How Does Peer Honesty Affect Focal Manager Honesty in a Budget Reporting Setting?

51 Pages Posted: 29 Jul 2012 Last revised: 2 Mar 2015

See all articles by Michael Paz

Michael Paz

Cornell University - School of Hotel Administration

Bernhard Erich Reichert

Virginia Commonwealth University

Alex Woods

College of William and Mary

Date Written: March 1, 2013

Abstract

We examine the effect of peer honesty on focal manager honesty in a budget reporting setting. We disclose peer honesty to the focal manager at three levels: no, partial, and full disclosure of the reporting behavior of the other managers in the focal managers’ cohort. In partial disclosure, only the reports of the least honest peers are disclosed to the focal manager. In full disclosure, all managers’ reports in the cohort are disclosed to the focal manager. We predict and find that disclosure of other managers’ reports leads to less honesty compared to the absence of disclosure. We show that disclosure changes the focal manager’s perceptions of what constitutes acceptable reporting behavior, such that reporting more dishonestly becomes more acceptable. Our results have implications for understanding fraud dynamics and have practical implications for the design of control systems, as they suggest that managers will use peer dishonesty to justify their own dishonesty, even when they know that only some of their peers report dishonestly.

Keywords: budgeting, honesty, disclosure, contagency

Suggested Citation

Paz, Michael and Reichert, Bernhard Erich and Woods, Alex, How Does Peer Honesty Affect Focal Manager Honesty in a Budget Reporting Setting? (March 1, 2013). AAA 2013 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2119359 or http://dx.doi.org/10.2139/ssrn.2119359

Michael Paz

Cornell University - School of Hotel Administration ( email )

435B Statler Hall
Ithaca, NY 14853-6902
United States

Bernhard Erich Reichert (Contact Author)

Virginia Commonwealth University ( email )

Richmond, VA
United States

Alex Woods

College of William and Mary ( email )

P.O. Box 8795
Williamsburg, VA 23185
United States

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