fsr forum 14-02

EarningsManagement

14th VolumeJanuary 2012issue #2

News UpdateThe Olympus case

Interview prof H.P.A.J. LangendijkExpert in Earnings Management

CleanTech ChallengeGrow your green ideas!

p43p30 p53

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BERK-085-02-opmaak-210x297-v15.indd 1 17-02-11 11:31

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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 fol-

lowing 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 man-

agement. 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.

fsrforum • volume 14 • issue #2

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 under-

standing of earnings management!

Sincerely,

Anne van Driesum

Editor in Chief FSR Forum

FSR board 2011-2012

Preface • 3

Table of contents

ColofonFSR FORUM appears five times a year and is an edition of the Financial Study Association RotterdamKvK Rotterdam no: V 40346422VAT no: NL 805159125 B01ISSN no: 1389-0913

14th volume, number 2, circulation 1550 copies

Editor in chiefAnne van Driesum

Editorial department Jeroen van Oerle

Editorial advisoryDr. M. B. J. SchautenDr. W. F. C. VerschoorDrs. R. Van der Wal RA

With the cooperation ofC.M. EasterwoodJ. JiangK.R. PetroniI.Y. WangG.H. HartmannV.S. MaasH.P.A.J. LangendijkDrs. J. G. Groeneveld RA RVC.D. KnoopsD. Smits

Editorial addressEditiorial office FSR Forum, Erasmus Universiteit Rotterdam Room H14-06Postbus 1738, 3000 DR RotterdamTel. 010 408 1830E-mail: [email protected]

Takeovers and incentives for earnings management: An empirical analysis.C. Mendez EasterwoodThis 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 WangThis 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 MachiavellianismFrank G. H. Hartmann, Victor S. MaasThis 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

Earnings Management

4 • Table of contents


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AdvertisersBaker Tilly Berk

www.werkenbijbakertillyberk.nl

NIBC

www.careeratnibc.com

KPMG

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Deloitte

www.werkenbijdeloitte.nl

Grand Thornton

www.carrierebijgt.nl

Mazars

www.werkenbijmazars.nl

PWC

www.werkenbijpwc.nl

Ernst & Young

www.ey.nl/carriere

Interview H.P.A.J. Langendijk 30

Expert in Earnings Management

Column Joost Groeneveld PhD 36

Rating: heilige getal 3

Column professor 39

C.D. Knoops

FSR News

Word of the Chairman 41

News update 43

FSR former board member 44

FSR member 45

Activity reports 48

FSR Activity Calendar 56

Company Presentations Deloitte 6www.werkenbijdeloitte.nlMazars 20www.werkenbijmazars.nlMinisterie van Financiën 34www.werkenvoornederland.nl/minfinKPMG 46www.gaaan.nuaccon avm 50www.werkenbijacconavm.nl

Table of contents • 5

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.

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modelling, strategisch vastgoedadvies, gebiedsontwikkeling, waardebepaling van contracten,

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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 /

[email protected])

Deloitte

Company presentation

6 • Companypresentation


Carrière Paul SeegersMijn 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

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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

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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.

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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,

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

Paul Seegers

Companypresentation • 7

Takeovers and incentives for earnings management:An empirical analysis

C. Mendez Easterwood

INTRODUCTIONA common view among accounting researchers and practi-

tioners, 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 evi-

dence 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

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 Zimmer-

man (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; how-

ever, as the takeover attempt progresses, they feel they can no

longer benefit from adopting income-increasing accruals.

RESEARCH DESIGN AND SAMPLE SELECTIONApproaches to Testing for Earnings ManagementTwo 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

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


Table 1: Description of Entire Sample of Takeover Targetsa

Year of Initiation Hostileb Friendly Total Avg. Total Assets ($million)

1985 11 6 17 1,644.86

1986 10 14 24 936.42

1987 10 11 21 1,278.50

1988 17 17 34 599.29

1989 9 5 14 1,553.26

Total 57 53 110 1,085.52

a 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.

