SYNOPSIS This paper examines how general counsels (GCs) in top management influence the use and timing of changes in accounting estimates (CAEs), an important but underexplored area in financial reporting. We provide evidence that when pre-CAE earnings narrowly miss analyst forecasts, firms with a GC in top management (GC firms) are more likely than non-GC firms to use income-increasing CAEs to meet or beat earnings expectations. These results are more pronounced for firms with weak integrity cultures, low analyst following, and non-industry-specialist auditors. We also find that in GC firms, post-CAE earnings are less predictive of future cash flows, suggesting a decline in earnings informativeness. Overall, our findings are consistent with GCs shaping the exercise of reporting discretion within GAAP rather than solely serving a gatekeeping function, highlighting how legal expertise at the executive level influences both the credibility and informativeness of reported earnings. Data availability: Data used in the analyses are obtained from public sources described in the text. JEL Classifications: M41; M48.
Yu et al. (Mon,) studied this question.