Subordinates as the First Line of Defense Against Biased Financial Statements

41 Pages Posted: 12 Jan 2008 Last revised: 27 Nov 2012

See all articles by S. Jane Kennedy Jollineau

S. Jane Kennedy Jollineau

University of San Diego - School of Business; University of San Diego - Department of Accountancy; University of Washington - Foster School of Business

Thomas W. Vance

Colorado State University, Fort Collins - Department of Accounting

Alan Webb

University of Waterloo - School of Accounting and Finance

Date Written: November 1, 2011

Abstract

Managers who generate financial reports often rely on subordinates who possess private information to provide inputs. When managers have incentives to manipulate reports, they may request biased inputs from subordinates. However, subordinates can act as informal controls and constrain managers’ opportunism. We experimentally examine two potential determinants of subordinates’ willingness to serve as informal controls: their perception of the subordinate-manager relationship quality and their beliefs about the ethical nature of the task. Subordinates who perceive a high quality relationship with their manager provide more bias, despite a compensation scheme that makes compliance costly. This result suggests that managers who cultivate close working relationships with subordinates may undermine the control system. Subordinates’ beliefs about the ethical nature of the task also reduce compliance, but more so when the manager requests income-increasing estimates. Our findings contribute to the management accounting literature by providing insights into the role of subordinate employees as informal controls.

Keywords: independence, reporting bias, control

JEL Classification: M13, M19, M40, M43, M46, M49

Suggested Citation

Kennedy Jollineau, S. Jane and Vance, Thomas W. and Webb, Alan, Subordinates as the First Line of Defense Against Biased Financial Statements (November 1, 2011). Available at SSRN: https://ssrn.com/abstract=1082884 or http://dx.doi.org/10.2139/ssrn.1082884

S. Jane Kennedy Jollineau

University of San Diego - School of Business ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States
619.260.2766 (Phone)

University of San Diego - Department of Accountancy ( email )

223 Olin Hall
5998 Alcalá Park
San Diego, CA
United States

HOME PAGE: http://https://www.sandiego.edu/business/directory/biography.php?_focus=1238

University of Washington - Foster School of Business ( email )

Seattle, WA 98195-3226
United States
206-543-4368 (Phone)
206-685-9392 (Fax)

Thomas W. Vance (Contact Author)

Colorado State University, Fort Collins - Department of Accounting ( email )

256 Rockwell Hall
Fort Collins, CO 80523
United States

Alan Webb

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

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