Earnings benchmarks, information systems, and their impact on the degree of honesty in managerial reporting

This paper provides experimental evidence about how the interaction between a company's earnings and its information system influences the degree of honest reporting by managers in a capital budgeting task. Specifically, the results show that participants overstate cost less when the manager's cost report determines whether the firm earns a gain or loss than when their report does not affect whether the firm earns a profit or loss (i.e., the firm always earns either a profit or loss regardless of the cost report). Further, the results suggest that the impact of the earnings situation on the degree of honesty depends on whether the firm uses an information system that improves its ability to detect misreporting. Specifically, the earnings situation has less effect on the degree of honesty when the firm uses an information system. This is because the information system decreases honesty when the manager's report determines whether the firm earns a profit or loss but increases it otherwise. This study provides important insights into the conditions under which information systems can crowd out prosocial behavior.