The moderating role of financial managers’ honesty-humility on aggressive financial reporting: evidence from Iran

• Date: 09 February 2023
• Pages: 395-411
• DOI: https://doi.org/10.1108/IJOES-07-2022-0154
• Published date: 09 February 2023
• Subject Matter: Economics,Social economics
• Author: Abdollah Taki,Afsaneh Soroushyar

The moderating role of f‌inancial

managers’honesty-humility on

aggressive f‌inancial reporting:

evidence from Iran

Abdollah Taki

Department of Accounting, Payame Noor University (PNU), Tehran, Iran, and

Afsaneh Soroushyar

Department of Accounting, Isfahan (Khorasgan) Branch,

Islamic Azad University, Isfahan, Iran

Abstract

Purpose –The purpose of this study is to investigate the moderating role of honesty-humility of f‌inancial

managerson aggressive f‌inancial reporting behavior.

Design/methodology/approach –To test the research hypotheses, a scenario-based questionnaire

taken from Brink et al. (2018) was used.Using a cross-sectional survey design, the authors collected primary

data of 160 f‌inancialmanagers of f‌irms in Iran using structured questionnaires.The research sample selected

was based on Cohenet al.’s (2000) table. To test the research hypotheses,analysis of variance was used.

Findings –The resultsshowed that increasing honesty-humilityof f‌inancial managersdecreases the impact

of social pressure and risk appetite interaction on aggressive f‌inancial reporting. In addition, the results of

further analysisshowed that reducing the honesty-humilityof f‌inancial managers increasesthe impact of risk

appetiteon aggressive f‌inancial reporting.Moreover, the results indicatethat reducing the honesty-humility of

f‌inancialmanagers increases theimpact of social pressure on aggressivef‌inancial reporting.

Research limitations/implications –This f‌inding providessignif‌icant evidence for auditor, managers

and policymakersin Iran. Policymakers, auditor and company managers can emphasizecompliance with the

code of ethics, internal control and corporate governance to increase ethics and reduce negative economic

consequences.

Originality/value –To the best of the authors’knowledge,this is the f‌irst case in an emerging economy to

survey the moderating role of honesty-humility of f‌inancial managers on aggressive f‌inancial reporting

behavior. Also, this study contributes to understanding how factors at the individual, social and

organizationallevel combine to inf‌luence f‌inancial managers’aggressivef‌inancial reporting behavior.

Keywords Honesty-humility, Social pressure, Risk appetite, Aggressive f‌inancial reporting

Paper type Research paper

1. Introduction

The occurrence of Industrial Revolutionand the separation of ownership from management

led to the growing importance of f‌inancial reporting to owners as oneof the major goals of

accounting. Financial reporting should ensure the provision ofreliable information because

users of f‌inancial statement information want accurate, credible and reliable information,

and this can only be achieved by enhancing ethical standards as much as possible

(Hendrikson and Vanbreda, 1992). In addition, one of the key features of the accounting

profession is the acceptance of the responsibilityto protect the public interest. Therefore, the

responsibility of professionalaccountants, to protect the public interest, is to followthe code

Financial

managers’

honesty-

humility

395

Received8 July 2022

Revised26 August 2022

6 October2022

18November 2022

Accepted24 November 2022

InternationalJournal of Ethics and

Systems

Vol.40 No. 2, 2024

pp. 395-411

© Emerald Publishing Limited

2514-9369

DOI 10.1108/IJOES-07-2022-0154

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/2514-9369.htm

of professional conduct. In International Code of Ethics for Professional Accountants, it has

been mentioned that dishonesty of the client can be a threat (such as illegal activities,

dishonesty, questionable f‌inancial reporting practices or other unethical behavior) to the

f‌inancial reporting quality and auditors need to take it into consideration when accepting

the client (IESBA, 2021). The code of professional conduct governing the profession is the

source of ethical principles in the f‌ield of accounting. Yet, no code of conduct can cover all

the potential moral issues that a professionalface because according to Flanagan and Clarke

(2007), the kind of decision-making practices at the time of preparing f‌inancial statements

goes beyond the standards and codes of professional conduct of accounting. On the other

hand, trust in information accuracy is the base of capital markets and fraudulent f‌inancial

reporting destroys this trust (Rezaee and Riley, 2010). After examining many fraudulent

reports, some research including Elkind and McLean (2002),Mehta (2002) and Kahn (2003)

concluded that an aggressive organizational culture promotes and encourages unethical

behavior in f‌inancial reporting. Fraudulent f‌inancial reporting can be intended to mislead

f‌inancial statements. In other words, if managers use accounting methods to deceive

information users and distort accounting earnings, aggressive f‌inancial reporting happens

(Powell et al.,2005).

Financial reporting misstatements are a form of aggressive accounting that ultimately

creates a level of fraud in the f‌inancial statements. Fraud involves the intentional

misrepresentation or omission of important information in f‌inancial reporting (Bishop,

2013). Previous research including Shafer (2002) and Ramamoorti (2008) showed that

companies’willingness to present aggressive f‌inancial reporting is inf‌luenced by

psychological, sociological and ethical motivations. Investigating the role of Arthur

Anderson Audit Firm in recent scandals has raised serious ambiguities about ethical

honesty in the accounting profession, particularly for the individuals who prepare f‌inancial

reporting and f‌inancial managers (Clayton and Van Staden, 2015). Honesty-humility in

addition to being one of the ethical principles in the accounting profession is also an

individual characteristic in the f‌ield of psychology and organizational behavior that plays

an important role in ethical decision-making (O’Fallon and Butterf‌ield, 2005). Honesty-

humility can play the role of an ethical sensor in the f‌inancial reportingprocess. This means

that low honest-humility f‌inancial manager is usually not sensitive to social pressures and

chooses aggressive f‌inancial reporting behavior. Low honesty-humility individuals are

described as sly, greedy, opportunist that most probably use manipulation rules, cheating

and robbery (Hilbig et al.,2013;Oh et al., 2011). In contrast, high honesty-humility

individuals incline to decide more impartially. Therefore, low honesty-humility of f‌inancial

managers can lead to unethical behaviors, includingaggressive f‌inancial reporting (Ashton

et al.,2004;Hilbigand Zettler, 2009).

The pressures exerted on f‌inancial managers can also be environmental and social.

Environmental pressure is actually the same risk appetite that senior managers tend to

accept on their way to achieve company’s goals. In accordance with the Committee of

Sponsoring Organizations of Trade Way Commission (COSO), the risk appetite is the

amount of risk that a companyis willing to take to gain value. If a company sets aggressive

goals in its agenda regarding the implementation of the rules and regulations, providing

liquidity, implementingthe company’s strategy, etc., in fact, it has taken a high level of risk

and has followed aggressive risk. Conversely, if a company’s risk taking is low, it should

pursue conservativegoals that entail conservative risk appetite (Brinket al.,2018).When the

company’s risk appetite is conservative, f‌inancial managers are less inclined to aggressive

f‌inancial reporting to adhere to the conservatism principle. In contrast, when the risk

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