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Presented by: Julie C. Hyde

Honesty in Accounting and Control: A Discussion of “The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective” By Steven E. Salterio and Alan Webb. Presented by: Julie C. Hyde. Lying is the opposite of honesty.

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Presented by: Julie C. Hyde

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  1. Honesty in Accounting and Control: A Discussion of “The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective” By Steven E. Salterio and Alan Webb Presented by: Julie C. Hyde

  2. Lying is the opposite of honesty. • Honesty: a tendency not to lie, cheat, or steal Grover (2005) the refusal to fake reality Smith (2003) • Lying: a statement one knows to be false Grover (2005) adeliberate statement to deceive others Sims (2000) definitions

  3. Economics-based researchers find up to 35% of participants consistently tell the truth. • Somanathan and Rubin 2004 • Social psychologists, sociologists, and philosophers find 10% will be honest in all situations. • Furnham and Taylor 2004; Murphy 1993 research on honesty and lying

  4. Promoting honesty and deterring lying are two different managerial problems. • Murphy 1993 • Promoting honesty: • Modeling behavior • Training on ethics • Establishing policies research on honesty and lying

  5. Four Conclusions on Lying • Difficult to detect • Caused by structural constraints • Individual differences • Reward structures increase likelihood Grover (2005) research on honesty and lying

  6. Budgetary control systems encourage gaming and perverse behavior. Neely, Sutcliff, and Heyns (2001) • Truth-inducing incentive schemes can reduce cheating in budgets and improve performance. Chow (1983) Mcs research on lying

  7. Individuals feel social pressure to behave honestly even when on monetary incentive exists. Young (1985) Participants lied significantly less when told that truthful budget reporting was valued in the experiment. Webb (2002) Mcs research on lying

  8. H1: The information system signal is a focal point for managers’ reports. H2: Managers’ reports are more honest when an information system exists than when no information system exists. Comments on HRT’s predictions

  9. H3: The information system signal is less of a focal point for managers’ reports when the information system is precise than when the information system is coarse. H4: (null) Managers’ reports are neither more nor less honest when an information system is precise than when it is coarse. Comments on HRT’s predictions

  10. No negative consequences to dishonest reporting Rewards increase as dishonest reporting increases Limited interpersonal interaction between the manager and owner HRT’s Research design

  11. Only reports the likely range of actual costs Cost report is provided to manager and owner before manager gives budgeted costs Not used to reward or punish Not used to monitor performance HRT Design Flaws: Info system

  12. The precise information system produces more lying than the coarser information system. A costly investment in more precise information system will increase lying? HRT’s Results

  13. Issue of “fairness” The more precise information system requires more managerial lying to create an equal allocation of profits between the owner and manager. An interaction between the reward system and the precision of the information system, not precision alone, cause HRT’s result. Alternative explanations…

  14. Examine a setting where the incentive scheme requires a smaller trade-off between obtaining a fair allocation of profits and the benefits of reporting honesty. Explore how belief and boundary systems might complement or serve as a substitute for more rigid diagnostic controls that invite gaming and dysfunctional behavior. Future research

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