Exploring Contagion in Budgetary Misreporting

Abstract

This study investigates the effect of internal reporting environment openness and organizational identification on managers’ budgetary misreporting. Using an experiment, we find that organizational identification moderates the effect of internal reporting environments on misreporting. That is, with weak organizational identification, there is significantly higher misreporting under an open reporting environment compared to a closed reporting environment. However, with strong organizational identification, there is no difference in misreporting between open and closed reporting environments. Our findings provide insight into how the internal reporting environment and the level of organizational identification jointly affect managerial reporting behavior. Our study has important implications for practice given many organizations are moving towards more open, transparent environments and increasing investment in building organizational identification. Our results suggest that organizations need investment in enhancing organizational identification first before considering having an open environment.