Agency Theory, Corporate Governance and Reputational Scandals: Executives v.s. Internal Auditors

• In Event: Potpourri (Accounting Behavior and Organizations and Tax)

Abstract

Organizations deal everyday with reputational threats. Reputational scandals occur when threats are not properly addressed. Once a scandal has occurred, not only shareholders are financially affected, but also organizational executives, if the threat was not properly addressed. This research addresses the question: “Do agency theory predictions –align incentives and monitoring- adequately address ways of effectively attending to reputational threats facing high and low reputational scandal probabilities?” To address the question we conduct an experiment where 90 executives and 90 internal auditors had to execute a BOD recommendation facing an organizational reputational threat. Findings indicate that executives prefer not to deal with reputational threats when their expected personal-gains are likely to be jeopardized. Internal auditors, in contrast, are less sensitive to personal gains, but their high level conservatism can endanger organizational growth while dealing with the threats. Reputational threats are adequately treated when neutrality between executives and internal auditors is secured.

Authors

• Jesus Rodolfo Jimenez-Andrade, Case Western Reserve University

• Timothy J Fogarty, Case Western Reserve University