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The roles of self-construal in sharpening reputation judgment: an experimental study on earnings management

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Abstract

This study aims to investigate the role of self-construal in sharpening reputation judgment on earnings management cases. This study involves a personality variable that can provide sharper insights into individual assessments, namely self-construal. The study uses an experimental case with involved participants to judge the ethics of earnings management done by other managers (the target managers). Participants of this study consist of 109 master’s degree students majoring in accounting and management who acts as fellow managers. Participants provide ethical judgment and reputation judgment of the target managers. This study indicates that ethical judgment on earnings management behavior differs depending on the target managers’ self-construal. In addition, ethical judgment has a positive and significant effect on reputation judgment. The following analysis showed that ethical judgment mediates the effect of earnings management behavior that self-construal moderates on reputation judgment. Studies that highlight the impact of managers’ reputation engaging in earnings management are still limited. This study used a behavioral approach, especially involving self-construal, to scrutinize the behavior of individuals within the organization, which is previous studies have not yet involved that personality factor. This research’s results imply that a manager’s response to peer’s behavior is helpful to design an appropriate management control system for organizations. This study only used earnings management scenarios in order to increase earnings. Earnings management can be in the form of actions to increase or decrease earnings.

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Author information

Authors and Affiliations

  1. Department of Economics Education, Universitas Negeri Semarang, Sekaran, Gunung Pati, Semarang City, Central Java, 50229, Indonesia

    Ida Nur Aeni

  2. Department of Accounting, Universitas Gadjah Mada, Yogyakarta, Indonesia

    Supriyadi

  3. Department of Accounting, Universitas Negeri Semarang, Semarang, Indonesia

    Heri Yanto

Authors
  1. Ida Nur Aeni
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  2. Supriyadi
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  3. Heri Yanto
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Correspondence to Ida Nur Aeni.

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Appendices

Appendices

Introduction to PT Andalan Indonesia

figure a

You are B division manager from PT Andalan Indonesia, a company engaged in the pharmaceutical and medical equipment industry. Nowadays, your company is doing a peer review internal control system in the company. You are asked to judge your colleague named Mr. Johan (a division manager of PT Andalan Indonesia). Your judgment can affect Mr. Johan’s career but will not affect your career.

Interdependent self-construal scenario

For his 3-year period, Mr. Johan has a good performance, and he included hardworking people and knowledge about the industry and business practices. In addition, Mr. Johan is eager to mentor a less experienced manager. During his work, Mr. Johan is seen as a manager who tends to focus on the group’s interests, increasing the company’s value. Every action taken is always to consider the interests of the company. Mr. Johan treats you as a close friend, and he always strives to establish a harmonious relationship between his coworkers.

Independent self-construal scenario

For his 3-year period, Mr. Johan has a good performance, and he included hardworking people and knowledge about the industry and business practices. In addition, Mr. Johan is eager to mentor a less experienced manager. During his work, Mr. Johan is seen as a manager who focuses on his interests. Every action taken is continuously assessed from his viewpoint. In addition, Mr. Johan treats his coworkers as the subject of performance comparison.

Method of accounting manipulation scenario

For the most recent period, the division reached targeted net income. Additional information showed that divisional revenues were about 4% below targeted levels but that divisional expenses were about 6% below targeted levels. You learn, however, that divisional expenses did not include the costs from an ongoing consulting engagement. As the end of the year approached, Mr. Johan considered calling the engagement partner of a consulting firm doing some work for A division and asking that the firm not send an invoice until next year. Mr. Johan was sure the partner would agree if asked. After thinking it over, Mr. Johan decided to make the call. The partner agreed to delay sending the bill. The amount of work done but not invoiced was $220,000. Divisional net income would have been below targeted net income had the expenses from the consulting engagement been included as part of this year’s divisional expenses.

Operating decision manipulation scenario

For the most recent period, the division reached targeted net income. Additional information showed that divisional revenues were about 4% below targeted levels but that divisional expenses were about 6% below targeted levels. You learn, however, that divisional expenses did not include employee travel, advertising, hiring, and maintenance expenses.

At the end of the year, Mr. Johan ordered division employees to defer all discretionary expenditures (e.g., postpone employee travel, advertising, hiring, maintenance) into the next accounting period to make its budgeted profit targets. Expected amounts of deferrals: $150 000. Divisional net income would have been below targeted net income had the expenses from the discretionary expenditure been included as part of this year’s divisional expenses.

Did not manipulate earnings scenario

The division did not reach the targeted net income; consequently, Mr. Johan received no bonus. Additional information showed that divisional revenues were about 4% below targeted levels but that divisional expenses were about 6% below targeted levels. You learn, however, that divisional expenses included the costs from an ongoing consulting engagement. As year-end approached, Mr. Johan considered calling the engagement partner of a consulting firm doing some work for A division and asking that the firm not send an invoice until next year. Mr. Johan was sure the partner would agree if asked. After thinking it over, Mr. Johan decided against asking the partner. The amount of work done and invoiced was $220,000. Divisional net income would have been above the targeted net income had the expenses from the consulting engagement been excluded from this year’s divisional expenses.

Ethical and reputation judgments

Please place a cross sign (x) in the space that accurately reflects your opinion.

“How ethical would you judge Mr. Johan to be?”

figure b

“Based on the available information, how willing would you be to work with Mr. Johan on an important company project?”

figure c

“Based on the available information, how willing would you be to favorably recommend Mr. Johan as a mentor for a less experienced manager?”

figure d

“A headhunter you know quite well calls you and asks about Mr. Johan. How willing would you be to recommend Mr. Johan to the headhunter favorably?”

figure e

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Aeni, I.N., Supriyadi & Yanto, H. The roles of self-construal in sharpening reputation judgment: an experimental study on earnings management. Asian J Bus Ethics 10, 183–204 (2021). https://doi.org/10.1007/s13520-021-00127-w

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