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Abstract
This study delves into the effectiveness of formal and informal controls in deterring misreporting within organizations, with a particular focus on the roles of whistleblowing mechanisms and ethical leadership. The research reveals that displacement of responsibility acts as a mediator in the relationship between delegation of decision rights and misreporting, allowing managers to rationalize their actions. Whistleblowing mechanisms are found to moderate the relationship between delegation and misreporting, with strong mechanisms weakening the positive effect of delegation on misreporting. However, the study also uncovers that whistleblowing mechanisms can inadvertently increase misreporting when displacement of responsibility is high, highlighting the complex interplay between formal controls and moral disengagement. The findings underscore the importance of combining formal and informal controls to create a robust ethical environment. The study concludes that ethical leadership alone is insufficient to prevent misreporting, emphasizing the need for a comprehensive approach that includes effective whistleblowing mechanisms and strong ethical leadership to foster an ethical organizational climate and reinforce accountability.
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Abstract
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.
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Introduction
Despite extensive regulatory responses to major corporate fraud scandals, such as the Enron accounting scandal (Powers et al., 2002), the Lehman Brothers bankruptcy in 2008 (Valukas, 2010), the Volkswagen’s Dieselgate emissions scandal in 2015 (U.S. Environmental Protection Agency, 2015), the Wells Fargo’s unathorized account scandal in 2016 (Consumer Financial Protection Bureau, 2016), and the Adani Group’s short selling in 2023 (Supreme Court of India, 2023), occupational fraud1 and unethical behavior remain pervasive worldwide (Adams, 2020; ACFE, 2024). Legislative reforms, including the Sarbanes–Oxley Act of 2002 (see Sarbanes & Oxley, 2002) in the United States, were designed to strengthen governance systems, regulate accountants’ conduct, and deter unethical practices (Copeland, 2015). Yet research continues to document widespread misreporting and misconduct across organizations (e.g., Brunner & Ostermaier, 2019; Chong & Wang, 2019; Church et al., 2014; Ferdiansah et al., 2023; Hunt et al., 2022; Maas & Van Rinsum, 2013; Mayhew & Murphy, 2014).2
A growing body of behavioral accounting research highlights how management control mechanisms shape ethical behavior in subtle but powerful ways (Chong & Wang, 2019; Murphy, 2012; Rose et al., 2021). For example, Chong and Wang (2019) show that delegation of decision rights increases misreporting3 through incentive-based compensation, but only among managers prone to responsibility rationalization.4 This reflects a broader insight in behavioral ethics: unethical behavior often emerges not only from opportunity and pressure but from cognitive justifications that allow individuals to maintain a positive self-image while acting dishonestly (Cressey, 1953; Dorminey et al., 2012).
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Three issues merit further investigation. First, Chong and Wang (2019) focus primarily on incentive-based compensation as the formal mechanism linking delegation to misreporting. While compensation structures certainly provide opportunities for unethical behavior, this perspective may not fully account for the psychological processes that enable managers to rationalize wrongdoing. Building on moral disengagement theory (Bandura, 1990, 1999), one such process is displacement of responsibility, wherein individuals attribute their unethical actions to external authorities, rules, instructions, or systems. Unlike other moral disengagement mechanisms that rely on internally redefining the act (e.g., “This is not really cheating”), displacement involves shifting agency outward (Bandura et al., 1996; Hinrichs et al., 2012; Newman et al., 2020). Recent work by Jolly et al. (2025) further highlights that displacement of responsibility becomes especially salient in contexts where autonomy is restricted by external decision structures such as algorithmic decision-making (ADM) systems. Crucially, displacement requires the presence of an identifiable external authority, such as a supervisor, policy, or decision protocol, to “absorb” responsibility (Hinrichs et al., 2012; Newman et al., 2020). Moral disengagement more broadly can occur internally, but displacement specifically depends on contextual cues of external agency.
