How Audits Moderate the Effects of Incentives and Peer Behavior on Misreporting

50 Pages Posted: 30 Sep 2012 Last revised: 10 Mar 2017

See all articles by Eddy Cardinaels

Eddy Cardinaels

Tilburg University - Tilburg University School of Economics and Management; KU Leuven

Yuping Jia

Frankfurt School of Finance & Management - Accounting Department

Date Written: August 2014

Abstract

Classical agency theory argues that economic incentives can have a strong impact on opportunistic reporting behavior. On the other hand, behavioral literature suggests that agents also adhere to descriptive norms established by peers. Most studies examine these effects in isolation, ignoring the role of mechanisms that firms use to detect misreporting. This research examines if the effects of incentives and descriptive peer norms depend on whether the firm uses an audit system to detect misreporting. In an experiment, we vary the material payoffs for lying (low vs. high compensation rate), the behavior of peers (low vs. high honesty), and the use of audits to detect misreporting (audited vs. not audited). Results indicate that the effect of peer behavior depends on the use of audits. When reporting decisions are audited, descriptive peer norms have a strong effect on the level of truthful reporting. We do not find evidence indicating that the effect of incentives depends on audits. Our findings have important implications for practice. Firms may need to consider the use of audits if they want to promote honesty through positive peer-established social norms.

Keywords: opportunistic behavior, descriptive norms, incentives and audits

JEL Classification: M40, G30, C91

Suggested Citation

Cardinaels, Eddy and Jia, Yuping, How Audits Moderate the Effects of Incentives and Peer Behavior on Misreporting (August 2014). Available at SSRN: https://ssrn.com/abstract=2154170 or http://dx.doi.org/10.2139/ssrn.2154170

Eddy Cardinaels

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Warandelaan 2
Tilburg, 5000 LE
Netherlands
+31 134668231 (Phone)

HOME PAGE: http://www.tilburguniversity.edu/webwijs/show/?uid=e.cardinaels

KU Leuven ( email )

Naamsestraat 69
Leuven, B-3000
Belgium
+32 16326984 (Phone)

HOME PAGE: http://www.kuleuven.be/wieiswie/nl/person/00013472

Yuping Jia (Contact Author)

Frankfurt School of Finance & Management - Accounting Department ( email )

Sonnemannstra├če 9-11
Frankfurt
Germany
0049 69 154008 839 (Phone)

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