Accountability in the Financial Sector
The Unique and Interactive Effects of Internal and External Supervisory Bodies
Regarding the Individuals’ Focus on Organizational Goals
D.R. Schipper University of Groningen Faculty of Economics & Business Course: Master thesis for MSc HRM
E-mail: d.r.schipper@student.rug.nl February 2014
Supervisor F. Rink
Abstract
Using a sample of financial managers from the financial sector, this research was designed to empirically examine the effects of different supervisory bodies on individuals focus on organizational goals. To test the hypothesises in this research, data was collected among 88 participants. The results indicate that financial managers who were controlled by internal supervisory body were more focused on organizational goals than financial managers who were controlled by external supervisory body. Managers who were controlled by both internal and external supervisory body were primarily driven by the internal supervisory body.
Keywords: Accountability, External auditors, Internal auditors, Decision making, Organizational
behavior.
Introduction
Since the outburst of the financial crisis, there has been an ongoing public debate about the causes of this crisis. Many have argued that the crisis may have been a result of a destabilized financial system that does not have the ability to correct itself. For example, numerous reports and analyses have demonstrated that several big financial institutions, such as Freddie Mac, Fannie Mae, Lehman Brothers and AIG collapsed because these institutions took too many risks in investments and lacked a sufficient regulation system that could control this behavior (Dowd, 2009). The impact of these collapses on society has been immense, with an unprecedented number of bankruptcies of alliance companies and many people losing their jobs.
full responsibilities for their actions (Kotowitz, 2008). For example, the World Bank conducted a study among 92 business projects that had a major impact on society and found that only a few projects used effective risk analysis tools to regulate their strategies and decisions (World Bank, 1996). Also a recent survey indicated that just a few participants have linked risk appetite to their day-to-day decisions (Ernst & Young, 2012). Accountability seems to be the solution to this problem, however it is generally agreed upon that more research is needed to understand how organizations will act when they are held accountable for their actions (Peecher et al., 2013; Ellul & Yerramilli, 2013). Organizations use accountability as the key determinant to make sure that their employees have a stronger focus on collective goals (Kerr, 1999) and that they make more sustainable and responsible decisions (Gaumnitz & Lere, 2002; Taylor, 2009).
Much research has been conducted on the effectiveness of accountability on reducing people’s risk taking behaviors (Lerner & Tetlock, 1999), demonstrating that the presence of a control system can indeed make people less self-serving and more focused on collective goals. However, these effects are not straightforward and seem contingent on the kind of behaviors that people are held accountable for (Pitesa & Thau, 2013). Moreover, research suggests that people also respond differently to accountability depending on who is holding them responsible for their actions; a regulatory body within their own organization or a regulatory body outside their organization. This distinction is formally referred to as internal vs. external accountability (Abelman et al., 1999).
on the financial managers’ focus on organizational goals?” I propose that both supervisory
bodies will influence the decisions of financial managers, but that the impact of an internal supervisory body should be greater than the impact of an external supervisory body. This means that an internal supervisory body should be more effective in getting financial managers to take less risky investments and to focus on organizational goals than an external supervisory body.
Conceptual Framework
Accountability refers to the “expectation that one may be called on to justify one’s beliefs, feelings, and actions to others” (Lerner & Tetlock, 1999, p255). In addition, it can be described as “the obligation to explain and justify conduct” (Bovens, M., 2007; p450). Moreover, accountability can be defined as “the degree to which a person feels responsible to justify one’s actions” (Frink et al., 1998). Accordingly, being held accountable means that an individual is held responsible for his or her own conducted activities; he or she has to present these activities in a transparent manner.
Before elaborating on the effects of supervisory bodies on financial decision makers, it´s important to emphasize what causes the need to use accountability in the first place. Four reasons are given to illustrate the importance and the need of accountability. A key word in these reasons, but also in the rest of the paper, is people’s tendency to use self-serving behaviors, or, people’s tendency to come with plausible excuses that allow them to attribute disobeying behavior to a lapse of temporary, external factors, rather than to enduring, personal ones (Brocas & Carrilo, 2003: 157). Another reason is that people are often confronted with moral hazards (Dowd, 2009), which are “situations where people’s actions to maximizing one’s own utility are detrimental to the actions of others or the collective” (Kotowitz, 2008; Pitesa & Thau, 2013). That is, people often do not feel responsible for the interests of others and therefore put their own interests first (Kotowitz, 2008; Holmstrom, 1979). The inadequate control of moral hazards is an important source of enhancing the chance of excessive risk taking and self-serving decision making in organizations (Dowd, 2009).
