The Sentinel Effect and Financial Reporting Aggressiveness in the Healthcare Industry

The sentinel effect posits that the perception of increased oversight is associated with improved behavior. We consider the association between enhanced government oversight and financial reporting aggressiveness in the healthcare industry. Specifically, we examine the association between criminal cases (pending cases and successful cases) against healthcare providers and the quality of subjective accounts that require significant judgment and have been shown to be linked to healthcare earnings management—revenue accruals and the allowance for doubtful accounts. We find that heightened government oversight is associated with lower financial reporting aggressiveness.