How Do Openness of Internal Reporting and Shared Interest with an Employee Affect Managerial Collusion and Subsequent Cooperation?

• In Event: Internal Reporting

Abstract

Firms vary in the extent to which individual managers can observe others’ reports and communication with upper-level managers. Many firms have recently increased this openness or transparency due to perceived benefits, such as improved communication and coordination. Similarly, incentives tied to group outcomes, which create a shared interest between managers and group employees, have grown in use because of perceived benefits to performance and commitment to group goals. In this study, I examine: 1) how these two common control elements – openness of internal reporting and shared interest with an employee – separately and interactively affect collusion between managers, and 2) how these controls and the act of collusion itself affect the subsequent cooperation of managers and others in the firm who observe managers’ behavior. In a two-stage experiment, I predict and find that open internal reporting and shared interest interact to cause increased collusive misreporting amongst managers. Evidence suggests that this effect stems from managers’ less positive feelings toward the firm, which also result in decreased subsequent firm-beneficial cooperation. I further predict and find that managers who collude build stronger identification with the firm, resulting in greater subsequent cooperation, and provide evidence that these effects are driven by managers whose collusive behavior is of a less severe magnitude in terms of its damage to firm welfare. Consistent with expectations, I also find that employees who observe managers’ reports build stronger identification with the firm and demonstrate greater cooperation when they benefit from managers’ collusion and/or when managers’ reporting behavior is more cooperative in nature. The implications of my findings for management accounting research and practice are discussed.

Author

• Dan Way, Clemson University