Managers’ Bad Accounting Behaviors of Listed
Companies in China
Abstract
Managers’ unintentional or intentional bad accounting behaviors will result in poor quality of accounting information of listed companies, making a great extent to interfere with investors, causing confusion in the capital market, is not conducive to reflect the performance management responsibility. Research on Managers bad accounting behaviors of listed companies is of great significance to improve management, optimize the allocation of social resources. This paper respectively discusses the
manifestation and the causes both of managers’ unintentional and intentional bad accounting behaviors. It also puts forward recommendations to prevent managers’ bad accounting behaviors of listed companies in China, so as to safeguard the interests of stakeholders and provide good environment for capital market by improving the efficiency and accounting information quality of listed companies.
Key words: Bad accounting behaviors; Managers; Listed companies; the quality of accounting
information
INTRODUCTION
Accounting behaviors refer to the course of conduct highly relevant to accounting information generation, processing and transmission. Accounting behaviors have a significant impact on budgeting, performance evaluation, cost control and decision-making (Hopwood, 1974). From the micro view, accounting behaviors include accounting organization, business accounting, and internal accounting controls. In the accounting process, managers who master business decision-making power and control are important participants in accounting policy choices, decision-making of significant accounting issues, etc. Thus the quality of accounting information of listed companies depends largely on the managers’ behavior. We call the managers’ actions and manifestations involved in corporate accounting practices as managers accounting behaviors.
Managers are usually referred to the human capital owners who join in a business contracts with their management talent and really own the residual rights of control (XIE, 2005). Managers are responsible for determining organizational goals, formulate strategies
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to achieve stated objectives, monitor and explain the external environmental condition, and make decisions on issues affecting the entire organization. General speaking, managers of Chinese listed companies cover president, vice president, department managers, chief financial officer, chief engineer and so on.
The result of accounting behaviors is to produce accounting information, thus accounting practices and accounting information has a direct causal relationship. Standard accounting practices provide true and full accounting information and meet various needs. Nonstandard accounting behaviors will produce false, incomplete accounting information, which ultimately disturbs or even misleads those in need of accounting information to use. Such irregularities may be due to two aspects, one is deviations from accounting objectives or losing the objectives because of people’s bounded rationality, which is summarized as non-subjective bad accounting (ZHANG, 2005). The other is negative affect on accounting information generation and disclosure for certain bad intent or purpose, which accordingly may be called intentional bad accounting. So, management accounting practices can also be divided into two categories: one is the management non-subjective bad accounting behaviors, the managers involved in the process of accounting practices have not any bad intentions but are constrained by bounded rationality, which lead to low quality of accounting information, it is not malicious, and thus may be called the managers unintentional bad accounting behaviors; the other is manager intentional bad accounting behaviors, which means the manager’s participate accounting practices just for their own interests or certain bad purpose. An analysis shows that management is the most fundamental body of financial reporting fraud, and is the real source of financial reporting fraud (CHEN, 2009).
This paper discusses the specific manifestations of managers’ unintentional and intentional bad accounting behaviors respectively, analyzes their causes and proposes recommendations against these two types of managers’ bad accounting behaviors of listed companies in China, which is to promote listed companies to improve management level and accounting information quality.
1. THE MANIFESTATION AND CAUSES OF MANAGERS’ UNINTENTIONAL BAD
ACCOUNTING BEHAVIORS IN CHINA’S LISTED COMPANIES
1.1 The Manifestation of Managers’ Unintentional Bad Accounting Behaviors
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The performance of manager’ unintentional bad accounting can be divided into the following three aspects:
First, the accounting organization is less rigorous. Accounting organization is the basis of accounting. From the micro view, it mainly covers the development and implementation of enterprise accounting system, setting up accounting body, arrangement of accounting personnel and selecting accounting methods, which is to ensure the rational and effective for accounting work.
But in fact some listed companies’ accounting basic work has weak links, the most prominent are: the quality of some company’s accounting staff is not high, resulting in accounting arbitrary, unclear procedures, serious errors, accounting data missing; some company’s accounting staff is not equipped well, accounting methods are not suitable for the unit, making accounting disorder and inefficient.
Second, the accounting process is less standardized Mainly include: managers' unintentional choices of accounting policies are not applicable, resulting in accounting information has less relevant to information users need for economic decision-making; the content of cross-company accounts imputation, books set confusion, accounting treatment was not standardized, leading to mismatch of financial reporting and financial activities, accounting information is not a true reflection of the company operation. China securities news, the Audit Commission reported on May 20, 2011 that, accounts in Aluminum Corporation of China is not standardized, so although it acquired a variety of enterprises, the integration situation is not satisfactory.
