Amal A. Said

Audit Committees Oversight Responsibilities Post Sarbanes‐Oxley Act

In this study we examine the oversight responsibilities of audit committees in the post Sarbanes‐Oxley Act of 2002 (SOX) era. The results show that audit committee oversight responsibilities assigned and disclosed in proxy statements expanded post‐SOX compared to pre‐SOX. We design a survey instrument to measure the difference between the perceived oversight responsibilities of audit committee members and the oversight responsibilities actually assigned in the proxy. Our results indicate that although audit committees made a substantial commitment to increase their assigned responsibilities over the period of 2001 to 2004, they still need to do more to meet the many additional challenges facing them in a post‐SOX environment. Overall, our results suggest that the intent of SOX‐for audit committees to be more involved and active in the oversight role of an organization‐is becoming institutionalized. These results should be interesting to policy makers, a variety of interest groups, and accounting researchers.

Nonfinancial Performance Measures and Earnings Management

We examine the earnings management implications of using nonfinancial performance measures in executive compensation contracts. We argue and test that when a managers compensation is based on financial and nonfinancial performance measures, he/she has less incentive to manipulate earnings to maximize the compensation. Using panel data covering the period 1992-2005, we compare earnings management behavior for a sample of firms that used both financial and nonfinancial measures to a matched sample of firms that based their performance measurement solely on financial measures. We consider the effect of the match between the use of nonfinancial measures and firm characteristics on earnings management behavior. The results are mainly consistent with a reduction in earnings management behavior for those firms that rely on nonfinancial performance measures in their compensation contracts.

Debt Covenant Violation and Earnings Management: A Neuroscience Approach and Future Directions – A Research Note

Decision-making rationality is said to be bounded by managers’ cognitive capabilities. Recent studies indicate that accounting functions evolved to augment the cognitively bounded human brain in handling complex economic exchanges. The neuroscience discipline indicates that human brains have the ability to implement ‘automatic’ processes of positive versus negative emotional stimuli to make rational decisions. Neuroscientific evidence shows that the activations in the ventral striatum decrease with negative emotional information/motives and increase with positive emotional information/motives. We, hence, argue that our understanding of decision making rationality in financial and managerial decisions could be enhanced by using a functional neuroimaging approach. Decision making rationality has been focal in debt covenant violation and earnings management research. The contracting theory predicts a relationship between managers’ decisions and the proximity of violating debt covenants. However, no prior research has investigated brain activities associated with evaluation of debt covenant violation and earnings management. Meanwhile, in another strand of research, there is extensive prior literature concerning consequences of managers’ decisions and use of accounting information in relation to their evaluative style, i.e. supervisory style. We argue that the relationship between proximity to debt covenants violation and earnings management and earnings management incentives is contingent upon managers’ supervisory style. However, no previous research has examined the impact of supervisory style on earnings management in the context of proximity to debt covenants violation and other earnings management incentives. In this research note, we argue here that neuroaccounting could be relied on to examine the relationship between proximity to debt covenants and earnings management, contingent upon managers’ supervisory style, by capturing brain activities. The adoption of a neuroscience functional neuroimaging approach in this field shall contribute to the understanding of managers’ behaviors and provide implications for research. The goal of this research note is to provide a new avenue for future research in this field.