Young, & Hauser, 2006; Haidt, 2001; Haidt & Hersh, 2001). For example, in several experiments where accountability was minimized for one’s behavior (e.g., anonymous situation), showed that participants broke the roles under material-reward conditions (Nogami, & Yoshida, 2013; Diener et al., 1976; Postmes & Spears, 1998). This means that when individuals are performing in a reward oriented environment without any accountability, they strongly prefer to maximize their material self-interest (e.g., monetary rewards). But as mentioned, such behavior has already harmed many organizations.
Notably, self-serving decisions are primarily made by individuals who hold power, such as financial managers. Power can be defined as “an individual’s relative capacity to modify others’ states by providing or withholding resources or administering punishments” (Keltner et al., 2003: 265). As people with power have more freedom, and are less dependent on others, it has been argued that they are therefore more likely to make self-serving decisions (Keltner et al., 2003). Research confirms this idea, demonstrating that an increase of power leads to a greater focus on rewards and a greater willingness to pursue personal interests (Guinote, 2007b; Keltner et al., 2003; Fiske, 1993; Fiske & Depret, 1996). Also, power increases the individuals’ tendency to pursue their own goals at the expense of others (Greunfeld et al., 2008; Guinote, 2007a). High power individuals act more on behalf of their own preferences and are less willing to conform to the group’s social norms (Keltner et al., 2003). In short, the fact that managers possess power aggravates their inclination to make self-serving decisions. This means that the individual’s focus on collective goals decreases when the possession of power increases (Rus et al., 2011).
self-serving decision making is likely to happy more often financial managers who are relatively powerful and work in a reward-rich environment (Martin Wolf, 2008a). Yet by behaving this way, financial institutions and its managers violate their obligations towards other stakeholders for excessive self-serving private gain, which ultimately causing the financial crisis (Guidi, 2011).
Accountability and Self-serving Behaviors
It is a fairly robust finding that when people are held accountable for their actions, they are inclined to demonstrate less self-serving behaviors and are more focused on collective goals (Kerr, 1999; De Cremer & Bakker, 2003). For example, in one study, individuals who knew that they would be held accountable for their performed tasks, were more likely to take stakeholders’ interests into account (Lerner & Tetlock, 1999; Tetlock, 1992). By making decision makers accountable for their actions, they have to deal with certain constraints, which reduces the level of power, and are more aware of others’ interests and collective goals (Guinote, 2007b).
However, accountability can also have some undesirable effects. Supervisory bodies affect people in such way that they behave as moral compensators (Jordan, Mullen & Murnighan, 2011). It can also lead to strategic behavior, whereby people adopt positions or change their behavior likely to gain the favor of those to whom they are accountable (Tetlock, 1983a; Tetlock, Skitka & Boettger, 1989; Lerner & Tetlock, 1999). This can be so excessive that it causes fraud or deception (Wolf & Janssens, 2007).
Internal vs. External Accountability
little scientific research is done to the question “accountable to whom?”. Therefore, this research focuses on the effects of a regulatory body within an organization and a regulatory body outside an organization.
Financial managers often have to justify their actions towards formal regulating bodies
outside their organization, such as the government, Dutch National Bank and committees (i.e.
external accountability). Besides these regulating bodies, financial managers also often have to justify their actions towards formal regulating bodies and systems inside the organization, such as rehabilitation management systems (i.e., internal accountability, Ferris et al, 1995). Both supervisory bodies have an influence on the extent to which these managers are motivated to reduce their self-serving behaviors and on their attempts to meet collective goals instead, but they do so through different mechanisms. However, no research is conducted on the effects of both supervisory bodies on the self-serving decisions in practice.
Internal Accountability
individuals’ behavior (De Beu & Buckely, 2001; Ellemers, de Gilder & van den Heuvel, 1998; Tetlock, Skitka & Boettger, 1989).
Research suggest that high identifiers are willing to make an effort for the organization, to focus on common goals and to conform to the group’s social norms, regardless of whether supervisory bodies are used (Yaniv et al., 2010; Ashforth & Mael, 1989; Tajfel & Turner, 1979). On the contrary, low identifiers are focusing on achieving their personal goals, but can be affected by internal supervisory bodies (Pauer-Studer, 2006; Anderson & Berdahl, 2002).