This distinction is central to our theoretical model. Delegation of decision rights inherently creates conditions under which such external cues become salient: when authority structures shift, managers can more easily interpret their discretion as operating under the shadow of a supervisor’s or organization’s mandate. From this standpoint, delegation itself, not only financial incentives, may give rise to misreporting by enabling managers to shift responsibility upward or outward. This reasoning suggests that displacement of responsibility may function as a more theoretically appropriate mediator of the delegation–misreporting relationship than incentive-based compensation. Accordingly, our first hypothesis examines whether delegation increases misreporting through displacement of responsibility.
Second, while Chong and Wang (2019) identify conditions that trigger misreporting, they do not examine mechanisms that may deter it. To address this gap, we draw on nudging literature (Thaler & Sunstein, 2008), which emphasizes how organizational controls shape ethical behavior through normative signals. From this perspective, delegation can be understood as a structural nudge: by altering the distribution of authority and oversight, it shapes descriptive norms, i.e., employees’ perceptions of what others ordinarily do when exercising discretion.
We further consider whistleblowing mechanisms function as injunctive nudges that codify what the organization approves or disapproves of, thereby increasing psychological and structural accountability. Prior work shows that strong whistleblowing systems deter unethical behavior by clarifying expectations, reducing ambiguity, and signaling that misconduct is likely to be detected and sanctioned (Near & Miceli, 1995; Taylor & Curtis, 2013; Wilde, 2017). Thus, in our model, whistleblowing mechanisms are expected to weaken the positive effect of delegation on misreporting by constraining managers’ ability to shift responsibility to external structures. This logic motivates our second hypothesis, which predicts that whistleblowing mechanisms moderate the indirect pathway from delegation to misreporting via displacement of responsibility. In this study, we define the whistleblowing mechanism as the formal organizational structures, policies, and training designed to enable employees to report perceived wrongdoing. Our focus is on employees’ perceptions of the existence and adequacy of these mechanisms as a form of formal control, rather than on whether whistleblowing reports were made or whether organizations subsequently investigated or acted upon such reports. Accordingly, the whistleblowing mechanism in our study captures the institutional availability of reporting channels, not the effectiveness of enforcement or organizational responses following whistleblowing incidents.
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Third, we examine ethical leadership as an informal behavioral nudge shaping both descriptive and injunctive norms. Ethical leaders model honesty, accountability, and integrity, thereby weakening subordinates’ reliance on external authority to justify misconduct (Avey et al., 2011; Brown et al., 2005). Through role modeling, ethical leaders reduce employees’ willingness to displace responsibility and clarify the moral meaning of reporting decisions (Brown et al., 2005). Importantly, because displacement of responsibility relies on external cues of authority legitimacy (Bandura et al., 1996; Hinrichs et al., 2012), the presence of ethical leadership is particularly relevant: when leaders demonstrate principled conduct, the legitimacy of using them (or the organization) as blame targets diminishes. Therefore, we expect ethical leadership to moderate the conditions under which displacement of responsibility is viable, not merely general tendencies toward self-justification.
Taken together, integrating moral disengagement theory with nudging theory provides a unified, normative-influence framework that explains how delegation, whistleblowing mechanisms, and ethical leadership jointly shape misreporting. Formal controls influence behavior by structuring choices and codifying expectations, while informal controls influence behavior by modeling norms and reinforcing ethical meaning. A conceptual model is developed for this study and shown in Fig. 1.
We relied on an online survey method to gather data from 145 middle-level managers at various manufacturing firms in the United States (U.S.). Our study makes several contributions to understanding managerial misreporting. First, it responds to calls for further research on the less understood rationalization component of the fraud triangle (see Mayhew & Murphy, 2014; Murphy, 2012). Our results suggest that displacement of responsibility serves as a rationalization mechanism within the fraud triangle, acting as a mediator in the relationship between delegation of decision rights and misreporting. Managers with greater decision-making authority may attribute responsibility to external sources, such as supervisors, policies, or systems (Hinrichs et al., 2012; Jolly et al., 2025), reducing personal accountability and enabling misreporting. This finding extends moral disengagement theory (Bandura, 1990, 1999) and agency theory by highlighting a specific mechanism through which individuals rationalize unethical behavior when given greater decision authority. Unlike other forms of moral disengagement that operate through internal cognitive reinterpretations of acts (e.g., “This is not really cheating”), displacement of responsibility relies on external agency transfer, making it especially salient in hierarchical or delegated decision contexts.
