Figure 3 reveals how auditors come only third as stakeholders of primary concern if a company is perceived as engaging in fraudulent activity, despite the professions claim that auditors play a significant regulatory role in the financial reporting process. Explain this moderate concern expressed by the managers.

Quite a few participants, however, also indicated a high level of concern regarding the perceptions of coworkers, external auditors, and other parties outside the company, such as creditors. Interestingly, all these stakeholder groups (investors, regulators, auditors, and creditors) have been identified as parties that subscribe to services that can be used to identify companies with aggressive accounting practices. These results seem to indicate that the more these earnings management detection tools are used by stakeholders, the less likely it is that managers will engage in earnings management out of fear of appearing overly aggressive.

Our studys results suggest that managers face conflicting pressures when it comes to managing earnings. While theyre concerned about negative shareholder reactions if earnings expectations are missed, they also fear appearing risky or aggressive to the public (particularly regulators and shareholders) if they were to take actions to inflate earnings.

These conflicting pressures raise the question: Which concern has a stronger effect on managers accounting decisions? To determine how managers perceive these conflicting pressures, we asked all 122 participants to identify which is most harmful to a companys reputation: (1) missing analysts earnings expectations or (2) being included on a watch list of aggressive companies. Eighty-four percent of managers surveyed believe that inclusion on a watch list of aggressive companies is more damaging to a companys reputation than missing analysts earnings expectations.

FIGURE 3: STAKEHOLDERS OF PRIMARY CONCERN IF COMPANY WERE PERCEIVED AS ENGAGING IN FRAUDULENT ACTIVITY (N = 51 FINANCIAL REPORTING MANAGERS) My friends and family, 6% External auditors, 14% Securities & Exchange Commission (SEC), 26% Others outside my company, 15% Others within my company, 16% Shareholders, 22%