Formal accountability, perceived accountability and aggressive reporting judgements

Abstract

We extend the literature on accountability in an experimental setting to examine the influence of formal accountability, individual-level perceived accountability and their interactions on accountants’ aggressive judgements in China. Individual-level perceived accountability is based on the phenomenological perspective, which recognises that its intrinsic nature is derived from multiple sources known as the ‘web of accountabilities’ in socialisation processes. Researchers suggest that perceived accountability is fidelity to ‘personal conscience’ in individuals’ moral values and their internal sense of moral obligations. Our findings show that when formal accountability was imposed, accountants were not aggressive in making their reporting judgements, irrespective of their scores on perceived accountability measures. In contrast, when formal accountability was not imposed, accountants who scored higher (lower) on perceived accountability measures were less (more) aggressive in making reporting judgements. Our results further show that imposition of formal accountability is not equally important in influencing the judgements of accountants who scored higher on perceived accountability measures and those who scored lower on those measures. Our findings have implications for determining which accountability frameworks could be developed to assist global standard setters, national regulators and organisations, including accounting firms, constrain aggressive financial reporting so as to improve financial reporting quality.

Keywords:

• formal accountability
• perceived accountability
• aggressive reporting judgements
• China

Acknowledgement

We thank the associate editor, Professor Frank Hartmann, two anonymous reviewers, Professor Graeme Harrison and Professor Shiqiao Zheng. We gratefully acknowledge the support from Macquarie University, Nanjing Audit University and Wuhan University.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability

Data are available from the first author.

Notes

1 Kadous and Sedor (2004) show that justification pressure is related to subjects’ recommendations that are related to the ‘general-purpose’ task, that is, subjects were required to provide input on a variety of issues. However, this justification requirement has no effect on subjects’ recommendations related to the ‘irrelevant-purpose’ task, that is, subjects were required to recommend a structure for a management compensation plan. Vance (2010) provides evidence that imposed accountability interacts with the quality of the manager–subordinate relationship to influence the level of effort that subordinates exert. Additionally, Van Rinsum et al. (2018) show that the application of a disclosure checklist leads to auditors’ greater acceptance of aggressive reporting methods when they are accountable to management, as opposed to being accountable to the audit committee.

2 We acknowledge that the term ‘perceived accountability’ may be ambiguous given that formal forms of accountability have to be ‘perceived’ by actors. However, the concept of perceived accountability is both theoretically and empirically supported in the literature (Ogden et al. 2006, Steinbauer et al. 2014, Wang et al. 2019).

3 We acknowledge that a sense of accountability may arise in both business and non-business contexts. Perceived accountability, as a subjective value-based dimension, is complex. The concept of perceived accountability reflects individuals’ experience and may not be equally applicable in various contexts. In the business context, prior research shows that individual differences, such as work experience, may influence how perceived accountability affects workplace perceptions and behaviours (Hall et al. 2017). In our study, we particularly focus on examining perceived accountability in the workplace, and we measure subjects’ perceived accountability by using a scale that has been widely used and tested in management studies, such as Hochwarter et al. (2007), Hall and Ferris (2011), Steinbauer et al. (2014) and Chen et al. (2016). Our results show that subjects’ perceived accountability was not significantly correlated with the years of their accounting and related work experience (Pearson correlation = 0.137, p = 0.270). However, in a non-business context, perceived accountability of subjects with no work experience, such as students, may differ, and so we acknowledge that our findings may not be applicable to subjects without relevant work experience.

4 Control refers to ‘the power to govern the financial and operation policies of an entity so as to obtain benefits from its activities’ (IAS 27, para. 4). In addition to this definition, IAS 27 provides a legalistic indicator, which states that control is usually reflected through ‘the investor entity's ownership of more than half of the voting power of the investee entity’ (IAS 27, para. 13). However, in a situation where the investor entity only owns half or less of the voting power of the investee entity, control can also exist if preparers can demonstrate and justify control. As such, prepares’ judgements are essential and important in determining whether consolidated financial reports should be prepared. IFRS 10 replaced IAS 27 in May 2011. IFRS 10 was further amended in 2012 and 2013. Chinese consolidated financial reporting standards including the definition of control are word-for-word translated from IAS 27.

