The Joint Impact of Accountability and Transparency on Managers’ Reporting Choices and Owners’ Reaction to Those Choices

42 Pages Posted: 24 Jan 2019

See all articles by Lucy F. Ackert

Lucy F. Ackert

Kennesaw State University - Michael J. Coles College of Business

Bryan K. Church

Georgia Institute of Technology - Accounting Area

Shankar Venkataraman

Bentley University - McCallum Graduate School of Business

Ping Zhang

University of Toronto - Rotman School of Management

Date Written: December 2018

Abstract

We report the results of an experiment designed to investigate the fundamental conflict of interest between managers and owners in a financial reporting setting. In our setting, owners seek accurate reports of financial performance whereas managers have incentives to distort performance reports in a self-serving fashion. Regulatory responses to such conflicts often call for improved disclosure, including more accountability and transparency (e.g., Sarbanes-Oxley Act and Dodd-Frank Act). We use the term accountability to imply answerability — wherein managers are required to reconcile the difference between reported and actual performance. We predict and find that when managers’ incentives are transparently disclosed, accountability does not rein in managers’ opportunistic reporting. By comparison, when managers’ incentives are less transparently disclosed (opaque), accountability dampens managers’ propensity to misreport. However, this reduction in opportunistic reporting due to accountability comes about because managers offset higher reporting bias in compensation periods with lower reporting bias in other periods. Therefore, not only are the benefits of accountability restricted to the setting where managers’ incentives are opaque, but the reduced reporting bias might arise due to window-dressing. Although managers seem to care enough about accountability to engage in window-dressing, financial incentives seem to dominate accountability, at least in our setting. We also find that managers’ payoffs are higher when their incentives are opaque, but owners’ payoffs are invariant regardless of whether incentives are transparent or opaque. Our analyses suggest that owners may be relying on accountability to curb opportunistic reporting by managers — a reliance that may be misplaced. Our findings have implications for regulatory responses aimed at addressing conflicts of interest.

Keywords: conflict of interest, accountability, transparency, experiment

Suggested Citation

Ackert, Lucy F. and Church, Bryan K. and Venkataraman, Shankar and Zhang, Ping, The Joint Impact of Accountability and Transparency on Managers’ Reporting Choices and Owners’ Reaction to Those Choices (December 2018). Journal of Accounting and Public Policy, Forthcoming; Georgia Tech Scheller College of Business Research Paper No. 19-03. Available at SSRN: https://ssrn.com/abstract=3319930

Lucy F. Ackert

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Department of Economics and Finance
Kennesaw, GA 30144
United States
770-423-6111 (Phone)
770-499-3209 (Fax)

Bryan K. Church

Georgia Institute of Technology - Accounting Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-3907 (Phone)
404-894-6030 (Fax)

Shankar Venkataraman (Contact Author)

Bentley University - McCallum Graduate School of Business ( email )

Waltham, MA 02452-4705
United States

Ping Zhang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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