The Dark Side of Executives’ Accounting Competence

What is it about?

Business professionals generally recognize that accounting competence gives executives the ability to generate accurate financial statements, free of misstatements. However, accounting competence, gained through executives’ prior experience as audit partners or managers in CPA firms, also gives executives the ability to hide misstatements because of their advanced knowledge of auditing and negotiation tactics. We do not suggest executives with accounting competence are more or less ethical than any other executives. Rather, we find accounting competence is associated with more misstatements when executives also have financial incentives to misstate, such as from compensation arrangements. In addition, we find that auditors do not appear to recognize this dark side of accounting competence.

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Why is it important?

Audit quality may suffer if auditors do not recognize the downside to accounting competence, especially in the presence of incentives to misstate. Further, boards of directors may wish to consider compensation arrangements for executives with accounting competence.

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