when assumptions are to be made about future developments, or valuation methods have to be selected to produce budget proposals (Maines et al. 2006; Collins et al. 1987). As a consequence, unit controllers have considerable discretion in representing the economic reality of their BU. We propose that controllers’ engagement in slack creation is the outcome of a three-way interaction between involvement in management, pressure from BU managers, and the personality factor Machiavellianism.

Controller Involvement in Management Controller involvement in management is the extent to which controllers are active participants in the unit’s operational and strategic decision-making processes and share responsibility for the outcomes of these processes (Sathe 1982; Hopper 1980). It is generally accepted that the quality of managerial decisions will improve by active engagement of unit controllers in decision processes (Regel 2003; Colton 2001; Sathe 1983). The reason is that local controllers can bring to bear a unique combination of specialist knowledge in the fields of finance and accounting, and detailed knowledge of the BU and its activities (Chenhall and Langfield-Smith 1998; Sathe 1982). The literature has also pointed to a downside to involvement, however, emphasizing that involvement is likely to strengthen the ties between the controller and the unit and its managers, providing a potential threat to the integrity and objectivity of unit reporting (San Miguel and Govindarajan 1984; Hopper 1980; Simon et al. 1954). This threat can be explained by social identity theory, which suggests that participation in a group decision-making process increases individuals’ identification with this group and with the group’s outcomes (Tyler and Blader 2003; Tajfel 1969). This does not mean, however, that unit controllers will necessarily be more inclined to produce budget proposals that

less Machiavellian controllers are less prone to create budgetary slack.

BU Controllers and the Creation of Budget Slack Following Webb (2002, 361), we deﬁne budget slack as the intentional biasing of performance targets below their expected levels. A common concern in budgeting is that BU managers have incentives to create budget slack to maximize the expected value of the payoffs from budget target achievement (Webb 2002; Nouri and Parker 1996), while it is in corporate managers’ and owners’ interest that budget proposals reﬂect the units’ performance potential as accurately as pos-

underestimate their unit’s performance potential when they have been involved in managerial decision making. The reason is that allowing slack in the budget of their “own” unit may be considered as more unprofessional and unethical than allowing slack in the budget of a unit at arm’s length. While uninvolved unit controllers might argue that the creation of budget slack should be considered, at least to some extent, to fall within “the rules of the budget game” (Hofstede 1967),

Why Business Unit Controllers Create Budget Slack: Involvement in Management, Social Pressure, and Machiavellianism • 23

fsrforum • volume 14 • issue #2

for involved controllers there will be a salient conﬂict of interest.

Social Pressure In their review of social pressure research in accounting, DeZoort and Lord (1997) distinguish between three forms of social pressure. Compliance pressure is pressure to go along with explicit requests of individuals at any level. Obedience pressure refers to pressure to submit to the directions of an authority ﬁgure. Conformity pressure refers to pressure in groups of peers on individual members of these groups. Pressure from BU managers on BU controllers to deliberately bias performance targets lies at the intersection of these three types of pressure since it is pressure from both a superior and peers to go along with an explicit request. Davis et al. (2006) show that management accountants are more likely to create budget slack when faced with obedience pressure from an immediate superior (the corporate CFO in their study). Social pressure induces conformance, as individuals want to avoid the negative consequences of appearing deviant in a peer group, or of disloyalty to someone in an authority position (Lord and DeZoort 2001). Psychological reactance theory (Brehm 1966; Brehm and Brehm 1981) in

straightforward effect. On the one hand, high Machs are likely to feel less restricted by standards of professional ethics, and may therefore be more inclined to bias budget estimates. On the other hand, however, high Mach unit controllers will only do so, if they perceive such behavior to be clearly in their own interest (Sakalaki et al. 2007). For low Machs, the decision whether to engage in slack creation will reﬂect their emotional reaction to the social setting and their negative predisposition toward behavior that conﬂicts with professional and moral principles.

Interaction between Involvement, Social Pressure, and Machiavellianism Social pressure by managers to engage in the creation of budget slack constitutes a threat to controllers’ freedom and professional independence (Shafer 2002). Pressure may therefore evoke either conformance or reactance. We expect the response to depend on controllers’ Machiavellianism and their level of involvement in BU management. First, there is substantial evidence that individuals differ in their susceptibility to social pressure (Brehm and Brehm 1981; DeZoort and Lord 1997) and that this difference is partly explained by Machiavellianism. Empirical studies in social psychology

Individuals experiencing reactance refuse to go along with the requested behavior.

particular posits that attempts to persuade individuals to act in a speciﬁc manner are often counterproductive, because they constitute a threat to individuals’ sense of freedom and control. Individuals experiencing reactance refuse to go along with the requested behavior, and often decide to act in an exactly opposite way (a “boomerang effect” [Brehm and Brehm 1981,38]). Existing studies on professionals in organizations indeed indicate that pressure from managers to deviate from professional guidelines sometimes causes individuals to ﬁrmly oppose the requested behavior and to place a renewed emphasis on their role as an independent professional.

Machiavellianism Individuals high in Machiavellianism (high Machs) have a stronger tendency than individuals low in Machiavellianism (low Machs) to detach from ethical considerations and to opportunistically take actions that beneﬁt themselves. When faced with an ethical dilemma, high Machs are more calculative, and rely less on ethical principles or social conventions than low Machs in deciding about their actions (Corzine and Hozier 2005; Cristie and Geis 1970). Thus far, no evidence exists about the effect of Machiavellianism on management accountants’ engagement in dubious accounting practices. However, the available research on Machiavellianism in other settings suggests that this is not a

indeed support that low Machs are more sensitive to social pressure than high Machs (Lamm and Myers 1976; Blumstein 1973). While it may be true that low Machs find it harder to resist social pressure than high Machs, they will also be more concerned about the violation of professional and moral norms implied by the requested act (Kleinman et al. 2003; Schepers 2003; Reiss and Mitra 1998).To understand the effect of pressure on low and high Mach controllers, we therefore have to look at the relationship that the controllers have with the BU they are working for. For low Mach controllers, we expect that involvement in management will have the primary effect of increasing the salience of conflicting interests and amplifying the extent to which slack creation feels like a violation of trust and professional guidelines Because of the opportunistic and calculative nature of their decision making, high Machs will be relatively easily persuaded to act in unprofessional or unethical ways, but only if the personal benefits of acting in such a manner are clear (Sakalaki et al. 2007; Cristie and Geis 1970). High Mach controllers will thus be more susceptible to pressure if they are active participants in their unit’s operational and strategic decision making. In absence of involvement, the lack of apparent personal benefits of filing a biased estimate and their ability to resist social pressure will make high Mach controllers relatively insensitive to the efforts of line manag-

24 • Why Business Unit Controllers Create Budget Slack: Involvement in Management, Social Pressure, and Machiavellianism

Figure 1: Hypothesized Relationships

Point A: Pressure = low, Involvement = low Point B: Pressure = high, Involvement = low Point C: Pressure = low, Involvement = high Point D: Pressure = high, Involvement = high L subscript denotes low Machiavellianism, H subscript denotes high Machiavellianism. H1 predicts that BH −AH < DH −CH (i.e., that the slope of the line AHBH is less positive than the slope of the line CHDH). H2 predicts that BL −AL > DL −CL (i.e., that the slope of the line ALBL is more positive than the slope of the line CLDL).

ers to engage them in the creation of budget slack. In conclusion, we hypothesize that only relatively Machiavellian BU controllers will be easier to persuade to create budget slack if they are involved in management. This is reﬂected in the following hypotheses: H1: The effect of social pressure on high Mach BU controllers’ engagement in the creation of budget slack will be more positive for BU controllers who are involved in management. H2: The effect of social pressure on low Mach BU controllers’ engagement in the creation of budget slack will be less positive for BU controllers who are involved in management. Our expectations are graphically depicted in Figure 1, which focuses on the different expectations for high Mach and low Mach controllers. In terms of the coding used in Figure 1, the two hypotheses above predict that the slope of the line CH − DH is more positive than the slope of the line AH − BH and that the slope of the line CL − DL is less positive than the slope of the line AL − BL.

RESEARCH METHOD Research Design To examine the hypotheses we conducted an experiment using a 2 X 2 between subjects factorial design. Involvement in management and social pressure to engage in slack creation were manipulated by varying the experimental case scenarios. Machiavellianism was measured using the Mach IV scale developed by Cristie and Geis (1970), which was included in an exit questionnaire. This scale contains 20 items and asks participants to what extent they agree with statements that are indicative of a Machiavellian personality.

Participants The participants in our study are students enrolled in a twoyear part-time executive educational program in finance and control. Students in this program, which is offered at different universities in The Netherlands, have previously obtained a Master of Science in an accounting-or finance-related field, and are required to have at least three years of relevant work experience. In total, 169 students from three different universities participated in the study. Of these 169 students, 25 indicated they were not currently employed in a manage-

ment accounting position. Since our hypotheses are about the decision processes of management accountants, these participants were excluded from the analyses. Furthermore, as is discussed below, eight of the remaining participants failed to provide a correct answer to one of the manipulation checks and their scores were excluded as well. The ﬁnal sample therefore consists of 136 students. Demographics of the participants in the ﬁnal sample are in Table 1.

