Dysfunctional Consequences of Disclosure

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D isclosure and transparency are often seen as universally desirable, and proposed as a part of solutions for a variety of social problems. ‘‘Rational’’ limitations on disclosure on grounds of proprietary costs are recognized (Verrecchia 2001), and there are merits of various levels of aggregation/disaggregation analyzed. Psychology literature points to contexts, e.g., those involving conflicts of interest, in which disclosure can create a ‘‘moral licensing’’ effect, which exacerbates bias instead of attenuating it (Cain et al. 2005; Miller 2007). The moral licensing literature (Monin and Miller 2001; Miller and Effron 2010) suggests that when people behave well, or intend to act in a way that increases their sense of their own ethicality (such as providing a conflict of interest disclosure), they feel ‘‘licensed’’ to act in a self-serving (or unethical) manner. This moral licensing effect creates counterfactual behavior whereby restaurants who add healthy choices to their menus (e.g., a green salad) find that sales of unhealthy items on the menu, such as French fries, increase (Wilcox et al. 2009). Having taken their bow to healthy food by going to a restaurant that serves salad, they order three times more French fries (compared to what they order from a menu without salad on it). To the extent regulators (and accounting scholarship) generally ignore factors such as moral licensing, there is a greater likelihood that use of disclosure as a regulatory mechanism may have unintended consequences, even backfire. Auditors get paid by managers they must monitor and, thus, work in an environment replete with conflict of interest. Their public reports serve clients with non-overlapping or conflicting interests. Many of these clients may prefer to have benefits of industry specialization, and often do not concern themselves with the potential for future multi-client conflicts of interest (Fiolleau et al. 2011). Accountants have traditionally used professional socialization and a code of conduct to control conflict of interest (Zeff 2003). In recent decades, regulators have reduced their reliance on professional codes, and supplemented them by market-based controls such as disclosure and certification. Regulatory reforms such as the Sarbanes Oxley Act (SOX) use both traditional professional controls (e.g., restricting auditors from providing some consulting services to audit clients), as well as market-based controls such as disclosure and certification, whereby market participants are supposed to protect themselves by discounting advice from professionals (Securities and Exchange Commission [SEC] 2003). Professional accountants may feel that it is unfair for users to discount their advice (Miller 2007). Ironically, this sense of being discounted