Recent, well-publicized accounting scandals have shown that the penalties outsiders impose on those found culpable of earnings management can be severe. However, less is known about how colleagues within internal labor markets respond when they believe fellow managers have managed earnings. Designers of responsibility accounting systems need to understand the reputational costs managers impose on one another within internal labor markets. In an experimental study, 159 evening MBA students were asked to assume the role of a manager in a company (...) and respond to a scenario in which another manager (the target manager) has the opportunity to engage in earnings management. Participants provided causal attributions, assessed the morality of the target manager, and indicated whether they would change their judgments about the target manager's reputation. The study manipulated three between-subjects factors: (1) whether the target manager chose to engage in earnings management, (2) whether the company's budgetary control system was rigid or flexible, and (3) whether the target manager's work history was average or above average. We found that causal attributions are affected more by the budgetary systems when the target did not manage earnings than when the manager did. We also found that morality judgments were significantly associated with the target manager's behavior, but not with the budgetary system. In addition, participants' judgments about the target manager's reputation were more strongly associated with morality judgments than with causal attributions. We discuss implications of the role of reputation in management control systems design. (shrink)

The current study is designed to propose and test a model about the ethical reputation of a target manager who must decide whether to engage in earnings management. We employ an experimental approach to examine the potential negative reputation effects within the internal labor market of a firm that occur as a consequence of earnings management. We examine participants’ responses to a hypothetical (target) manager when both the target’s behavior and the corporate incentives were manipulated. Participants assessed how ethical they (...) believed a target manager to be, based on the target’s decision regarding earnings management and the nature of the corporate incentives. Participants also assessed the target’s managerial ability. Participants’ judgments regarding the target’s morality were significantly affected by the target’s behavior, but were not affected by the incentive structure. Ability judgments were significantly and positively related with morality assessments. Further analysis indicates that morality assessments mediate the relationships between the target’s behavior and the participants’ willingness to extend work-related opportunities to the target. Implications of these results for management control systems design and for future research are discussed. (shrink)

The current study is designed to propose and test a model about the ethical reputation of a target manager who must decide whether to engage in earnings management. We employ an experimental approach to examine the potential negative reputation effects within the internal labor market of a firm that occur as a consequence of earnings management. We examine participants’ responses to a hypothetical (target) manager when both the target’s behavior and the corporate incentives were manipulated. Participants assessed how ethical they (...) believed a target manager to be, based on the target’s decision regarding earnings management and the nature of the corporate incentives. Participants also assessed the target’s managerial ability. Participants’ judgments regarding the target’s morality were significantly affected by the target’s behavior, but were not affected by the incentive structure. Ability judgments were significantly and positively related with morality assessments. Further analysis indicates that morality assessments mediate the relationships between the target’s behavior and the participants’ willingness to extend work-related opportunities to the target. Implications of these results for management control systems design and for future research are discussed. (shrink)