Research Instrument and Procedures The students participated in the experiment during class hours. During the specific class the students were asked to participate in the study by ﬁlling in two questionnaires. Subsequently they were provided with the research instrument and an exit questionnaire. The research instrument contained a case scenario that was specially developed for this study. The scenario describes a situation in which a BU controller needs to decide whether to deliberately underestimate the unit’s expected performance in a budget proposal to increase the expected payoff from reaching the budget target. The manipulations of involvement in management and social pressure were embedded in the scenarios. In the scenarios, “Splash” was the name of the BU, “Wouter Simons” was the name of the BU controller, and “Gerard van Dinkel” was the name of the BU’s general manager. In addition to the common part of the case, participants in the high involvement conditions read the following statement: BU controller Wouter Simons has always been very actively involved in the BU’s strategic and operational management. He has also contributed substantially to the initiation, development and implementation of Splash’s new strategy. Participants in the low involvement conditions instead read: BU controller Wouter Simons has never been actively involved in the BU’s strategic and operational management. Neither has he contributed in any way to the initiation, development or implementation of Splash’s new strategy. Similarly, participants in the high social pressure conditions read: Gerard van Dinkel and the other two members of the BU management team put severe pressure on BU controller Wouter Simons to agree to a ROI proposal of 11%. Participants in the low social pressure conditions instead read:

Why Business Unit Controllers Create Budget Slack: Involvement in Management, Social Pressure, and Machiavellianism • 25

fsrforum • volume 14 • issue #2

Table 2: Descriptive Statistics Dependent Variable Full Sample Involvement High

Low

Overall

Mean

High

54.44

26.207

52.22

27.109

53.33

26.497

Low

40.00

23.381

42.45

29.539

41.27

26.553

Overall

47.76

25.795

47.55

28.514

136

47.65

27.108

Pressure

High Mach Subgroup Involvement High

Low

Overall

Mean

High

68.44

22.783

54.00

26.873

61.45

25.501

Low

35.31

19.619

52.16

27.144

44.46

25.147

Overall

51.88

26.843

52.97

26.629

52.44

26.532

Low Mach Subgroup Involvement High

Low

Overall

Mean

High

43.25

23.635

50.95

27.866

47.20

25.861

Low

45.00

26.592

29.29

28.342

37.41

28.113

Overall

44.00

24.579

42.29

29.663

43.14

27.056

Gerard van Dinkel and the other two members of the business unit’s management team do not push BU controller Wouter Simons in any way to agree to a ROI proposal of 11% but instead leave the decision for him to make all by himself. The dependent variable was measured by asking participants to indicate the likelihood that Wouter Simons, the BU controller in the case, would go ahead and produce a report that would provide the foundation for an unrealistically low ROI estimate of 11 percent. The participants indicate their assessment of the likelihood in percentages between 0 percent (certain not to do it) and 100 percent (certain to do it). The research instrument was pre-tested in a separate group of 20 part-time students enrolled in a Master of Science in Accounting and Control program, most of who were working in a management accounting position. This pilot test conﬁrmed that there was substantial variance in the dependent variable and that a signiﬁcant amount of this variance could be explained by the study’s independent variables. Moreover, the pilot test showed that participants found the case realistic and interesting.

RESULTS Manipulation Checks and Descriptive Statistics The manipulation of social pressure was checked with the following post-experimental questionnaire item scored on a five-point Likert scale (1 = “Strongly disagree” and 5 = “Strongly agree”): “Business unit controller Wouter Simons was under strong pressure from the other members of the business unit management team to build slack in the unit’s ROI budget target.” The mean score in the high-pressure conditions was 4.26, while the mean score in the low-pressure conditions was 1.92. The difference between the scores is significant (t = 15.58, p < 0.000). The manipulation of involvement in management was checked with the following item scored on a five-point Likert scale (1 = “Strongly disagree” and 5 = “Strongly agree”): “Business unit controller Wouter Simons was actively involved in strategic and operational decision making at the business unit.” The mean score in the high-involvement conditions was 4.24, while the mean score in the low-involvement conditions was 1.65. This difference is also significant (t = 22.20, p < 0.000). Descriptive

statistics regarding the dependent variable in our experiment are in Table 2. We calculate individuals’ Machiavellianism scores as their average scores on the 20 items in the Mach IV scale (ten negatively worded items were reverse coded). The Machiavellianism scores in our sample range from 1.75 to 3.55 with a mean of 2.76 (SD = 0.36) and a median of 2.75. The mean score of 2.76 is slightly below the scale mean of 3, which indicates that on average the management accountants in our sample tended to somewhat disagree with the statements indicative of a Machiavellian personality. The reliability of the Mach IV scale was assessed using Cronbach’s alpha. Cronbach alpha is 0.69, which indicates acceptable scale reliability. A one-way ANOVA with Bonferroni corrected post hoc tests confirmed that Machiavellianism did not differ significantly between experimental conditions. Dependent variable scores range from 0 percent to 100 percent and there is considerable variance in all four experimental conditions and all eight cells in a model with Machiavellianism split at the median. The overall mean score is 47.65 (SD = 27.11). The highest mean score is found in the cell with both experimental manipulations high and participants with above median Machiavellianism scores (mean = 68.44, SD = 22.78) while the lowest mean score is for low Machiavellian participants in the condition with both manipulations at the low level (mean = 29.29, SD = 28.34). The only other cell, besides these two, in which the value of the dependent variable is significantly different from the scale midpoint of 50 percent, is the high involvement, low-pressure situation for high Mach controllers (mean = 35.31, SD = 19.62).

Hypothesis Tests We test our hypotheses using moderated regression analysis. We use regression analysis because it allows us to examine the interaction between the experimental manipulations and a continuous variable (Machiavellianism) without the loss of information that would result if we dichotomized the Machiavellianism scores (Cohen et al. 2003; Hartmann and Moers 1999). Before calculating the interaction terms, we standardized the Machiavellianism scores to facilitate interpretation of the results. A hierarchical regression procedure was run with SOCIAL PRESSURE, INVOLVEMENT, and MACHIAVEL-

26 • Why Business Unit Controllers Create Budget Slack: Involvement in Management, Social Pressure, and Machiavellianism

Figure 2: Results for High Machs

Figure 3: Results for Low Machs

Point A: Pressure = low, Involvement = low Point B: Pressure = high, Involvement = low Point C: Pressure = low, Involvement = high Point D: Pressure = high, Involvement = high H subscript denotes high Machiavellianism. Results are consistent with H1 because BH −AH < DH −CH (i.e., the slope of the line AHBH is less positive than the slope of the line CHDH).

Point A: Pressure = low, Involvement = low Point B: Pressure = high, Involvement = low Point C: Pressure = low, Involvement = high Point D: Pressure = high, Involvement = high L subscript denotes low Machiavellianism. Results are consistent with H2 because BL− AL DL − CL (i.e., the slope of the line ALBL is more positive than the slope of the line CLDL).

LIANISM, the two way-interactions and the three-way interaction as predictors of engagement in slack creation. Using a hierarchical regression allows us to separately evaluate the significance of the two-way and three-way interaction effects and the contribution of including the interaction coefficients in the regression model to the explanatory power of the model. The results are in Table 3. The results in column 1 of Table 3 show that the maineffects-only model is significant and that there exist main (average) positive effects of SOCIAL PRESSURE and MACHIAVELLIANISM on SLACK CREATION. As can be seen in column 2 of Table 3, introduction of the two-way interactions (column 2) does not improve the predictive ability of the model. However, the introduction of the coefficient for the three-way interaction does result in a higher adjusted R2.An F-test (Cohen et al. 2003) confirms that this increase in R2 is significant (F = 4.543, p < 0.05). The results for the full model are in column 3 of Table 3. The results for this full model confirm that there is a significant three-way interaction effect between INVOLVEMENT, SOCIAL PRESSURE, and MACHIAVELLIANISM (p < 0.05), as was predicted by H1 and H2. Also notice that the main effect of SOCIAL PRESSURE is not significant in the models with interaction terms, providing an indication that the positive effect of SOCIAL PRESSURE on SLACK CREATION is not equally strong for all combinations of INVOLVEMENT and MACHIAVELLIANISM. To shed more light on these results and to add some intuition to this three-way interaction, we analyze our experimental data separately for subgroups of high and low Machiavellian participants using factorial ANOVA’s and plot the results. The results show that INVOLVEMENT and SOCIAL PRESSURE interact differently for high Machs and for low Machs. The findings are illustrated in Figures 2 and 3. First, considering the high Mach subgroup, H1 predicts an interaction between SOCIAL PRESSURE and INVOLVEMENT. The results indicate that this effect is indeed significant at the 0.05 level (F = 5.955, p = 0.018). Figure 2 shows that the findings for high Mach controllers follow a pattern that is consistent with our H1. While for involved controllers, pressure strongly increases engagement in slack creation (the

likelihood score increases from 35.31 percent to 68.44 percent), the increase is insigniﬁcant for uninvolved controllers. As is clear from Figure 3, the results from a factorial ANOVA for the low Mach group on the contrary show that pressure only increases slack creation for uninvolved controllers (from 29.29 percent to 50.95 percent). Involved low Mach controllers are not affected by pressure. This interaction effect of pressure and involvement is marginally signiﬁcant in this subsample (F = 3.518, p = 0.066).

DISCUSSION AND CONCLUSION This paper set out to examine how BU controllers respond to the ethical dilemma that arises if they can spur the interests of their own unit by deliberately biasing budget estimates to create slack. We were particularly interested in increasing our understanding of how, if at all, involvement of controllers in operational and strategic management decisions affects their ability to resist pressure to engage in slack creation. We expected and found that the three factors, involvement in management, pressure from BU managers and personality, should be considered together to understand controllers’ engagement in the creation of budget slack. More speciﬁcally, we found that only high Mach unit controllers become more susceptible to pressure if they are involved in management. Low Mach unit controllers actually became less willing to give in to slack-inducing pressure if they had been involved in managerial decision making.

Note Full article: Hartmann, F.G.H. & Maas, V.S, Why Business Unit Controllers Create Budget Slack: Involvement in Management, Social Pressure, and Machiavellianism, BEHAVIORAL RESEARCH IN ACCOUNTING American Accounting Association 22 (2), 27–49

A behavioural finance model of exchange rate expectations within a stock-flow consistent framework • 27

W W W.G A A A N . N U

Scriptietip # 1:

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W W W.G A A A N . N U

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fsrforum • volume 14 • issue #2

Interview Nyenrode: Prof Dr Henk Langendijk

Jeroen van Oerle and Anne van Driesum - Breukelen, 9 January 2012

What is earnings management? In the simplest narrowest meaning of the word one must look at earnings management as simple creative bookkeeping. In two dimensions one can make the distinction between creative and fraudulent bookkeeping as well as upward and downward adjustments to accounting figures. When I refer to earnings management I implicate the practise of creative bookkeeping by companies. This is done within the boundaries of the accounting regulation as mandated by IFRS, US GAAP or the Dutch BWtitel9 (Dutch law book). One must think of creative bookkeeping for internal purposes such as bonus requirements and targets and for external purposes in order to please the banks in the form of complying with debt covenants. If the statements send internally and externally are artificially constructed with the sole purpose of deceit one must speak of fraud. Where creative bookkeeping is still within the legal bounds of the system, fraud is obviously not. The purpose of fraud can be the same as the purpose of creative bookkeeping though. At the moment the external component of earnings management is extremely important for the survival of companies. Where the engine of the financial markets has

Career: Prof. Dr Langendijk started his career at the accounting firm Arthur Andersen after his study Economics at the Amsterdam University and having served the, at that point in time, obligatory period in the national Dutch Army. After some time he made the switch to the predecessor of BDO accountants in the Netherlands. Following several years in business, Langendijk came to the conclusion that this was not the perfect job for him. For that reason he started working at the University of Amsterdam (UVA) and promoted in the field of auditing. At the moment prof. Dr. Langendijk is working at Nyenrode business University as Professor and Chairman of the Financial Accounting & Reporting department at Nyenrode School of Accountancy & Controlling. As a true earnings management expert he served in several governmental advisory agencies and took part in the parliamentary commission surrounding fraud in the construction sector. Next to his professorship, prof. Dr. Langendijk is working as an advisor to several companies and middle large accountancy firms and he regularly provides business seminars. 30 • Interview

One must look at earnings management as simple creative bookkeeping

slowed down or stopped, the bank covenants are very much alive. If companies can not comply anymore with the covenants attached to their bank debts, bankruptcy could result. This is where one must be most cautious of fraudulent behaviour.

