How reporting environments and company managers' sense of power unconsciously influence aggressive reporting and audit evidence quality

While companies benefit from reporting subjective accounts in a way that reveals their underlying economics, company managers still sometimes aggressively report these accounts. One potential reason is that financial reporting environments influence managers behavior outside of their awareness (i.e., they unconsciously report aggressively). Managers may be particularly likely to unconsciously report aggressively when they feel more powerful than other people (i.e., they can control other peoples outcomes). Importantly, aggressive reporting may spill over into the audit evidence managers provide, making it more difficult for auditors to appropriately challenge aggressive reporting. I experimentally examine whether, while holding underlying company features constant, a longer- or shorter-term focus of the financial reporting environment and managers sense of power unconsciously influence managers reporting aggressiveness and audit evidence quality. I find that managers who feel more powerful report more aggressively than managers who feel less powerful, when they are in longer-term focused environments. However, contrary to expectations, a shorter-term focused environment mitigates the troubling reporting behaviors of managers who feel more powerful because these managers are more likely to consider the ensuing external audit while making their reporting choices. Also, I find that successful earnings management (i.e., managing earnings aggressively enough to meet an earnings target) spills over into audit evidence quality.