Honesty in Accounting and Control: A Discussion of “The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective” By.

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Honesty in Accounting and Control: A Discussion of “The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective” By Steven E. Salterio and Alan Webb

 Lying is the opposite of honesty.  Honesty: a tendency not to lie, cheat, or steal Grover (2005) the refusal to fake reality Smith (2003)  Lying: a statement one knows to be false Grover (2005) a deliberate statement to deceive others Sims (2000)

 Economics-based researchers find up to 35% of participants consistently tell the truth.  Somanathan and Rubin 2004  Social psychologists, sociologists, and philosophers find 10% will be honest in all situations.  Furnham and Taylor 2004; Murphy 1993

 Promoting honesty and deterring lying are two different managerial problems.  Murphy 1993  Promoting honesty:  Modeling behavior  Training on ethics  Establishing policies

 Four Conclusions on Lying  Difficult to detect  Caused by structural constraints  Individual differences  Reward structures increase likelihood Grover (2005)

 Budgetary control systems encourage gaming and perverse behavior. Neely, Sutcliff, and Heyns (2001)  Truth-inducing incentive schemes can reduce cheating in budgets and improve performance. Chow (1983)

 Individuals feel social pressure to behave honestly even when on monetary incentive exists. Young (1985)  Participants lied significantly less when told that truthful budget reporting was valued in the experiment. Webb (2002)

 H1: The information system signal is a focal point for managers’ reports.  H2: Managers’ reports are more honest when an information system exists than when no information system exists.

 H3: The information system signal is less of a focal point for managers’ reports when the information system is precise than when the information system is coarse.  H4: (null) Managers’ reports are neither more nor less honest when an information system is precise than when it is coarse.

 No negative consequences to dishonest reporting  Rewards increase as dishonest reporting increases  Limited interpersonal interaction between the manager and owner

 Only reports the likely range of actual costs  Cost report is provided to manager and owner before manager gives budgeted costs  Not used to reward or punish  Not used to monitor performance

 The precise information system produces more lying than the coarser information system.  A costly investment in more precise information system will increase lying?

 Issue of “fairness”  The more precise information system requires more managerial lying to create an equal allocation of profits between the owner and manager.  An interaction between the reward system and the precision of the information system, not precision alone, cause HRT’s result.

 Examine a setting where the incentive scheme requires a smaller trade-off between obtaining a fair allocation of profits and the benefits of reporting honesty.  Explore how belief and boundary systems might complement or serve as a substitute for more rigid diagnostic controls that invite gaming and dysfunctional behavior.