How Control System Design Influences Performance Misreporting

Abstract:     
This paper investigates reporting honesty if managers have monetary incentives to overstate their performance. We argue that managers reporting their performance will take into account how their report affects their peers (i.e. other managers at the same hierarchical level). This effect depends on the design of the organization’s control system, in particular on its reward structure and the transparency of the reporting process. The reward structure determines if peers’ monetary payoff is increased or decreased when managers claim a higher level of performance. The transparency of the reporting process determines if managers will be able to link individual peers to their reports and affects the non-monetary costs of breaking social norms. We present the results of a laboratory experiment. As predicted, we find that participants are more likely to overstate their performance if this increases the monetary payoff of others than if their reported performance decreases others’ monetary gains. In addition, overstatements are lower when each individual’s reported performance is made public compared to a system where participants only learn the average performance of the other participants. Our findings have several important implications for management accounting research and practice.

Number of Pages in PDF File: 52

Keywords: performance measurement, gaming, incentives, honesty, transparency

JEL Classification: M46

working papers series