IDEAS home Printed from https://ideas.repec.org/a/kap/jbuset/v129y2015i2p295-310.html
   My bibliography  Save this article

Managers’ Unethical Fraudulent Financial Reporting: The Effect of Control Strength and Control Framing

Author

Listed:
  • Xiaotao Liu
  • Arnold Wright
  • Yi-Jing Wu

Abstract

In response to numerous recent cases involving materially misstated financial information arising from fraudulent financial reporting, companies, auditors, and academics have increased their focus on strengthening internal controls as a means of deterring such unethical behaviors. However, prior research suggests that stronger controls may actually exacerbate the very opportunistic behavior the controls are intended to curb. The current study investigates whether the efficacy of an implemented control is conditioned on not only the strength of the control (weaker or stronger), but also on how the firm frames the purpose for implementing the control (e.g., monitoring or coordinating). A monitoring purpose frames controls as reducing managers’ opportunities to engage in self-interested behavior, while a coordinating purpose frames controls as facilitating coordination between the firm and its managers. We posit that the efficacy of stronger controls to reduce unethical fraudulent reporting depends on the control frame. Using an experiment, this study investigates the interactive effect of control strength and control frame on managers’ fraudulent reporting decisions. As predicted, our results show that when controls are framed for monitoring purposes, stronger controls result in less fraudulent reporting than weaker controls. Conversely, when controls are framed for coordinating purposes, stronger controls result in more fraudulent reporting than weaker controls. Our results suggest that an inconsistency between the firm’s choice of the control strength and the control frame reduces the efficacy of the implemented control to curb unethical reporting behaviors. Furthermore, supplemental analysis shows that managers’ rationalization helps explain the interactive effect of control strength and communicated control purpose on fraudulent reporting. Copyright Springer Science+Business Media Dordrecht 2015

