The Effects of Openness of Internal Reporting and Shared Interest with an Employee on Managerial Collusion and Subsequent Cooperation

Abstract

Collusion between managers who share private information represents a significant control concern for firms. Prior research suggests that mutual monitoring contracts that incentivize honest reporting do not prevent all collusion, making it important to understand how elements of the control environment may facilitate increased collusion, as well as how these control choices – and the act of collusion itself – affect subsequent behavior within the firm. In a two-stage experiment, I predict and find that the frequency of collusion between managers in a repeated-period setting is greatest when one can view the other’s reports to the firm before making their own (“open internal reporting”) and any slack obtained from misreporting is shared with an employee (“shared interest”). Moreover, I find that open internal reporting by itself leads to increased collusion relative to closed reporting in single-shot settings with or without a residual claimant to managers’ budget reports present, while no differences in collusion are observed as a function of openness alone in a repeated-period setting. Results further suggest that open reporting leads to decreased perceptions of autonomy, which lead to lower cooperation on a subsequent task. Finally, I find that successful collusion improves managers’ perceptions of autonomy and group identification, resulting in greater cooperation on a subsequent task and potentially reducing the costs of some collusion. The implications of my findings for management accounting research and practice are discussed.

Keywords: Collusion, honesty, managerial reporting, group identification, cooperation