b'Research Articles Accepted or Publishedfor School of Accountancy Faculty (2022-2023) Faculty ResearchIS A RECESSION LOOMING?Look to accounting fraud for answersBastos Gurgel Silva, F., Moura Dantas, M., & Merkley, K. J.Mauldin, E. G., Emett, S., Pickerd, J., & Kaplan, S. (2023). Auditing (2023). Government Guarantees and Banks Income Smoothing.with Data and Analytics: External Reviewer Perceptions of AuditBased on Messod D. Beneish; David B. Farber;senttheirfinancial Journal of Financial Services Research.Quality. Contemporary Accounting Research.Matthew Glendening; Kenneth W. Shaw, Aggregatereports. This could be Financial Misreporting and the Predictability ofdue to initial signs of Baer, L. M., Ertimur Y., Zhang J. (2023). Tainted Executives asMessod D. Beneish; David B. Farber; Matthew Glendening;U.S. Recessions and GDP Growth. The Accountingeconomic headwinds, Outside Directors. The Accounting Review.Kenneth W. Shaw. (2022). Aggregate Financial Misreporting andReview (2022).suchasmorefirms the Predictability of U.S. Recessions and GDP Growth. Thebeginningtoreport Baer, L. M., Khurana, I. K., & Kyung, H. (2022). Weak ReportingAccounting Review. BY MATT GLENDENING AND KEN SHAWMatt Glendening Ken Shaw poor performance. It Controls and Insider versus Outsider CEO Selection Decision.could also be due to a misreporting firm getting caught and Journal of Management Accounting Research.Neuman, S. S. (2023). Examining Tax Strategy Choice. The JournalWill the U.S. economy go into a slowdown or recession?having to restate its financial reports. Chy, Mahfuz, and Hoyoun Kyung. (2022). The Effect of Bondof the American Taxation Association.Elevated risk of accounting fraud serves as a useful signal,As misreporting firms come under more scrutiny, they are Market Transparency on Bank Loan Contracting. Journal ofShaw, K. and J. Whitworth. (2022). Client importance and uncon- according to our recent research.forced to report more realistic results. In turn, competitor Accounting and Economics, forthcoming. ditional conservatism in complex accounting estimates. Advances inWhat is financial reporting and can it befirms realize they relied on information that was too optimistic Accounting.manipulated? and begin to curtail investment, production and employment. Golshan, N., Khurana, I. K., & Bastos Gurgel Silva, F. (2023).Publicly traded companies in the United States must issueThis decrease in economic activity can subsequently lead to Financial Transparency, Labor Productivity, and Real Wages;Shaw, K. W., & Zhao, L. (2023). The cost of becoming informedquarterly financial statements. These accounting reports allowa reduction in consumer spending. Together, these business Evidence from Mandatory IFRS Adoption. Journal of Internationaland audit fees. Review of Pacific Basin Financial Markets and Policies. players in the economy to make better, more informed deci- and consumer effects can potentially lead to a slowdown in Accounting Research. Wild, J., & Shaw, K. (2022). Financial and Managerial Accountingsions.the economy and even a recession. Govindarajan, V., Srivastava, A., Silva, F. B. G., and Dantas, M. M.9th edition (9th ed.). McGraw-Hill Education.However, companies sometimes manipulate financial state- How do we measure financial statement (2023). How Companies Should Prepare for Repeated Debt-Ceilingments to hide their true state of business. For example, theymisreporting?Standoffs. Harvard Business Review.might improperly accelerate the recognition of revenue and/ There are two ways to measure whether a company manip-or delay the recognition of expenses. Setting aside the innateulated its financial reporting. One is to wait until a misre-ethics of corporate executives, financial statement manipu- porting firm is caught, but this can take several years and not lation typically results from two forces: strong incentives toall misreporting firms are caught. A better approach, which report good news and inadequate monitoring over financialwe use in our study, is to measure the likelihood of misre-reporting. Importantly, both forces are most intense duringporting based on a model that incorporates known predictors economic booms, when there is a desire to keep the goodof misreporting, in real time. times rolling. This can have potentially damaging economicThe measure we use is known as the M-Score, which is a consequences.firm-level measure of the likelihood of misreporting devised How does financial reporting manipulation relateby our co-author, Professor Messod D. Beneish at Indiana to the macroeconomy?University, in the late 1990s. It is based on eight predictors The problem with companies providing false or misleadingof misreporting, including whether earnings are supported financial information is that economic decisions are thenby cash flows. The M-Score is widely used in capital markets misinformed. At the micro level, this is costly to investors ifand predicted the well-known Enron fraud; we construct a they lose money by investing in fraudulent companies. Peerquarterly average M-Score across firms and use it to predict companies also bear consequences if they rely on competitoreconomic outcomes. firms misleading financial reports when making investment,What do we find? production and hiring decisions. This effect on peer compa- In our article forthcoming in The Accounting Review, Aggre-nies can impact the economy at large.gate financial misreporting and the predictability of U.S. When more and more companies misreport their financialrecessions and GDP growth, with co-authors Beneish and performance, it can give their competitors a false impressionDavid Farber from Indiana University, we find that recessions of the economic environment because they are relying onand economic slowdowns are more likely when there is a high overly optimistic information. In turn, these firms are slowlevel of manipulation in companies financial statements (i.e., to recognize that macroeconomic activity is declining. Even- aggregate misreporting). Specifically, aggregate misreporting tually, however, misreporting firms become subject to morepredicts recessions five to eight quarters ahead, even after scrutiny, making it harder for them to continue to misrepre-16 School of Accountancy2023 Newsmagazine 17'