The Effects of Reciprocity, Self-Awareness, and Individual Characteristics on Honesty in Managerial Reporting

Abstract

Management accounting involves the communication of information within an organization to facilitate planning, coordination, resource allocation, and performance evaluation. As such, the budgeting process is a core component of management accounting. In decentralized organizations, however, upper management must rely on the budget information of better informed local managers. Contrary to the assumptions of agency theory, the findings from Evans, Hannan, Krishnan, and Moser (2001) suggest that local managers are willing to sacrifice wealth for preferences for honesty or equitable distributions. I extend this literature by examining the effects of reciprocity, self-awareness, and the individual characteristic of social value orientation on honesty in managerial reporting. In particular, I conduct an experimental study that manipulates two contextual factors that are likely present in the participative budgeting process: a hiring choice that triggers reciprocity, and a certification requirement that triggers self-awareness. I find that when upper management endogenously chooses to hire the local manager, the local manager reciprocates the hiring choice by reporting more honestly. Contrary to expectations, I do not find support for a budget report certification requirement leading to increased levels of honesty in managerial reporting. However, I find that managers are not homogeneous in their reporting decisions. Specifically, cooperative social value orientation types provide more honest reports when they are required to certify the budget report or when they are endogenously hired by upper management. The level of honesty does not incrementally increase when cooperative social value orientation types are endogenously hired by upper management and are required to certify the budget report. In contrast, individualistic and competitive social value orientation types provide more honest reports when they are endogenously hired by upper management and the level of honesty incrementally increases when the local manager is also required to certify the budget report. However, I find no support for the certification requirement alone increasing the level of honesty exhibited by individualistic and competitive social value orientation types.