Effectiveness of Formal and Informal Controls in Deterring Misreporting: The Role of Whistleblowing Mechanism and Ethical Leadership

Our paper examines the effectiveness of formal control (i.e., whistleblowing mechanism) and informal control (i.e., ethical leadership) on the relationship between delegation of decision rights and displacement of responsibility on managers’ misreporting. We find delegation of decision rights affects managers’ misreporting indirectly through displacement of responsibility. We also find that whistleblowing mechanism and ethical leadership negatively moderate the relationship between delegation of decision rights and managers’ misreporting under low displacement of responsibility situations. This result suggests that whistleblowing mechanism and ethical leadership are effective formal and informal controls, respectively, to deter managers’ misreporting only when displacement of responsibility is low. The theoretical and practical implications of our findings are discussed.