The Role of Trait and State Moral Disengagement on FIN 48 Earnings Management

Abstract

This behavioral study assesses the influence that dispositional trait and situational state moral disengagement tendencies have on an accounting managers’ willingness to engage in earnings management in the FIN 48 setting. We develop a measure of state moral disengagement so that we can assess the relative influence of both trait and state moral disengagement on opportunistic FIN 48 accruals that are necessary to meet earnings targets. Findings suggest that both trait and state moral disengagement factors significantly influence accounting manager earnings management. We also find noteworthy trait mediation effects that contribute to our understanding of moral disengagement theory. Overall, we find that trait moral disengagement is more salient than state moral disengagement when both factors are included in regression models. Further, we find that more than forty percent of our sample is willing to participate in egregious earnings management that could constitute fraud. We also find that participants with stronger ethical reasoning capabilities are less likely to participate in severe FIN 48 opportunistic behavior. The study contributes to understanding the theoretical boundaries of moral disengagement and how moral disengagement impacts FIN 48 accruals.