The impact of control mechanisms and personality of middle managers on fraudulent financial reporting intentions: Experimental evidence from Indonesia

Trisna T Dwiyanti

This thesis investigates the factors affecting middle managers’ intention to engage in fraudulent financial reporting. While there are extensive studies on fraudulent financial reporting, this field of study tends to overlook the role of middle managers, even though there is evidence indicating the massive involvement of middle managers in such an unethical act. According to the extant literature, strong formal control, such as the internal audit function (hereafter - IAF), is able to prevent middle managers from manipulating the financial statement. However, the comparatively widespread and persistent occurrence of accounting manipulations in many organisations have raised questions regarding its effectiveness. It is presumed that the efficacy of a stronger IAF to reduce unethical fraudulent reporting depends on the norm espoused by the informal control system (e.g., good or poor tone at the top). Given this assumption, this study examines the joint effect of the formal (i.e. IAF) and informal system (i.e. tone at the top) on middle managers’ intention to engage in fraudulent financial reporting. Furthermore, the mediating role of middle managers’ rationalisation in such a relationship is also investigated. Finally, the analysis was expanded by investigating whether the joint effect of the IAF and tone at the top on middle managers’ fraudulent reporting intention vary depending on their level of dark triad personality. Using a 2 x 2 experiment, this thesis shows that middle managers are less likely to commit an act of fraud in an environment with a strong IAF and good tone at the top as compared to the other conditions (i.e., when there is a strong IAF and poor tone at the top or when there is a weak IAF and either good or poor tone at the top). The result also reveals that the interactive effect of the IAF and tone at the top on the middle managers’ intention to commit fraud is facilitated by their willingness to rationalise fraud. Moreover, the result indicates that a strong IAF and good tone effectively reduces middle managers’ intention to engage in fraud, but only if those managers score low on dark triad personality (i.e., narcissism and psychopathy). The findings of this thesis have important theoretical and practical implications. In terms of theoretical implications, this thesis reveals the conditions under which middle managers are more and less likely to misreport financial statements. Consequently, this study enriches the accounting literature in the area of fraudulent financial reporting and provides a starting point for further theoretical development. With respect to practical implications, this thesis contributes to developing the corporate governance mechanism to mitigate the fraud intention of middle managers.

The impact of control mechanisms and personality of middle managers on fraudulent financial reporting intentions: Experimental evidence from Indonesia

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