The Effects of Cost Goals and Decision Responsibility on Managerial Reporting Honesty

• In Event: Management Accounting

Abstract

Goals represent an important control mechanism for increasing employee effort and performance. However, the use of goals has also been shown to decrease employee honesty. We use an agency theoretic perspective to experimentally examine the effects of goal presence and decision responsibility on managerial honesty in a cost reporting setting with a fixed-wage contract. In contrast to previous research, in two experiments we find that in a cost center environment, goal presence leads to increased reporting honesty. In addition, we find that the reporting honesty of managers without decision responsibility is not influenced by the presence or absence of a cost goal, emphasizing responsibility as a necessary condition for goals to affect managerial reporting behavior. Our study indicates that the effect of goals on honesty depends on the nature of the contract in which goals operate, and identifies important boundary conditions to warnings about the dangers of goal-setting in organizations.

Authors

• Chad Proell, Texas Christian University

• Steven D. Smith, Brigham Young University