This paper examines the coordination of a financial reporting system and a contracting system in a principal-agent model with managerial reporting incentives and moral hazard. The manager privately observes both economic earnings and the available reporting discretion. A tradeoff between the firm's financial reporting system and the contracting system determines whether the owner will find it optimal to induce the manager to report the firm's economic earnings or to manage the reported earnings by exercising reporting discretion. We refer to the former as "truthful reporting" and the latter as "earnings management," where earnings management incorporates any accruals-based manipulation of economic earnings by the manager. We find that the principal uses the contracting system primarily to deal with moral hazard over managerial