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Is accountability a double-edged sword? Experimental evidence on the effectiveness of internal controls to prevent fraud

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Abstract

Recent legislations oblige organizations to monitor the effectiveness of internal control mechanisms that are necessary to prevent fraud. However, little is known about the effectiveness of different internal controls. We investigate whether the duty to sign work results—one of the most prominent internal control mechanisms—is effective to prevent fraud under different superior instructions. We use a 2×2 between-subjects experimental design with accountability (duty to sign work results vs. no duty to sign) and superior instructions (with vs. without profit maximization cue) as independent variables. Both manipulations of superior instructions reminded people to respect accounting standards and principles but in one condition, an instruction to increase revenues was integrated as profit maximization cue. We expected this cue to trigger a profit maximization decision frame that increases the likelihood for fraudulent revenue recording. 58 managers from an executive MBA class participated in the experiment. We find that superior instructions interact with accountability. Fraudulent revenue recording was particularly observed when people received instructions to increase revenues and had to sign their work results. Consequently, fraudulent behavior can occur without pressure to commit fraud due to profit maximization cues that are communicated by a superior and despite implemented internal control mechanisms. We discuss possible implications of our results for the prevention of fraudulent behavior.

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Notes

  1. See also the EU Transparency Directive for required certifications. In particular, see Article 4, 2.c Directive 2004/109/EC of the European parliament and of the council of 15 December 2004 on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC.

  2. Research on the tone at the top suggests that objectives communicated by senior management significantly influence behavior of subordinates (e.g. Schwartz et al. 2005). However, senior management would usually not directly call for unethical behavior.

  3. The wording of the internal auditor’s certificate was as follows: “As internal auditor, I have audited the accounting records of [the company] for the year ended 31 December 2006. My responsibility is to express an opinion on these financial statements based on my audit. I confirm that I meet the legal requirements concerning independence. My audit was conducted in accordance with […] accounting standards and accounting principles, which require that an audit be planned and performed to obtain reasonable assurance about whether the financial statements are free from material misstatement. I believe that my audit provides a reasonable basis for my opinion. I recommend that the financial statements submitted should be approved.”

  4. Authority instructions were coded as −1 for the “respect standards” condition and +1 for the “maximize profits” condition, while accountability was coded as −1 for the “not accountable” condition and +1 for the “accountable” condition.

  5. Excluding gender and age from our analyses changes neither the pattern nor the significance of our results: superior instructions (B=0.26,ns), accountability (B=−0.04,ns); interaction term (B=0.33,p<.05).

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Authors and Affiliations

  1. Department of Accounting and Management Control, HEC Paris, 78351, Jouy-en-Josas, France

    Florian Hoos

  2. Department of Organizational Behavior, Faculty of Business and Economics, University of Lausanne, Internef Building 622, 1015, Lausanne-Dorigny, Switzerland

    Grégoire Bollmann

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  1. Florian Hoos
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  2. Grégoire Bollmann
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Correspondence to Florian Hoos.

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Both authors contributed equally to this article.

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Hoos, F., Bollmann, G. Is accountability a double-edged sword? Experimental evidence on the effectiveness of internal controls to prevent fraud. J Manag Control 23, 115–132 (2012). https://doi.org/10.1007/s00187-012-0161-z

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