Bad Mood Accounting Behavioral Implications of Accounting Information

Presented at the National Central University

Jacob Peng, Ph.D.Associate Professor of Accounting

School of ManagementUniversity of Michigan-Flint

INTRODUCTION TO ACCOUNTING RESEARCH (A VERY INCOMPLETE ONE)

Not-Completed-At-All Snapshot of Accounting Research

• By fields/topics • By method– Analytical, modeling– Archival, capital

market research– Experiment,

behavioral research– Others

• Survey• Case• Field study

New Alphabets in Accounting(Brian Summer’s presentation at 2011 AAA Annual Meeting)

• SOX - control: workflow, segregation, process testing, SAAS: SAS 70: security

• XBRL - XML, tagging, integration, schemas

• IFRS - convergence, historical restatement, simultaneous ledgers ( US GAAP book and IFRS book)

Archival Research

• Archival: data collection from databases• Efficient market hypothesis, earnings management,

event studies, etc. – Fama lecture:

http://www.dimensional.com/famafrench/2009/10/fama-lecture-masters-of-finance.html

– More publication outlets– Finance, econ journals

Experimental Research

• Experimental: study limited number of variables in a controlled environment where causal relationship can be verified– Major variables– Interactions– Must by carefully designed because of high “transaction cost”

• Understand the “black box” of human information processing– Theories from cognitive psychology – Heuristics– Decision making bias

MY MOOD AND SOCIAL PRESENCE PAPER

Who Will You Hire?

• Candidate A– Graduate from top

university– Extensive work

experiences– Strong

recommendations

• Candidate B– Graduate from top

university– Extensive work

experiences– Strong

recommendations

What if…..

• Candidate A– Knowledgeable about

baseball – You happen to be an ESPN junkie

• Candidate B– Confident in his ability

but far less impressed with his interpersonal skills

Mind Reader

• Emotional response (heuristic decision making) vs. analytical reasoning (normative decision making)

• Use MRIs to examine financial decision making (University of Illinois)

Are You in Good Mood Today?

• Affect, Mood, Emotion• Why study mood?– Factors that influence decision-making– Cognition uninfluenced by mood may be

relatively rare• General question: – Mood Decision making (improve or

impair?)

Research of Mood in Accounting• Kadous 2001 @ Contemporary Accounting Research• Kida et al. 2001 @ Contemporary Accounting Research• Moreno et al. 2002 @ Journal of Accounting Research• Bhattacharjee and Moreno 2002 @ Journal of Behavioral

Decision Making• Rose et al. 2004 @ International Journal of Accounting

Information Systems• Curtis 2006 @ Journal of Business Ethics• Chung et al. 2008 @ Auditing: A Journal of Practice & Theory• Cianci and Bierstaker 2009 @ Auditing: A Journal of Practice &

Theory• Ford and Peng 20XX

Theoretical Background (1)• According to neurobiological studies, individuals have difficulty

functioning when the link between affective and cognitive system is destroyed (Kida et al. 2001)

• Affect and cognition are intertwined to influence decision making (Bhattacharjee and Moreno (2002)

• Affect-as-information theory (Kadous 2001): affect facilitates evidence retrieval or treated as information relevant to decision at hand

Theoretical Background (2)

• Memory reconstruction effect (Rose et al. 2004): memories are reconstructed to match affective response

• Affect infusion model (Curtis 2006): affect has strongest impact when cognitive processing is substantive or heuristic, least when processing is direct or motivated

• Mood-congruent retrieval of information (Chung et al. 2008): positive (negative) mood individuals retrieve more positive (negative) information from memory which lead to positive (negative) evaluations

• Mood maintenance theory (Chung et al. 2008): Positive mood individuals are more interested in maintaining their positive mood; while negative mood individuals are more interested in repairing their mood state

• Cognitive-affective model of ethical decision making (Curtis 2004; Cianci and Bierstaker 2009): positive mood leads to more ethical decisions

Task Used in Experiments• Capital budgeting decisions (Kida et al. 2001; Moreno et al.

2002): which involve negotiations among parties on transfer pricing, inter-departmental divisions and cross-functional teams

• Jurors’ auditor negligence case evaluations (Kadous 2001)• Inventory obsolescence risk judgment (Bhattacharjee and

Moreno 2002)• Financial data analyses (Rose et al. 2004)• Whistle-blowing intentions (Curtis 2006)• Inventory valuation decisions (Chung et al. 2008)• Hypothesis generation for financial rations fluctuations

(Cianci and Bierstaker 2009)

Main Findings• Negative affect created during auditor negligence trial

judgments against auditors (Kadous 2001)• Negative mood Higher Risk assessment; mediated by auditor

experiences (Bhattacharjee and Moreno 2002)• Auditor Risk-taking tendencies are alerted by mood state

(Morena et al. 2002)• Information load and cognitive load mediated the reliance on

affective responses (Rose et al. 2004)• Negative mood lower intention to report unethical behavior

(Curtis 2006)• Positive (negative) mood ==? Lowest (highest) judgment

consensus and make least (most) conservative judgment (Chung et al. 2008)

MEDIATORS OF THE EFFECT OF MOOD ON EXPENSE REPORTING BEHAVIOR:COMMUNICATION MEDIUM AND DEBRIEFING

Motivation

• “Phantom costs” as one of the top red flags for increased opportunity for corporate fraud.

