EXPERIMENTAL INSTRUMENT
(from “The Impact of CFOs’ Incentives and Earning Management Ethicson their Financial Reporting Decisions and the Mediating Role of Moral Disengagement”)
EXHIBIT 1
General Instructions and Demographic Questions – All Conditions
EXHIBIT 2
Case Information and Journal Entry Decision Task – Incentive Conflict Present Condition (i.e., Variable Bonus)
EXHIBIT 3
Case Information and Journal Entry Decision Task – Incentive Conflict AbsentCondition (i.e., Fixed Bonus)
EXHIBIT 4
Post-Case Questions—All Conditions
(Item 3 – EM-Ethics Construct; Item 6 – Moral Disengagement Construct)
EXHIBIT 1
General Instructions and Demographic Questions – All Conditions
Dear Business Professional,
We invite you to participate in an academic research study examining financial reporting accrual decisions. Your participation in this study is vital to advancing the body of knowledge of business practice.
In the enclosed case, you are provided with a hypothetical scenario and asked to indicate your recommended accrual amount. The amount of information provided is limited to minimize the time required to complete the task. Once you make your accrual decision, you will be asked a series of general questions.
The entire questionnaire should take approximately 10–15 minutes to complete, although you may take as long as you like. Your participation is voluntary. Your responses will remain strictly confidential and anonymous and will be analyzed only after being combined with the responses of other participants. We will not disclose any information that you provide to us in this questionnaire. If you have any questions regarding this study, please feel free to contact us at the e-mail addresses provided below.
Thank you very much for your time and participation!
Sincerely,
NOTE: Researchers’ names concealed for review purposes.
Before you begin the case, please answer the following general questions:
What is your current job title? ______
How many years of professional work experience do you have? ______years
How many years have you worked at your current job? ______years
What is your gender? (Circle your answer) Male Female
What is your age? ______years
What is the highest level of education you attained? ______
Do you, or have you ever, worked for a publicly-traded company? _____Yes _____No
Do you, or have you ever, worked as an external auditor? _____Yes _____No
EXHIBIT 2
Case Information and Journal Entry Decision Task – Incentive Conflict Present Condition (i.e., Variable Bonus)
General Background Information
Assume that you are the controller for Health Care Products, Inc. (hereafter, “HCP”). HCP is a large, publicly-traded company. You have worked at the company for the past tenyears. Overall, you are quite satisfied working for the company. HCP is financially strong, stable and strategically well-positioned.
Compensation and Expense Information for Current Year (Year 1) and Next Year (Year 2)
Your compensation package for both the current year and next year is composed of a base salary of $200,000 along with a bonus based on meeting company expense targets.Your bonus as a percentage of base salary ($200,000) is calculated as follows:
Bonus Targets (based on expenses)a: / Year 1 / Year 2Actual expenses $80,100,000 / 40% / 40%
$80,100,000 < Actual expenses $83,000,000 / 20% / 20%
Actual expenses > $83,000,000 / 0% / 0%
Current projected expenses / $77,100,000 / $83,050,000
aThe initial annual budget for expenses was projected to be $85,000,000 for both the current year and the next year.
The corporate controller has recently reminded you that the company is committed to controlling costs and that staying focused on current year costs should help the company meet the combined organization’s financial targets.
End of Year 1 Expense Decision
It is now December 31st and you need to decide whether to record additional outstanding expenses before the Year 1 financial statements (as well as your bonus figures) are finalized. The only expense items you are considering relate to consulting and advisory services for which HCP has not yet been billed (see table below). All of these projects were initiated in Year 1 and are expected to be completed within one year of initiation.
Service Provided by: / Project Status / Estimated Contract AmountaABC Consulting
GPS Consulting
CUFF Advisory Services
SGP LLP / In early stages, estimated completion late Fall Year 2
In early stages, estimated completion late Fall Year 2
In early stages, estimated completion late Fall Year 2
In early stages, estimated completion late Fall Year 2 / $ 300,000
$ 600,000
$ 800,000
$1,600,000
a You have not yet been billed for any of the above services. The estimated contract amounts are included in the Year 2 projected expense figure. Also, you have spoken with the vendors, who, at this stage, were unable to give you any further details regarding the completion of these contracts.
Any expense entry of up to $3,000,000 still qualifies you for a 40% bonus in Year 1 and increases the likelihood of your receiving a bonus in Year 2. In addition, you have previously communicated to the CFO the current projection of Year 1 expenses before any final expense entries. The CFO has told you he would like to know the final expense numbers as soon as possible to facilitate preparation of HCP’s Year 1 financial statements. You indicated that you would provide final expense numbers to him before you left for the day.
Final Expense Numbers for the End of Year 1: How much do you recommend be recorded for consulting and advisory services for which you have not yet been billed?
$______
Place a dollar amount on the line above. ($0 indicates you do not recommend recording an expense entry.)