Emphasizing on low identifiers, research show that internal accountability system represents one mechanism that can convert people’s commitment to self-serving goals to collective goals by emphasizing people’s focus to social group norms and thus collective goals (Anderson & Berdahl, 2002).
Another reason why internal supervisory bodies are able to function as a convert mechanism is that they are a daily based check and use specific indicators in order to control managers’ activities (Heffes, 2006; Davidson et al., 2013; Internal control systems, 1998; Buchman, Tetlock & Reed, 2006). These indicators control and monitor individuals in such specific way and these individuals are therefore strongly committed to this supervisory body. To conclude, my central hypotheses for internal accountability are;
H1: Internal accountability will positively influence the extent to which financial managers focus on their organizational goals.
H2a: Internal accountability will positively influence the extent to which financial managers are aware of the social norms within their organization (i.e., internal accountability has social power).
H2b: Internal accountability will positively influence the extent to which financial managers feel that they regularly need to account for their actions (i.e., internal accountability has high visibility)
External accountability
organizational stakeholders more salient to them (Lerner & Tetlock, 1999; Tetlock, 1992). This relationship can be explained by the fact that external supervisory bodies are assumed to have legitimate punishment authority, which leads to a higher concern for stakeholders’ interests among decision makers (Ferris et al., 1995; De Beu & Buckely, 2001).
How this legitimate punishment authority of external supervisory bodies works can be illustrated in the following way. Due to their independent authority, external supervisory bodies are able to harm a managers or organization’s reputation in the business world (Combs et al., 2007; Philipe & Durand, 2008). These bodies can controls individuals’ actions, results and behavior by providing or withholding resources that leads to behaviors and performance outcomes that are beneficial for the organization (Merchant, 1985; French & Raven, 1959). In this way, they are therefore expected to represent an effective way of reducing the power of those managers who make self-serving decisions in organizations (Combs et al., 2007; Philipe & Durand, 2008).
Why this external supervisory body works is due to the fact that high power managers find it important to have a high reputation and are therefore conducting their activities in a way that protects their high reputation (Kahneman & Tverzky, 1979; Reddiar et al., 2012; O’Callaghan, 2007). In other words, when a manager is not acting according to the external system, he or she can be punished by external system through legitimated power, which could harm his or her reputation. In this way, external accountability increases a managers concern for other stakeholders by influencing their reputation.
accountability leads to a higher focus on collective goals among high power individuals. The following hypothesis is made:
H3: External accountability will positively influence the extent to which financial managers focus on their organizational goals.
H4a: External accountability will influence the extent to which financial managers are aware of the legal rules within their organization (i.e., external accountability has punitive/legitimate power).
H4b: External accountability will influence the extent to which financial managers feel concerned for their reputation.
Comparing both Supervisory Bodies
Although internal and external supervisory bodies are both expected to reduce the self-serving behaviors of financial managers, and hence are expected to increase their focus on collective organizational goals, there are several reasons why one can expect internal accountability to have a stronger impact on individuals’ focus on collective goals than external accountability.
approach (Tjafel & Turner, 1979; Mathieu & Zajac, 2010; Pauer-Studer, 2006; Anderson & Berdahl, 2002). On the contrary, external supervisory bodies influence high power holders to focus more on collective goals by determining their reputation (Combs et al., 2007; Philipe & Durand, 2008). Comparing both supervisory bodies, each body has its own way to let people focus more on collective goals rather than self serving decisions. However, group commitment is been higher valued than reputation. Research suggest that group commitment is needed to establish reputation (Whetten & Mackey, 2013). Therefore, I suggest that internal supervisory bodies have a stronger impact on self-serving decision making than external supervisory bodies.
Second, research shows in an experiment that individuals were more influenced by internal social group norms than external group norms. (Smith & Louis, 2009). This can be explained by the fact that outgroup norms are less consequential for the respect that can be gained from other intragroup members (Pagliaro et al., 2011). This means that individuals value norms, values and regulations of the group higher than those of outside the group.
systems, 1998; Buchman, Tetlock & Reed, 2006; Haley & McKeon, 1990). Therefore, internal supervisory bodies have a stronger impact on individuals’ focus on collective goals and the following hypothesis is made:
H5: Internal accountability will influence the extent to which financial managers focus on their organizational goals more strongly than external accountability.