Second, our results highlight the conditional effectiveness of formal controls. The positive relationship between delegation of decision rights and misreporting is weaker when whistleblowing mechanisms are strong and stronger when they are weak. Formal mechanisms such as whistleblowing work best when employees cannot easily shift responsibility, indicating that the effectiveness of structural controls depends on the underlying psychological context of accountability (Bhal & Dadhich, 2011; Callahan et al., 2002; Dyck et al., 2010; Farrell & Petersen, 1982; Lee & Fargher, 2013).
Third, we find that informal controls, specifically ethical leadership, shape employees’ perceptions of norms and interact with formal mechanisms to reduce misreporting (Avey et al., 2011). Ethical leadership signals expected ethical behavior (Brown & Mitchell, 2010; Brown et al., 2005), creating social and moral pressure that complements formal oversight. When both ethical leadership and whistleblowing mechanisms are strong, misreporting is minimized; when either is weak, the deterrent effect is reduced. These results demonstrate the importance of aligning formal and informal controls to reinforce ethical behavior.
Finally, by integrating nudging theory (Thaler & Sunstein, 2008), our study provides a unified theoretical framework for understanding how formal and informal controls influence misreporting. Delegation acts as a structural nudge, shaping descriptive norms (“what others typically do”), while whistleblowing mechanisms function as formal injunctive nudges, clarifying organizational expectations (“what the organization approves or disapproves of”). Ethical leadership serves as a behavioral nudge, modeling integrity and reinforcing ethical norms. This integration advances the literature by linking structural and behavioral mechanisms through a shared normative lens, bridging rationalization processes with normative influence, and offering practical insights for designing effective management control systems that account for both psychological and structural factors (Near & Miceli, 1995; Vandekerckhove & Lewis, 2012).
Our paper is organized as follows: The next section discusses the study’s hypothesis development, followed by the study's reserach method and results. The final section discusses the findings, contributions, and limitations of the study.
Theoretical and Hypotheses Development
In this paper, we integrate insights from agency theory, moral disengagement theory, and the nudging literature to explain how formal (i.e., delegation of decision rights and whistleblowing mechanisms) and informal (i.e., ethical leadership) management controls jointly shape managers’ misreporting behavior. Drawing on agency theory, we argue that delegation of decision rights, while necessary for efficiency, creates autonomy and information asymmetry that can increase opportunities for misreporting. Building on moral disengagement theory, we consider displacement of responsibility as the key psychological mechanism through which delegation promotes misreporting, allowing managers to rationalize unethical actions by attributing blame to superiors (and sometimes organizational) authorities. We further conceptualize whistleblowing mechanisms as formal, rule-based controls that serve as structural injunctive norms (nudges signaling what is approved), and ethical leadership as an informal, norm-setting control that conveys descriptive norms (nudges signaling what others do). By integrating the nudging perspective, we align these mechanisms under a shared normative framework: formal controls shape behavioral expectations through structure and surveillance, while informal controls shape ethical conduct through social modeling and norm internalization. Together, these controls influence how responsibility is perceived and displaced, clarifying when and why delegation leads to misreporting and when it does not.
The Indirect Effect of Delegation of Decision Rights on Misreporting is Via Displacement of Responsibility
Delegation of decision rights is initiated by supervisors to assign specific decision-making authority and tasks to subordinates. While its primary focus is on task performance and operational discretion, it can inadvertently reduce direct supervisor oversight and, in some cases, create opportunities for misreporting (Locke & Schweiger, 1979). According to agency theory, giving agents the rights to make decisions creates information asymmetry, amplifies agency discretion, and encourages misreporting or opportunistic behavior (Hamman et al., 2010; Locke & Schweiger, 1979). Principals increase the discretion of subordinates in decision making, facilitating a decline in direct supervision and thus generating room as well as a psychological rationale for self-serving reporting (Alchian & Woodward, 1988; Ittner et al., 2003). Delegation is, in this sense, a structural nudge (from a behavioral standpoint), or a change in the decision architecture of how people think, which changes perceived norms and accountability expectations (Thaler & Sunstein, 2008). If employees observe others exercising discretion without facing consequences, they may deduce a descriptive norm (“others bend the rules in reporting”), thereby normalizing low standards of reporting within their own group. Therefore, delegation not only opens the door to misreporting but also subtly affects the normative setting where it happens.