»

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 dis-

cretionary 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 FirmsThe 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 Data-

base. 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 manage-

ment 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.

Selection of Matched Sample of NontargetsTo 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

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 non-

target firms. Panel A reports quarterly data and Panel B reports

annual data for the fiscal year ended immediately prior to ini-

tiation. 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.

Measurement of Earnings ManagementQuarterly Earnings AnnouncementsThis 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

Takeovers and incentives for earnings management: An empirical analysis • 9

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 Friendly Targets and their Matches

All Targets N=110

All Matches N=186

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

Hostile Targets N=57

Matches for Hostile Targets N=95


Friendly Targets N=53

Matches for Friendly Targets N=91


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)

1344.33 (550.71)

-0.26 (0.14)

897.28 (241.93)

2100.99 (253.86)

-1.22 (0.02)

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

0.70 (1.08)

1.33 (1.48)

-1.79* (-2.46**)

1.30 (1.13)

1.33 (1.58)

-0.08 (-1.95**)

0.07 (0.90)

1.34 (1.42)

-2.11** (-1.74*)

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

25.18 (23.58)

21.61 (20.89)

1.58 (1.21)

22.99 (24.00)

23.27 (22.30)

-0.12 (0.36)

27.54 (21.91)

19.89 (18.45)

1.93* (1.41)

Change in Return on Assets for Quarter t-1b

-0.0028 (-.0005)

0.0023 (0.0008)

-1.40 (-1.27)

0.0003 (-.0007)

-0.0010 (0.0008)

0.55 (-0.63)

-0.0062 (-.0004)

0.0057 (0.0011)

-1.69* (-1.25)

Change in Return on Assets for Quarter tb,c

0.0022 (-.0019)

-0.0026 (0.0001)

0.66 (-1.37)

-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).a 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.

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 N=57

Matches for Hostile Targets N=95


Friendly Targets N=53

Matches for Friendly Targets N=91


Panel B. Annual Data for the Year Ended Immediately Prior to Initiation

Return on Assets (%)a 2.03 5.24 -2.07** 4.54 5.43 -0.83 -0.66 5.05 -1.92*

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

* Significant at the 0.10 level (two-tailed).** Significant at the 0.05 level (two-tailed).a 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.

(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 man-

agement. 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 manage-

ment. Although the quarter t-1 earnings announcement

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 AccrualThe 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 maturi-

ties of long-term debt for firm i at quarter t, and

DEPRi,t = depreciation expense for firm i at quarter t.



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) t-statistic for difference in:

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

Initiation and Completion 162.8 (137.5) 177.3 (136) 147.2 (142) 1.34

Quarter-end t-1 and the Earnings Announcement for Quarter t-1 33.7 (29) 30.7 (27) 37.0 (32) -2.00**

Quarter-end t and the Earnings Announcement for Quarter t 28.8 (25.5) 27.4 (25) 30.3 (26) -1.18

* 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 nondiscretion-

ary component and a discretionary component. The discre-

tionary 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.

The Modified Jones Approach to Estimating the Discretionary AccrualTwo methods are used to estimate NQACCi,t. The first

method, based on the model developed by Jones (1991), con-

sists 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 regres-

sions 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:

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

where:

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

assets),

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,

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

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,

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,t-

CHGARi,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-

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

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

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 scru-

tiny may have on managerial discretion over fiscal fourth

quarter earnings (FOURQ).

The average R-squared for the 124 estimation period multi-

ple 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 estima-

tion period regressions. Table 4 shows that the independent

variable that is significant in the greatest number of regres-

sions 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 RegressionsIncluded 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 3 5 11

CHGREV - CHGAR -0.248 2.02 33 43 52

GPPE 0.045 1.01 6 18 25

FDIFF 0.042 1.06 7 13 20

FOURQ -0.011 1.52 22 34 39

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

The DeAngelo Approach to Estimating the Discretionary AccrualThe second approach – the DeAngelo approach - to estimat-

ing 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.

EMPIRICAL RESULTSComparison of All Takeover Targets to All NontargetsThe 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. Differ-

ences 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 tar-

gets is greater than and significantly different from the mod-

ified 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 nontar-

gets. 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.