Using both Supervisory Bodies
The information about the combined effect of the internal and external supervisory bodies is limited in the existing literature. In this paper, I will explore the combined effect of these bodies by conducting an online questionnaire. Due the fact that each supervisory body has its own influence on the individuals’ focus on collective goals, I suggest that the combination of these supervisory bodies have a stronger impact than when these bodies are installed independently from each other. Despite the stronger impact of using both supervisory bodies, there are also negative consequences.
Both supervisory bodies have a positive impact on group goals, research suggest that control and commitment to group goals are opposites of each other. Too much focus on those control systems can effect employee behavior in such way that it leads to lower productivity and lower job satisfaction (Arthur, 1994).
employees (Chris et al., 2008). The reason for these perceived feelings is that penalties, which employees can get by using control mechanisms, can be interpreted as a signal of distrust by employees. This lead to lower effort among employees (Christ et al., 2011). Based on this argumentation, we suggest that too much control – combining external audits with internal audits – can decrease the willingness of employees to focus on collective goals.
Furthermore, authority can stimulate “strategic thinking” among managers. Boards have nowadays the authority to judge a managers’ submission. Without an approval of the board, managers cannot implement their submissions in practice. In order to get the board’ approval, managers customize their submissions to the board in such way to in order to increase the probability of board approval. This means that managers avoid touchy elements and include extraneous elements to minimize the level of resistance of board members. Therefore, these submits are politicized and cannot been seen as the managers’ first choice. Following this reasoning, too much supervision and authority can stimulate this dynamic of play (Carver & Carver, 2013; Jamal, 2004).
The level of quality of these findings and evaluations determines the effectiveness of the external supervisory body (Morrill & Morrill, 2003; Zain & Stewart, 2006; Al-Twaijry, 2004). In order to realize sufficient quality, the communication between external supervisors and internal supervisors must be good. However, some internal supervisors see working and cooperating with external supervisors as not of their favorite parts of their job (Golen, 2008). This can have an oppressive effect on the cooperation between internal and external supervisors.
Based on these argumentations, I suggest therefore that the combination of both supervisory bodies have a positive, but also a cumulative effect on self-serving decision making. I will test the following hypothesis in the experiment:
H6: The combination of the internal and external supervisory body influences the individuals’ focus on collective goals stronger than when these supervisory bodies are installed independently from each other.
Conclusion. The use of supervisory bodies is a necessity in order to decrease self-serving
decisions of people. In this paper, the distinction is made between internal and external
supervisory body. Both supervisory bodies will influence the decisions of people, but the impact of an internal supervisory body is greater than the impact of an supervisory body.
Internal Accountability
Visibility & social power
External
Accountability punitive/legitimate Reputation & power
Methodology
Design and Participants
I used a 2 (Internal Accountability: Yes vs. No) by 2 (External Accountability: Yes vs. No) between-subjects design. A total of 155 financial managers from insurance companies, banks and investment companies were approached to participate in a survey on financial decision making (See Appendix 1). Quantitative methods in this survey were used to investigate and measure the constructs in the model (see figure 1) and consisted of rating scale questions. In total, n= 88 financial managers completed the survey (effective response rate of 56,8%). These managers worked all in different countries, e.g. Belgium, Germany, Poland, England and The Netherlands. On average, the financial managers were 39,76 years of age (SD=12,52, 71.6% male), possessed higher vocational education (95,5%) and occupied financial positions where they were responsible for making financial decisions. Their average years of work experience within the financial sector was 13.10 (SD=11,54) and 48.9% (SD=1,09) of the financial managers worked at the intermediate level where they supervised at least one subordinate (62.5% SD=1,90). No distinctions were found in the analyses between financial managers who did or did not lead subordinates. Similar questions were asked to participants of each accountability form (See Appendix). The online questionnaire for the participators in the no accountability condition was limited, because most questions were used to assess the influence of auditors.
Scenario
Upon start of the online questionnaire, all financial managers read the following excerpt (adapted from Pitesa & Thau, 2013);
project can be very profitable for the organization due to its size and prospects and if the project is successful you can get a sizeable bonus.