It is consistent with the moral disengagement theory that employees also justify unethical behavior within such organizations, providing more explanation for how they make excuses to act under ethical considerations. Moral disengagement is a broader theory from Bandura’s social-cognitive view of moral agency in which people deactivate their self-regulatory moral controls so they can act against their own moral standards without self-condemnation (Bandura, 1999). Displacement of responsibility is positioned as a specific mechanism within this broader framework—one that operates by shifting the locus of agency to an external authority, rule, or decision source (Bandura et al., 1996; Hinrichs et al., 2012; Newman et al., 2020). Whereas many forms of moral disengagement rely on internal redefinition of the act (e.g., “This is not really cheating”), displacement of responsibility centers on external blame-shifting (e.g., “I am simply following an instruction or system output”).5
In the context of delegation, the transfer of decision-making authority from superiors to subordinates inherently increases the agent’s responsibility. However, this increased responsibility may also create psychological discomfort, leading agents to rationalize unethical behavior by attributing decisions and consequences to their superiors. Employees taking on more decision-making authority may displace responsibility for negative outcomes, creating a psychological buffer against the moral distress associated with unethical behavior (Cressey, 1950, 1953; Moore, 2015). This enables them to frame misreporting as an act of compliance, not deception, telling themselves, “I was simply following orders.” Previous research finds that as accountability is spread through hierarchical or algorithmic decision structures, people suffer less guilt and are more likely to engage in misconduct (Jolly et al., 2025; Mayhew & Murphy, 2014; Moore, 2015).
Taken together, delegation of decision rights can be seen as a structural condition that nudges individuals toward moral disengagement by creating psychological distance from responsibility. Displacement of responsibility functions as a cognitive bridge between structural autonomy (the descriptive norm cue) and unethical behavior. Therefore, although delegation is a functional efficiency mechanism, it also risks undermining a powerful normative norm of injunctive honesty, increasing the salience of rationalizations for misreporting. This leads to the following hypothesis:
Hypothesis 1
The relationship between the delegation of decision rights and misreporting is mediated by displacement of responsibility.
Moderating Role of Whistleblowing Mechanisms on the Displacement of Responsibility–Misreporting Relationship
Whistleblowing mechanisms are initiated by the organization as formal reporting systems designed to detect and respond to rule violations. Near and Miceli (1995) define whistleblowing as “the disclosure by organization members (former or current) of illegal, immoral, or illegitimate practices under the control of their employers, to persons or organizations that may be able to effect action” (Near & Miceli, 1985, p. 4). The whistleblowing mechanisms in this study refer to the existence of (1) a formal structure to report wrongdoing, (2) a whistleblowing policy, and (3) training for employees to help identify wrongdoing in the organization (Brennan & Kelly, 2007.
In this paper, we consider whistleblowing mechanisms as a rule-based formal injunctive nudge that indicates what behaviors the company explicitly approves or disapproves (Thaler & Sunstein, 2008). These systems formalize ethical values, encourage transparency, and enhance perceived chances of exposure (Miceli et al., 2013). In the context of nudging, whistleblowing mechanisms reinforce injunctive norms and facilitate psychological accountability by making ethical standards visible and institutionalized, for example, employees’ intuitions about what “should” be done.
Effective whistleblowing mechanisms prevent fraud, enhance organizational integrity, protect stakeholder interests, and foster an ethical corporate culture. Empirical evidence consistently shows that whistleblower tips are the most effective method for detecting organizational misconduct (e.g., Lowe & Reckers, 2024; Seifert et al., 2010). Robust mechanisms thus mitigate financial and reputational risks, enhance corporate governance, and foster trust among employees, investors, and the public. Key design features include confidential and anonymous reporting channels, clear policies and procedures, strong legal protections, and a culture that encourages ethical reporting. Leadership commitment and regular training further normalize whistleblowing as an integral component of corporate governance (Brennan & Kelly, 2007; Taylor & Curtis, 2013).