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

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

Panel A. The Modified Jones Approach

All takeover targets Control group of nontargets Mean Median

0.0035 0.0024 42 -0.0065 -0.0041 42 0.47 (0.6408) 0.60 (0.5459)

Hostile takeover targets Control group of nontargets Mean Median

-0.0011 0.0047 19 -0.0012 -0.0030 19 -0.55 (0.5847) 0.00 (0.9999)

Friendly takeover targets Control group of nontargets Mean Median

0.0072 0.0013 23 -0.0108 -0.0109 23 1.16 (0.2531) 0.83 (0.4038)

Panel B. The DeAngelo Approach


92 -0.0061 -0.0003 92 1.54 (0.1252) 0.79 (0.4277) Text Text


41 -0.0016 0.0035 41 0.91 (0.3646) 0.33 (0.7385) Text Text


51 -0.0097 -0.0005 51 1.25 (0.2146) 0.60 (0.5469) Text Text

Approaches to Computing the Discretionary Accrual

ap-values are in parentheses.bTest 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 N Mean Median N t-statistic (Wilcoxon Z) for difference in:a,b

Panel A. The Modified Jones Approach


0.0028 0.0063 47 -0.0179 -0.0095 47 2.29 (0.0246) 1.88 (0.0597)


0.0033 0.0080 26 -0.0201 -0.0101 26 1.94 (0.0580) 1.73 (0.0837)


0.0021 -0.0072 21 -0.0151 -0.0095 21 1.23 (0.2250) 0.65 (0.5131)

Panel B. The DeAngelo Approach


0.0049 0.0020 101 -0.0102 -0.0097 101 1.94 (0.0538) 2.08 (0.0373)


0.0072 0.0021 52 -0.0151 -0.0088 52 2.29 (0.0242) 2.35 (0.0188)


0.0024 0.0018 49 -0.0050 -0.0103 49 0.60 (0.5480) 0.64 (0.5225)

Approaches to Computing the Discretionary Accrual

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

Comparison of Hostile and Friendly Takeover Targets to their Matched NontargetsIf managers of firms that are targets of hostile takeovers have

greater incentives to manage reported earnings, then exam-

ining 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 tar-

gets 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, there-

fore, are similar to the results obtained in the previous sec-

tion.

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- »Takeovers and incentives for earnings management: An empirical analysis • 13

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 posi-

tive and significantly different from the DQACC for the non-

targets. This difference is significant at the 10% level. The

results presented in Panel A, however, for the friendly takeo-

ver 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 signif-

icantly 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 CONCLUSIONSThis study tests the hypothesis that managers of firms that

are targets of takeovers systematically adopt income-increas-

ing 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 dis-

cretionary 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-increas-

ing accruals during the quarter ended prior to initiation of

the takeover attempt but not during the quarter ended sub-

sequent to initiation of the takeover attempt. The test results

also indicate that the income-increasing accruals are primar-

ily 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.

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 Cor-porate 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 Con-sequences, 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 Cor-porate 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.

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



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 con-

siders 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 compen-

sation 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

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 fore-

casts 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 managementFollowing 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 cal-

culated 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

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 man-

agement 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

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


»

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 meas-

ured 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.

3.3 Additional analysisThe study primarily concentrates on the impact of CFO’s

equity incentives on earnings management relative to the

equity incentives of CEOs. The equity incentives were esti-

mated 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.

The estimate on beta1 captures the sensitivity of a firm’s

stock return to earnings. The model is corrected for AR(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.

ConclusionIn this study it was investigated whether CFO equity incen-

tives are associated with earnings management and the

incremental role of CFO equity incentives in earnings man-

agement relative to those of the CEOs. The inspiration for

this paper came from the increased regulation on the disclo-

sure 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 measure-

ment of earnings management. First the accruals are looked

at and secondly the likelihood of beating analyst forecasts.

This paper finds that CFO influences on earnings manage-

ment 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 disclo-

sure 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.