How is earnings management applied in practice? Every publicly traded company needs to report at least annually. What is done in case of earnings management is that the company will apply tricks in order to have its annual report published as positive as possible. This can mean that the company will try to fulfil market expectations or that the company will optimize the loss reports. This is what I referred to earlier in terms of upward and downward adjustments to the accounting figures. In downward adjustments a company will report lower earnings in order to keep a buffer for the next annual report. In an example one must think of a company that is expected to earn $200 (by the market), but has actually earned $300. What this company will do is not to disclose the full $300 this year but to disclose some number slightly above $200 and keep the rest of the money for safeguarding purposes for the next report. Many accountants view this as the prudent way of reporting; hence the negativity surrounding this form of earnings management is limited. On the other part of the spectrum is the upward earnings management. If a company was supposed to make the $200 target but actual earnings were below $200, management will try to creatively approach the target requirements by means of inflating numbers. This kind of earnings management is negative and can easily resolve in fraudulent behaviour. What a company can do is to artificially keep their books open after December and count additional earnings of January as December earnings. The practice of overleaping budgets, re-valuing accruals, the capitalization of costs, the manipulation of provision accounts and the creation of false invoices are practices which are all too common. The sole purpose of these practises: EBITDA management.

If the manners in which earnings management and fraud are applied are so obvious, why canâ&#x20AC;&#x2122;t auditors prevent this from happening? The biggest problem is that of Control. Auditors have to believe that the management is in control. They are dependent upon the information provided to them by management. The quality of the audit report all comes down to the trustworthiness of the CEO and CFO reports. If management cannot be trusted, the entire pyramid collapses. What is done in case of fraudulent behavior is to create small journal entries which in total add up to a very large sum. Since the auditors work with threshold levels, they do not look at these small journal entries. What is done next is to create suspense accounts and to book all these small posts to the ledger account. Since this is the only materialized amount the auditor looks at, he/she misses all the small accounts which were artificially created in one of the applicable accounting practices priory discussed. The compliance of the companies in terms of bank covenants is extremely important at the moment. Every three months the company has to report a compliance certificate on the covenants to the banks. These numbers are very easy to manipulate since there is little to no audit on this short term scale, while the impact of the certificates can be very large.

How large is the earnings management practice in the Netherlands? There is no company that will publish their plain results directly without any form of number alteration. Creative bookkeeping is always present in all companies. But this is not a bad thing. No fraudulent behaviour is applied directly in these cases. If a company decides that it is time

Âť Interview â&#x20AC;˘ 31

fsrforum • volume 14 • issue #2

The quality of the audit report all comes down to the trustworthiness of the CEO and CFO reports

to increase the shareholder’s equity it can change its cost system from historical pricing to market pricing. This is perfectly within the boundaries of IFRS (and US GAAP) but it is a case of earnings management because of the eventual effect of the change on the reported numbers. In times of economic hardship and in times of persistent threats on breaking the debt covenants, the pressure to use aggressive forms of earnings management becomes larger. It is also in these periods that the likelihood of companies committing fraudulent changes to their accounting records increases. In general one can say that small losses are rare, but small profits are common. Every small loss will be transformed to a small gain just for the matter of signalling and public opinion. In case of large losses the loss account will also be increased (taking a bath) with the sole purpose of having the ability to positively influence next year’s earnings. The usual accounts for these practises are impairments and provisions. On these accountss the company can make their preferred outcomes up to a certain boundary as stipulated in the accounting regulations. In the financial sector (on the stock exchange), it is also known that companies behave in this way. A firm publishing the numbers as stipulated by their targets is not the only reason for the firm’s stocks to increase. The signalling that the company is also in control with respect to next year’s numbers is what triggers the upward valuation of the stock. Every-one knows this and every-one plays along the same set of game rules. In general earnings management takes place throughout all sectors. But there are some sectors where earnings management practises are more aggressive and larger, such as the construction sector. There are other sectors where the earnings management process is milder. One must think of stable, well functioning businesses such as those in the food and beverage industry as well as in the natural gas and oil industry. Even during the crisis people need food, drinks and gasoline. The general need for earnings management in this stable environment is therefore lower.

How does the Netherlands relate to the USA in terms of the magnitude of earnings management? This is hard to say. Actually, the comparison between the two cannot even be made. There are size differences, regulatory differences as well as cultural differences which disable a proper comparison. In the USA the SEC has much more authority than the AFM or the DNB in the Netherlands. In the USA the number of annual reports that is restated is about a 1000 per year. These are reports from let’s say 2008 which came through their first checks and which, at the time, were reported as true figures. In the Netherlands we have had no such cases. Although it is possible to restate annual reports in Holland when there have been cases of fraudulent behavior or excessive creative book keeping, it is simply not done. In case of the Ahold scandal in the Netherlands, Michiel Meurs was only mildly punished (9 months conditional jail sentence and a fine of 225.000 euro). If Meurs was to be brought to court in the USA, he would have probably been sentenced to several years in jail. What we see in the Netherlands is that the discussion on the so called aggressive earnings management cases has increased lately. In the USA aggressive earnings management is also illegal if the long term goal of the aggressor is to deliberately deceive stakeholders. This is despite the fact that the earnings management practices are still within the bounds of US GAAP. Aggressive book keeping is also a matter of cultural differences. I am working on a case that is related to aggressive earnings management by a navigation cards company called AND. Although this

32 • Interview

company has complied with the IFRS regulations, the discussion on the aggressive earnings management techniques used by this company is a hot topic at the moment. How to decide on the boundary? Do we follow the USA case or do we make different choices in how to deal with the situation?

kind of clearing institute system) from which auditors are being paid. In my view accountants are there to control. Changes in the accounting business itself would further increase the level of auditing quality. One must think of reducing the size of the big 4 and aiming more towards the revival of the big 8. Also, if an accountant firm is auditing a

How do other circumstances effect earnings management?

company, it should be banned to also advice that same client. These are small improvements, but the first and biggest step that needs to be made in the sector is the change of payment system in order to improve auditor’s independence. I want to stress the fact that I am talking about the upper market (large companies). I know that in the medium and small companies the function of the accountant is much wider. The accountant does some auditing but is more sort of an adviser. The fact that one can never reduce the level of earnings management in the lower market (mid/small companies) must be clear by now. However, when concentrating on the upper market and on the social impact these companies have, an improvement in terms of pay-system changes is an absolute requirement for an improvement of audit quality. To conclude, it must come from these systematic changes and not from more regulation or further empowerment of regulatory agencies.

The bonus culture also has an impact on earnings management. Even if the bonuses were cancelled in the upcoming years we would still have influences on earnings management in terms of target meeting. Meeting a target or not can have large implications for an employee’s position within the firm. When one combines this with the possibility of creatively working the books, the outcome is clear. The current crisis has the largest impact on the earnings management practice at the moment. When creative bookkeeping cannot save a company anymore from being punished by the market or the banks (for not living up to the debt covenants), the practice of fraud will become more widely used. Not making the EBITDA targets or having the reports delivered too late are deadly moves for CEOs and CFOs. They cannot afford it. They will simply lose their jobs. So what we see is that earnings management is about bonuses when financial times are good and becomes about pleasing the banks (and ultimately survival of the company) in bad times. Not getting a bonus is a pity whereas not making the bank’s requirements is lethal since there is no other source of money available at the moment.

Is the regulation in terms of the prevention of earnings management behavior sufficient in the Netherlands? One can always think of points to improve, but the practice of earnings management shall always be present. It was present many years before and it will still be present many years from now. This is something that regulatory agencies such as the AFM or the DNB simply cannot completely ban. One big fundamental change that can be made, however, is a change in the remuneration system of accountants. At this point in time the accountants are paid by the companies they audit. If one small audit company with two/three big clients is dependent on the revenues from those activities one can do the math in terms of the independence of these auditors. We must go to the situation of common pools of money (some

Are there Red flags we can monitor? Yes there are. There have even been models developed with the sole purpose of predicting fraudulent behavior at companies. One must think of model variables such as the state of the economy or the height of debt covenants, liquidity ratings and EBITDA values. What’s common practice in the earnings management cases in the Netherlands is that the books are being kept open, budgets are overleaping, accruals are mispriced and costs are capitalized when they should not have been capitalized. Via provisions and impairments the usual changes are made to the accounting reports. For an auditor, however, it is very difficult if not impossible to change and check these balances. To rephrase what I said earlier; it all starts and ends with trust.

Interview • 33

Je derde week bij Financiën...

