the main points
Earnings management refers to the ethically questionable practice of manipulating earnings upward to achieve desired financial results.
People with dark personalities (such as narcissism) are more likely to be hired because of their willingness to engage in earnings management.
Interventions to combat earnings management should target different stages of the hiring process of accounting managers.
Why do companies hire dishonest and unscrupulous employees, such as managers with dark personality traits (e.g., deceptive, manipulative, exploitative managers)?
In their paper published in the Journal of Business Ethics, Ling Harris and colleagues suggest that companies appoint managers whose “desire to push ethical boundaries is aligned with organizational goals.” One such unethical organizational behavior is creative accounting, specifically earnings management.
Before reviewing their findings, I briefly defined dark personality traits and explained what earnings management means.
Earnings management and dark personality traits
Senior accounting managers make accounting estimates and other judgments that affect a company’s financial statements (for example, net income). Although their goal should be transparency and accuracy, this is not always the case. Earnings management refers to situations in which senior accounting managers change their estimates and influence financial reports to reflect the desired level of earnings and not the actual economic performance of the company.
Previous research suggests that managers with dark personality traits tend to engage in unethical business behavior, such as earnings management.
Dark personality traits are associated with the following personalities.
Psychopaths are outwardly charming but cruel.
Narcissists feel superior and entitled.
Machiavellians calculate and manipulate in the long term.
Sadists lack empathy and enjoy cruelty.
Although dark personality traits tend to be dysfunctional and disliked, research suggests that some characteristics of individuals with dark personalities are viewed favorably in contexts such as politics and business. Which qualities? Self-confidence, impression management skills, creativity, innovation, leadership skills, etc.
In fact, many people with dark personality traits, especially Machiavellians, easily rise to leadership positions. Likewise, those with narcissistic tendencies are more likely to emerge as leaders, a phenomenon observed even in children of narcissists.
Thus, hiring people with dark traits could be a by-product of the search for stereotypical “strong leaders.” In other words, organizations that aim to hire very confident employees may hire people with some dark personality traits as well.
However, Harris and others have a different theory: Perhaps companies hire individuals who are willing to do what is necessary (even if unethical) to achieve organizational goals. Simply put, companies intentionally look for people with dark personalities.
Let us now turn to tests of the above hypothesis.
An investigation into hiring decisions and dark personality traits
Experiment 1
Sample: 113 businessmen.
Method: The researchers aimed to diversify the pressure to manage earnings by manipulating the type of organization (i.e., nonprofit versus for-profit). Participants were randomly assigned to either a nonprofit organization or a public for-profit company and were instructed to imagine that they were corporate recruiters (financial executives) trying to hire a chief accounting officer.
As financial executives, they had to choose between two finalists, Candidate M and Candidate F. These candidates were very similar in terms of work experience, education and competence, but different in their personal profiles. Specifically, Candidate F had few dark traits, while Candidate M had many traits – high in narcissism, Machiavellianism, moral disengagement, a tendency to rationalize and justify behaviors inconsistent with values, a belief in the importance of pleasing powerful others, etc.
Participants first answered questions about personality and organizational fit (e.g., in terms of the value system, attitudes, and priorities of each candidate), followed by two questions about the likelihood of hiring the candidate, and how much they personally liked the candidate.
Results: In the case of a for-profit company, data analysis showed that the fit between people and the organization and the probability of hiring Candidate M (compared to Candidate F) were higher. This suggests that hiring decisions were influenced by pressure to manage earnings.
Experiment 2
Sample: 110 individuals with a background in accounting and finance.
The method: This time, the researchers tried to manipulate the pressure to manage earnings by changing the purpose of financial statements. Therefore, the type of organization remained constant (always a for-profit company), but the purpose of the data related to either “owner monitoring” or “company evaluation.”
Specifically, participants were asked to imagine themselves as company owners trying to hire a chief accounting officer and were randomly assigned to a company evaluation condition (i.e., the owner plans to sell the company) or an owner monitoring condition (i.e., the owner wants to correct deficiencies in the company’s operations). The rest of the procedure was identical to the previous investigation.
Results: When financial data was used to evaluate the company (compared to owner control), participants were more likely to choose Candidate M. Why? Perhaps because of the added pressure to manipulate earnings upwards.
Experiment 3
Sample: 41 executive recruiting professionals.
Method: Participating business professionals were asked to imagine themselves as executive recruitment consultants making interview recommendations for a senior accounting manager position for a public company client. The hiring organization has remained constant. Also, only one candidate was considered, either M or F, not both.
Results: Data analysis again showed a higher likelihood of recommending Candidate M for an interview. Thus, the authors note that individuals with dark personality traits appear to be “pre-selected early in the recruitment process.”
Dark traits and unethical behaviors in the workplace
In sum, the results show that organizations tend to hire senior account managers with dark personality traits (e.g., high degree of narcissism, Machiavellianism, moral detachment) when the position requires a willingness to cross ethical boundaries. In fact, this was the case even when the alternative candidate (Candidate F) was perceived as more likable, an overall better manager, and less likely to engage in fraud.
Although a variety of factors (e.g., organizational culture or identity, such as organizational narcissism) can explain the prevalence of unethical behavior in the workplace, the research reviewed suggests that hiring individuals with dark personalities—particularly those People with high narcissism and Machiavellianism, but low idealism may be an important factor.
At present, there is little empirical evidence on the type or timing of interventions to combat earnings management. Therefore, we need to test interventions that target different stages of the recruitment process for senior accounting managers—from job posting and advertising to recruitment, selection, and retention—to identify areas that may be most effective.
