Subordinates as the First Line of Defense Against Biased Financial Statements
41 Pages Posted: 12 Jan 2008 Last revised: 27 Nov 2012
Date Written: November 1, 2011
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: Suggested Citation