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


Mazars, een organisatie waar Rules don’t Rule !

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 inven-

tiviteit. Integendeel. Wij helpen bedrijven zich verder te

ontwikkelen. Vooruitkijken vinden we even zinvol als achter-

uitkijken. 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 & Hoff-

man fuseerde met het internationale Mazars-netwerk. Hier-

uit 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 thuis-

markt 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.

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 geïnte-

resseerd 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 medewer-

ker 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 VlasblomDe slogan van Mazars is Rules don’t rule. Een marketing-

campagne 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 nage-

leefd worden dan kan een accountantskantoor zelfs zijn ver-

gunning 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 mak-

kelijk om je hier achter te verstoppen. Het staat in het hand-

boek van de Raad van de Jaarverslaggeving, dus moeten we

het zo doen... Zelf blijven nadenken en passende oplossingen


Dayenne Faneyte



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. Daar-

naast 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 doorgroeimoge-

lijkheden 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.

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 mee-

pikken. 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.

Kristianne Vlasblom


Why Business Unit Controllers Create Budget Slack: Involvement in Management, Social Pressure, and MachiavellianismFrank 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 activ-

ities and performance of their unit to higher-level manage-

ment. 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) pro-

vide survey evidence, which suggests that organizational

slack is higher in firms in which BU controllers focus rela-

tively more on providing decision-making information to BU

managers than on providing information for corporate con-

trol 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 profes-

sional management accountants to explore whether and

when BU controllers’ involvement in their unit’s manage-

ment 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 con-

stitute 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 con-

trollers are less prone to create slack under this condition.

HYPOTHESIS DEVELOPMENT

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 achieve-

ment (Webb 2002; Nouri and Parker 1996), while it is in cor-

porate managers’ and owners’ interest that budget proposals

reflect the units’ performance potential as accurately as pos-

sible (Fisher et al. 2000; Indjejikian and Matfjka 2006). To

mitigate such budget-related agency problems, organiza-

tions 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 per-

sonality factor Machiavellianism.

Controller Involvement in Management Controller involvement in management is the extent to

which controllers are active participants in the unit’s opera-

tional 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 down-

side 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 sug-

gests 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 nec-

essarily be more inclined to produce budget proposals that

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),

less Machiavellian controllers are less prone to create budgetary slack.