EXHIBIT 3
Case Information and Journal Entry Decision Task – Incentive Conflict Absent Condition (i.e., Fixed Bonus)
General Background Information
Assume that you are the controller for Health Care Products, Inc. (hereafter, “HCP”). HCP is a large, publicly-traded company. You have worked at the company for the past ten years. Overall, you are quite satisfied working for the company. HCP is financially strong, stable and strategically well-positioned.
Compensation and Expense Information for Current Year (Year 1) and Next Year (Year 2)
Your compensation package for both the current year and next year is composed of a base salary of $200,000 along with a guaranteed bonus of 25% of your base salary.
Expensesa: / Year 1 / Year 2Current projected expenses / $77,100,000 / $83,050,000
aThe initial annual budget for expenses was projected to be $85,000,000 for both the current year and the next year.
The corporate controller has recently reminded you that the company is committed to controlling costs and that staying focused on current year costs should help the company meet the combined organization’s financial targets.
End of Year 1 Expense Decision
It is now December 31st and you need to decide whether to record additional outstanding expenses before the Year 1 financial statements are finalized. The only expense items you are considering relate to consulting and advisory services for which HCP has not yet been billed (see table below). All of these projects were initiated in Year 1 and are expected to be completed within one year of initiation.
Service Provided by: / Project Status / Estimated Contract AmountaABC Consulting
GPS Consulting
CUFF Advisory Services
SGP LLP / In early stages, estimated completion late Fall Year 2
In early stages, estimated completion late Fall Year 2
In early stages, estimated completion late Fall Year 2
In early stages, estimated completion late Fall Year 2 / $ 300,000
$ 600,000
$ 800,000
$1,600,000
a You have not yet been billed for any of the above services. The estimated contract amounts are included in the Year 2 projected expense figure. Also, you have spoken with the vendors, who, at this stage, were unable to give you any further details regarding the completion of these contracts.
Regardless of your expense entry, you will be receiving a guaranteed 25% bonus in both Year 1 and Year 2. In addition, you have previously communicated to the CFO the current projection of Year 1 expenses before any final expense entries. The CFO has told you he would like to know the final expense numbers as soon as possible to facilitate preparation of HCP’s Year 1 financial statements. You indicated that you would provide final expense numbers to him before you left for the day.
Final Expense Numbers for the End of Year 1: How much do you recommend be recorded for consulting and advisory services for which you have not yet been billed?
$______
Place a dollar amount on the line above. ($0 indicates you do not recommend recording an expense entry.)
EXHIBIT 4
Post-Case Questions—All Conditions
(Item 3 – EM-Ethics Construct; Item 6 – Moral Disengagement Construct)
POST-CASE QUESTION
For the next question, please do not refer back to any prior pages.
- Based on the information presented in this case, it stated that your bonus was (check one):
_____ a guaranteed bonus_____ a bonusbased on meeting company expense targets
NONCASE-RELATED QUESTIONS (i.e., NOT based on the case materials)
2. / Please answer the following questions based on your own personal work experience. / Not At All / Extremelya. / Indicate how familiar you are with the concept of accrual accounting (e.g., recording expenses for services provided to a company but not yet billed). / 1 / 2 / 3 / 4 / 5 / 6 / 7
b. / Indicate how strongly you identify with your current employer. / 1 / 2 / 3 / 4 / 5 / 6 / 7
- Indicate your agreement with the following statements. Using accounting
Disagree / Strongly Agree
a. / to benefit shareholders. / 1 / 2 / 3 / 4 / 5 / 6 / 7
b. / to achieve analysts’ earnings targets. / 1 / 2 / 3 / 4 / 5 / 6 / 7
c. / to minimize earnings volatility. / 1 / 2 / 3 / 4 / 5 / 6 / 7
d. / to maintain my career trajectory. / 1 / 2 / 3 / 4 / 5 / 6 / 7
e. / to prevent violation of a debt covenant. / 1 / 2 / 3 / 4 / 5 / 6 / 7
f. / to achieve corporate earnings targets. / 1 / 2 / 3 / 4 / 5 / 6 / 7
g. / to protect my professional reputation. / 1 / 2 / 3 / 4 / 5 / 6 / 7
h. / to preserve or achieve a desired credit rating. / 1 / 2 / 3 / 4 / 5 / 6 / 7
i. / to protect the management team’s external reputation. / 1 / 2 / 3 / 4 / 5 / 6 / 7
j. / to achieve a personal bonus. / 1 / 2 / 3 / 4 / 5 / 6 / 7
k. / to increase the value of stock options. / 1 / 2 / 3 / 4 / 5 / 6 / 7
l. / to control company costs. / 1 / 2 / 3 / 4 / 5 / 6 / 7
m. / to benefit employees. / 1 / 2 / 3 / 4 / 5 / 6 / 7
n. / to achieve a team-based bonus. / 1 / 2 / 3 / 4 / 5 / 6 / 7
- Indicate your agreement with the following statements. Ethical leaders…
Disagree / Strongly
Agree
a. / listen to what employees have to say. / 1 / 2 / 3 / 4 / 5 / 6 / 7
b. / discipline employees who violate ethical standards. / 1 / 2 / 3 / 4 / 5 / 6 / 7
c. / conduct their personal life in an ethical manner. / 1 / 2 / 3 / 4 / 5 / 6 / 7
d. / have the best interests of employees in mind. / 1 / 2 / 3 / 4 / 5 / 6 / 7
e. / make fair and balanced decisions. / 1 / 2 / 3 / 4 / 5 / 6 / 7
f. / can be trusted. / 1 / 2 / 3 / 4 / 5 / 6 / 7
g. / discuss business ethics or values with employees. / 1 / 2 / 3 / 4 / 5 / 6 / 7
h. / set an example of how to do things the right way in terms of ethics. / 1 / 2 / 3 / 4 / 5 / 6 / 7
i. / define success not just by results but also the way that they are obtained. / 1 / 2 / 3 / 4 / 5 / 6 / 7
j. / when making decisions, ask “what is the right thing to do?” / 1 / 2 / 3 / 4 / 5 / 6 / 7
- Indicate your agreement with the following statements, which relate to your current or most recent employer.
