The Dual Role of Leaders in Shaping Fraudulent Reporting
Posted: 6 Nov 2019 Last revised: 6 Aug 2021
Date Written: October 28, 2019
We examine whether and how leaders shape fraudulent behaviors within their organization. We use a lab experiment where subjects—randomly assigned the role of leaders or workers—are asked to privately roll a die and report the outcome, with higher reported outcomes corresponding to higher payoffs. Before rolling the die, they can choose how to report the outcome, by either a computer draw or a self-reported die roll. Self-reporting allows for profitable, undetectable earnings manipulation. We vary the leaders’ ability to choose the reporting system, and punish or reward workers for their reporting system choices. Our results indicate that workers are more likely to choose computer reporting when their leaders voluntarily do so, and can punish or reward. Even workers who choose self-reporting reporting tend to cheat less when their leaders choose computer reporting. However, most leaders do not opt for computer reporting in the first place: they frequently choose self-reporting and punish workers who rather choose computer reporting. Collectively, our results reveal a dual role of leaders in fostering an ethical climate in their organization: they can affect workers’ reporting system choices, but most of the times this exacerbates—rather than fixes—fraudulent behaviors.
Keywords: reporting systems; ethical leadership; leaders; fraudulent behavior; cheating
JEL Classification: M14, M41, D20, C92
Suggested Citation: Suggested Citation