The effect of systems of management controls on honesty in managerial reporting

While budgetary controls with capital rationing are theoretically optimal and widespread in practice, empirical research documents their association with higher employee dishonesty compared to budgetary controls without rationing. In this study, we examine whether combining budgetary controls with mission statements in a system of management controls decreases employee dishonesty. We predict that the system's effect on dishonesty depends on the interaction of the social norms conveyed by each control instrument within the system. We study two types of budgetary controls that differ in whether they include budget rationing and two types of mission statements that differ in whether they emphasize integrity or financial values. We provide experimental evidence that mission statements reduce employee dishonesty more if combined with budget rationing controls than non-rationing budgetary controls. This effect is enhanced when the mission statement conveys a norm of integrity, as opposed to a norm of financial performance. Our results suggest that mission statements can mitigate the downsides of budget rationing, but this effect is less pronounced when the norms conveyed by each instrument are redundant.