Do CEOs Manage Earnings Before Turnover and do Auditors Recognize the Risk?

Abstract

CEOs have a large amount of control within an organization and discretion when it comes to accounting within a firm. A firm's earnings also have large implications both internally and externally. Internally the earnings of a firm affect executives and lower level employee’s compensation, when a portion is based on earnings. Externally, investors and the market take into account the earnings of a firm and the smoothness of the earnings when considering whether or not to invest and the future of the company. The CEO in charge of large firms are not solely responsible for the financial statements, but in many cases they have the final say in discretionary expenses such are research and development and advertising, which can be income increasing accruals that increase earnings.