Given that the relationship between the delegation of decision rights and misreporting is likely to be positive, we expect this relationship to be mitigated by the effectiveness of whistleblowing mechanisms. Effective whistleblowing mechanisms can discourage employees from engaging in unethical behavior and promote misconduct reporting. In this study, it is anticipated that managers with higher delegated decision authority may be less inclined to misreport when robust whistleblowing mechanisms are in place, as added scrutiny serves as a deterrent. Thus, we predict that misreporting is shaped by the interaction between the extent of decision authority delegated to managers and the effectiveness of whistleblowing mechanisms.
When whistleblowing mechanisms are weak or absent, the risk of misreporting increases, particularly for managers with greater decision-making authority. In such environments, high levels of delegation grant managers more autonomy, creating opportunities for misconduct to go unchecked. For example, a manager with full discretion over expenditure approvals might authorize spending on unplanned items, such as lavish office decorations or personal club memberships, with minimal oversight. Without strong whistleblowing mechanisms (i.e., formal injunctive nudge) to signal clear organizational disapproval and accountability expectations, these managers face few deterrents and are more likely to exploit their authority for personal gain. Conversely, managers with lower levels of decision rights in weak whistleblowing environments have fewer opportunities to misreport. Decision-making authority remains concentrated at higher levels of management, resulting in closer oversight. In these cases, the absence of formal injunctive cues has less impact, as the limited autonomy naturally constrains opportunities for misconduct.
In contrast, when whistleblowing mechanisms are robust, they operate as a formal injunctive nudge that clarifies what behaviors the organization deems acceptable and enforces those expectations through visible structures. Whistleblowing mechanisms, such as anonymous reporting channels, documented policies, and consistent follow-up actions, enhance perceived accountability and make ethical norms salient, thereby moderating the relationship between delegation and misreporting. Employees with high levels of decision-making authority become more cautious as the risk of detection increases through additional scrutiny and secure reporting channels. Employees in these environments are more willing to report wrongdoings, especially when organizations demonstrate a strong response to previous reports (Brennan & Kelly, 2007; Taylor & Curtis, 2013). Through the lens of social learning, effective whistleblowing mechanisms publicly reinforce injunctive norms of transparency and integrity, defining peer expectations, and reducing moral ambiguity. Even employees with lower levels of delegated decision rights are influenced by effective whistleblowing mechanisms. Although their opportunities to misreport are already limited by centralized decision-making processes, they internalize ethical norms and will be less likely to rationalize unethical actions. In these settings, employees are less likely to rationalize unethical actions, as the organizational climate discourages such behavior and increases the perceived risk of detection. Based on the above discussions, we predict that:
Hypothesis 2
The whistleblowing mechanism moderates the relationship between delegation of decision rights and misreporting, such that the positive effect of delegation on misreporting is weaker when the whistleblowing mechanism is strong and stronger when it is weak.
Moderating Role of Whistleblowing Mechanism on the Relationship between Displacement of Responsibility and Misreporting
As previously mentioned, employees with decision-making authority may deflect responsibility for unethical actions by shifting blame upward in the hierarchy. Mayhew and Murphy (2014) find that participants frequently attribute opportunistic behavior to orders from their superiors and, in doing so, can rationalize misconduct and reduce the psychological discomfort associated with acting unethically. In this way, displacement of responsibility is expected to be positively associated with misreporting, as managers position their behavior as a consequence of organizational structures rather than personal choice.
However, the influence of displacement of responsibility on misreporting depends on the presence and effectiveness of whistleblowing mechanisms. Although whistleblowing mechanisms are designed to function as formal injunctive nudges that signal the organization’s explicit disapproval of unethical conduct, they do not always reduce misreporting (see Dozier & Miceli, 1985; Seifert et al., 2010). Seifert et al., (2010, p. 714) argue that:
“…when displacement of responsibility is high, such mechanisms may create a false sense of ethical oversight, inadvertently increasing unethical behavior rather than preventing it.”
