Continuous monitoring and the status quo effect

Hunton et al. (Hunton J., Mauldin E., Wheeler P. Potential functional and dysfunctional effects of continuous monitoring. The Accounting Review 2008; 83(6):1551-1569) observed that while continuous monitoring reduced earnings management of discretionary expenditures, it also dampened the willingness of managers to increase investment in a risky but viable long-term project. The current study examines why continuous monitoring appeared to trigger such risk aversion. Sixty-one managers participated in a vignette-based experiment that replicated Hunton et al. (2008), except that instead of making their own decisions, participants evaluated a fictitious manager, Bob, who already made a decision consistent with the results reported in Hunton et al. (2008). This revised design seeks to minimize self-presentation bias while providing further evidence about the reasons for Hunton et al.'s (2008) results. As expected, we find that continuous monitoring (relative to periodic monitoring) increased the perceived likelihood that Bob's decisions would be detected and the likelihood that Bob would be asked to justify his decisions to his superiors. We also find that managers rated the status quo decision to maintain the current level of investment in the ongoing project (made under continuous monitoring) easier to defend than either the decision to increase or decrease the current level of investment (made under periodic monitoring). Further, the status quo decision was viewed as equally credible and trustworthy to superiors as increasing the investment in the project, the latter being judged as most consistent with both the long-term success of the project and Bob's future opportunities. Combined, these results suggest that continuous monitoring can increase the perceived need to justify, which in turn encourages managers to maintain the status quo. Implications for practice and research are discussed.

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