...beheer jij staatsbedrijven. Bij het ministerie van Financiën werk je aan grote omvangrijke projecten waarmee veel geld is gemoeid. Het Rijk is mede-eigenaar van een aantal

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Ministerie van Financiën

fsrforum • volume 14 • issue #2

Bij Financiën tel je meteen mee. Zeker als bedrijfseconoom. Company presentation

Als ambitieuze academicus kun je overal aan de slag. Ook bij de overheid. Daar moet je wel bewust voor kiezen, de publieke zaak moet je ter harte gaan. Bij Financiën vertaal je politieke keuzes in concreet beleid. Het gaat daarbij om heel veel geld, zo’n 180 miljard euro per jaar, een bedrag dat zo effectief en efficiënt mogelijk moet worden ingezet. Resultaatgericht en projectmatig werken is bij ons dan ook eerder regel dan uitzondering. Tegelijkertijd opereren we in de context van hectische politieke verhoudingen en maatschappelijke ontwikkelingen. Die dimensie maakt het werk extra spannend.

van de staatsschuld, het optimaliseren van bedrijfsvoeringprocessen, het verbeteren van het risicomanagement, het uitvoeren van audits en het meewerken aan de Miljoenennota.

Zo blijf je in beweging Bij het ministerie van Financiën tel je meteen mee. Maar het is natuurlijk belangrijk dat je je ook snel verder ontwikkelt. Daarbij krijg je hulp in de vorm van allerlei individuele en collectieve opleidingsprogramma's. Financiën is voor bedrijfseconomen een plek met heel veel doorgroeimogelijkheden. We kennen een roulatiebeleid, zodat je steeds nieuwe dingen leert en je grenzen verlegt. Zowel op nationaal als op internationaal niveau. Hoe ver je komt, is ook een kwestie van ambitie en talent.

Vanaf dag één meedoen

Kennismaken?

Bij het ministerie van Financiën draai je gelijk volledig mee. Zo is het heel gewoon dat je als bedrijfseconoom om de tafel zit met andere beleidsmedewerkers en externe partijen als aandeelhouders en CFO’s. Ook werk je mee aan het opstellen van de financieringsplannen voor grote projecten. Het werk is dus deels beleidsmatig, deels projectmatig. Je kunt meewerken aan het verzekeren van exportkredieten. Of analyses maken van landenrisico’s. Wat is hun beleid en hoe zijn daar de economische vooruitzichten? Kortom, je krijgt vanaf de eerste werkdag de kans om jezelf te bewijzen. Om te laten zien dat je de verantwoordelijkheden aankunt. Uiteraard word je niet zomaar in het diepe gegooid. Er zijn altijd seniorcollega’s die je coachen of als mentor optreden.

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Als bedrijfseconoom aan de slag Tegenwoordig verschilt de overheid helemaal niet zo veel van een bedrijf. Het gaat om het effectief en doelmatig inzetten van middelen. Alleen gaat het op ons ministerie om iets grotere bedragen: jaarlijks ruim 180 miljard. Bijna altijd is de vraag hoe we dat gemeenschapsgeld op de juiste manier gaan besteden, gezien de actuele maatschappelijke ontwikkelingen. Het antwoord vereist inzet, precisie en creativiteit, maar ook een scherp gevoel voor politieke verhoudingen.

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Meer informatie Wil je meer weten over werken bij het ministerie van Financiën? Kijk voor informatie over startfuncties, traineeships, stagemogelijkheden en onze recruitmentactiviteiten op www.werkenvoornederland.nl/minfin. Je kunt ook meteen solliciteren via recruitment@minfin.nl. Bellen kan ook naar (070) 342 89 69 of (070) 342 73 17.

Bij het ministerie spelen bedrijfseconomen een belangrijke rol. Wat jij precies gaat doen, hangt natuurlijk af van je achtergrond en belangstelling. Je kunt denken aan: het uitgeven van staatsaandelen, het initiëren en stimuleren van publiekprivate samenwerkingsverbanden, het risicomanagement

Companypresentation • 35

fsrforum • volume 14 • issue #2

Rating: het heilige getal 3

K(r)anttekening | Drs. Joost Groeneveld RA RV1

Getallen hebben allerlei betekenissen. Daar worden we van jongs af aan mee vertrouwd gemaakt. Wie kent niet de waarschuwende ouder die met onheil dreigt dat onherroepelijk zal komen zodra tot 3 is geteld? Waarbij de ouder zelf probeert dat onheil af te wenden door invoegsels als tweeëneenhalf, tweedriekwart … Ja, 3 is onherroepelijk. En bij 3 is het geen toeval meer. Dan is het echt waar. En we roepen driewerf hoera! Het hoeft dan ook niet te verwonderen dat in kwaliteitsaanduidingen 3 de overtreffende trap is. Triple-A wordt algemeen gezien als “risicovrij”, tenminste als het om kredietrisico gaat. Van zo’n crediteur kun je echt op aan. Hij betaalt zijn rente en aflossingen stipt volgens schema, ongeacht de omstandigheden van dat moment. Je hoeft je daarover geen ogenblik te bekommeren. Een verzekeringspremie in de vorm van een risico-opslag in de rente is dan ook volledig misplaatst. Natuurlijk moet de crediteur zich inspannen om zijn vlekkeloze reputatie waar te maken: vertrouwen vertrekt te paard.

Drs. Joost G. Groeneveld RA RV is directeur van Wingman Business Valuators B.V. te Breda en voorzitter van de Stichting WBO (register van business valuators). Hij was hoofddocent aan de Economische Faculteit van de Erasmus Universiteit te Rotterdam.

36 • Rating: het heilige getal 3

Omdat volledige zekerheid nu eenmaal niet te koop is, wordt “risicovrij” door Moody’s als volgt “vertaald”: Aaa: Moody judges obligations rated Aaa to be the highest quality, with the "smallest degree of risk". Als ik AA+ oversla, volgt Aa: “Aa (Aa1, Aa2, Aa3): Moody judges obligations rated Aa to be high quality, with "very low credit risk", but "their susceptibility to long-term risks appears somewhat greater".

instelling, per bank en per land de specifieke risico’s naar aard en omvang verschillend zijn. Het mooie is natuurlijk dat met de rating die verschillende risico’s zijn gecodeerd: door de kwantitatieve codering worden de kwalitatieve verschillen weggepoetst. Daarmee ontstaat een enorme abstractie. De macht van het getal. De uitkomst van een ‘black box’. Je zou er in kunnen geloven. Eigenlijk kun je niet anders dan er in te geloven.

Door de kwantitatieve codering worden de

kwalitatieve verschillen weggepoetst.

Op kortere termijn dus geen verschil en op lange termijn een klein beetje. Dat stemt overeen met de bijgaande tabel. Er zal wel een ingewikkelde formule achter zitten, maar de trendlijn geeft daarvan een aardige indruk. Het is natuurlijk wel knap dat een agency als Moody’s op zo’n lange termijn zo’n genuanceerd verschil kan maken. Je zou toch zeggen dat na een termijn van 5 jaar de wereld zo zal zijn veranderd dat over de risico’s voor de jaren daarna weinig concreets valt te zeggen. Misschien juist daarom dat per definitie voor de langere termijn enig risico in rekening wordt gebracht. En omdat op korte termijn geen verschil bestaat, moet het er op lange termijn wel zijn, tenminste als je verschil wilt maken.

De formule zal een goed bewaakt geheim zijn. Zoiets als een familierecept in een 3-sterrenrestaurant. En de rating-agencies krijgen altijd gelijk. Dat is zo mooi met risico. Zelfs als het naar verwachting afloopt, wil dat niet zeggen dat het risico niet aanwezig was. Het wordt pas vervelend als het ernstiger mis gaat dan voor mogelijk werd gehouden. Een reden om vooral geen te hoge code af te geven. Voorzichtigheid dus; de voorzichtigheid van de accountant die déflatteren beter vindt dan flatteren. Daar zit misschien ook bij wat in accountancy controle-risico heet. Dat is het eigen risico dat je het niet goed hebt gedaan: iets niet hebt opgemerkt en ten onrechte onvermeld hebt gelaten. Voor een rating-agency is bij een sub-toprating het risico daarmee te worden geconfronteerd veel minder groot dan bij een afgegeven hoogste status. Er is dus een eigenbelang van de agency bij stelselwijziging als het gaat om triple-A ratings. Dus als risicoprofielen niet veranderen en je wilt toch een lagere status toekennen, neem je je toevlucht tot stelselwijziging. Logischerwijze betekent dit een extra risicofactor in de formule. Het rating-systeem moet worden uitgebreid.

Alleen voor triple-A zou kunnen gelden dat verschillen in risico niet gelden omdat ze er per definitie niet kunnen zijn. Anders was het geen triple-A. Daarvan afziende zullen per

In de financiële pers wordt wel opgemerkt dat als iedereen achteruit gaat, eigenlijk niemand achteruit gaat. Dat argument heeft betrekking op de relatieve positie van de desbetreffende

organisaties. Interessanter is het om te zien welke invloed de stelselwijziging in absolute zin heeft. Een lagere rating betekent dan niet dat de risicosituatie is verslechterd. Zoals in jaarrekeningen zou de vorige rating moeten worden herrekend aan de hand van het nieuwe model om te zien wat de invloed is van de stelselwijziging. Bij zo’n stelselwijziging zal blijken dat alles met alles samenhangt: wie met pek omgaat, wordt daar zelf mee besmet. Want dat is toch de inhoud van de stelselwijziging? De vraag wordt dan interessant of risico een zero-sum game is. In dat geval zal tegenover de neerwaartse rating ook elders in de wereld een opwaartse rating staan. Zo is Griekenland binnen de EU minder riskant dan daarbuiten. Uiteindelijk ontstaat dan een soort gemiddelde rating, waarin de kwantitatieve verschillen nog veel kleiner zijn geworden dan op dit ogenblik het geval is. Dat heet solidariteit: wij betalen mee aan hun strop, vice versa. Dat gebeurt òfwel in de vorm van subsidie, òfwel in de vorm van belasting òf in de vorm van waardedaling respectievelijk hogere rente door een risico-opslag. O ja, inflatie kan ook als de remedie wordt gezocht in het bijdrukken van geld. De rating agencies hebben met hun stelselwijziging natuurlijk wel gelijk. Zij lopen wel een beetje achter de ontwikkelingen aan, maar ze doen nu toch mee met de actualiteit. Nog niet zo lang geleden ging een onderneming die te veel risico had genomen gewoon failliet. De strop kwam ten laste van eigenaren en schuldeisers. Ook werknemers, afnemers en toeleveranciers, zelfs consumenten konden de nare gevolgen ervaren. Om de schade te beperken werd de sterfhuis-constructie bedacht. Die constructie heeft nu de gedaante aangenomen van “too big to fail”. Dat wil zeggen dat wij allemaal de falende organisatie in stand houden omdat de ellende anders nog groter zou zijn. Dat betekent enorme bescherming van de desbetreffende organisatie. Maar ook een enorme verslechtering van de risicopositie van de verder verwijderde omstanders. Tenslotte draaien we er allemaal voor op. Dat zou fijn zijn als we de zo verwaterde gevolgen niet meer zouden voelen. Het tegendeel is waar. Eigenlijk zijn de rating agencies dus te laat met hun stelselwijziging. We betalen al. 1 Directeur Wingman Business Valuators B.V., Breda

