Budgeting Without Commitment: The Effect of Non Contractible Information on Honesty in Managerial Reporting

Budgeting Without Commitment: The Effect of Non Contractible Information on Honesty in Managerial Reporting
Author(s): Towry, Kristy L. and Hannan, R. Lynn and Rankin, Frederick W.
Year: 2003
Paper Number: GBS-ACC-2003-002
Goizueta Department: Accounting

Abstract

This paper examines experimentally the effects of two institutional factors (the presence of an information system and the method of reporting – anonymous or face-to face) on honesty in a participatory budget setting. Prior analytic work in budgeting depends critically on the assumption that the owner can commit ex ante to enforce a contract when it is ex post irrational to do so. We relax the assumption of commitment. Without the commitment assumption, economic theory predicts that the institutional factors we investigate would have no effect on honesty. We find, however, that both the presence of an information system and the reporting method do have significant effects on honesty in managerial reporting. As expected, we find that face-to-face reporting increases honesty. We also find that when an information system exists, managers report more honestly. Contrary to predictions, though, this effect occurs irrespective of the reporting method. Supplemental analysis suggests that the information system affects honesty through different mechanisms in the anonymous vs. face-to-face conditions.