However, the business project also bears some serious risks because it is difficult to estimate its feasibility. In case the project fails you will not bear the consequences personally. You may receive a smaller bonus, but your job is not at risk. If the project is unsuccessful, however, this can have a negative impact on your company’s results. Being the financial manager, you know that it is possible to invest 1.000.000 Euros in the project and you can decide what the organization will do. If the project is successful this will generate profit for your organization and yourself. If the project fails the market position of the organization will be at stake”.
Accountability
Manipulation. Before responding to the scenario, participants in the internal accountability condition (Appendix A) were told: “Note that you as a financial manager in this
case has to justify the investment decision to internal supervisors within the organization (such as the management board of the organization or an internal audit committee). Internal supervisors control whether managers act in line with formal internal policy rules”. Participants in the
external accountability condition (Appendix B) were told: “Note that you as a financial manager
in this case has to justify the investment decision to external supervisors outside the organization (such as a tax supervisor or an external accountant). External supervisors control whether managers act in line with formal external legal rules”. In the external*internal accountability
condition (Appendix C), participants were told: “Note that you as a financial manager in this
case has to justify the investment decision to internal supervisors within the organization (such as the management board of the organization or an internal audit committee) and to external supervisors outside the organization (such as a tax supervisor or an external accountant). Internal supervisors control whether managers act in line with formal internal policy rules and external supervisors control whether managers act in line with formal external legal rules”. In the no accountability condition (Appendix D), participants were told nothing.
Dependent Measures
Investment decision. After reading the scenario and having received their accountability
manipulation, financial managers were asked how much money they would invest in the project (in Euros, see Pitesa & Thau, 2013, range € 0 and € 1.000.000).
Rationalization of decision. The extent which the financial managers rationalized their
decision was measured with a five-item scale based on Mulder et al., (2013). These items were “Investing in the project would benefit the organization”, “Investing in the project would benefit me personally”, “It is OK to invest money in the project because the gains are bigger than the losses”, “It is OK to invest money in the project because there is more chance that it will succeed than that it will fail” and “It is OK to invest money in the project because the organizational risks are manageable”. These items formed a reliable scale (a = 0,80).
Power bases. To explain the influence of each form of accountability on the decisions
and rationalizations of the financial managers, I measured four out of five power bases developed by French & Raven (1959). Firstly, this scale consists of the following four items for
reference power; This supervisory board can “Make me feel valued”, “Make me feel like it
have to accomplish”. Finally, the four items for reward power were; “Influence my personal pay level”, “Influence whether or not I get a pay raise”, “Provide me with special benefits” and “Influence whether or not I get a promotion”. These items were computed into a reliable scale (a = 0,94).
Proximity. I measured the proximity of each form of accountability by three
self-developed items; “I expect to meet these supervisors on a regular basis”, “I expect to have personal contact with the supervisors” and “I expect to give personal updates of my work to the supervisors”. These items were computed (a =0,94).
Detection. The detection probability with each form of accountability was also measured
with three items; “Notice my investment decision”, “Detect my investment decision” and “Find out about my investment decision”. These items also formed a reliable scale (a = 0,86).
Reputational concern. I measured reputational concern with a scale developed by De
Cremer & Tyler (2005) and distinguished reputational concern between personal and organizational reputational concern. For both scales I used two items. The two items for personal reputational concern were; “This supervisory board can damage my reputation among colleagues” and “This supervisory board can have a negative impact on my internal job evaluation”. The two items I used for organizational reputational concern were; “This supervisory board can damage the image clients have of the organization” and “This supervisory board can have a negative impact on the organizations market position”. The items of personal (a = 0,85) and organizational reputational concern (a = 0,90) could be computed into reliable scales.
Manipulation checks. Following previous studies (Brtek & Motowidlo, 2002;
using the following two questions: “I fully understood who the internal supervisors were” and “ I fully understood who the external supervisors were”.
Control variables. Because gender has been associated with accountability (Biernat &
Feugen, 2001; Brandts & Garofalo, 2012), reputational concern (Larkin et al., 2012; Borden, 1998) and maintaining relationships with stakeholders (Ragins & Scandura, 1994). For this reason gender is included as a control variable in the analyses. In addition, we controlled for the management level of the financial managers, as functioning in higher hierarchical levels entails a higher responsibility for manager’s actions (Mulgan, 2003). Moreover, research suggest that the attention to rewards, punishments (Keltner et al., 2003), reputation (Combs et al., 2007; Philipe & Durand, 2008; Hirshleifer, 1993) and stakeholders (McClelland & Boyatzis, 1982) is different on each management level.