Rating: het heilige getal 3 • 37

“Groeien tot het hoogste niveau dat voor mij haalbaar is. Dat is mijn toekomstvisie.” Marc Buijs, assistent accountant

Onze ruimte, jouw groei Meer weten over de carrière van Marc en zijn collega’s? Of benieuwd naar onze mogelijkheden? Scan de QR of surf naar onze website.

www.carrierebijGT.nl

Accountancy - Belastingen - Advies

fsrforum • volume 14 • issue #2

Earnings management

Dr. C.D. Knoops

Department of Business Economics Erasmus School of Economics

In 1998 the chairman of the Securities and Exchange Commission, Arthur Levitt in his famous lecture “The ‘numbers game’, eluded on the pressures on companies “to make the numbers”, i.e. to present earning that fulfill the expectations of investors. And he mentioned some ‘tricks’ that firms use(d) to manage earnings, or to ‘create illusions’ as he called it. In 1986 Griffiths started his book “Creative accounting” on financial reporting in the UK as follows: “Every company in the country is fiddling its profits. Every set of accounts is based on books which have been gently cooked or completely roasted” (quote taken from Jones, 2011, p. 4). Other authors describe the so-called ‘earnings game’ that firms and financial analysts ‘play’; management of firms and financial analysts have learned to work together to ‘realize’ expectations (Eccles et al., 2001). The references mentioned above are old, and maybe things have changed? New regulations for listed firms, like International Financial Reporting Standards, international auditing guidelines and corporate governance codes, have been introduced since. Does earnings management still occur? A recent book edited by Jones (2011) describes accounting scandals in many countries (58 high-profile accounting scandals across 12 countries): “every country has its own accounting scandals”. He says: “Accounting scandals, by their nature, are extreme cases. They generally involve creative accounting and fraud”. Many academic papers show that earnings management exists and sometimes even conclude that earnings management is on the rise. Financial accounting and reporting deal with questions like: whether certain transactions and events (e.g. changes in values) should be recognized in financial statements, how items in financial statement items should be defined, recognised, measured and presented, what additional disclosures should be made, what vehicles (e.g. annual reports, integrated reports, sustainability reports, conference calls, websites) should be used to inform interested parties and who should be informed (stakeholders or shareholders). Regulation is in place to guide this; for listed firms this is IFRS. Firms have to give a ‘true and fair’ view or ‘present fairly’ the state of affairs in annual reports and interim reports. Flexibility in accounting rules is necessary to keep pace with business innovations. Ideally the preparers of accounts us the flexibility in the accounts to deliver a ‘true and fair view’ (Jones, 2011, p. 5). During the last decades improvements in IFRS limited flexibility and aim at greater comparability. Creative accounting means using the flexibility in accounting within the regulatory framework to manage (de)recognition, measurement, presentation, disclosures (through all kinds of vehicles) so that they give primacy to the interests of the preparers of the financial reports, instead of the interests of the users of the financial reports (adapted from Jones, 2011). Earnings management involves using flexibility within accounting to deliver a predetermined profit and is aimed at misleading users of financial reports. Earnings management is often defined in a broader sense and comprises all manipulation of figures and narratives with the aim of misleading users of financial reports, where it is more like a synonym for creative accounting. Earnings management can be conducted in the interest of the firm (e.g. to reduce political visibility, to reduce taxes, to meet and beat targets) or in the interest of management (e.g. to maximize bonuses, reputation). Earnings management can be aimed at influencing profit (net income, earnings per share), but also at influencing other financial ratios (e.g. solvency, preventing to breach debt covenants) and at influencing perceptions of users through narratives (and graphs) in the directors report (this is called impression management). Earnings management can be conducted through accounting changes or estimates, but also through managing transactions. Earnings management can be detected through a detailed analysis of a firm’s accounting practices, looking at the key accounting policies of a firm, the flexibility the firm has, the firm’s accounting

strategy, the quality of disclosures , and the identification of ‘red flags’ (Palepu et al., 2007; Mulford and Comiskey, 2002). Earnings management can be detected analytically by studying accruals. Accruals are the difference between net income and cash flow from operating activities. Net income is considered as a better performance measure than cash flows. Accruals consist of changes in working capital, depreciation and amortization charges, including impairments, and changes in provisions. Accruals tend to reverse out over time. Earnings management can be measured by trying to separate discretionary accruals from non-discretionary accruals, where discretionary accruals are a proxy for earnings management. In the accounting literature typically time-series or cross-sectional accrual models are used to determine discretionary accruals (see Ronen and Yaari, 2008). In the literature (Hribar and Collins, 2002) objections are raised against the use of accrual models because of measurement errors. Dechow et al. (2011) suggests that incorporating priors concerning the timing of the reversal can significantly improve the power and specification of tests of earnings management. This offers interesting perspectives for further research.

Literature: Dechow, P.M., Hutton, A.P., Kim, J.H., & Sloan, R.G. (2011). Detecting earnings management: a new approach (October 2011). Available at SSRN: http://ssrn.com/abstract=1735168. Eccles, R.G., Herz, R.H., Keegan, E.M., & Phillips D.M.H. (2001). The value reporting revolution. Moving beyond the earnings game. New York, etc.: John Wiley & Sons, Inc. Giroux, G. (2004). Detecting earnings management. Hoboken, NJ: John Wiley & Sons. Griffiths, I. (1986). Creative accounting. London: Sidgewick and Jackson. Hribar, P., & Collins, D.W. (2002). Errors in estimating accruals: Implications for empirical research. Journal of Accounting Research, 40(1), 105-134. Jones, M. (ed.) (2011). Creative accounting, fraud and international accounting scandals. Chichester: John Wiley & Sons Ltd. Levitt, A. (1998). The “numbers” game. Securities and Exchange Commission. Available at: http://www.sec.gov/news/speech/speecharchive/1998/spch220.txt. Mulford, C.W., & Comiskey, E.E. (2002). The financial numbers game. Detecting creative accounting practices. New York: John Wiley & Sons. Palepu, K.G., Healy, P.M., Bernard, V.L., & Peek, E. (2007). Business analysis and valuation. IFRS edition. London: Thomson Learning. Ronen, J., & Yaari, V. (2008). Earnings management. Emerging insights in theory, practice, and research. New York: Springer Science+Business Media, Inc.

Earnings management • 39

De weg naar de top is minder lang dan je denkt. Academisch toptalent Met je titel op zak wil je natuurlijk zo snel mogelijk een absolute topbaan. Maar de weg naar de top is lang, en de kans op ﬁlevorming groot. Behalve als je een alternatieve route durft te nemen. Op veel topfuncties bij multinationals en de overheid werken mannen en vrouwen die hun carrière gestart zijn bij Deloitte. En dat is niet toevallig. Bij ons werk je namelijk al vanaf dag één aan innovatieve oplossingen voor én met toonaangevende organisaties. En ondertussen aan je eigen loopbaanversnelling. Dus als jij wilt dat de topbedrijven straks voor jou in de rij staan, kun je nu het beste bij ons beginnen. Zoek jij de beste start van je carrière? Begin eerst hier: werkenbijdeloitte.nl.

fsrforum • volume 14 • issue #2

Word of the chairman

Wessel Ploegmakers

Dear reader, After spending some quality time with family and friends during the holidays, the second part of the academic year has started. The first part of the academic year proved to be a great success with the International Banking Cycle, Big 4 Cycle, Accountant Firms Day and the Traders Trophy. Now that a new year has begun, I would like to use this opportunity to wish you all a very successful and good year on behalf of the FSR board! If we look back at the past events we can truly say that the academic year had a beautiful start. Together the 10 banks of the International Banking Cycle invited over 250 students to work on cases and had the first-hand opportunity to get acquainted with the work of an investment banker. Next to these workshops, the presentations and drinks at ‘de Etage’ provided many interested students with more information about the opportunities within investment banking. There were record breaking enrolments for the Big 4 Cycle this year and we are very satisfied with the broad overview these four inhouse days delivered. Together with the Accountant Firms Day the accountancy student is very well served this year. Already famous in the FSR curriculum is the Traders Trophy, where over 90 students can experience what it takes to be a stock trader through a simulation game. Although a little hectic at sometimes, trading stocks in the market is nerve gripping and very addictive. Before the holidays we had the CleanTech Challenge kick-off session, which marked the start of an event organised by us for the first time this year in close cooperation with YES!Delft Students and the Delft Energy Club. This CleanTech Challenge is an innovation competition for green ideas. It will provide students with the opportunity to develop an idea and to build a diverse team of entrepreneurial technology and finance students. Next to these events we had the honour to host many guest lectures this year and we look forward to those to come. These guest lectures provide an excellent base to link the theoretical lectures to the practical insight of a company. At the 19th of November the yearly active members’ day took place. First, we took our active members for some thrills to the woods of Breda. Here they could go buggy crossing at some bumpy dirt roads. To stay in style, we then went to cocktailbar Level for a workshop and had dinner at restaurant Humphreys. Of course the day ended with some well-deserved drinks. As the year is still fresh I would like to indicate some of our upcoming events to you. The New Year kicked-off with the Financial Business Cycle and the preparations for the International Research Project are almost finishing as in April the participants will leave to Bangkok and Ho Chi Minh city. Next to this international journey the European Finance Tour will conquer Milan with an exciting and packed programme in March. For the finance-oriented students the Banking Dinner is one not to be missed in February. Also this time, the National Investment Competition will prove who will be the best student investor of the Netherlands. In addition, the Erasmus students will have to strive to be the best at the Multinational Battle and make Rotterdam third time in a row winner. As you can read, we can look back on a successful first half year, but there are many more activities yet to come. Therefore, I would like to end with saying that I look forward welcoming you all at one of our cycles, workshops, master classes or drinks.