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

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. Pres-

sure 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 indi-

viduals 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

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 profes-

sional 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 calcula-

tive, 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

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 con-

trollers 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 there-

fore 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

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 profes-

sional guidelines

Because of the opportunistic and calculative nature of their

decision making, high Machs will be relatively easily per-

suaded 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 con-

trollers 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-

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



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 Machiavel-

lian 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 control-

lers’ 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 posi-

tive 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 crea-

tion were manipulated by varying the experimental case sce-

narios. 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 two-

year part-time executive educational program in finance and

control. Students in this program, which is offered at differ-

ent 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 uni-

versities 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. Sub-

sequently 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 sce-

narios, “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 involve-

ment 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, devel-

opment 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

Table 2: Descriptive Statistics Dependent Variable

Full Sample

Involvement

High Low Overall

N Mean SD N Mean SD N Mean SD

Pressure

High 36 54.44 26.207 36 52.22 27.109 72 53.33 26.497

Low 31 40.00 23.381 33 42.45 29.539 64 41.27 26.553

Overall 67 47.76 25.795 69 47.55 28.514 136 47.65 27.108

High Mach Subgroup

Involvement

High Low Overall


High 16 68.44 22.783 15 54.00 26.873 31 61.45 25.501

Low 16 35.31 19.619 19 52.16 27.144 35 44.46 25.147

Overall 32 51.88 26.843 43 52.97 26.629 66 52.44 26.532

Low Mach Subgroup

Involvement

High Low Overall


High 20 43.25 23.635 21 50.95 27.866 41 47.20 25.861

Low 15 45.00 26.592 14 29.29 28.342 29 37.41 28.113

Overall 35 44.00 24.579 35 42.29 29.663 70 43.14 27.056

Gerard van Dinkel and the other two members of the busi-

ness 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 con-

troller 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 assess-

ment 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 depend-

ent 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-pres-

sure 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 disa-

gree” and 5 = “Strongly agree”): “Business unit controller

Wouter Simons was actively involved in strategic and opera-

tional 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 dif-

ference 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 neg-

atively worded items were reverse coded). The Machiavellian-

ism 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 condi-

tions 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 vari-

able 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 Machi-

avellianism scores (Cohen et al. 2003; Hartmann and Moers

1999). Before calculating the interaction terms, we standard-

ized the Machiavellianism scores to facilitate interpretation

of the results. A hierarchical regression procedure was run

with SOCIAL PRESSURE, INVOLVEMENT, and MACHIAVEL-



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 = lowPoint B: Pressure = high, Involvement = lowPoint C: Pressure = low, Involvement = highPoint D: Pressure = high, Involvement = highL 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 inter-

action 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 main-

effects-only model is significant and that there exist main

(average) positive effects of SOCIAL PRESSURE and MACHI-

AVELLIANISM on SLACK CREATION. As can be seen in

column 2 of Table 3, introduction of the two-way interac-

tions (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 interac-

tion 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 PRES-

SURE 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 MACHIAVELLIAN-

ISM.

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 INVOLVE-

MENT. 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, pres-

sure strongly increases engagement in slack creation (the

likelihood score increases from 35.31 percent to 68.44 per-

cent), 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 CONCLUSIONThis 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 control-

lers in operational and strategic management decisions

affects their ability to resist pressure to engage in slack crea-

tion. We expected and found that the three factors, involve-

ment in management, pressure from BU managers and per-

sonality, should be considered together to understand

controllers’ engagement in the creation of budget slack.

More specifically, we found that only high Mach unit control-

lers 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.

NoteFull 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

© 2011 KPMG N.V., alle rechten voorbehouden. W W W.GA A AN.NU

Kijk voor meer tips op facebook.com/kpmgscriptiecoach.Of beter nog: schrijf je scriptie bij KPMG.

Scriptietip # 1:

“Houd de hoofdvraag compact. Met een te wijdlopige probleemstelling loop je vroeg of laat vast.”

KLEIN IS FIJN

-04445_210x297mm_adv_Scriptanten_alle.indd 1 28-11-2011 12:39:07

© 2011 KPMG N.V., alle rechten voorbehouden. W W W.GA A AN.NU

Kijk voor meer tips op facebook.com/kpmgscriptiecoach.Of beter nog: schrijf je scriptie bij KPMG.

Scriptietip # 3:

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EEN INHOUDS-OPGAVE IS HET HALVE WERK

-04445_210x297mm_adv_Scriptanten_alle.indd 3 16-11-2011 13:28:36

Interview Nyenrode:Prof Dr Henk Langendijk

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

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 govern-mental advisory agencies and took part in the par-liamentary 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.

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 con-

structed 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


30 • Interview

»

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 pur-

poses 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 can’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

One must look at earnings management as simple creative bookkeeping

Interview • 31

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 pre-

ferred 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 man-

agement 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

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


32 • Interview

company has complied with the IFRS regulations, the dis-

cussion 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?

How do other circumstances effect earnings management?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 book-

keeping cannot save a company anymore from being punished

by the market or the banks (for not living up to the debt cov-

enants), 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 fun-

damental 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

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

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 com-

panies) 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.

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 mis-

priced 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

Ministerie van Financiën

www.werkenbijhetrijk.nl

Werken bij het Rijk. Als je verder denkt

...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

grote ondernemingen zoals Schiphol, Havenbedrijf Ro� erdam en Gasunie.

Het ministerie van Financiën is hier namens de staat aandeelhouder.

Een grote verantwoordelijkheid die je vanaf het begin moet dragen.

Bij Financiën tel je meteen mee.

Wil je ervaring op doen bij Financiën?

