In order to reinforce to participants that the whistle-blowing allegation represented a potential reputation threat to audit committee members should the allegation be true, we included the following statement after the presentation of the allegation:  You have determined that should the allegation be true, a restatement of 2005 revenue would be necessary. The next portion of the instrument indicated that the service contract was legally valid and in accordance with Generally Accepted Accounting Principles (GAAP). Pro- vision of clear indication of the legality of the contract and its use of GAAP-compliant methods prevented participants from making erroneous assumptions about the use of illegal or non-GAAP methods for recognizing revenue. If participants assumed that there had been illegal activity or use of non-GAAP accounting methods, then they may also have assumed that external auditors would be immediately alerted by the contracts. Such assumptions could confound the effects of anonymity and reputation threats with different assumptions about the legality of the contracts and the likelihood of external auditor intervention. We attempted to eliminate the potential for erroneous assumptions about legality or use of non GAAP-compliant contracts with the following statements: As a board member at BioMeasure, you are aware that a new service contract was employed in 2005 and that the contract revenue is recognized by BioMeasure using the percentage of completion method. You have made some preliminary inquiries into the new service contract and have concluded the following: the new service contract is legally valid and in accordance with Generally Accepted Accounting Principles (GAAP); however, because a contract of this nature involves subjective estimates regarding percentage of completion, it is possible that managers could use such discretion to manage earnings. Whistle-Blowing Allegations 85 © 2010 The Authors Journal of Management Studies © 2010 Blackwell Publishing Ltd and Society for the Advancement of Management Studies
Independent Variables Allegation source. The whistle-blowing allegation contained a manipulation of the allega- tion’s source (anonymous versus non-anonymous). [A non-anonymous] [An anonymous] source, the identity of whom you [do] [do not] know, has filed a report alleging that top management adopted a new form of long-term service contract in 2005 with the explicit intent of managing earnings. Perceived reputation threat arising from the whistle-blowing allegation. We manipulated the degree of reputation threat via the adoption or non-adoption of similar contracts (i.e. contracts similar to the suspect contract in the whistle-blowing allegation) by other boards on which the audit committee member served. A wealth of research indicates that firms that share board members also share common business practices and strategies (see, e.g.
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