Results
The hypotheses were tested with UNIANOVAs, or one-way ANOVAs analysis (Field, 2014). In this way, the outcomes of each group were compared with the other groups. Initial analyses demonstrated that gender and management level did not influence the effects of our accountability manipulations on the dependent measures. These variables were therefore excluded from the final analyses reported below.
Manipulation checks. One manipulation was successful; Financial managers had a
was present (M = 5.48, SD = 1.50) than when it was not present (M = 4.67, SD = 1.83, p = 0.115).
Investment Decision. An UNIANOVA test with the four conditions on investment
decision revealed an significant effect, F (3,78) = 2.818, p = 0.044. Post hoc comparisons using Fisher LSD implied that financial managers invest significantly less money in the internal condition (M = 402500, SD = 355214,91) than financial managers in the external condition (M = 669047.62 , SD = 298946.56, p = 0.012). Results also revealed that no significantly differences were found between the no accountability condition (M = 467537.50, SD = 362424.17) and other conditions.
Rationalization of decision. An UNIANOVA test revealed that rationalization of
decision did not differ significantly across the four conditions, F (3,84) = 1.837, p = 0.147. Post hoc comparisons using Fisher LSD showed that financial managers rationalized significantly different when they were in the internal condition (M = 4.34, SD = 1.44) rather than in the no accountability condition (M = 5.13, SD = 0.97, p = 0.033. No results occurred for external accountability and the combination of both accountability forms.
Power bases. I conducted one-way ANOVAs on each power base to compare the
condition where there was internal accountability only (no external accountability) with the condition where there was external accountability only (no internal accountability) and with the condition where both supervisory bodies were present. Two out of the four power bases yielded significant results. No results occurred for coercive power and legitimate power. However,
reward power differed significantly across the three conditions, F (2,64) = 5.872, p = 0.005. Post
accountability (M = 4.32, SD = 1.73, p = 0.013) or to the presence of both forms of accountability (M = 4.63, SD = 1.87, p = 0.002). There were no statistically significant differences between the latter two conditions (p = 0.549). Also reference power differed significantly across the three conditions, F (2,64) = 7.558, p = 0.001. Post hoc comparisons using the Fisher LSD test revealed that financial managers allocated significantly less reference power to external accountability (M = 3.85, SD = 1.60) than to internal accountability (M = 5.19, SD = 1.35, p = 0.002) or to the presence of both of accountability (M = 5.29, SD = 1.16, p = 0.001). There were no statistically significant differences between the latter two conditions (p = 0.807).
Proximity. An one-way ANOVA with the three conditions on proximity revealed an
significant effect as well, F (2,64) = 6.018, p = 0.004. Post hoc comparisons using the Fisher LSD test revealed that financial managers allocated significantly less proximity to external accountability (M = 4.08, SD = 1.91) than to internal accountability (M = 5.05, SD = 1.41, p = 0.041) or to the presence of both forms of accountability (M = 5.61, SD = 1.15, p = 0.001). There were no statistically significant differences between the latter two conditions (p = 0.208).
Probability of Detection. The one-way ANOVA with the three conditions on probability
Concern for Reputation. I also conducted an one-way ANOVA with concern for
reputation. However, for both dimensions, in terms of personal reputational concern (F (2,64) = 0.852, p = 0.431) and organizational reputational concern (F (2,64) = 1.280, p = 0.285), no results occurred.
General Discussion
This study tested the idea that different forms of accountability weaken the focus on personal goals, and instead make individuals more likely to focus on collective goals when making an investment decision. This effect was tested across three accountability forms: internal accountability, external accountability and the combination of internal and external accountability. I used different scales and theories to test my theory.
The results provide some evidence for my model. Financial managers who were controlled by an internal supervisory body used fewer rationalizations for their decision (indicating that they were more focused on collective goals) than financial managers who were not controlled by a supervisory body, but also than financial managers who were controlled by an external body only. Interestingly, financial managers who were controlled by both internal and external bodies responded equally well as the financial managers who were controlled by an internal body only. This indicates that in this situation, the positive effects are primarily driven by the internal supervisory body.
between internal and external accountability. This indicated a more proximal relationship between financial managers and the internal supervisory body, with a higher punitive probability than the relationship between financial managers and the external supervisory body. Thus, these specific and daily indicators are one the reasons causing the influence of internal accountability.