Ben je op zoek naar een stage waarin je direct veel verantwoordelijkheid

krijgt en mee kunt denken over uitdagende projecten met maatschap-

pelijke gevolgen? Dan is stage lopen bij het ministerie van Financiën

iets voor jou. We zijn op zoek naar talentvolle studenten bedrijfs-

economie die zich willen inze� en voor een � nancieel gezond en wel-

varend Nederland. Kijk voor meer informatie op www.min� n.nl of

bel 070- 342 7317. Je sollicitatie mail je naar recruitment@min� n.nl.

Je derde week bij Financiën...

-00194_adv_a4_bdrfseconoom.indd 1 07-12-2010 17:01:57

Bij Financiën tel je meteen mee.Zeker als bedrijfseconoom.

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 poli-

tieke verhoudingen en maatschappelijke ontwikkelingen. Die

dimensie maakt het werk extra spannend.

Vanaf dag één meedoenBij 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.

Als bedrijfseconoom aan de slagTegenwoordig 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 maatschap-

pelijke ontwikkelingen. Het antwoord vereist inzet, precisie

en creativiteit, maar ook een scherp gevoel voor politieke

verhoudingen.

Wat wil je doen?Bij het ministerie spelen bedrijfseconomen een belangrijke

rol. Wat jij precies gaat doen, hangt natuurlijk af van je achter-

grond en belangstelling. Je kunt denken aan: het uitgeven

van staatsaandelen, het initiëren en stimuleren van publiek-

private samenwerkingsverbanden, het risicomanagement

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 bewegingBij 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.

Kennismaken?Elk jaar organiseert het ministerie van Financiën de Studentendag voor academici vanaf het

tweede studiejaar. Tijdens deze dag krijg je een unieke kans om het ministerie van binnenuit te

leren kennen. Je draait een dag mee en wordt door enthousiaste medewerkers begeleid. Meer

informatie op www.studentendag.nl. Naast de studentendag zijn er verschillende andere

inhousedagen bij het ministerie van Financiën.

Traineeships: Het Audit Traineeship en het Financial TraineeshipIn september gaan het Audit Traineeship en Financial Traineeship weer van start. Het Audit

Traineeship is een programma van de Auditdienst Rijk, de dienst die voor de gehele rijksoverheid

de wettelijke taak (accountantscontrole) uitvoert en audits op verzoek levert. Als pas afgestudeerd

academicus krijg je de kans ervaring op te doen binnen de auditfunctie van het Rijk. Je draait

twee jaar volledig mee op verschillende werkplekken binnen verschillende ministeries. Zo doe

je ruime praktijkervaring op met de politieke, bestuurlijke en financiële werkelijkheid van het

Rijk. Daarnaast krijg je een Post Master Accountancy of een Post Master IT-audit en een intern

opleidingsprogramma aangeboden.

Tijdens het Financial Traineeship werk je in verschillende financiële functies. Je gaat aan de

slag bij een directie Financieel-economische Zaken van één van de ministeries en je werkt een

half jaar bij het ministerie van Financiën, de Tweede Kamer, de Algemene Rekenkamer of een

uitvoeringsinstantie. Daarnaast neem je samen met de andere trainees deel aan een op maat

gemaakt cursusprogramma.

Aanmelden voor één van beide traineeships kan tot en met 20 mei 2012!

Meer informatieWil je meer weten over werken bij het ministerie van Financiën? Kijk voor informatie over

startfuncties, traineeships, stagemogelijkheden en onze recruitmentactiviteiten op www.werk-

envoornederland.nl/minfin. Je kunt ook meteen solliciteren via [email protected]. Bellen

kan ook naar (070) 342 89 69 of (070) 342 73 17.




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 ver-

schillen 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.

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 toe-

vlucht tot stelselwijziging. Logischerwijze betekent dit een

extra risicofactor in de formule. Het rating-systeem moet

worden uitgebreid.

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

Getallen hebben allerlei betekenissen. Daar worden we van

jongs af aan mee vertrouwd gemaakt. Wie kent niet de waar-

schuwende 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 kwaliteitsaan-

duidingen 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.

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".