• Expense report fraud as one of the most common types of fraud allegations

• Why? Two factors are examined in this paper:– Mood– Communication medium

Research Questions

• Does “mood state” affect expense reporting behavior?

• Does communication medium used influence expense reporting behavior?

• Can “mood state” effect on expense reporting behavior be altered?

Literature Review (1)

• Effect of mood on ethical behavior– Mood is well documented that it is an essential

component of social life and organizational behavior– Generally speaking, mood can be categorized into different

states: positive, negative, and neutral– Relationship between mood and ethical behavior

• Cianci and Bierstaker (2009): auditors in a positive (compared to negative) mood state did, in fact, perform better in an inventory ethical task by indicating that they would be more likely to recommend a write-off of obsolete inventory.

• Curtis (2006): negative mood is associated with lower intentions to report the unethical actions of others to a superior (whistle-blowing) within the organization.

Mood and Ethical Judgment

Source: Gaudine and Thorne (2001)

Literature Review (2)• Social presence = the degree to which a medium is perceived as

conveying the presence of the communicating participants• Relationship between social presence and ethical behavior:

– Logsdon and Patterson (2009): increased deception in online business networks due to weak ties (less empathy between sender and receiver), increased opportunity for asymmetrical emotional relationships (one party has empathy, other does not), differential power relationships, and decreased proximity among participants.

– Kachelmeier and Towry (2002): the means of negotiation, whether conducted face-to-face or via a computer network, influenced fairness pressures during transfer price negotiations.

– Valley et al. (1998): participants negotiating face-to-face achieved higher joint benefit due to higher levels of truth-telling than those negotiating by telephone or in writing

Method

• 3 x 2 between subject experiment– Mood: positive, neutral, negative– Social presence (communication medium):

face-to-face and web-basedPositive MOOD Neutral Mood Negative

MOOD

High SOCIAL PRESENCE (face to face)

Treatment 1 Treatment 2 Treatment 3

Low Social PRESENCE (online)

Treatment 4 Treatment 5 Treatment 6

Experiment Procedures

Subjects sign in and

consent

Mood manipulation

including instructions

Expense report task

1

Mood-removal

procedures

Expense report task

2Debrief

Mood Manipulations

• Videos• Unrelated events• Stories• Short statements

Read the Following Statements to Yourself(Velten Instrument)

• I feel a little low today.• I ‘m getting tired out I can feel my body

getting exhausted and heavy. • Sometimes I wonder whether school is all

that worthwhile. • People annoy me; I wish I could be myself. • I’ve doubted that I’m a worthwhile person. • Sometime I’ve wished I could die.

Velten Statement (2)

• This might turn out to have been one of my good days

• I feel cheerful and lively• If I set my mind to it, I can make things turn

out fine • I feel superb! I think I can work to the best of

my ability • Life is so much fun; it seems to offer so many

sources of fulfillment

Experiment Task• Task 1: subjects to assume the role of a business traveler traveling

for business purposes. Subjects read scenarios describing business expenditures and are asked to determine the amount of business expenses to be included in their request for reimbursements. The scenarios are intentionally ambiguous and are subject to each individual’s judgment about whether the expenses are indeed legitimate business expenses and should be included in the expense report.

• Task 2 (debriefed): subjects are told to intentionally clear their minds and empty the feelings induced by the mood statements. They are asked to make the next decisions free from affected mood. Subjects are presented with the same business scenarios with additional information regarding their colleagues’ responses to the same business expenses described in each scenario.

Experiment Task Example: Task 1

Experiment Task Example: Task 2

Results 1• Mood manipulation was successful

• Subjects with negative mood reported on average 10% more on their expense report

• Subjects using web-based system reported 5% more than their counterparts who filed in-person

• Debriefing was not successful

Supplemental Analysis

Results 2

F2F (High Social Presence) Online (Low Social Presence)

positive mood

negative mood

Exp

ense

Rep

ort

Am

ount

Conclusions• Confirmed prior findings that negative mood leads to

undesired behavior• Our contribution: the effect of negative mood on behavior

can be mediated to some degree by increasing social presence of the communication medium

• Additional research: our debriefing technique was not successful. Simply asking subjects to recognize their mood and the potential it may have to influence their decisions was not enough to alter their decisions. This is definitely a potential arena for future research. Implementing a more formal approach to change mood may still have implications for behavior changes.

Thank you for listening!

http://www.jacobpeng.net