This counterintuitive effect arises because whistleblowing mechanisms only function as injunctive nudges when employees perceive them as fair, supported by management, and likely to result in meaningful action. In environments where responsibility is highly displaced, these perceptions are often weak. The mere existence of formal reporting structures may foster moral licensing, the belief that organizational safeguards rather than individual moral agency are responsible for ensuring ethical conduct (Merritt et al., 2010). Under such conditions, managers interpret whistleblowing systems as institutional moral protection, allowing them to rationalize opportunistic behavior as compliant with, rather than contrary to, organizational expectations.
Concerns about psychological safety further undermine the injunctive force of whistleblowing mechanisms. Even when formal channels exist, employees may hesitate to report misconduct due to fears of retaliation or low trust in follow-through (Lee & Fargher, 2013). In environments where responsibility is frequently displaced, these fears are amplified: if no one else reports wrongdoing, individuals infer that violations are insignificant or implicitly tolerated. As personal accountability diffuses, the injunctive signal intended by whistleblowing mechanisms is muted, rendering them ineffective at constraining misreporting.
In contrast, when whistleblowing mechanisms are strong, they function as powerful formal injunctive nudges, strengthening both accountability and ethical norms. When displacement of responsibility is low, such mechanisms reinforce ethical behavior by amplifying individuals’ sense of personal accountability. Managers who already feel directly responsible for their actions experience greater psychological deterrence against misreporting, as whistleblowing mechanisms add an external layer of oversight that aligns with their internal moral compass. The combination of internal accountability and external monitoring fosters a climate where misreporting is minimal. When the displacement of responsibility is high, strong whistleblowing mechanisms still serve as a critical safeguard, albeit with a more nuanced effect. Individuals prone to shifting blame may attempt to rationalize unethical decisions, attributing their actions to organizational pressures or ambiguous accountability. Such mechanisms create psychological tension: even when they rationalize misconduct as “following orders,” the heightened likelihood of detection curbs the willingness to engage in unethical behavior. Thus, while displacement of responsibility may create cognitive space for misreporting, effective whistleblowing mechanisms constrain its behavioral expression by reinstating clear external accountability.
In environments where whistleblowing mechanisms are weak or absent, the impact of displacement of responsibility on misreporting becomes more pronounced. Managers with a strong sense of personal responsibility continue to avoid misreporting, unaffected by the lack of formal oversight. These managers are intrinsically motivated to act ethically, minimizing the need for external controls. Without the option to deflect blame, the psychological burden of engaging in misreporting remains high, discouraging unethical actions even in the absence of organizational safeguards.
However, in settings where both displacement of responsibility is high, the absence of credible injunctive nudges greatly amplifies misconduct. With minimal internal accountability and no meaningful external scrutiny, misreporting becomes far more likely, and discretionary authority can be exploited with little fear of exposure. In these environments, the combination of high displacement and weak whistleblowing systems creates an organizational climate where misconduct can flourish unchecked. Based on the discussions, we hypothesize that:
Hypothesis 3
Whistleblowing mechanisms moderate the relationship between the displacement of responsibility and misreporting, such that the positive relationship is weaker when the whistleblowing mechanism is high and stronger when it is low.
Joint Effect of Whistleblowing Mechanism and Ethical Leadership on Misreporting
While whistleblowing mechanisms operate as formal injunctive nudges that signal the organization’s explicit disapproval of unethical conduct, ethical leadership functions as an informal, social–psychological nudge that shapes norms through role modeling. Ethical leadership refers to “the demonstration of normatively appropriate conduct through personal actions and interpersonal relationships, and the promotion of such conduct to followers through two-way communication, reinforcement, and decision-making” (Brown et al., 2005, p. 120). Numerous scholars have examined the moderating role of ethical leadership (Babalola et al., 2016; Loi et al., 2012),6 yet the joint effect of the whistleblowing mechanisms and ethical leadership on misreporting remains largely unexplored.