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 trend-

lijn 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.

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

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.

Rating: het heilige getal 3

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

Door de kwantitatieve codering worden de kwalitatieve verschillen weggepoetst.

36 • Rating: het heilige getal 3


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 jaarre-

keningen 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 sterf-

huis-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 organisa-

tie. Maar ook een enorme verslechtering van de risicopositie van de verder verwijderde omstan-

ders. Tenslotte draaien we er allemaal voor op. Dat zou fijn zijn als we de zo verwaterde gevol-

gen 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

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

“Groeien tot het hoogste niveau dat voor mij haalbaar is. Dat is mijn toekomstvisie.”

Marc Buijs, assistent accountant

Accountancy - Belastingen - Advies

Onze ruimte, jouw groei

www.carrierebijGT.nl

Earnings management

Dr. C.D. KnoopsDepartment 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 guide-

lines 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 addi-

tional disclosures should be made, what vehicles (e.g. annual reports, integrated reports, sus-

tainability 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 discre-

tionary accruals from non-discretionary accruals, where dis-

cretionary 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 specifica-

tion 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 fi levorming 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.

DB-000-adv-regulier-basis-210x297-v10.indd 2 23-12-10 15:29

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 inter-

ested 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

44

45

53

55

Column Hanneke Wisman

Column Anastasia van der Wees

CleanTech Challenge

Active Members Day

Word of the chairman

Wessel Ploegmakers


FSR news • 41

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 fi levorming 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.

DB-000-adv-regulier-basis-210x297-v10.indd 2 23-12-10 15:29

Olympus shares fall after

it admits hiding lOsses,

8 nOvember 2011

Olympus tO revise five years Of earnings,

14 nOvember 2011

Olympus faces seriOus

fraud Office inquiry,

16 nOvember 2011

Olympus bOard tO quit by february as prObe annOunced, 7 december 2011

⎥⎦W.we∼kΨnbijmΕzars.⇔ ←

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

Ga verder met Mazars.

0475.00.596 WT Rules BS_210x297_FC.indd 1 21-08-2008 11:13:06

News UpdateThe Olympus case

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.

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 man-

agement 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 con-

cerning 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

Olympus shares fall after

it admits hiding lOsses,

8 nOvember 2011

Olympus tO revise five years Of earnings,

14 nOvember 2011

Olympus faces seriOus

fraud Office inquiry,

16 nOvember 2011

Olympus bOard tO quit by february as prObe annOunced, 7 december 2011

Olympus sharehOlder calls fOr reinstatement Of ex-ceO, Wed nOv 9, 2011

Olympus used takeOver

fees tO hide lOsses,

nOvember 8, 2011

Olympus investigatiOn

panel finds 'rOtten' management,

7 december 2011

FSR news • 43


⎥⎦W.we∼kΨnbijmΕzars.⇔ ←

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

Ga verder met Mazars.

0475.00.596 WT Rules BS_210x297_FC.indd 1 21-08-2008 11:13:06

FSR Former board member

Hanneke Wisman

After a year of attending and organizing FSR activi-

ties (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 con-

templating 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

FSR Member

Anastasia van der Wees

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 com-

munity 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 Inter-

national 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 oppor-

tunities 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 encoun-

tered 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 con-

tributed 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 pro-

vides 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.

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!


FSR news • 45

KPMG

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 AuditBij 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.

KPMG AdvisoryOnder de noemer Advisory levert KPMG adviesdiensten aan alle soorten organisaties op diverse

terreinen, zoals business performance, restructuring, IT, valuations en advies bij fusies of over-

names. 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 [email protected] of op 020 - 6567162.

Nummer één blijven op gebieden waarop we het al zijn en nummer één worden waar we het nog niet zijn.




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 inte-

resse 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 aan-

geboden. 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.

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’ waar-

door 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 ver-

schillende 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.

