Advances in Accounting Behavioral Research: Volume 18

Research has shown evidence of the use of impression management strategies in corporate disclosures as a means of presumably tempering and swaying investors’ perceptions. These impression management strategies include shifts in the tone used when providing disclosures. However, recent research also provides evidence that such techniques can have a contrary effect when the tone of the message appears to be “too good to be true.” This study explores how the use of optimism and certainty in the Management Discussion and Analysis (MD&A) portion of the annual report affects nonprofessional investors’ investment decisions – a class of investors known to heavily rely on the MD&A portion of annual reports. We theorize a bifurcated effect where optimism and certainty have a positive and direct effect on investor willingness to invest, but at the same time optimism and certainty have a negative indirect effect on willingness to invest that is mediated through decreased perceptions of disclosure credibility. The results provide evidence supporting such a bifurcated effect from the use of tone in management disclosures.

This study investigates how disclosure of the board of directors’ leadership and role in risk oversight (BODs oversight disclosure) influences investors’ judgments when information on risk exposures is disclosed. The theoretical lens through which we examine this issue involves negativity bias. Sixty-two stock market investors who engage in the evaluation and/or investment of stocks on a regular or professional basis participated in our study. Our results reveal that the addition of BODs oversight disclosure (positive information) does not carry significant weight on investor judgments (i.e., attractiveness and investment) when financial statement disclosures indicate a high level of operational and financial risk exposures (negative information). In contrast, under the condition of a low level of risk exposures, BODs oversight disclosure causes investors to assess higher risk in terms of worry, catastrophic potentials and unfamiliarity about risk information and, in turn, make less favorable investor judgments. Our findings add to the literature on negativity bias and contribute to the debate on the usefulness of disclosures about risk.

Prior research suggests that perceived levels of a subordinate auditor’s competence affects audit reviewers’ judgments. We extend this line of research by investigating the effects of perceived client competence (hereafter, ClientComp) and its interaction with subordinate auditor’s competence (hereafter, AuditorComp) on audit reviewers’ judgments. Using data from highly experienced CPA audit managers, senior managers, and partners, we find a significant main effect for AuditorComp, but not for ClientComp. We also find that when AuditorComp is high, levels of ClientComp do not affect audit reviewers’ judgments. However, we cannot support the hypothesis that when AuditorComp is low ClientComp will significantly affect audit reviewers’ judgments. These mixed results suggest that in the post-SOX (2002) era regulatory environment, audit reviewers may be exercising heightened professional skepticism about ClientComp whenever they consider clients’ assertions.

This study examines the effects of incentive compensation and guanxi, a type of informal personal relationship between people, on the objectivity of Chinese internal auditors. Given that the objectivity of internal auditors is essential for promoting financial reporting quality, it is important to investigate the effectiveness of internal audit functions, especially in emerging markets where the corporate governance mechanisms designed to promote objectivity are less mature.

The research employs a 2 × 2 between participants experiment with 116 graduate accounting student participants.

After controlling for internal auditors’ ethicality, we find that close-guanxi between management and internal auditors and incentive compensation in the form of bonuses based upon meeting earnings targets both have the capacity to impair the objectivity of Chinese internal auditors. Participants were more tolerant of management’s attempts to manage earnings when there was close guanxi or bonus compensation. Further, compensation structure only influenced internal auditors’ support of management when guanxi was distant, but when there was close guanxi between internal auditors and management, internal auditors were unlikely to challenge management regardless of the compensation structure.

We conduct an experiment to examine the occurrence of the bystander effect on willingness to report a fraudulent act. Specifically, we investigate the impact of evidence strength on managers’ decisions to blow the whistle in the presence and absence of other employees who have knowledge of the wrongdoing. Results indicate that when there is strong evidence indicating a fraudulent act, individuals with sole knowledge are more likely to report than when others are aware of the fraudulent act (the bystander effect). However, the bystander effect is not found when evidence of fraud is weak. Further, a mediated moderation analysis indicates that perceived personal responsibility to report mediates the relation between others’ awareness of the questionable act and reporting likelihood, suggesting that the bystander effect is driven by diffusion of responsibility. Our results have implications for all types of organizations that wish to mitigate the detrimental effect of fraud. Specifically, training or incentives may be necessary to overcome the bystander effect in an organization.

Attribution bias can be costly to firms because it hinders decision makers’ ability to infer the real cause of prior events and take corrective action to improve future performance. This study extends prior research by examining whether and how the presence of variance reporting from accounting systems affects firm profitability through a labor cost management decision that is highly susceptible to attribution bias. Our results support the prediction that the presence of variance reporting (process feedback) increases the likelihood of belief revision and corrective action related to the systematic error, and thus increases overall profitability for the firm. The findings of our study propose a solution to attribution and learning problems observed when decision makers are responsible for both cost management and bids as documented in prior literature.

This study collected perceptual data from 162 manufacturing managers to assess whether their perception of organizational learning is related to firm profitability or whether the relationship is indirect through firms’ competitive advantage (quality improvement, cost improvement, cycle-time improvement). The results indicate that managers perceive that organizational learning is significantly related to competitive advantage that, in turn, is positively related to profitability. The results also indicate that the relation between organizational learning and profitability is fully mediated by firm competitive advantage.