Suggested Citation

  • Xiaotao Liu & Arnold Wright & Yi-Jing Wu, 2015. "Managers’ Unethical Fraudulent Financial Reporting: The Effect of Control Strength and Control Framing," Journal of Business Ethics, Springer, vol. 129(2), pages 295-310, June.
    • Handle: RePEc:kap:jbuset:v:129:y:2015:i:2:p:295-310
    DOI: 10.1007/s10551-014-2156-1
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10551-014-2156-1
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s10551-014-2156-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jeffrey Cohen & Yuan Ding & Cédric Lesage & Hervé Stolowy, 2010. "Corporate Fraud and Managers’ Behavior: Evidence from the Press," Journal of Business Ethics, Springer, vol. 95(2), pages 271-315, September.
    2. Andreas I. Nicolaou & Karen L. Sedatole & Nancy K. Lankton, 2011. "Integrated Information Systems and Alliance Partner Trust," Contemporary Accounting Research, John Wiley & Sons, vol. 28(3), pages 1018-1045, September.
    3. R. Lynn Hannan & Frederick W. Rankin & Kristy L. Towry, 2006. "The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective," Contemporary Accounting Research, John Wiley & Sons, vol. 23(4), pages 885-918, December.
    4. Langfield-Smith, Kim, 1997. "Management control systems and strategy: A critical review," Accounting, Organizations and Society, Elsevier, vol. 22(2), pages 207-232, February.
    5. Murphy, Pamela R., 2012. "Attitude, Machiavellianism and the rationalization of misreporting," Accounting, Organizations and Society, Elsevier, vol. 37(4), pages 242-259.
    6. Baiman, S & Evans, Jh, 1983. "Pre-Decision Information And Participative Management Control-Systems," Journal of Accounting Research, Wiley Blackwell, vol. 21(2), pages 371-395.
    7. Roth, Kendall & Nigh, Douglas, 1992. "The effectiveness of headquarters-subsidiary relationships: The role of coordination, control, and conflict," Journal of Business Research, Elsevier, vol. 25(4), pages 277-301, December.
    8. Frisch, Deborah, 1993. "Reasons for Framing Effects," Organizational Behavior and Human Decision Processes, Elsevier, vol. 54(3), pages 399-429, April.
    9. Pamela Murphy & M. Dacin, 2011. "Psychological Pathways to Fraud: Understanding and Preventing Fraud in Organizations," Journal of Business Ethics, Springer, vol. 101(4), pages 601-618, July.
    10. Sarkar Madhulika P. & Kumar Vivek, 2010. "The Emerging Business Models in the Knowledge Economy: Its impact on Society and Government," Advances In Management, Advances in Management, vol. 3(1), August.
    11. Craig Emby & David Finley, 1997. "Debiasing Framing Effects in Auditors' Internal Control Judgments and Testing Decisions," Contemporary Accounting Research, John Wiley & Sons, vol. 14(2), pages 55-77, June.
    12. Michael C. Jensen, 2003. "Paying People to Lie: the Truth about the Budgeting Process," European Financial Management, European Financial Management Association, vol. 9(3), pages 379-406, September.
    13. Levin, Irwin P. & Schneider, Sandra L. & Gaeth, Gary J., 1998. "All Frames Are Not Created Equal: A Typology and Critical Analysis of Framing Effects," Organizational Behavior and Human Decision Processes, Elsevier, vol. 76(2), pages 149-188, November.
    14. William B. Tayler & Robert J. Bloomfield, 2011. "Norms, Conformity, and Controls," Journal of Accounting Research, Wiley Blackwell, vol. 49(3), pages 753-790, June.
    15. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xi Fu & Xiaoxi Wu & Zhifang Zhang, 2021. "The Information Role of Earnings Conference Call Tone: Evidence from Stock Price Crash Risk," Journal of Business Ethics, Springer, vol. 173(3), pages 643-660, October.
    2. Pamela R. Murphy & Michael Wynes & Till‐Arne Hahn & Patricia G. Devine, 2020. "Why Are People Honest? Internal and External Motivations to Report Honestly†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 945-981, June.
    3. Chunling Zhu & Ruixin Zeng & Ruxi Wang & Yihui Xiao, 2023. "Corporate social responsibility and chief executive officer wrongdoing: A fraud triangle perspective," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(2), pages 874-888, March.
    4. Martin Mutschmann & Tim Hasso & Matthias Pelster, 2022. "Dark Triad Managerial Personality and Financial Reporting Manipulation," Journal of Business Ethics, Springer, vol. 181(3), pages 763-788, December.
    5. Valeria Cavotta & Guido Palazzo & Antonino Vaccaro, 2023. "Mobilizing After Corporate Environmental Irresponsibility in a Community of Place: A Framing Microprocess Perspective," Journal of Business Ethics, Springer, vol. 182(4), pages 1155-1169, February.
    6. Hope, Ole-Kristian & Wang, Jingjing, 2018. "Management deception, big-bath accounting, and information asymmetry: Evidence from linguistic analysis," Accounting, Organizations and Society, Elsevier, vol. 70(C), pages 33-51.