Importantly, I expected that external accountability would trigger financial managers to focus on collective goals as well because of its punishment authority and because it triggers a concern for reputation. Yet, the results demonstrate that financial managers focus only slightly more on collective goals when they need to account for their actions to an external body compared to financial managers who are not held accountable for their actions. This difference did not yield significance. Moreover, the external supervisory body did not hold significantly more punishment authority than the internal body, and did not trigger more concern for reputation than the internal body.
Theoretical implications
This research has several theoretical implications to the accountability literature. First, this research is the first to explore the direct differences between internal and external supervisory bodies. Although many research papers explain the existence, relationship and outcomes of internal and external supervisory bodies (Davidson et al., 2013; Stefaniak et al., 2012; Felix Jr., Gramling & Maletta, 2005; Arnold Sr. et al., 2013), they don’t fully explain how and why supervisory body is different from external supervisory body. In addition, this study explores the combined effect of both internal and external supervisory bodies of individuals’ focus on collective goals.
research in this area (Pomeroy & Thornton, 2008; Hay, Knechel & Wong, 2006) and the increasing importance of accountability (Bannier et al., 2013), literature is still too limited about how individuals can be affected by the supervisory bodies. My research identified variations in the level of influence that different supervisory bodies hold. This explains why and how different accountability supervisory bodies affect individuals’ financial decision making. I show that each supervisory body makes people less focused on their own personal goals and makes them more conformity to social group norms when responding to financial issues.
The present study has also implications for research on power bases by testing the role of each power base in the effectiveness of influence of each supervisory body. I hypothesized and found in this study that different power bases, in the internal accountability situation more than the external situation, increase collective goal focus. In the internal accountability situation, I found that the social power bases, in terms of referent and reward power, and coercive power play an important role for the effectiveness of internal supervisory bodies on the collective focus of financial managers focus. These findings extend previous works on power bases by providing more detailed information about the social role of power in influencing individuals´ preferences to personal vs. collective behavior (Pierro et al., 2013; Guinote, 2007; King & Lenox, 2000). In contrast to other research (Handley & Benton, 2012), I found that coercive power base was associated with a diminished level of opportunistic, personal - focused behavior.
goals. Therefore, this study provide a more clear interpretation of the role of daily checks in decision making situations.
Limitations and Future Research
This study provides a presentation of the effects of different supervisory bodies in decision making situations. Findings about the internal supervisory bodies provide a clear explanation how internal auditors influence individuals financial decision making. Future research may use more complex theoretical models to examine the internal auditors influence. For example, future research can examine whether auditor independence play a role in influencing individuals focus on organizational goals in decision making situations (Bedard, Chtourou & Courteau, 2004). Auditor independence is to ensure the integrity of the auditing process, whereby the supervisor will detect a discovered breach in the financial reports (De Angelo, 1981; Watts & Zimmerman, 1983). Research shows that aggressive earnings management actions are restrained by supervisory bodies, based on indicators as independence (Krishnamurthy et al., 2006). In this way, auditor independence has an impact on perceived audit quality. Following this reasoning, I predict that auditor independence will positively influence financial managers’ focus on collective goals.
lack of knowledge about this specific area, replications and extensions of these single results are clearly needed.
The results about the combination of internal and external supervisory bodies did also not fully confirm my hypotheses. Financial managers who were controlled by both internal and external bodies were equally focused on collective goals as the financial managers who were controlled by an internal body only. More future research is needed to explain this observation.
Finally, I also did not examine across the three accountability forms whether differences in the level of variables (e.g. high power vs. low power of each power base, daily indicators vs. yearly indicators) affect individuals focus on organizational goals. Differences in the level of these variables may affect the effectiveness of influence of auditors on decision making processes. For example, research suggests that the level of power determines the goal commitment of employees (Locke, Latham & Erez, 1988). This research demonstrates that the use of more authority and rewards lead to a higher commitment. Therefore it is recommended more research must be done to clarify these possibilities.
Managerial implications
investments. Consequently, to improve and remain DNB its control function, I suggest that it has to integrated more into internal accounting systems of banks to increase effectiveness of their control function in decision making processes. This case can also be used as an example for other financial sectors.
