What is impression management in accounting communication?

“People like [Berni Madoff] become sort of like chameleons. They are very good at impression management ... They manage the impression you receive of them. They know what people want, and they give it to them.”
(Cresswell and Thomas, 2009)

Impression management entails the construction of a public impression by organisational members, usually with the intention to appeal to shareholders, stakeholders, the general public, and the media. The impression conveyed may correspond to an ostensible reality. Alternatively, it may entail enhancing desirable aspects of the organisation or obfuscating less desirable aspects, thus attempting to manipulate organisational audiences’ perceptions (Gioia et al., 2000). For this purpose, organisations may either use financial statements (earnings management) or corporate narrative documents (e.g., annual reports, corporate social responsibility reports, press releases, websites, etc.). Impression management entails attempts to influence audiences’ perceptions of financial performance, social and environmental performance, organisational legitimacy, and organisational changes (i.e., restructuring and reorganisation, privatisation, demutualisation, mergers or acquisitions).

What is earnings management?

Earnings management entails managers exercising discretion in structuring financial reporting transactions to alter financial reports either to mislead some stakeholders about the underlying economic performance of the firm or to influence contractual outcomes that depend on the reported accounting numbers (Healy and Wahlen, 1998). Earnings management constitutes a purposeful intervention in the financial reporting process with the objective of obtaining some private benefits (Schipper, 1989). Earnings management is the result of some degree of flexibility accorded by Generally Accepted Accounting Practices (GAAP), as well as the discretion managers have in reporting financial performance.

Why is it important?

If accounting communication is used for impression management purposes, then financial reporting quality will be undermined and capital misallocations may result. Wider social and political consequences of impression management include unwarranted support of organizations and their activities by non-financial stakeholders or by society at large.