The Impact of Authority on Reporting Behavior, Rationalization and Affect

Abstract

We examine reporting choices, rationalizations and emotional responses when an authority figure directs participants to misreport the results of their performance for financial gain. Our research is motivated by the assertions of several individuals involved in major accounting scandals that an authority figure instructed them to perpetrate fraudulent financial reporting. We employ a laboratory experiment where a “boss” instructs participants to misreport for financial benefit. We find that, when instructed to misreport: (1) more participants misreport, (2) they rationalize their behavior primarily by displacing responsibility, and (3) they do not feel as badly as they do when they misreport on their own volition. We find that displacing responsibility mediates the relation between being told to misreport and the act of misreporting, resulting in lower levels of negative affect. Our research addresses calls to better understand the role of rationalizations in fraudulent reporting (Hermanson 2009) and lays the groundwork necessary to explore interventions that reduce fraudulent financial reporting (AICPA 2002, Wells 2004).

Keywords: obedience, misreporting, rationalization, negative affect, moral disengagement

JEL Classification: M40, M41