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Who Follows the Unethical Leader? The Association Between Followers’ Personal Characteristics and Intentions to Comply in Committing Organizational Fraud

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Abstract

The role of followers in financial statement fraud has not been widely examined, even though these frauds typically involve collusion between followers and destructive leaders. In a study with 140 MBA students in the role of followers, we examined whether two follower personality traits were associated with behavioral intentions to comply with the demands of an unethical chief executive officer (CEO) to be complicit in committing financial statement fraud. These personality traits are (1) self-sacrificing self-enhancement (SSSE), a form of maladaptive narcissism characterized by seemingly altruistic behaviors that are actually intended to boost self-esteem and (2) proactivity, a trait characterized by behaviors reflecting efforts to positively change one’s environment. As predicted, follower SSSE was positively associated with follower behavioral intentions to comply with CEO pressure to commit fraud, while follower proactivity was negatively associated with fraud compliance intentions. Also as predicted, follower SSSE interacted with follower proactivity, such that followers high in SSSE and high (low) in proactivity reported greater intentions to resist (comply with) pressure from the unethical CEO to commit fraud compared to low-SSSE followers. Implications for future research and corporate governance are discussed.

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Notes

  1. No differences in responses from participants across the two schools were noted at p < .05. Therefore, all responses were pooled into a single sample for analysis purposes.

  2. The ethical scenarios were pilot-tested with MBA students not included in the experimental sample. Minor changes in wording were incorporated in the final version of the scenarios based on the pilot tests.

  3. As shown in Table 1, Panel A, the means for the remaining two items are close to the scale midpoint.

  4. The use of a single instrument and method for data collection raises the possibility of common method bias on our findings. To test for the possible influence of common method bias, we employed the Harman single factor test recommended by Podsakoff et al. (2003). We included all variables (i.e., the six SSSE scale items, the 10 proactivity scale items, and the outcome variable Fraud Index) in a principal components analysis that forced all variables to load onto a single factor. The single factor resulting from the test explained only 22.7 percent of the variance among the items. This is far below the 50 percent criterion value for common method bias suggested by Podsakoff et al. (2003); thus we concluded that this bias was not a major concern.

  5. Because Hypothesis 3 predicts an interaction between SSSE and Proactivity, the interaction term SSSE × Proactivity is included in the regression. An interaction term created by multiplying two continuous variables, however, results in substantial multicollinearity between the variables and the interaction term. Accordingly, the values of SSSE, Proactivity, and the interaction term were mean-centered to reduce multicollinearity (Aiken and West 1991).

  6. Because the distribution of mean-centered SSSE scores was not continuous, the 35th and 70th percentile values were the closest available to the commonly-used 33rd and 67th percentile scores.

  7. We acknowledge that measuring, rather than manipulating, independent variables prevents us from making causal inferences regarding the influence of the measured variables on the dependent variable. Accordingly, all hypotheses are expressed in terms of association rather than causality.

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Authors and Affiliations

  1. University of Wyoming, 1000 E. University Ave., Dept. 3275, Laramie, WY, 82071, USA

    Eric N. Johnson

  2. Nova Southeastern University, 3301 College Avenue, Fort Lauderdale, FL, 33314, USA

    Linda A. Kidwell

  3. Arizona State University, 300 E. Lemon St., Tempe, AZ, 85287, USA

    D. Jordan Lowe & Philip M. J. Reckers

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  1. Eric N. Johnson
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  2. Linda A. Kidwell
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Correspondence to Eric N. Johnson.

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All authors declare that they have no conflict of interest.

Ethical Standards

All procedures performed in studies involving human participants were in accordance with the ethical standards of the institutional and/or national research committee and with the 1964 Helsinki Declaration and its later amendments or comparable ethical standards.

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Informed consent was obtained from all individual participants included in the study.

Appendix

Appendix

Ethical Scenarios

Note: Scenario 1 is reproduced in the text of the paper. Scenarios 2 through 4 are shown below.

