We already know that tone at the top plays a major role in reporting choices and internal control. But this experiment reveals some surprising nuances.
Participants were asked how far they would go in underestimating a warranty provision to meet an earnings forecast. Two factors played a role:
- Tone at the top — positive or negative:
- Kind vs. unkind attitude toward employees
- Less aggressive vs. aggressive forecasts
- A previous accounting choice — whether or not it involved a “minor violation”:
- For example, accepting a gift that violated company policy but saved costs
Striking result: The combination of a positive tone at the top and a previous minor violation led to the most aggressive choices.
A valuable reminder that even a positive tone at the top can be a red flag when it comes to reporting decisions.
👉 Do we sometimes underestimate the risks of an overly positive culture?