Moral Reasoning, Distributional Inequity, and Honest Reporting

• In Event: Accounting, Behavior, Organizations and Leadership

Abstract

Our study examines honesty in managerial reporting among individuals with different moral cognitive schemata. We manipulate distributional equity between the firm and participants. The results show that participants with pre-conventional schema, whose moral value resides in self-interests, submit reports with the lowest level of honesty; distributional equity does not significantly affect their honesty. Conventional-schema participants follow social norms and others’ expectations to act ethically; they are more likely to report honestly in a distributional-equity firm. However, when the firm unfairly distributes surpluses to participants, conventional-schema participants may think that the firm does not have high expectations of ethical behavior since fairness is an aspect of morality. Due to their perception of the firm’s low expectations of ethical behavior, these participants are more likely to lie in their budgets. Post-conventional-schema participants act ethically because morality is a universal value. We find that they submit an honest report in a distributional-equity firm. However, when post-conventional-schema participants face distributional inequity, which violates the universal value of fairness, they do not report their budgets truthfully. Based on the responses to the post-experiment questionnaire, post-conventional-schema participants express their desire to be treated fairly and to treat the firm fairly in both distributional equity and inequity scenarios. Misreporting can adjust distributional inequity and, thus, maintain the value of fairness. Post-conventional-schema participants may not consider that such an action to be at the expense of the firm since they have contributed significantly to its surplus. Our paper contributes to the accounting and business ethics literature by further exploring the interaction between distributional inequity and employees’ cognition moral development. The results provide important implications for the design of management incentives to enhance honesty in reporting. A fairly-distributed compensation system is especially important to maintain honest reporting behavior of post-conventional-schema employees.

Authors

• Sylvia H. Hsu, York University

• Janne O Chung, York University