Management Accounting and Control Systems and Earnings Management: Effects on Future Firm Performance

Abstract

We examine an unexplored side of management control systems (MCS): its links with real earnings management. We propose that interactive use of MCS support management in identifying, evaluating, selecting, and implementing real actions that conceptually would be classified as real earnings management (REM) and that impact firm performance. Interactive MCS use is predicted to enhance managerial REM actions that retain the focus of the organization on its strategic objectives, leading to higher future performance. We test our research model empirically with survey and archival data. The results support our predictions. Finally, we explore the role of other levers of control.