For informal controls, ethical leadership is the most relevant mechanism to influence misreporting specifically, rather than unethical behavior in general. Ethical leaders shape group norms by modeling honesty, integrity, and accountability (Demirtas & Akdogan, 2015), setting clear expectations in contexts where responsibility could otherwise be displaced. Furthermore, ethical leadership reduces subordinates’ willingness to shift blame, directly opposing the psychological mechanism of displacement of responsibility that commonly drives misreporting. Whereas formal controls rely on codified rules and procedures, ethical leadership exerts normative influence through social learning, cultivating a climate of transparency and accurate reporting (Brown et al., 2005). This distinction is grounded in empirical evidence: teams led by strong ethical leaders exhibit lower levels of misreporting independent of formal mechanisms (Brown et al., 2005; Kalshoven et al., 2013; Mayer et al., 2009).
As mentioned above, whistleblowing mechanisms do not always reduce misreporting (see Dozier & Miceli, 1985; Seifert et al., 2010), despite their intended function as injunctive signals of unacceptable conduct. This counterintuitive effect occurs because whistleblowing systems only function as effective injunctive nudges when employees believe the system is fair, supported by leadership, and responsive to reports. In some cases, the presence of formal reporting channels may create moral licensing, where employees view the organization rather than themselves as responsible for ensuring ethical conduct (Merritt et al., 2010). Ethical leadership may inadvertently contribute to this effect: when employees perceive the environment as “ethical,” some may feel licensed to commit minor unethical acts, rationalizing misreporting as aligned with organizational goals.
This dynamic is consistent with research on the unintended consequences of ethical leadership, which shows that it can promote unethical pro-organizational behavior (Graham et al., 2015; Miao et al., 2013; Mishra et al., 2021; Umphress & Bingham, 2011). These findings highlight how the “dark side” of leadership traits can complicate the influence of ethical leadership. Although ethical leadership is generally associated with positive outcomes, darker traits such as narcissism or manipulativeness may paradoxically enhance a leader’s effectiveness in certain contexts. Understanding this tension is essential, as it raises critical questions about how ethical principles and darker leadership behaviors interact, challenging conventional assumptions and prompting a deeper examination of leadership dynamics and their impact.
Psychological safety theory (Edmondson, 1999) highlights another limitation. Although ethical leaders may foster openness and trust (Demirtas & Akdogan, 2015), weak whistleblowing mechanisms discourage employees’ willingness to report misconduct (Lee & Fargher, 2013). Without credible safeguards, employees fear retaliation or assume reports will not lead to action, undermining the deterrent effect of ethical leadership. Social learning theory (Bandura, 1977, 1986) supports this perspective: employees may emulate ethical leaders, but without consistent enforcement through formal mechanisms, they may interpret the absence of consequences as tacit tolerance of misreporting.
Together, these perspectives show that ethical leadership shapes norms, but its ability to curb misreporting depends heavily on the presence of robust whistleblowing mechanisms. Formal injunctive nudges reinforce accountability, support psychological safety, and prevent moral licensing, allowing the normative influence of ethical leadership to translate into actual reductions in misconduct.
We expect the interaction between whistleblowing mechanisms and ethical leadership to significantly influence misreporting. Misreporting is most likely in organizations where both whistleblowing mechanisms and ethical leadership are weak. In such settings, the absence of formal oversight provides little deterrence, and the lack of ethical role modeling leaves employees without clear normative guidance. Social learning theory (Bandura, 1977) suggests that employees observe and emulate leaders’ behavior; however, when neither strong ethical leadership nor robust whistleblowing mechanisms are in place, accountability is minimal. Prior studies support this view, indicating that firms with low ethical leadership interpret and respond to unethical behaviors differently than those with stronger ethical norms (Douglas et al., 2001; Merchant & Rockness, 1994; Sweeney et al., 2010). For example, Douglas et al. (2001) found that a firm’s ethical culture affects auditors’ judgments on independence and confidentiality. Sweeney et al. (2010) observed that ethical culture influences auditors’ decisions to sign off on work papers and underreport time prematurely. In the absence of both ethical leadership and robust whistleblowing mechanisms, accountability is minimal, reducing moral restraint and creating an environment where misreporting thrives.