Third, the internal accounting control is a mere formality. The main internal accounting controls include internal accounting management system, accounting personnel, job responsibility system, the financial processing system, the internal containment system, audit system, quota management system, measurement inspection system, and property inventory system, the financial revenue and expenditure approval system, cost accounting system , financial analysis, risk early warning system. However, some managers’ design of approval authority and approval process on financial revenue and expenditure is unreasonable, leading to false accounting information; delivery of accounting documents in some companies is not scientific, resulting in inefficient accounting; Job separation in some companies is not clear, causing accountant misrepresent accounting information; some companies’ internal accounting control system is designed by copying others, does not apply to their characteristics and requirements for production and management; some companies’ feasibility studies on foreign investment is not sufficient, resulting in corporate decision-making mistakes, increasing risks and grim financial situation. “New Century Weekly” reported that the National Audit Office claimed in August 2010 after auditing: China Steel Group has financial management confusion and other major problems such as high-risk investment, huge debts. It means there are significant internal accounting control deficiencies in CSG, and there is little internal control and regulation according to the enterprise itself.
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1.2 The Causes of Managers’ Unintentional Bad Accounting Behaviors
Person’s rational behavior is limited rational behavior but not fully rational behavior (Simon, 1947). The root cause of unintentional bad accounting lies in managers’ limited rationality. On the one hand, various managers own different intelligence, ability, personality, temperament, attitudes, values, and different degree in understanding accounting theory and methods; on the other hand, it’s impossible for managers to fully master and comprehensively apply accounting knowledge, while accounting theory is in a dynamic developing process, a variety of accounting codes of conduct and financial regulations constantly change with social development.Combining with the mentioned three manifestations, we analyze the reasons for managers’ unintentional bad accounting behaviors as following:
In the organization of accounting work, many factors should be considered when managers design the accounting organization forms. They should appraise company size, business conditions, related accounting requirements, the number and the ability of accounting personnel; they strive to simplify accounting procedures, deliver accounting information timely and correctly, and save human and material resources while ensure the quality of accounting; they should make relevant departments cooperate to provide consistent accounting data. But there is no fixed standard to evaluate these factors, managers subjective judgments are necessary. While managers’ awareness and capacity is limited, the design of corporate accounting organization is not necessarily of scientific and rational.
As to accounting, appropriate accounting policies and reasonable recognition, measurement and reporting accounting elements require that managers should be familiar with the current financial regulations and accounting standards, has a wealth of practical experience, a positive sense of innovation, keen vision and adequate professional ability to judge. For the existence of bounded rationality which create limitations in managers’ knowledge, ability and experience, continuous development of accounting theory and the relevant laws and regulations in addition, managers can not fully grasp the timely knowledge of accounting and related laws and regulations, it is impossible for them to put their knowledge into practice. Moreover, due to limited time and energy, relearning the accounting knowledge is difficult.
Speaking of internal accounting controls, managers do not pay attention to the internal accounting control system enables the production of accounting information process get out of control, ultimately affect the quality of accounting information. Since bounded rationality exists, there are omissions of the internal control system designed by managers, or corporate internal control system which is no longer meet the new environment has not been revised and improved in time, or the sound internal control system isn’t implemented well. All of these have a direct impact on the reliance of accounting information.
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2. THE MANIFESTATION AND CAUSES OF MANAGERS’ INTENTIONAL BAD ACCOUNTING BEHAVIORS IN CHINA’S LISTED COMPANIES
2.1 The Manifestation of Managers’ Intentional Bad Accounting Behaviors
The feature of managers’ intentional bad accounting behaviors is the managers’ bad intent or purpose. It includes accounting fraud and earnings management. Earnings management contains accounting policy choice, the way of it is to disclosure companies’ earnings for outsider, the final object of it is accounting data, its concrete operation is ultimately reflected in accounting fraud (LIU, 2009). Following studies take accounting fraud as a typical case of managers’ intentional bad accounting behaviors.
According to China Securities Regulatory Commission penalty notice, there are 41 listed companies are punished for untrue disclosure, incomplete or late accounting information from January 2008 to January 2011. Table 1 shows specific tools and the frequency of accounting fraud.
Tracing the reasons why these companies are punished, we can find various means and a huge amount are involved in managers’ intentional bad accounting behaviors.
Firstly, various means are involved in managers’ deliberately bad accounting behaviors. From Table 1 we can find, 41 listed companies reached 7 categories 127 kinds of fraud means as much, in average, every punished company adopts more than three kinds of accounting fraud method. Table 1 also indicates that the most important category of accounting fraud is the seventh one (concealment, late or improper disclosure of material matters), up to 66 cases, accounting for 51.96% of the total samples.10 cases among them are underestimation of liabilities, accounting for 52.63% of this category. There are 16 cases of the third category (inflated assets) and 13 cases of the forth category (false revenue), respectively accounting for 12.60% and 10.24% of the total samples. These accounting fraud methods seriously distort the company’s assets, liabilities and profits.
Secondly, a huge amount of money is involved in managers’ intentional bad accounting behaviors of listed companies. For example: six companies cumulatively fabricate ￥2.23 billion operating revenue. Of which Jinli Technology has reported fictitious revenues for two times and has been punished twice by SEC. Specific circumstances is shown in Table 2.
The distorted accounting information generated by accounting fraud makes serious consequences: on one hand, it may result in financial virtual income, the excessive distribution of national income, inflation of consumption, distortion of economic facts, covering up some contradictions in the economy, and make
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