Riding a Tiger without Being Eaten - RePub - Erasmus Universiteit ...

Next to greed, many philosophers, politicians, poets and writers have written about
the concept of self-interest throughout history. A common theme is that greed and
self-interest are drivers of unacceptable social behaviour; though we all know and
recognize that greed exists, still society and its gatekeepers fail to effectively address
the problem. The ascent of the corporation, and the increase of powers assigned to
corporate executives during the past 50 years, has only exacerbated the situation.
In this study, we will address some of the behavioural limitations inherent in
gatekeepers, and in the communications between executives and those gatekeepers
who are assigned responsibilities to act as a countervailing power to potential
misbehaviours.
Traditionally, annual financial statements were designed to enable shareholders
to monitor and control the actions of management; in some views, the statements
carried the additional burden of being a means to discharge the independent board
and management of their duties to responsibly manage the company. However,
greed and lust for power resulted in an unprecedented increase in financial fraud
and misreporting during the past 10 years.
The primary subject of our research is such misreporting, how companies should
manage them, and the perceptions of analysts in their role as gatekeepers, as it
concerns the behaviours of the chief executive officer. Analysts, and their firms,
have a reputational interest in warning investors for executive behaviour (earnings
management) which could result in financial restatement. Analysts’ professional
standards require them to exercise diligence and thoroughness in analyses before
making investment recommendations. If they ignore clear warning signs of corporate
wrongdoing, they will be blamed for incorrectly advising investors, which can lead
to litigation and will affect the analyst’s reputation and position in analysts’ league
tables. The next section will deal with describing the restatement phenomenon.
Thereafter, we will continue with an overview of the more significant restatement
studies, conducted both by regulatory bodies (section 1.2) as well as academics (section
1.3). That overview will be concluded with a summary of how those academic studies
are connected with our research into restatements. The section thereafter (section
1.4) will give a short overview on how restatements affect corporate reputation. This
overview on corporate reputation is provided as we plan to research how analysts’
perceptions of pressures on the CEO, both before and after a restatement, are
Chapter 1 - Introduction and Historical Overview
29