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The Impact of Budget Goal Difficulty and Promotion Availability on Employee Fraud

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Abstract

The purpose of this research is to examine the effect of two organizational variables, budget goal difficulty and promotion availability, on employee fraud (e.g., stealing). Limited research shows that difficult, specific goals result in more unethical behavior than general goals (Schweitzer et al., Acad Manag J 47(3):422–432, 2004). We predict that goal difficulty and promotion availability will interact to affect employee fraud. Specifically, we contend that the availability of promotions will have little, if any, effect on employee fraud under easy goals but have a substantial effect on fraud under extremely difficult goals. To test this prediction, we use an experiment in which participants play the role of production employees. All participants are assigned cost goals and are responsible for reporting costs to the organization. Information asymmetry exists such that the organization is unable to assess whether costs have been reported accurately, and any overstatement of costs directly increases the employee’s compensation at the expense of the organization. The results of our experiment support the prediction, even though the cost goal is not tied to current period compensation (e.g., a mere goal). Our results have implications for academics and practitioners concerned with factors that affect fraud in organizations.

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Notes

  1. The primary difference between fraudulent financial reporting and employee fraud is that fraudulent financial reporting benefits the organization by making financial performance appear better than it is. In contrast, employee fraud benefits the individual at the expense of the organization (Albrecht et al. 2011).

  2. Our research uses student participants in the role of employee. Thus, we use the terms employee and participant interchangeably throughout the paper.

  3. Some of the participants in the experiment were assigned to the role of owners. As discussed more fully below, these participants do not make reporting decisions and have limited involvement in the experiment.

  4. Evans et al. (2001) refer to contracts involving this type of information asymmetry as “trust contracts.”

  5. Of course, important differences exist between the costs reported by employees in our setting and the costs reported in the binding and nonbinding conditions examined by Rankin et al. (2003). For example, in our setting the owners were required to accept the cost report whereas in the nonbinding condition examined by Rankin et al. (2003) the owner can choose whether or not to fund the project based on the cost report.

  6. While this is often the case, we note that in some circumstances, such as when a difficult goal is perceived as threatening, performance can be inhibited (Drach-Zahavy and Erez 2002). For a more general discussion of the potentially disruptive effects of difficult goals, see Sitkin et al. (2011).

  7. Using actual participants as owners, rather than programming the computer to act as an owner, serves to highlight for the employees that there is an actual counter-party who suffers a loss as a result of any employee fraud. This strengthens the experiment by biasing against finding support for our hypothesis.

  8. Following Bloomfield and Luft (2006) the production recommendation made by participants did not relate in any way to the earnings of the production employees or owners. This part of the task was intended to better reflect a production environment, stimulate participant’s interest in the task, and increase participants’ feelings of responsibility for production cost goals.

  9. Consistent with prior accounting research involving participant recommendations and pre-determined outcomes used to compare across conditions (e.g., Bloomfield and Luft 2006; Tayler 2010) no definitive assertions stating a connection between production recommendations and cost outcomes were made.

  10. Consistent with prior studies on managerial honesty (e.g., Evans et al. 2001; Rankin et al. 2008) and because we are concerned with reporting behavior, the cost of effort is assumed to be zero and therefore, does not affect the participants’ payout.

  11. Under a flat wage contract, the only way an employee can increase their utility is to over-report costs and then increase perquisite consumption. Prior honesty research on perquisite consumption (e.g., Evans et al. 2001; Rankin et al. 2008) captures this element experimentally by paying subjects the difference between the subjects cost report and actual cost. Thus, there are two elements to the payoff function under a flat wage contract, the 175 experimental dollar base salary and the amount of money claimed above the actual cost (report − actual cost).

  12. Had we chosen to also include an economic incentive, then we would not have been able to discern the psychological effects of the goal difficulty manipulation, which are important to our theory. To the extent that our set-up deviates from that which is found in practice, we believe that this would affect the level of fraud but would not affect the shape of our predicted interaction between goal difficulty and promotion availability.

  13. It is important to point out that the procedures used in this experiment were adapted from Evans et al. (2001), Hannan et al. (2006), and Rankin et al. (2008). The procedures assure anonymity and were set up so that participants should pay all of their attention to economic incentives and always claim costs of $200 to maximize their payouts. Deviations from this economic maximizing behavior suggests, by design, that participants are persuaded, at least partially, by psychological influences over economic influences. In the case of promotions tied to a small raise, participants focusing on economic incentives would still be enticed monetarily to report the maximum cost of $200 as participants were informed of the small (and capped) raise sizes before making their reporting decisions and would be able to see that they would be better off financially over-reporting costs.

  14. In the promotion absent condition, we needed to select a single title that would be held constant throughout the experiment. We selected what we believed to be a very generic title, “production manager.” As this title was held constant, we do not believe our results are sensitive to the specific title we selected. For example, we have no reason to believe that our results would have been any different if we had selected “production supervisor” as the title.

  15. The results of pilot testing indicated that participants considered a promotion without at least a nominal raise to be highly unusual.

  16. We analyzed the data using a repeated measures analysis-of-variance to evaluate potential period effects. Controlling for the within-subject error variance, period was not significant and did not interact with any of the between-subjects factors. Similarly, we find that round also did not significantly interact with any of the between-subjects factors (F = 0.70, p = 0.71). This suggests that the instructions effectively communicated the nature of the task to participants.

  17. Descriptive statistics are in experimental dollars, unless otherwise indicated.

  18. Recall that participants observed three different cost sequences. To ascertain whether different cost sequences had a significant effect on the results we conducted a 2 (goal difficulty: easy vs. extremely difficult) × 2 (promotion availability: present vs. absent) × 3 (cost sequence), ANOVA using the fraud measure as the dependent variable. The results show that the main effect for cost sequence was insignificant (F = 0.85, p = 0.43), and cost sequence did not interact with either or both of the other independent variables. Consequently, we do not discuss cost sequence further.

  19. All p-values are two-tailed unless otherwise stated.

  20. We also examine an alternative measure of fraud in which the average reported cost is greater than actual cost. To compute this measure we set to zero all observations for which the average reported cost is less than the actual cost. This occurs for 7 of the 59 participants. Using this alternative measure of fraud we find results that are consistent with those reported in the text. Specifically, the main effect of promotion availability remains marginally significant (F = 3.96, p = 0.06), the main effect of goal difficulty remains non-significant (F = 0.03, p = 0.86), and the interaction between goal difficulty and promotion availability remains significant (F = 8.56, p = 0.01).

  21. Unfortunately, due to an experimental error, this data was not collected for all subjects.

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Authors and Affiliations

  1. Neeley School of Business, Texas Christian University (TCU), Fort Worth, TX, USA

    Shana M. Clor-Proell & Chad A. Proell

  2. School of Accountancy, Arizona State University, Phoenix, AZ, USA

    Steven E. Kaplan

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  1. Shana M. Clor-Proell
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  3. Chad A. Proell
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Correspondence to Shana M. Clor-Proell.

Appendices

Appendix 1: Instructions for Experimental Task

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Appendix 2: Compensation Information

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Appendix 3: Comprehension Checks for Experimental Procedures

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Appendix 4: Production Recommendations

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Appendix 5: Actual Cost Report

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Appendix 6: Outcome Summary

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Clor-Proell, S.M., Kaplan, S.E. & Proell, C.A. The Impact of Budget Goal Difficulty and Promotion Availability on Employee Fraud. J Bus Ethics 131, 773–790 (2015). https://doi.org/10.1007/s10551-013-2021-7

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