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Why Financial Executives Do Bad Things: The Effects of the Slippery Slope and Tone at the Top on Misreporting Behavior

Abstract

This paper employs theory of normal organizational wrongdoing and investigates the joint effects of management tone and the slippery slope on financial reporting misbehavior. In Study 1, we investigate assumptions about the effects of sliding down the slippery slope and tone at the top on financial executives’ decisions to misreport earnings. Results of Study 1 indicate that executives are willing to engage in misreporting behavior when there is a positive tone set by the Chief Financial Officer (CFO) (kind attitude toward employees and non-aggressive attitude about earnings), regardless of the presence or absence of a slippery slope. A negative tone set by the CFO does not facilitate the transition from minor indiscretions to financial misreporting. In Study 2, we find that auditors evaluating executives’ decisions under the same conditions as those in Study 1 do not react to the slippery slope condition, but auditors assess higher risks of fraud when the CFO sets a negative tone. Overall, our results indicate that many assumptions about the slippery slope and tone at the top should be questioned. We provide evidence that pro-organizational behaviors and incrementalism yield new insights into the causes of ethical failures, financial misreporting behavior, and failures of corporate governance mechanisms.

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Fig. 1

Notes

  1. We employ a direct questioning approach for the minor rule violation because it is minor and harmless to investors, and it does not violate controllers’ professional standards. In addition, in order to allow for psychological numbing to occur, we needed participants to make a personal decision about the marketing items.

  2. Our ANCOVA model used to test hypotheses includes a covariate that captures participants’ beliefs about the willingness of others to engage in misreporting similar to the misreporting in the experimental case. This covariate controls for dispositional beliefs about the willingness of others to misreport. Results of hypothesis testing remain the same if this covariate is removed from the model.

  3. To verify that results are similar for only the practicing controller subset of participants, we perform the same ANCOVA analyses using only the practicing Dutch controllers. We again find a significant interaction (F = 6.23, p = 0.018), and the same pattern of results. Results indicate that practicing controllers and the executive MBA proxies for practicing controllers make very similar decisions in our experimental scenario.

  4. It is also plausible that these results are driven, at least in part, by dispositions. Participants who choose to slip and violate a minor rule may hold beliefs that rules are relatively unimportant.

  5. Preliminary tests revealed no significant effects of tone or the slippery slope on perceptions of the appropriateness of the warranty estimate (p = 0.71 and 0.55). These results are not tabulated.

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Acknowledgements

The authors wish to thank participants of the 2018 Glen McLaughlin Prize for Research in Accounting Ethics Conference, participants of the Accounting, Behavior and Organizations conference, and workshop participants at Oregon State University, University of Hawaii at Manoa, University of Otago and University of Waikato.

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Correspondence to Jacob M. Rose.

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The experiment was approved by the Office of Research Compliance at Marquette University (Ethics Approval Number: HR-2894).

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Rose, A.M., Rose, J.M., Suh, I. et al. Why Financial Executives Do Bad Things: The Effects of the Slippery Slope and Tone at the Top on Misreporting Behavior. J Bus Ethics 174, 291–309 (2021). https://doi.org/10.1007/s10551-020-04609-y

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Keywords

  • Fraud
  • Misreporting
  • Slippery slope
  • Tone at the top