Romain Wigny


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 evi-

denced 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

Accountant Firms Day

After the first edition of January this year, the FSR organized for the second time the account-

ant 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 audi-

tor. The day started off with a speech by dr.sc.ind. A.H. van der Boom followed by a short com-

pany presentation by each of the four participating firms. After these introductions, the stu-

dents 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 stu-

dents 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

Onze klanten zijn zonder uitzondering ondernemende mensen. Harde werkers met veel energie en stevige verantwoordelijkheden. Dat vraagt om een fl inke 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

voor de agenda

van je klant?

HOE VER GA JIJ

147778_210x197.indd 1 08-11-11 17:01

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

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 klantcon-

tact’ en het ‘net dat beetje meer kunnen betekenen voor de

klant’ miste.

“Ik ging op zoek naar een bedrijf wat de kansen en mogelijk-

heden 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 controle-

praktijk.”

VerantwoordelijkhedenBinnen accon■avm adviseurs en accountants kent men ver-

schillende 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

Dichtbij de klant!accon■avm adviseurs en accountants heeft vele diverse

MKB-klanten, van klein tot groot, met allemaal hun speci-

fieke kenmerken. Doordat je voortdurend contact hebt met

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■avmBinnen 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!

SfeerDe 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 mij-

zelf 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.

ToekomstbeeldIk 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.




Traders Throphy

Thursday, the first of December the qualification rounds for the Traders Trophy world-

wide were held in Rotterdam at the Erasmus University. After experiencing the suc-

cesses 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 Nether-

land on the 3rd of May 2012. On behalf of the FSR we would like to congratulate him and wish

him good luck!


52 • FSR news

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 win-

ning 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 even-

ing. 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 incred-

ible 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 DINNER29 FEBRUARY

WWW.FSR.NL/CARRIEREFSR Career site

The first step in your career!

Vacancies, Internships and Inhouse days of more than 50 companies for Finance, Accountancy and Control students!

Every week new items in our database!

APPLICATION DEADLINE 17 FEBRUARY

Advo BD-Carriere.indd 1 12-12-2011 18:47:31

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 loca-

tion 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 opportu-

nity 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 well-

earned 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.


FSR news • 55

BANKING DINNER29 FEBRUARY

WWW.FSR.NL/CARRIEREFSR Career site

The first step in your career!

Vacancies, Internships and Inhouse days of more than 50 companies for Finance, Accountancy and Control students!

Every week new items in our database!

APPLICATION DEADLINE 17 FEBRUARY

Advo BD-Carriere.indd 1 12-12-2011 18:47:31

FSR Activity Agenda 2012

January/February Financial Business CycleExplore the financial opportunities

January/April CleanTech ChallengeGrow your green ideas!

February Banking DinnerGet acquainted with the world of banking

March European Finance Tour Milan, managing uncertainties.

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

April Female Business TourIt might be a men’s world but it would be nothing without women.

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

National Investment CompetitionInvest and be a winner!

May Bachelor Accountancy DayWill you choose for a career in accounting?

Corporate Finance CompetitionFive star event: hotel, companies and participants!

Finance DayWant to know what finance is all about…

Investment Banking MasterclassLearn to valuate, like an investment banker.

Cartoon: Deef Smits www.coolgraphix.nl


56 • FSR news

© 2011 PricewaterhouseCoopers B.V. (KvK 3412089) Alle rechten voorbehouden.

www.werkenbijpwc.nl

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

Kom verder met het Financial Traineeship

Financial TraineeshipStart september 2012Evi van Splunder088 792 73 [email protected]

Sta je op het punt je fi nanciële master af te ronden, dan ligt de wereld bij ons aan je voeten. Want als talent met een stevig fi nancieel 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/fi nancialtraineeship

4694-76 PwC RC FT A4 FSR Forum.indd 1 12/2/11 2:20:27 PM

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

Inge TjeerdsmaSenior Staff Audit FSO

Een succesvolle carrièrestart is meer dan een goede cijferlijst. Het begint met karakter en inzicht in jezelf. Ontdekken wie je bent, weten waar je naartoe wilt groeien én 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

E&Y_210x297mm_potentials.indd 1 03-11-10 17:11

fsr forum 14-02

Documents

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