Parte II: Teoría de Sistemas
2. Introducción a la Teoría de Sistemas Sociales de Niklas Luhmann
Consistent with the view of Van den Steen (2010), O’Reilly (1989) view corporate culture as shared beliefs and expectations by an organization’s members. O’Reilly argues that individuals are influenced by the common expectations by other individuals within the group, because individuals seek to be accepted and live up to peer individuals’ expectations and therefore ought to conform to other individuals’ beliefs and expectations. Hence, corporate culture functions as a “social control” system. This view is broadly supported in the literature, for example by Hackman (1992) and social norm theory (Elster 1989).
Whereas Van den Steen (2010) models corporate culture as an outcome of the manager’s decision to employ employees with similar beliefs (the sorting channel), O’Reilly (1989) recognizes that employee beliefs do not necessarily conform to top management beliefs, and note that the management’s beliefs capture how things are ought to be, whereas employee beliefs define “how things actually are” (p. 13). Further, Van Den Steen (2010) extend his theory and note that corporate culture can persist even when the original managers who contributed to defining the corporate culture have left the firm. From a theoretical standpoint it seems that employees have a say in corporate culture.
There are several channels through which employees can influence firm financial reporting. Accounting data originate far from the C-suite, and many employees participate in the generation of financial reporting data, because the firm’s final report is compiled of several sub- reports within the firm. Through thus channel, employees can choose to submit (or not submit) opportunistic sub-reports. This phenomenon is a well-recognized issue in the management accounting literature, where budget targets provide subordinates incentives to manage earnings (Libby and Lindsay 2010; Courty et al. 2004; Jensen 2003). Employees can manage their earnings estimates they submit to superiors to personally gain reputation and/or obtain bonus payments. Also through this channel, employees can choose to comply (or not comply) with opportunistic managers’ request to help managing earnings, which is what happened in for example the HealthSouth case. In this case, employees might succumb to a manager’s pressure and help manage earnings in order to keep his/her job.
Beyond their participating role in the accounting information generation, employees play an important governance role and may (or may not) take corrective action or report intentional financial misreporting. For example, in the case of HealthSouth an employee was one of the first to inform the firm’s auditors about severe accounting problems in the Accounting Department.
153 Dyck et al. (2010) find that employees detect fraud more often than both the SEC and firm auditors and Call et al. (2016) find that firms involved in financial reporting violations take actions to motivate employees not to report financial misconduct emphasizing the importance of employees as a governance mechanism.
In the finance and accounting literature empirical research on employees, corporate culture and financial reporting is limited, likely because employee beliefs are difficult to quantify. Therefore, researchers have resorted to proxy corporate culture using executive traits (as discussed in the previous section) or used proxies such as the level of religiosity (McGuire et al. 2012; Dyreng et al. 2012) or education (Call et al. 2017) at the geographic proximity of a firm’s headquarter11. A notable exception is the research by Guiso et al. (2015), who use employee survey responses administered by the Great Place To Work Institute, and find that firms in which employees score their executives high on integrity experience higher profitability.
By exploiting a hack of the infidelity website Ashley Madison, Griffin et al. (2019) find that financial advisors active on the webpage are significantly more likely to engage in misconduct12, and that individuals active on the webpage are significantly more likely to be defendants of SEC litigation alleging fraud and white-collar crime, suggesting that employees’ actions in their professional lives are shaped by their personal traits and beliefs.
Because of employees’ influence on corporate culture and their ability to affect financial reporting, I predict that firms with relatively criminal employees are relatively more prone to use earnings management, and I expect this association to be incremental to the association between criminal executives and earnings management. I point out that criminal employees may influence financial reporting themselves, or through their influence on corporate culture and thus non-criminal employees’ behavior, because individuals seek to conform to group norms.
H2: Incremental to the effect of executives, firms with a criminal workforce are relatively more prone to manage earnings.
Lastly, because I expect criminal executives and criminal employees to capture two distinct but correlated aspects of corporate culture, I predict that firms with both criminal executives and criminal employees are relatively more likely to engage in earnings management. The hypothesis is motivated by anecdotal evidence (for example the case of HealthSouth) where it is
11 I point out that McGuire et al. and Dyreng et al. argue that managers (end not employees) even self-select or
conform to local norms, whereas Call et al. use a geographic proxy to capture traits of a firm’s workforce.
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evident that firm executives need the cooperation of a nexus of employees to push through their opportunistic accounting gimmicks. Therefore, firms with criminal executives who employ criminal employees are expected to engage the most in earnings management.
H3: Firms with both criminal executives and a criminal workforce are relatively more prone to manage earnings