FSR News

Column Hanneke Wisman

Column Anastasia van der Wees

CleanTech Challenge

Active Members Day

44 45 53 55 FSR news • 41

Mazars is ontstaan uit een fusie tussen Mazars en Paardekooper&Hoffman

⎥⎦ W.w e∼k Ψnb ijmΕ zar s.⇔←

Ga verder met Mazars.

fsrforum • volume 14 • issue #2

News Update The Olympus case

takeover d e s u s u p Olym osses, l e d i h o t fees 8, 2011 r e b m e v No Olympu s share holder for rei n io t a calls ig n t s s e t atemen Olympus inv , t n t e m o f ex-CEO Wed No tten' manage o 'r , s d v in f 9 l , e 2011 pan 1 1 0 2 7 December

In an incredibly troubled quarter for Japanese camera and medical equipment manufacturer Olympus, the company shed two presidents, saw its share price plummet by almost 75 percent, and came under investigation from regulators and enforcement agencies across the globe. CEO and President Michael Woodford, who brought the matter to the company’s attention, was let go.

Olympus bo by Febru ard to quit ary as p announc robe ed, 7 Dec ember 2 011

es Serious Olympus fac inquiry, e ic f f O d u a Fr 2011 16 November Olymp five ye us to revis e ars of e a r 14 Nov ember nings, 2011 ll after a f s e r a sh Olympus losses, g n i d i h s it admit ber 2011 m e v No 8

At the centre of the controversy were four deals made between 2006 and 2008. In this period Olympus acquired three firms – Humalabo, a producer of nutritional supplements; Altis, a waste disposal and recycling firm; and News Chef, a seller of microwave cooking ware and asset management firm. These companies were bought for a combined $773m, written down to just $187m in 2009. Much of the near $1bn that Olympus spent on these three Japanese start-up firms went to Cayman Islands-based companies that were dissolved or closed down shortly after receiving the money, according to internal documents and Cayman Islands records. The fourth deal, the $2bn purchase of UK medical firm, Gyrus Group, proved to be the most controversial. Olympus reportedly paid $687m in fees to two advisory companies related to the purchase – more than a third of the purchase price. The money went to New York firm AXES, and AXAM, a firm incorporated in the Cayman Islands. While payments to advisers in takeovers are normal, fees in the region of $20m to $40m would be expected (1-2%). After clearing his desk and promptly leaving Japan, Mr Woodford went to the media with his version of events, making public a PwC report he commissioned that suggested further regulatory and legal scrutiny in light of the payments made during the Gyrus deal. The report stated that the acquisitions had led to a combined loss of $1.2bn for shareholders and highlighted potential offences including false accounting, financial assistance and breaches of duties by the board. After the controversy surfaced, it emerged that KPMG flagged issues surrounding the Gyrus deal as far back as 2009 – years before Mr Woodford’s revelations. The auditor was unable to ascertain Olympus’s relationship with Cayman-based Axam, and complained that records were not properly kept. KPMG was replaced by Ernst & Young in July 2009, though Olympus denied that this was due to the issues raised by KPMG, stating the firm’s contract had simply come to an end. Ernst & Young too had raised its own concerns about the irregularities of the Gyrus deal. In the weeks after Mr Woodford went public, Olympus faced a bombardment of questions concerning the removal of its auditors. There is speculation that the firm used a maneuver known as tobashi, where companies hide losses on bad assets by selling them to other companies, often dummy companies, with the intent of buying them back at a later date. Olypmus chairman Mr Kikukawa and executive vice president Mr Mori both confessed to having roles in the fraud, and Mr Mori was relieved of his position. The firm’s internal auditor, Hideo Yamada, also offered to resign. Olympus now finds itself in an unenviable position. On the home front, as well as waiting for the results of an independent commission, it is under investigation by Japan’s Financial Services Authority (FSA) and the Tokyo Metropolitan Police Department. Abroad, the company is under investigation by the UK’s SFO, while the FBI and SEC continue to probe its accounts. Olympus Corp itself is preparing to take legal action against any executives found responsible for the scandal. The Tokyo Stock Exchange (TSE) has also put Olympus shares under supervision and warned that they could be delisted. Olympus was required to post its quarterly results by 14 December, which they did, thereby avoiding delisting.

This text was taken from a larger paper on the Olympus case written by Matt Atkins and accessible via: http://www.financierworldwide.com/article.php?id=8798

FSR news • 43

fsrforum • volume 14 • issue #2

FSR Former board member

Hanneke Wisman

After a year of attending and organizing FSR activities (amongst others the Big Five (!) Cycle) during the 3rd year of my bachelor I decided to apply for a position in the FRS board of 2000-2001. Main points of “attraction”: the open atmosphere, the combination of formal and informal activities and the challenges I was going to face to find enough sponsors as main responsible board member for external affairs. FSR was at that point an association that was in an early growth stage. We still had to proof ourselves and proof the importance of our independent existence. We had a marvelous time! We learned to think and act very quickly and I learned to stop contemplating and just GO! No guts no glory. This meant I had a lot of “first times” and I developed a broad range of (social) skills from selling and negotiating to organizing and hosting activities, from developing a network inside and outside the university to drink at the same pace as the other board members (of which 5 were male). I had a lot of exciting moments that I will never forget, one of them was a 24-hour workshop at the French Construction and Communication company Bouygues. We were asked to form a team of 3 Economic students and 3 students from the Technical University in Delft to attend a workshop in Paris that was organized by Bouygues. I went with Simon Kielman (responsible for the organization of the International Research Project) and Teije Smittenaar (member of the committee that was responsible for the organization of the International Research Project) and three students from the TU in Delft. The trip and the workshop were very exciting and kind of bizarre because we had to work on a case for which most material and all presentations were in French. The case involved the design and calculation of an underground metro-system in Rome. We won the workshop using our “secret weapon” Teije, who just came back from an exchange program in Paris. The result: a trip to Hong Kong where we visited some large Construction projects, but also had more than enough time for sightseeing. Looking back I am proud off all the things we accomplished during that year; amongst others the International Research Project to New York and San Jose and the introduction of new activities, like the “Controllers-days”. The thing I treasure most is the fact that I learned to face my fears, two of them are still very useful (1) Hosting and leading activities and (2) fear of flying. After the trip to Paris and Hong Kong, London and Mexico came in the same year and a much more flights in the years after! During my year as board member I realized KPMG was the company I wanted to work for, after a short internship and finishing my master(thesis) I started working in November 2002 at the audit department of this firm… and I never left.

Passport Name Hanneke Wisman Age 32 Residence Rotterdam Employed at KPMG Current position Senior Manager Which FSR Board 3rd FSR Board (2000-2001) Board function external affairs Study Economics (Accounting & Controlling) Year of graduation 2002 Which car do you drive BMW What do you drink on a Friday night A glass of chardonnay Life Motto Everything is possible

44 • FSR news

fsrforum • volume 14 • issue #2

FSR Member

Anastasia van der Wees

Passport Name Anastasia van der Wees Age 23 Residence Rotterdam Study Msc Financial Economics/ Msc Accounting, Auditing and Control Year of graduation 2010 FSR event International Research Project 2011 Job at Ernst & Young Accountants Department Assurance Which car do you drive Seat Ibiza What do you drink on a Friday night White wine Life Motto Work hard, play hard!

During my study at the Erasmus University Rotterdam I frequently encountered flyers and posters for the events organized by the FSR. The promotional material captured my interest and a visit to the FSR website followed. The FSR website exposed the close relationship that the organization holds with many business organizations and the close community it holds among its members. The website and a visit to the FSR Office inspired me to become an active member at the FSR. As an active member I received the chance to organize one of the greatest events of the FSR and enjoyed all other benefits of being part of the FSR. Together with 4 other active members, I organized the International Research Project 2011. The International Research Project 2011 gave 20 students the opportunity to conduct academic research in Kuala Lumpur and Singapore. During our research period in Kuala Lumpur and Singapore we visited several large organizations that provided us with insights on their economy and operations in relation to our research subject, ‘’Diversity’’. In addition, all participants visited the partnering companies of the project during in-house days in the Netherlands. During the in- house the partnering companies also provided us with insights on our research topic and provided us with useful tools for our visits to Kuala Lumpur and Singapore. The visits to the different partnering organizations of the project, furthermore provided us with insights on services provided by the different partnering organizations. During the in-house days I also received the chance to get a taste of the company culture and colleagues working at the different partnering companies. The company that appealed the most to me was Ernst & Young. During the in-house days and other events organized by the FSR I came into contact with the recruiter of Ernst & Young and discussed my opportunities and possibilities at Ernst &Young. My first months at Ernst & Young were great. Every day at work is different as you get to conduct different proceedings and handle different parts of a particular assignment. Since my start I have also worked with different teams for a diverse set of clients. The colleagues that were part of the different teams, I have worked on so far, were all very approachable and willing to assist where necessary.

Providing services for a diverse set of clients has also widened my perspective on different industries. During my first months at Ernst & Young I have encountered that the corporate culture of Ernst & Young is built around the values the organization stands for. All employees strive to provide quality in everything they do and also strive to be the best at all they do. This inspires me to live by the values of the organization as well. On every assignment you are part of a team of colleagues with different levels of experience. Even though I am a starting employee, the colleagues on the different teams always gave me the feeling that I am a valuable team member that contributed to the assignment at hand. Ever since I started it became clear that is necessary to take on a proactive attitude. By taking on a proactive attitude you are able to take responsibility for your own work and career. It will also give you the opportunity to improve your skills and learn new skills whenever appropriate. It is advised to start orienting about different organization, jobs and internship during your study period. The FSR provides you with a great platform to get in touch with different organizations through the different events the FSR organizes. Participating in the events will also give you the opportunity to know more about the work that is performed at different organizations. Furthermore it is greatly advice to become an active member at the FSR. Being an active member will not only bring you into contact with different organizations but it will also bring you valuable experiences and lasting relations with your peers.

