The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective*

Abstract This study examines the behavioral impact of an information system, and how that impact varies with the information system's precision, in an internal reporting environment. We propose that a manager's reporting decisions are affected by his or her trade‐off of the benefits of appearing honest against the benefits of misrepresentation. The information system affects the manager's trade‐off by improving the owner's ability to make an inference regarding the manager's level of honesty. Thus, to the extent that the manager perceives benefits to appearing honest, the presence of an information system can increase managerial honesty. As the information system becomes more precise, however, the manager must forgo greater benefits of misrepresentation in order to achieve the same appearance of honesty. For managers under a precise system, this will shift the trade‐off decision toward the benefits of misrepresentation and away from the benefits of appearing honest. Notably, in our experiment, the only benefit of appearing honest is an intrinsically motivated desire for social approval. We find that, although the existence of an information system increases managerial honesty, honesty is lower under a precise than under a coarse information system. We also compare profit earned by the owners in our experiment, which relies on a behavioral role of an information system, with the maximum profit theoretically possible given a contractual use of the information system. This comparison suggests that, unless the available information system is sufficiently precise, the owner will obtain greater profits by not contracting on its output, even if that output is fully contractible.