How Control System Design Influences Performance Misreporting

Forthcoming in Journal of Accounting Research

43 Pages Posted: 21 Jun 2010 Last revised: 25 Jul 2014

See all articles by Victor S. Maas

Victor S. Maas

University of Amsterdam Business School

Marcel Van Rinsum

RSM Erasmus University

Date Written: August 5, 2013

Abstract

This paper investigates reporting honesty when managers have monetary incentives to overstate their performance. We argue that managers who report about 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 the reward structure and the information policy regarding individual performance reports. The reward structure determines if peers’ monetary payoff is increased or decreased when managers claim a higher level of performance. The information policy 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 under an open information policy, where each individual’s reported performance is made public, compared to a closed information policy where participants only learn the average performance of the other participants. Our findings have several important implications for management accounting research and practice.

Keywords: performance measurement, data manipulation, incentives, information policies, social preferences, social norms, honesty, lying aversion.

JEL Classification: M40, M50

Suggested Citation

Maas, Victor S. and Van Rinsum, Marcel, How Control System Design Influences Performance Misreporting (August 5, 2013). Forthcoming in Journal of Accounting Research. Available at SSRN: https://ssrn.com/abstract=1628171 or http://dx.doi.org/10.2139/ssrn.1628171

Victor S. Maas (Contact Author)

University of Amsterdam Business School ( email )

Plantage Muidergracht 12
Amsterdam, 1018TV
Netherlands

Marcel Van Rinsum

RSM Erasmus University ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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