FSR news • 45

fsrforum • volume 14 • issue #2

KPMG

Company presentation

Om maar meteen met de deur in huis te vallen: wij willen nogal wat! Nummer één blijven op gebieden waarop we het al zijn en nummer één worden waar we het nog niet zijn. Dat bereik je alleen door het talent dat je in huis hebt te koesteren. En door daarnaast voortdurend op zoek te gaan naar mensen met dezelfde passie. Mensen die ambitieus en betrokken zijn en het beste uit zichzelf willen halen door heel goed samen te werken. Als je de markt waarin wij opereren zou vergelijken met de eredivisie, dan is accountancy binnen KPMG zoiets als voetballen voor een topclub. KPMG behoort tot de meest prestigieuze accountants –en advieskantoren wereldwijd.

KPMG Audit Bij KPMG Audit start je als trainee en volg je naast je werk een opleiding tot registeraccountant. Omdat je werkt in wisselende teams, voor meerdere klanten en op verschillende locaties (in binnen- en buitenland) en geen bedrijf en geen jaarrekening hetzelfde is, is het een heel dynamisch vak. Dat je continu blijft leren en alle ruimte krijgt om jezelf te blijven ontwikkelen, maakt het alleen maar extra aantrekkelijk. Naarmate je meer kennis en ervaring hebt, krijg je steeds een andere rol binnen het controleteam, met meer verantwoordelijkheden en bevoegdheden.

Nummer één blijven op gebieden waarop we het al zijn en nummer één worden waar we het nog niet zijn. KPMG Advisory Onder de noemer Advisory levert KPMG adviesdiensten aan alle soorten organisaties op diverse terreinen, zoals business performance, restructuring, IT, valuations en advies bij fusies of overnames. We werken voor grote (inter)nationale ondernemingen en voor not-for-profitorganisaties, maar net zo goed voor (semi)overheidsinstellingen. En dat doen we niet zonder succes. Onze passie en ambitie, gecombineerd met kennis van zaken en sterke teams, zorgen voor eersteklas adviezen. Die ook zo worden gewaardeerd door onze opdrachtgevers. Zodat Advisory een onmisbare pijler is van de KPMG-organisatie.

Meer informatie? Voor meer informatie kun je kijken op www.gaaan.nu. Of je neemt contact op met het KPMG Recruitment Centre via recruitment@kpmg.nl of op 020 - 6567162.

46 • Companypresentation

Je kunt als bedrijf nog zoveel willen, je krijgt pas iets voor elkaar met goede mensen.

Kun je jezelf kort introduceren? Mijn naam is Romain Wigny, ik ben 25 jaar en ik werk sinds april 2011 bij KPMG Corporate Finance in het Financing team. Financing is één van de drie sub units van Corporate Finance en adviseert over alle mogelijke vraagstukken die bedrijven kunnen hebben met betrekking tot vreemd vermogen. Voorbeelden hiervan zijn projectfinancieringen, securitisaties en overname financieringen. Ik heb Economie gestudeerd aan de Erasmus Universiteit in Rotterdam waar ik ook actief was als (bestuurs)lid van de Financiële Studievereniging Rotterdam. Daarnaast voetbal ik bij Antibarbari en probeer ik (nog steeds) mijn GVB te halen.

Hoe ben je gekomen op de keuze voor KPMG? Mijn eerste kennismaking met KPMG vond plaats tijdens een Advisory inhousedag in Rotterdam waar alle facetten van het werken bij KPMG Advisory aan bod kwamen. Tijdens mijn tijd bij de FSR heb ik veel bedrijven gezien, maar KPMG sprong er voor mij echt uit met name door de grote diversiteit aan werkzaamheden en de ‘klik’ die ik had met de mensen. Daarnaast is KPMG Corporate Finance marktleider in het middensegment op het gebied van mergers & acquisitions en leidend op het gebied van securitisaties en projectfinancieringen. Door mijn specifieke interesse in projectfinancieringen kwam ik na mijn afstuderen al snel bij KPMG Corporate Finance terecht en na mijn deelname aan Fast Forward Friday kreeg ik dezelfde dag nog een baan aangeboden. Tijdens Fast Forward Friday doorloop je in één dag het gehele sollicitatietraject dat bestaat uit sollicitatiegesprekken, het uitwerken van cases en uiteindelijk een gesprek met een partner. Je maakt tijdens deze dag bovendien kennis met veel toekomstige collega’s. Aan het einde van deze intensieve dag wist ik zeker dat ik bij KPMG wilde beginnen. Romain Wigny

Hoe was je start bij KPMG? De eerste maanden kwam er best veel op me af. Hoewel ik mijn studie goed had afgerond, kwam ik al snel tot de conclusie dat je in het werkende leven van voren af aan moet beginnen en dat je vooral heel veel nog niet weet. Dat maakt het werk erg uitdagend en geen dag is tot nu toe hetzelfde geweest. Bij KPMG Corporate Finance ligt de nadruk op ’learning-on-the-job’ waardoor je direct bij klanten aan tafel zit en meedraait in opdrachten. Daarnaast investeren collega’s veel tijd in het ontwikkelen van je kennis. Je wordt goed opgevangen en begeleid en er zijn verschillende mogelijkheden voor het volgen van opleidingen en cursussen.

Wat waren je verwachtingen van KPMG en voldeed KPMG aan je verwachtingen? Ik verwachtte bij KPMG vooral veel te leren, veel te zien bij klanten en samen te werken met jonge, ambitieuze mensen. Tot nu toe voldoet KPMG zeker aan mijn verwachtingen. De diverse klantportefeuille, de uitdagende projecten en met name de leuke collega’s maken voor mij echt het verschil.

Welke tips kun je tenslotte geven aan Accountancy / Finance studenten? Binnen zowel accountancy als finance zijn er ontzettend veel leuke banen te vinden. Ik heb daar goed de tijd voor genomen, een keuze maken was voor mij dan ook een intensief proces. Zorg er dus voor dat je gebruik maakt van alle mogelijkheden die de FSR je biedt voor een goede oriëntatie op de arbeidsmarkt.

Companypresentation • 47

fsrforum • volume 14 • issue #2

BIG 4 cycle

In the past few years it has become more popular for many students to have a career at one of the four biggest accountancy firms worldwide, the Big 4. It is known that these firms offer many opportunities to help starters continue developing themselves. Besides this, it was evidenced during the Big 4 Cycle in October and November 2011 that it does not mean that the bigger the firm is, the more formal it is to their employees. Due to these two crucial factors, the Big 4 have become very attractive for many people. With a large group of students from the Erasmus University Rotterdam, we visited the head quarters of KPMG, PwC, Deloitte and Ernst & Young in Rotterdam. The in-house days started with an exclusive lunch in the “living rooms” of the firms. After the lunch, students could bring their theoretical knowledge in practice by working on cases. They needed to detect several business and accounting risks by looking through annual reports or by having interviews with different employees of the fictive firm in the case. By actually doing these cases, students could not only get an idea what an accountant does during their working hours but they could also taste the atmosphere of each accounting firm. This would help them in making a choice for which of the Big 4 they are likely to work in the near future. Furthermore, it was quite obvious for many of us that it is not only about numbers in the accountancy world, as communication is also very important. When presentations of results were finished, it was time to have dinner. To end the intensive day, the accounting firms all organized a delicious dinner at various locations near Rotterdam. During the dinners, students had the opportunity to get to know the firms better in an informal way. We, the accountancy committee, hope that we succeeded with helping students to get to know the Big 4 better, so they can facilitate their choice of future employer. Finally, we are proud that The Big 4 Cycle has been a very successful event not only for all the students but also for the accounting firms.

48 • FSR news

fsrforum • volume 14 • issue #2

Accountant Firms Day

After the first edition of January this year, the FSR organized for the second time the accountant firms day (AKD) in cooperation with Baker Berk Tilly, BDO, Grant Thornton and Mazars on the 30th of November. This day, students had the opportunity to get acquainted with some of the middle-sized accountancy firms aside from the big four, during an intensive and practical case. The event was held at hotel STROOM in Rotterdam. A group of 25 students was selected to participate in this event. Each company had two employees present, a recruiter and an auditor. The day started off with a speech by dr.sc.ind. A.H. van der Boom followed by a short company presentation by each of the four participating firms. After these introductions, the students had the chance to get to learn more about the firms and other students during the lunch and of course to have a good meal before starting the case. As for the rest of the day, the students were divided into four groups, each working on and solving the case in their own way. During the case, the groups had to conduct interviews with the management of a company they were going to audit. The management was acted out by the employee of the accountancy firms, giving them a chance to observe and interact with the students in practice. This led to some interesting results. Each group presented their conclusions at the end of the day, after which the companies got a chance to comment. After this intensive but informative day, it was finally time for drinks and snacks! Around seven o’clock in the evening the day had come to an end. We as the accountancy committee thought it was a successful day and we can conclude the same from the students’ and companies’ comments. The Accountancy Committee

FSR news • 49

HOE VER GA JIJ

vo or de agenda van je klant?

Onze klanten zijn zonder uitzondering ondernemende mensen. Harde werkers met veel energie en stevige verantwoordelijkheden. Dat vraagt om een flinke dosis inlevingsvermogen. Je moet hun wensen, zorgen en plannen begrijpen. En soms moet je je aanpassen aan hun werkritme. Ook al kost het wat slaap. Iets voor jou? Ga naar werkenbijacconavm.nl

dichtbij kom je verder

fsrforum • volume 14 • issue #2

accon■avm biedt mij de ruimte om te ontwikkelen, dichtbij mijzelf én dichtbij de klant Company presentation

je klanten, kan je de klanten bij vraagstukken ook snel helpen. Met de diverse soorten dienstverlening binnen de organisatie is er altijd een collega die de klant verder kan helpen. Hierdoor wordt de klant ontzorgt en het geeft mij een prettig en fijn gevoel om net dat beetje meer te kunnen betekenen voor een klant.

Carrière bij accon■avm

Norma Bonten, werkzaam als assistent-accountant in de controlepraktijk bij accon■avm Norma Bonten (26) startte na haar diploma Accountancy aan de HEAO, met de Master of Science in Accountancy aan de Nyenrode Universiteit. Tevens ging zij aan het werk bij een groot accountantskantoor. Na één jaar werken bij dit kantoor kwam ze tot de conclusie dat ze het ‘persoonlijke klantcontact’ en het ‘net dat beetje meer kunnen betekenen voor de klant’ miste. “Ik ging op zoek naar een bedrijf wat de kansen en mogelijkheden biedt van een groot kantoor, maar waar je ook net dat beetje meer klantcontact kunt hebben. Dit alles vond ik bij accon■avm adviseurs en accountants. Hier werk ik nu ruim een jaar met veel plezier als assistent-accountant in de controlepraktijk.”