a. / I represent my organization favorably to outsiders. / 1 / 2 / 3 / 4 / 5 / 6 / 7
b. / I do not go out of my way to defend my organization against outside threats. / 1 / 2 / 3 / 4 / 5 / 6 / 7
c. / I do not tell outsiders this is a good place to work. / 1 / 2 / 3 / 4 / 5 / 6 / 7
d. / I do not defend my organization when employees criticize it. / 1 / 2 / 3 / 4 / 5 / 6 / 7
e. / I actively promote my organization’s products and services. / 1 / 2 / 3 / 4 / 5 / 6 / 7
f. / I would accept a job at competing organizations for more money. / 1 / 2 / 3 / 4 / 5 / 6 / 7
g. / I am not involved in outside groups for the benefit of my organization. / 1 / 2 / 3 / 4 / 5 / 6 / 7
h. / I volunteer for overtime work when needed. / 1 / 2 / 3 / 4 / 5 / 6 / 7
- Please indicate your agreement with the following statements.
Disagree / Strongly Agree
a. / It is okay to spread rumors to defend those you care about. / 1 / 2 / 3 / 4 / 5 / 6 / 7
b. / Taking something without the owner’s permission is okay as long as you’re just borrowing it. / 1 / 2 / 3 / 4 / 5 / 6 / 7
c. / Considering the ways people grossly misrepresent themselves, it’s hardly a sin to inflate your own credentials a bit. / 1 / 2 / 3 / 4 / 5 / 6 / 7
d. / People shouldn’t be held accountable for doing questionable things when they are just doing what an authority figure told them to do. / 1 / 2 / 3 / 4 / 5 / 6 / 7
e. / People can’t be blamed for doing things that are technically wrong when all their friends are doing it too. / 1 / 2 / 3 / 4 / 5 / 6 / 7
f. / Taking personal credit for ideas that were not your own is no big deal. / 1 / 2 / 3 / 4 / 5 / 6 / 7
g. / Some people have to be treated roughly because they lack feelings that can be hurt. / 1 / 2 / 3 / 4 / 5 / 6 / 7
h. / People who get mistreated have usually done something to bring it on themselves. / 1 / 2 / 3 / 4 / 5 / 6 / 7
- As you read each scenario below, try to imagineyourself in that situation. Then indicate the likelihood that you would react in the way described.
Unlikely / Very Likely
a. / After realizing you have received too much change at a store, you decide to keep it because the sales clerk doesn’t notice. What is the likelihood that you would feel uncomfortable about keeping the money? / 1 / 2 / 3 / 4 / 5 / 6 / 7
b. / You are privately informed that you are the only one in your group that did not make the honor society because you skipped too many days of school. What is the likelihood that this would lead you to become more responsible about attending school? / 1 / 2 / 3 / 4 / 5 / 6 / 7
c. / You secretly commit a felony. What is the likelihood that you would feel remorse about breaking the law? / 1 / 2 / 3 / 4 / 5 / 6 / 7
d. / You reveal a friend’s secret, though your friend never finds out. What is the likelihood that your failure to keep the secret would lead you to exert extra effort to keep secrets in the future? / 1 / 2 / 3 / 4 / 5 / 6 / 7
e. / At a coworker’s housewarming party, you spill red wine on their new cream-colored carpet. You cover the stain with a chair so that nobody notices your mess. What is the likelihood that you would feel that the way you acted was pathetic? / 1 / 2 / 3 / 4 / 5 / 6 / 7
f. / You strongly defend a point of view in a discussion, and though nobody was aware of it, you realize that you were wrong. What is the likelihood that this would make you think more carefully before you speak? / 1 / 2 / 3 / 4 / 5 / 6 / 7
g. / You lie to people but they never find out about it. What is the likelihood that you would feel terrible about the lies you told? / 1 / 2 / 3 / 4 / 5 / 6 / 7
h. / While discussing a heated subject with friends, you suddenly realize you are shouting though nobody seems to notice. What is the likelihood that you would try to act more considerately toward your friends? / 1 / 2 / 3 / 4 / 5 / 6 / 7