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Uncertainty and the Decision to Manipulate Reported Performance

Acknowledgement: We thank the anonymous reviewers and discussants at the American Accounting Association, Canadian Academic Accounting Association, OCIS Division of the Academy of Management Annual Meeting, American Accounting Association midyear IS meeting. We appreciate the helpful comments of Ken Klassen, Alan Macnaughton and workshop participants at the University of Waterloo as well as the research assistance of Xiarong Zou. Finally we wish to acknowledge the financial support provided by the ABSTRACT We consider the role of forecast uncertainty in whether an attempt to manipulate reported performance is made and the magnitude of any attempt. We present a model of manager behavior, given a desired performance target and level of forecast uncertainty. Implications of the model suggest that, all else equal, as a manager becomes more certain, more attempts will be made to manipulate reported performance, using smaller magnitude adjustments. These results suggest that bias in internal and external reporting of performance is a function of the manager's information setting (e.g. information system quality, experience, competitive environment, etc.). Further, earnings management, which is already difficult to detect, becomes more challenging to identify as managerial uncertainty decreases. 3