Dr. Eslam Youssef from the department of diagnostic radiology at University of Toledo Medical Center and colleagues from the United Arab Emirates and Holland developed an fMRI protocol to explore neuroaccounting research, which relates to brain activation associated with earnings management.
The researchers analyzed 52 local male and female business owners and managers between the ages of 18 and 60 years. All subjects had some education in accounting, business, or finance and were employed in a managerial capacity.
Youssef and colleagues crafted different scenarios in which companies were either "close" or "far" from violating debt covenants. The subjects were asked to choose a way to manage their earnings to avoid further debt troubles. The participants' management style and perception were evaluated for each scenario.
Functional MRI scans revealed greater activation in the prefrontal cortex during the close scenarios, compared with activity in the far scenarios.
"The results suggest that earning management decisions under high levels of financial stress require more prefrontal cortex cognitive functions," the authors wrote in their abstract. "We also found that there was greater activation in the bilateral nucleus accumbens and the left amygdala in close than far scenarios."
The researchers also found different activation in emotion response and cognitive processing when the company was close to debt violation, compared with the far scenario, which in turn could influence a manager's approach to a particular problem.
