Why controllers compromise on their fiduciary duties: EEG evidence on the role of the human mirror neuron system☆
Introduction
The accounting scandals that have occurred in recent decades have increased awareness of financial reporting integrity threats in society, capital markets, and business firms (Cohen, Dey, & Lys, 2008). Recently, accounting researchers have started to explore the role of business unit (BU) controllers in these integrity violations. Whereas professional norms dictate that controllers should safeguard reporting integrity as part of their fiduciary duty (e.g. Indjejikian and Matějka, 2009, Maas and Matějka, 2009, Sathe, 1983), studies show that BU controllers may be inclined to engage in financial misreporting as a result of pressure from their BU managers (Davis et al., 2006, Hartmann and Maas, 2010, Sathe, 1983). Because BU managers often have incentives to misrepresent the performance of their unit (Indjejikian & Matějka, 2006) and BU controllers are often closely involved in local managerial decision-making processes, the incidence of social pressure is difficult to evade (Maas & Matějka, 2009). As a consequence, individual controllers’ ability to withstand managerial social pressure to misreport is considered a crucial professional competence (Chartered Institute of Management Accountants (CIMA), 2010, Institute of Management Accountants (IMA), 2011), and discovering the determinants of this ability is an important aim of research (Davis et al., 2006, Hartmann and Maas, 2010).
In this paper, we investigate whether this ability has a biological basis. The alleged existence of such a basis is reflected in the stereotypical view of accounting professionals as “cold, aloof and impersonal” (DeCoster & Rhode, 1971, p. 651), which suggests they possess an innate immunity against social pressure. However, no systematic evidence of the actual presence of such immunity among accounting professionals, or of any underlying personal characteristics, exists. Our research responds to recent calls in the accounting literature to explore neuroscientific drivers of human social behavior (Waymire, 2014).
Our analysis specifically builds on the recent discovery of the human mirror neuron system (hMNS) in the neuroscience literature (Rizzolatti & Craighero, 2004). The hMNS designates a set of related regions in the human brain that have “mirroring” properties, which means they are active not only when someone performs a movement but also when observing someone else who is making the same movement (Iacoboni, 2009). These mirroring properties enable us to understand other people's emotions through an automatic mimicking of emotional facial expressions (Carr, Iacoboni, Dubeau, Mazziotta, & Lenzi, 2003). Studies in neuroscience show that people differ in the extent to which their brain has this mirroring function (Iacoboni & Dapretto, 2006). This hMNS functionality is a stable personal trait (Bastiaansen et al., 2011, Leslie et al., 2004), which explains why some people are consistently more receptive and responsive to other people's feelings and emotions than others (Kaplan and Iacoboni, 2006, Yang et al., 2009). For BU controllers, we expected that hMNS functionality predicts controllers' vulnerability to the social pressure to misreport exerted by BU managers.
For a sample of 29 experienced unit controllers, we conducted a scenario-based survey on a validated set of six scenarios describing situations in which BU managers try to influence their BU controllers' financial reporting behaviors. The scenarios included a context effect: BU managers were either driven by personal interests (e.g. obtaining a bonus) or organizational interests (e.g. saving a valuable project). We separately examined these controllers' hMNS functionality using electroencephalographic (EEG) recordings during a dynamic emotional facial expressions task (Bastiaansen et al., 2011, Jabbi et al., 2007, Jabbi and Keysers, 2008, Schraa-Tam et al., 2012). Our findings indicate a strong association between hMNS functionality and controllers' inclination to yield to BU managers' pressure to misreport when this pressure stems from BU managers' personal interests rather than from managers’ concerns with organizational interests.
This paper contributes to the accounting literature on the advantages and disadvantages of current developments in controller roles (Hartmann and Maas, 2010, Indjejikian and Matějka, 2006, Maas and Matějka, 2009). We show that controllers’ inclination to misreport under social pressure has a neurobiological antecedent. Given recent calls in theory (Sathe, 1982, Sathe, 1983) and practice (Granlund and Lukka, 1998, Maas and Matějka, 2009) for more socially able and socially active controllers, our findings identify a potential cost: such a controller may be less equipped to withstand social pressure to misreport. In establishing the role of the hMNS, our paper also contributes to the emergent field of neuroaccounting by further exploring the neuroscientific drivers of human social behavior (Birnberg and Ganguly, 2012, Dickhaut, 2009, Dickhaut et al., 2010, Waymire, 2014). Because responses to emotional pressures typically occur non-consciously, eluding traditional personality psychology constructs and instruments (Becker, Cropanzano, & Sanfey, 2011), our introduction of the EEG method to analyze an accounting phenomenon also constitutes a methodological advancement of the field.
The remainder of the paper is structured as follows. In the next section, we present the theoretical background of our study and develop the hypothesis. We then present the research design and implementation, followed by an analysis of the empirical results. The final section reviews the findings, presents conclusions, and discusses the theoretical and practical implications and limitations of the study.
Section snippets
Responsibilities of a BU controller
An important characteristic of the role of BU controllers is the combination of local and functional responsibilities (see, e.g., Hopper, 1980, Indjejikian and Matějka, 2006). The latter type of responsibility pertains to the fiduciary duty controllers have in enabling corporate control. BU controllers must ensure corporate management receives objective and reliable reports on the performance of the BU. This task requires sufficient independence in opinion, judgment, and reporting from BU
Sample
A total of 29 people participated in the study (mean age 34.7 years; SD age 7.8 years; 5 females). We recruited professional controllers from the Executive Master of Finance and Control programs of two universities in the Netherlands. These programs are designed for professional controllers and lead to both a Master of Science degree and the professional qualification of Certified Controller. All participants in our sample had several years of relevant working experience in a controller role,
Results
We validated the distinction between the SELF and ORG scenarios as follows. An independent and separate sample of 52 management accounting professionals rated each scenario on two seven-point scales (1 = Do not agree at all; 7 = Completely agree): the extent to which the BU manager is following his/her self-interest and the extent to which the BU manager is following the interest of the organization. Table 1 presents the mean difference score per scenario between these two dimensions. We
Discussion and conclusions
The goal of this paper is to explain the propensity of BU controllers to engage in misreporting behavior that runs counter to their fiduciary duties. Based on the growing literature on hMNS functionality as a crucial determinant of human social behavior, we expected a positive association between controllers' hMNS functionality and their inclination to give in to misreporting pressure from BU managers, and we expected this relation to be limited to situations where BU managers act from
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We gratefully acknowledge the helpful feedback and suggestions received on earlier versions of this paper from reviewers and participants of the 2013 NeuroPsychoEconomics Conference (Bonn, Germany) and the 2014 Management Accounting Section Research Conference of the American Accounting Association (Orlando, USA), from seminar participants at Erasmus University (Rotterdam, the Netherlands), the Karlsruhe Institute of Technology (Germany), the Ludwig-Maximilian University (Munich, Germany), the National University of Ireland (Galway, Ireland), the University of Ljubljana (Slovenia), Pablo de Olavide University (Seville, Spain), Uppsala University (Sweden) and the Donders Centre for Cognitive Neuroscience (Radboud University, Nijmegen, the Netherlands), and from Joan Luft, Michal Matějka, Anke Murillo Oosterwijk, Paolo Perego, Marcel van Rinsum, Philipp Schreck, Utz Schäffer, Mike Shields (editor), Roland Speklé, Ivan Toni, Brian White, Alex Woods, Michael Williamson, Rick Young, and two anonymous reviewers. We also gratefully acknowledge the cooperation of program management in two universities who allowed us to invite professional controllers as experimental subjects in our study.