Why Financial Executives Do Bad Things: The Effects of the Slippery Slope and Tone at the Top on Misreporting Behavior
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ORIGINAL PAPER
Why Financial Executives Do Bad Things: The Effects of the Slippery Slope and Tone at the Top on Misreporting Behavior Anna M. Rose1 · Jacob M. Rose1,2 · Ikseon Suh3 · Jay Thibodeau4 · Kristina Linke5 · Carolyn Strand Norman6 Received: 3 February 2020 / Accepted: 20 August 2020 © Springer Nature B.V. 2020
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. Keywords Fraud · Misreporting · Slippery slope · Tone at the top
Introduction
* Jacob M. Rose [email protected]; [email protected] Anna M. Rose [email protected] Ikseon Suh [email protected] Jay Thibodeau [email protected] Kristina Linke [email protected] Carolyn Strand Norman [email protected] 1
University of Waikato, Hamilton, New Zealand
2
Monash University, Caulfield, Australia
3
University of Nevada Las Vegas, Las Vegas, USA
4
Bentley University, Waltham, USA
5
University of Groningen, Groningen, The Netherlands
6
Virginia Commonwealth University, Richmond, USA
Financial executives and external auditors play key roles in corporate governance (Gramling et al. 2004). Financial executives assist top management to safeguard the integrity of financial reporting (Maas and Matejka 2009; Suh et al. 2018), while auditors actively monitor organizational risks and provide assurance regarding the quality of financial reporting (Gramling et al. 2004). As internal corporate watchdogs, financial executives are expected to maintain their independence from “top management’s overly aggressive accounting and reporting practices” (Howell 2002, p. 20) while still working closely with top management (Ezkenazi et al. 2016). External auditors are required to exercise their professional skepticism throughout audit engagements, as they serve as external corporate wat
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