How Do Openness of Internal Reporting and Shared Interest with an Employee Affect Managerial Collusion and Subsequent Cooperation?

Abstract

Collusion between managers who share private information represents a significant control concern for firms. Prior research suggests that mutual monitoring contracts that incentivize honest reporting and whistleblowing do not prevent all collusion, making it important to understand how elements of the control environment facilitate or prohibit collusion, as well as how these control choices – and the act of collusion itself – affect subsequent behavior within the firm. In a two-stage experiment, I predict and find that the frequency of collusion between managers is greatest when one can view the other’s reports to the firm before making their own (“open internal reporting”) and any slack obtained from misreporting is shared with an employee (“shared interest”). Evidence suggests this stems from managers’ less positive perceptions of the firm and the reporting environment, which also result in decreased cooperation on a subsequent task. I further predict and find that successful collusion improves managers’ perceptions of trust, control in reporting decisions, and group identification, resulting in greater cooperation on a subsequent task and potentially reducing the costs of some collusion. The implications of my findings for management accounting research and practice are discussed.