5 As part of the agreement, over 260 of the 1,500 listed companies on the Shanghai Exchange are eligible to list in London (BBC 2019).

6 Since 1978 when China adopted an ‘open-door’ policy, the country has rapidly moved from a fully centrally managed economy to a system where a Chinese brand of capitalism is still heavily regulated by the government (Shambaugh 2009, Lee 2001). Under the previous traditional Chinese uniform accounting system, accountants’ exercise of professional judgement was not required because accounting standards were highly legalistic, and the main task of accountants was to prepare historic cost reports mostly for the central government's planning and control (Tang 2000, ICAS 2007, 2010). However, this uniform and rigid accounting system with a strong emphasis on government control could no longer meet the information needs associated with the significant increase in international trading and investment (Tang 2000, Lee 2001). Joining the World Trade Organization in 2001 was another important step for the Chinese economy to converge with the world economy, and this development continues to significantly influence the economy and the country's traditional work-related cultural values.

7 Other studies that examine the effectiveness of process versus outcome accountability include Chang et al. (2013), Kim and Trotman (2015) and Phang and Fargher (2019). Specifically, Chang et al. (2013) show that negotiators under process accountability are better able to reduce their ‘fixed-pie biases’ and achieve lower joint costs compared to those under outcome accountability. Moreover, Kim and Trotman (2015) provide evidence that auditors show greater levels of professional scepticism under process accountability compared to outcome accountability. Furthermore, Phang and Fargher (2019) find that process accountability, rather than outcome accountability, mitigates the effect of prior commitment on auditor judgements.

8 Since 1987, this university has been under the direct supervision of the China National Audit Office. This university's nationwide reputation for its accounting and auditing degrees attracts auditing firms, domestic companies and international enterprises to arrange specifically tailored training for their staff. This university also provides general training programs to accountants and auditors at various levels.

9 All subjects were required to answer: ‘Are you familiar with the accounting standards on consolidated financial reporting?’, on a seven-point Likert scale (1 = ‘not familiar at all’; 7 = ‘very familiar’). All subjects in our study scored 5 and above, indicating they had satisfactory familiarity with the standards.

10 A Cronbach's α above 0.7 is statistically acceptable (Nunnally 1978, Field 2005). Prior studies on perceived accountability have reported Cronbach's α above 0.7, such as 0.8 in Hochwarter et al. (2005), 0.74 in Hochwarter et al. (2007), 0.76 in Laird et al. (2015), and 0.78 and 0.75 for two samples in Mackey et al. (2018).

11 We conducted semi-structured interviews with six Chinese accounting academics and 10 Chinese professional accountants, who had at least two years’ accounting-related work experience. The feedback and comments received from the interviews confirmed the relevance and applicability of the formal accountability manipulation and perceived accountability measures in the Chinese context.

12 The research instrument was administered to 10 academics and 10 Chinese accountants with relevant work experience in business consolidation. Specifically, they were required to complete the instrument and comment on whether the accounting scenario was realistic. Based on their feedback, only a few editorial revisions were made to the research instrument.

13 Ten subjects failed the debriefing question, that is, ‘Do you believe that the investor entity's financial position would be worsened or improved by including the investee entity in its consolidated accounts?’ on a 10-point Likert scale (1 = ‘very much worsened’; 10 = ‘very much improved’). Ten subjects scored below 4, indicating that including the profit-making investee entity in the group report would worsen the investor entity's financial position. We excluded these 10 subjects from data analysis because their responses suggested they may not capture or understand the scenario information presented in the instrument. However, we also conducted additional analysis by including these 10 subjects’ responses and our results confirm that including these 10 subjects’ responses did not change our reported results.

14 The results of binary logistic regression show that subjects’ reporting judgements did not significantly differ based on their gender (p = 0.423), age (p = 0.903) or years of accounting and related work experience (p = 0.124).

15 Although our findings show that subjects’ intrinsic perceived accountability is not significantly correlated to the imposition of formal accountability, we acknowledge that there is a possibility that, if using a larger sample, the relationship between perceived accountability and aggressive reporting may be influenced by omitted variable bias as in any cross-sectional research design.

16 Hosmer and Lemeshow test results confirm that the model is a good fit for the data. The model is 76.1% accurate in its predictions of subjects’ consolidation judgements.