Imagine that you are Terry Crawford, a newly promoted MGE division manager and prospective trusted lieutenant of Clinton Markem III. In this role, please respond to the following four independent scenarios as you believe Terry Crawford would.

Scenario 2: In these unstable and challenging economic times, MGE needs to maintain a favorable earnings trend. As an ongoing accounting reporting strategy, Clinton Markem III has asked all division managers to aggressively defer reporting losses on any inventory or fixed asset obsolescence until it has “without-any-doubt” occurred. “Until it is sold, we don’t know what it will sell for!” Accounting rules, however, state that accountants and auditors must apply “best estimates” of obsolescence losses, in advance of ultimate disposition (corporations have been known in the past to postpone ultimate sales to avoid loss recognition). Terry Crawford estimates that selected items in the division have lost up to 25% of their value. Another division manager advises Terry that “We need to go along with this. Instead of recognizing losses this year, just wait till next year and see how it looks. It’s a judgment call. What can the auditors really do to us? We can’t let them push us around…too much is at stake!”

In your opinion, to what degree do you believe if YOU were in Terry Crawford’s position you would agree to this request to defer recognition of obsolescence losses? Use the following scale for your response:

  • Not At All 1……2……3……4……5……6……7……8……9……10 Fully Support Request.

Scenario 3: One of the CEO Markem’s assistants phones Terry Crawford from headquarters informing Terry of the critical need to boost profits for the current year because MGE is negotiating new bank borrowings to support vital new initiatives… and a better profit picture could help make this happen and at better interest rates. Accordingly, it is important that Terry do whatever it takes to hit profit targets in the division. The chief accountant in Terry’s unit says there is a way to do this. The idea is to offer customers special sweetheart pricing if they build up their inventories now… with an expected slump in sales next year (if not massive purchase returns next year.) This practice is known as “channel stuffing” or “trade loading” and is included among objectionable accounting practices not allowed by the SEC. Markem’s position is that if goods are shipped, they are sales! And, sometimes you have to be a little aggressive with narrow minded regulators to protect your own interests.

In your opinion, to what degree do you believe if YOU were in Terry Crawford’s position, you would accede to this request to pump sales this year by “trade loading”? Use the following scale for your response:

  • Not At All 1……2……3……4……5……6……7……8……9……10 Fully Support Request.

Scenario 4: Corporate headquarters phones Terry Crawford, stressing a new critical need to squeeze out all the profits possible. MGE is on the threshold of a remarkable turnaround, but vocal stockholder group has emerged that is opposing Markem’s leadership and “necessary changes if MGE is to re-emerge as an industry leader”. Any success by this group in electing any directors to the board could critically delay new initiatives. Terry is asked to do “your part, as a member of the team” by postponing for 6 months “discretionary costs” at Terry’s facility, thus moving expenses from this year into next. Included would be postponements of the acquisition of new and safer manufacturing equipment (mandated by new federal OSHA guidelines) and new software (facilitating quality control of drugs’ purity). Markem has no patience with the Feds on these issues; arguing MGE’s safety and quality control standards are already high. “We know are business better than those guys. The Feds are just going to destroy us with costly junk that does no good but puts us at a cost disadvantage with foreign competitors. Not this year and not ever if I have my way. We will duke this out in Washington next year after we talk seriously to our representatives in Congress. They will see the light!”

In your opinion, to what degree do you believe if YOU were in Terry Crawford’s position you would agree to postpone the equipment changes this year? Use the following scale for your response:

  • Not At All 1……2……3……4……5……6……7……8……9……10 Fully Support Request.

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Johnson, E.N., Kidwell, L.A., Lowe, D.J. et al. Who Follows the Unethical Leader? The Association Between Followers’ Personal Characteristics and Intentions to Comply in Committing Organizational Fraud. J Bus Ethics 154, 181–193 (2019). https://doi.org/10.1007/s10551-017-3457-y

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