Verantwoordelijkheden Binnen accon■avm adviseurs en accountants kent men verschillende functieniveaus, tevens allemaal doorgroeifuncties! Ik startte als assistent-accountant en ondanks mijn weinige ervaring was ik gelijk een volwaardig teamlid. Ik ging gelijk mee naar de klant en het mooiste is dat niet alleen de controleleider gesprekken voert met de klant, maar dat ikzelf ook gesprekken mag voeren. Mijn ervaring is dat je hierdoor de klant sneller leert kennen en een duidelijker beeld van de klant en zijn omgeving krijgt

Binnen accon■avm krijg je voldoende gelegenheid om jezelf te ontplooien. Uiteraard heb je een persoonlijk aanspreekpunt binnen de organisatie; hij of zij houdt jouw ontwikkelingen in de gaten houdt en helpt je bij het maken van je carrière binnen accon■avm. Daarnaast heeft accon■avm een eigen Academy, waar je cursussen en opleidingen kunt volgen. Álle mogelijkheden dus!

Sfeer De sfeer binnen accon■avm is gezellig, informeel en persoonlijk. Je voelt je snel welkom. Ik heb leuke en diverse collega’s, waar ik met al mijn vragen over werk en studie terecht kan. Verder studeren veel van mijn collega’s nog, waardoor het op vrijdag meestal erg rustig is op kantoor. Ik kan dichtbij mijzelf blijven en dit is belangrijk bij accon■avm, want als je dichtbij jezelf blijft, kan je meer betekenen voor de klant en accon■avm. Daarbij is er een goede balans tussen werk en privé.

Toekomstbeeld Ik sta nu nog aan het begin van mijn carrière bij accon■avm en de organisatie is nog steeds groeiende. accon■avm biedt voor mij dan ook nog talloze mogelijkheden. Mijn plan voor nu is het behalen van de Master of Science in Accountancy en het doorgroeien naar de functie van asprirant-controleleider.

Dichtbij de klant! accon■avm adviseurs en accountants heeft vele diverse MKB-klanten, van klein tot groot, met allemaal hun specifieke kenmerken. Doordat je voortdurend contact hebt met

Companypresentation • 51

fsrforum • volume 14 • issue #2

Traders Throphy

Thursday, the first of December the qualification rounds for the Traders Trophy worldwide were held in Rotterdam at the Erasmus University. After experiencing the successes of the preceding years, the expectations were high. Last year the event was organized in cooperation with Oxyor and Optiver and this year we were pleased to host the event with these great partners for the second time. The Traders Trophy is a worldwide event. Through a simulation game, students from Singapore, Dubai, New York or even Brazil are given the chance to experience the thrill of trading. Selling and buying stocks, while interacting with virtual clients plus keeping an eye on market information and reacting within split seconds is a daunting task. However, students in Rotterdam have accepted this challenge with much enthusiasm. The qualification day proved to be a great success. First of all, Rotterdam had one of the highest enrolments amongst the competing Traders Trophy universities. Next to Rotterdam, the qualification rounds took place at Amsterdam, Delft, Groningen, Nyenrode, Tilburg and Maastricht. Eager students filled up the first qualification round quickly, and the session started with a short introduction from one of Optiver’s traders and a brief explanation on the simulation game from Oxyor. After an hour of intensive trading, students were invited to hang out at the Optiver lounge, playing Wii Mario cart, and even accepting a second challenge: doing 80 mathematical questions in just 8 minutes. Another two qualification sessions were held during the day and at the end of the day the awards ceremony was well attended. Amongst the 90 participants during the day, four students were selected to compete in the national final held on the 8th of December at the Amsterdam Stock Exchange. The selection was based on scores on profitability, market awareness, market making and risk management. The winners of the Rotterdam qualification round are Sander Barendse, Jos Mijnarends, Georgi Stanchev and Korrein Volders. Of this selection Sanders Barendse was the proud all day winner and received an Apple Ipod from Oxyor. The national final held at the Amsterdam Stock Exchange was buzzing; 28 participants from all over the Netherlands did their best and had to trade three different stocks for well over an hour. It is an honour to tell you that FSR member Jos Mijnarends is the national winner and Netherlands best student trader. He will compete in the worldwide final to represent the Netherland on the 3rd of May 2012. On behalf of the FSR we would like to congratulate him and wish him good luck!

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fsrforum • volume 14 • issue #2

CleanTech Challenge 2012

At the 7th of December the Dutch CleanTech Challenge 2012 kick-off session at the YES!Delft Students headquarters was held. This event is new in the FSR portfolio and we are very proud to offer this great opportunity to the Erasmus students. The CleanTech Challenge originated in London in 2009 as a student competition designed to nurture innovative ideas. For the first year this competition has a Dutch counterpart and after completion of the Challenge the winning team has the opportunity to fly to London for the worldwide finals. In this final you will compete with the winning teams of other countries to win a staggering amount of £10.000! The kick-off session proved to be a great success as we had three encouraging speakers for the evening. The first was Eiso Vaandrager, a cleantech investor and the second speaker was Berend Jan Kleute, CTO and founder of Bluerise, a new technology startup that works with ocean energy. The last but certainly not least speaker of the evening was the winner of last year’s global final Hjalmar Nilsonne who has been through the rounds of the challenge before and is actually up and running with his company Black Sillicon Solar! The Cleantech Challenge provides entrepreneurial students first and foremost with an incredible opportunity to test the strength and viability of their start-up concept on both a local and international platform. You do not need a brilliant idea to make it happen, the challenge is there to provide the opportunity to look at an idea critically and see what it takes to make it to the next level. In order to create a powerful team the competition encourages students with technical and business backgrounds to integrate their experience and expertise. Competing in the challenge you will get workshops and consults from professionals and companies active in the field of clean technology. The Challenge is set up in three rounds in which Round 1 gives you the opportunity to participate until the 12th of February! The only requirements for this round are a short description of your idea, only 200 words, and a team with at least 2 and at maximum 5 students. If you have a good idea for the clean technology sector regardless of how vague/undeveloped/feasible it is, if it’s clean, it can be more than just a dream. However, you need a team to make it real. And even when you don’t have an idea, but you're really eager to participate? Don’t worry! There are people who need you to strengthen their team; you just haven't met them yet! If you still look for a team or an idea you can come to the network session at the 9th of February. Make sure you have a look at www.cleantechchallenge.nl and subscribe for the next network session! We look forward to your input to make this world a little better!

FSR news • 53

BANKING DINNER 29 FEBRUARY

APPLICATION DEADLINE 17 FEBRUARY

WWW.FSR.NL/CARRIERE FSR Career site Vacancies, Internships and Inhouse days of more than 50 companies for Finance, Accountancy and Control students! Every week new items in our database!

The first step in your career!

fsrforum • volume 14 • issue #2

Active Member’s Day

The active members had no idea what they were about to do, when they met each other at the parking lots of metro station Kralingse Zoom at 11.00 AM on Saturday, the 19th of November. Three white vans and an extra car were ready to transport the 29 active members to the location of the first activity. The first activity was one hour of buggy riding in the neighborhood of Breda. One hour long the active members raced over unpaved roads, bouncing over bumps and slipping through the corners. When the finish had been reached, everybody had the opportunity to clean his or her face from sand and mud to make a decent group picture. Hereafter, the active members got in the vans again. This time, the destination was Dordrecht for a wellearned lunch. After the lunch the trip continued back to Rotterdam. In Rotterdam the second activity of the day was scheduled: a cocktail workshop. After learning something about the history and theory of cocktail shaking every active member had the opportunity to make her own cocktail. Different techniques like shaking and stirring were applied in practice. When everybody had enjoyed his own made cocktail it was time to have dinner. This three course meal tasted great and led to lively conversations. After the speech of the chairman it was time to end the day with a party. This party continued until the early hours and was a nice finishing touch of a successful day.

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fsrforum • volume 14 • issue #2

FSR Activity Agenda 2012

January/February Financial Business Cycle Explore the financial opportunities

January/April CleanTech Challenge Grow your green ideas!

February Banking Dinner Get acquainted with the world of banking

March European Finance Tour Milan, managing uncertainties.

February/March Multinational Battle Five multinationals, five battling cities, are you part of it?

Cartoon: Deef Smits www.coolgraphix.nl

May Bachelor Accountancy Day Will you choose for a career in accounting?

April Female Business Tour

Corporate Finance Competition

It might be a men’s world but it would be nothing without women.

Finance Day

Five star event: hotel, companies and participants!

Want to know what finance is all about…

April/May International Research Project Examine the corporate world of Bangkok & Ho Chi Minhcity.

National Investment Competition Invest and be a winner!

56 • FSR news

Investment Banking Masterclass Learn to valuate, like an investment banker.

www.werkenbijpwc.nl

Soms weet je precies welke smaak je wilt Soms wil je eerst nog van alles proeven

Sta je op het punt je financiĂŤle master af te ronden, dan ligt de wereld bij ons aan je voeten. Want als talent met een stevig financieel fundament kun je proeven aan alle smaken van je vakgebied tijdens ons Financial Traineeship; een tweejarig coachings- en opleidingstraject. Wil je meer weten, neem dan contact op met Evi van Splunder. Of kijk op werkenbijpwc.nl/financialtraineeship

Kom verder met het Financial Traineeship

Financial Traineeship Start september 2012 Evi van Splunder 088 792 73 69 evi.van.splunder@nl.pwc.com

Weten wat je kan, begint met weten waar je naartoe wilt.

Inge Tjeerdsma Senior Staff Audit FSO

Een succesvolle carriĂ¨restart is meer dan een goede cijferlijst. Het begint met karakter en inzicht in jezelf. Ontdekken wie je bent, weten waar je naartoe wilt groeien ĂŠn hoe je dat voor elkaar krijgt staat altijd aan de basis. Ernst & Young coacht jou actief op weg naar jouw succes. We bieden je volop kansen in de wereld van assurance, tax, transaction en advisory. Ontdek ze op ey.nl/carriere