Shared Financial Interest, Fairness, and Honesty in Budget Reporting: Experimental Study in Indonesia

Abstract

This study uses two experiments to investigate the honesty of manager’s budget reports when the financial benefit resulting from budgetary slack is shared by the manager and other non-reporting employees and when managers consider the fairness of budget participation. Drawing on moral disengagement theory, it is said that the shared financial interest in slack creation makes misreporting more self-justifiable to the manager and, therefore, leads to lower honesty. Consistent with prediction, the result of first experiment show that manager report less honestly when the benefit of slack is shared than when it is not shared, regardless of whether others are aware of the misreporting.

The second experiment investigates whether the fairness concern will affect the honesty of manager’s budget reports in all condition as in first experiment. The result of second experiment confirming that fairness concern effects the honesty of manager’s budget reports when the financial benefit resulting from budgetary slack is shared and when others are aware of the misreporting.

Results of this study have implications for research and practice of management accounting. This study identifies how the control system has positive and negative externalities, such as group-based incentive plans that widely used within the organization.

Keywords: shared financial interest, fairness, honesty, budget reporting

JEL Classification: M40, M41