In addition, organizations use various systems, such as reward systems and sanctioning systems, to control decision making processes (Argüden, 2013; Tenbrunsel & Messick,, 1999). The effectiveness of these systems on decision making processes is based on the same influence logic. Therefore, my findings can support decision makers in deciding which system is more effective. Another practical implication of my results is that using continuous auditing, in terms of daily and specific indicators, for decision making processes will lead to more effective decisions for organizations. This study makes financial executives aware of the general benefits of such programs (Rezaee, 2001).
Acknowledgements
In writing this paper, I would like to thank my first supervisor Dr. Floor Rink for guiding through the whole process by providing me specific feedback and suggestions. I would also like to thank the proof readers, participants, fellow master students, supportive friends and family.
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Appendix A
Questionnaire
“New business project”
Dear participant,
Thank you for participating in this questionnaire as part of my master thesis in conjunction with the University of Groningen (The Netherlands) with the goal to investigate what people what people prioritize when making financial decisions. You are hereby invited to participate in this research. The study will only take 10 minutes and participation is voluntary.
First of all, you will read a description of a decision making scenario after which you will be asked to make some decisions relating to this scenario. Furthermore, you will be presented with some additional questions. Although this scenario is a fictive situation, we ask you to respond to the question in a realistic and honest way. We make use of validated and carefully selected propositions to measure behavioral concepts. Some questions look similar, but we request you to answer all questions. In case of uncertainty, choose the answer that matches the most with your first thoughts. There are no wrong answers.
All the information that you provide will be treated confidentially and kept anonymous. This means that your answers will only be used by the researchers of the University of Groningen for scientific purposes. The results of this research will be presented in such way that participating organizations and individuals cannot be recognized.
As a financial manager in a large organisation it is your responsibility to improve your organization’s market position and her financial performance. To achieve these goals, many financial managers invest in new business projects or develop new financial products.
Imagine that you, being a financial manager, are currently investigating a new business project. It is up to you to decide how much money the organisation will invest in this project. The project can be very profitable for the organization due to its size and prospects and if the project is succesful you can get a sizeable bonus.
However, the business project also bears some serious risks because it is difficult to estimate its feasiblity. In case the project fails you will not bear the consequences personally. You may receive a smaller bonus, but your job is not at risk. If the project is unsuccesful, however, this can have a negative impact on your company’s results.
Being the financial manager, you know that it is possible to invest 1.000.000 Euros in the project and you can decide what the organisation will do. If the project is succesful this will generate profit for your organisation and yourself. If the project fails the market position of the organisation will be at stake.
Please, read the described situation below. This situation describes one of the many decisions employees in the financial sector, like you, have to make in their work.
We will now ask you a series of questions about the situation we have just described. How much money would you invest in the new project?
You can choose between 0 en 1.000.000 Euros. €………..
Please indicate the extent to which you agree with the following statements.
Strongly disagree Disagree Slightly disagree Neither agree, nor disagree Slightly agree Agree Strongly agree I think that…
Investing in the project would benefit the
organization. 1 2 3 4 5 6 7
Investing in the project would benefit me
personally. 1 2 3 4 5 6 7
It is OK to invest money in the project because the
gains are bigger than the losses. 1 2 3 4 5 6 7
It is OK to invest money in the project because there is more chance that it will succeed than that it will fail.
1 2 3 4 5 6 7
It is OK to invest money in the project because the
organizational risks are manageable. 1 2 3 4 5 6 7
Strongly disagree Disagree Slightly disagree Neither agree, nor disagree Slightly agree Agree Strongly agree
The investment decisions made me choose between...
Short-term gains versus long-term gains. 1 2 3 4 5 6 7
Organizational profit versus organizational
sustainability. 1 2 3 4 5 6 7
I do not matter how others think of my iinvestment
decision. 1 2 3 4 5 6 7
I hold a high degree of personal responsibility for
my investment decision. 1 2 3 4 5 6 7
I personally take the credit or blame for the
consequences of my investment decision. 1 2 3 4 5 6 7
Whether or not my investment decision is right is
clearly my responsibility. 1 2 3 4 5 6 7
The investment policies were obvious to me. 1 2 3 4 5 6 7
It was clear to me what considerations I had to take into account when making the investment decision.
1 2 3 4 5 6 7