    7. Yanhong Tang & Xin Miao & Hongyu Zang & Yanhong Gao, 2018. "Information Disclosure on Hazards from Industrial Water Pollution Incidents: Latent Resistance and Countermeasures in China," Sustainability, MDPI, vol. 10(5), pages 1-15, May.
    8. Lu, Qiaoshan & Xiang, Cheng & Li, Bingxiang & Feng, Lixuan, 2023. "Non-controlling shareholders' governance participation and corporate misconduct: Evidence from voting in general meetings," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Church, Bryan K. & Kuang, Xi (Jason) & Liu, Yuebing (Sarah), 2019. "The effects of measurement basis and slack benefits on honesty in budget reporting," Accounting, Organizations and Society, Elsevier, vol. 72(C), pages 74-84.
    2. Shana Clor-Proell & Steven Kaplan & Chad Proell, 2015. "The Impact of Budget Goal Difficulty and Promotion Availability on Employee Fraud," Journal of Business Ethics, Springer, vol. 131(4), pages 773-790, November.
    3. Markus Brunner & Andreas Ostermaier, 2019. "Peer Influence on Managerial Honesty: The Role of Transparency and Expectations," Journal of Business Ethics, Springer, vol. 154(1), pages 127-145, January.
    4. Pamela R. Murphy & Michael Wynes & Till‐Arne Hahn & Patricia G. Devine, 2020. "Why Are People Honest? Internal and External Motivations to Report Honestly†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 945-981, June.
    5. Eddy Cardinaels & Yuping Jia, 2016. "How Audits Moderate the Effects of Incentives and Peer Behavior on Misreporting," European Accounting Review, Taylor & Francis Journals, vol. 25(1), pages 183-204, May.
    6. Deore, Aishwarrya & Gallani, Susanna & Krishnan, Ranjani, 2023. "The effect of systems of management controls on honesty in managerial reporting," Accounting, Organizations and Society, Elsevier, vol. 105(C).
    7. Liuyang Ren & Xi Zhong & Liangyong Wan, 2022. "Missing Analyst Forecasts and Corporate Fraud: Evidence from China," Journal of Business Ethics, Springer, vol. 181(1), pages 171-194, November.
    8. Lan Guo & Theresa Libby & Xiaotao (Kelvin) Liu & Yu Tian, 2020. "Vertical Pay Dispersion, Peer Observability, and Misreporting in a Participative Budgeting Setting," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 575-602, March.
    9. Hideaki Sakawa & Naoki Watanabel, 2022. "Accounting Frauds and Main-Bank Monitoring in Japanese Corporations," Journal of Business Ethics, Springer, vol. 180(2), pages 605-621, October.
    10. Jiandong Chen & Douglas Cumming & Wenxuan Hou & Edward Lee, 2016. "Does the External Monitoring Effect of Financial Analysts Deter Corporate Fraud in China?," Journal of Business Ethics, Springer, vol. 134(4), pages 727-742, April.
    11. Schreck, Philipp, 2015. "Honesty in managerial reporting: How competition affects the benefits and costs of lying," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 27(C), pages 177-188.
    12. Cardinaels, Eddy & Jia, Y., 2015. "How audits moderate the effects of incentives and peer behavior on misreporting," Other publications TiSEM 15e939fa-d6dd-4bda-824d-e, Tilburg University, School of Economics and Management.
    13. W. Robert Knechel & Natalia Mintchik, 2022. "Do Personal Beliefs and Values Affect an Individual’s “Fraud Tolerance”? Evidence from the World Values Survey," Journal of Business Ethics, Springer, vol. 177(2), pages 463-489, May.
    14. Katrin Weiskirchner-Merten, 2020. "Interdependence, participation, and coordination in the budgeting process," Business Research, Springer;German Academic Association for Business Research, vol. 13(1), pages 247-274, April.
    15. Nadia Smaili & Paulina Arroyo, 2019. "Categorization of Whistleblowers Using the Whistleblowing Triangle," Journal of Business Ethics, Springer, vol. 157(1), pages 95-117, June.
    16. Christian Hauser, 2019. "Fighting Against Corruption: Does Anti-corruption Training Make Any Difference?," Journal of Business Ethics, Springer, vol. 159(1), pages 281-299, September.
    17. Lorko, Matej & Servátka, Maroš & Zhang, Le, 2023. "Hidden inefficiency: Strategic inflation of project schedules," Journal of Economic Behavior & Organization, Elsevier, vol. 206(C), pages 313-326.
    18. Dufwenberg, Martin & Gächter, Simon & Hennig-Schmidt, Heike, 2011. "The framing of games and the psychology of play," Games and Economic Behavior, Elsevier, vol. 73(2), pages 459-478.
    19. Dorian Jullien, 2013. "Asian Disease-type of Framing of Outcomes as an Historical Curiosity," GREDEG Working Papers 2013-47, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    20. Huang, Cheng-Li & Chen, Mien-Ling, 2009. "Relationships among budgetary leadership behavior, managerial budgeting games, and budgetary attitudes: Evidence from Taiwanese corporations," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 18(1), pages 73-84.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jbuset:v:129:y:2015:i:2:p:295-310. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.