When whistleblowing mechanisms are weak but ethical leadership is strong, the effect on misreporting becomes ambiguous. Ethical leaders may encourage ethical behavior through role modeling and communication, yet without secure reporting structures, these norms may not be fully enforced. Employees may still hesitate to report wrongdoing due to psychological safety concerns or fear of retaliation, and moral licensing may arise as individuals perceive themselves as contributing to an “ethical” organization while justifying minor misreporting. Thus, strong ethical leadership alone cannot reliably curb misconduct when formal oversight is lacking.
In contrast, when whistleblowing mechanisms are strong but ethical leadership is weak, the deterrent effect of formal controls becomes more prominent. Robust reporting systems provide clear channels for exposing unethical behavior, increasing the perceived risk of detection and punishment. While the lack of ethical leadership may weaken the broader organizational culture, strong whistleblowing mechanisms make employees less likely to engage in misreporting due to heightened accountability. Even without ethical role models, the external pressure created by effective reporting channels reduces overall misconduct.
The lowest levels of misreporting occur when both whistleblowing mechanisms and ethical leadership are strong. In this scenario, ethical norms are clearly modeled and credibly enforced. Ethical leaders promote integrity and transparency, while strong whistleblowing systems provide reliable channels for reporting wrongdoing and reinforce accountability. Employees feel psychologically safe to report concerns, and formal enforcement mechanisms support the ethical culture shaped by leadership. Together, these complementary controls create a dual-layered system that strongly discourages misreporting. Therefore, we predict:
Hypothesis 4
There is a two-way interaction between whistleblowing mechanisms and ethical leadership on misreporting, such that the negative relationship between ethical leadership and misreporting is stronger when whistleblowing mechanism is high and weaker when it is low.
Research Method
Data Collection and Sample
We collect data using an online survey administered through Qualtrics, a professional survey provider.7 Qualtrics distributed an invitation to relevant panel members who met our sample selection criteria listed below, with a link to the survey, and informed them that participation was voluntary. Respondents were offered a small monetary incentive for completing the survey.
Some criteria were used to ensure the participants were suitable for this study. The first criterion was that the respondents were middle-level managers from manufacturing companies. This type of manager is relevant for addressing the delegation of decision-making. The middle-level manager usually receives a transfer of authority from his/her superior (i.e., top-level manager) to make specific decisions. The second criterion is that the respondents must have at least 100 employees. This criterion ensures that the company is large enough to implement a formal accounting system and has control over the company’s size in the sample. The third criterion was that the participants must have at least one year of managerial experience. This ensures the participant has experienced one annual performance evaluation cycle (Moers, 2006). The last criterion was that the participants had at least one direct subordinate under their supervision in the area of their responsibility.
We launched a pre-test with a sample of 16 participants. Based on responses from 16 participants, minor modifications were made to the survey instrument. Specifically, some questions were set in the demography section so the participants could answer using numbers. We launched the primary and online surveys, which remained open for 13 days. A total of 155 completed responses were received from qualified participants.8 The participants’ identification (ID) and Internet Protocol (IP) addresses were examined to ensure no multiple responses from the same participant. These examinations suggest that there are no multiple responses from the same participants. In addition, we conducted an outlier analysis based on age, work experience, and tenure, and the results showed one respondent based on age, two respondents based on work experience, and seven respondents based on tenure were indicated as outliers. Thus, the 10 respondents were excluded from the final sample, resulting in a final sample of 145 for our data analyses. Table 1 presents the demographic information of our sample.
Table 1
Demographic information, type of industries/sectors, and functional areas (departments) (n = 145)
Panel A: Demographic information of participants and organizations
Mean
Standard deviation
Minimum
Maximum
Experience
10.16
6.053
1
29
Tenure
7.77
4.676
1
22
Age
43.18
11.334
22
73
Gender:
Number
Percentage
Female
36
24.8
Male
109
75.2
Education:
Bachelor’s degree or under
113
77.9
Master’s degree or higher
32
22.1
Panel B: Type of industries/sectors
Number
Percentage
Automotive
10.00
6.90
Building and construction
33.00
22.76
Food and beverage
13.00
8.97
Furniture, cabinets, and joinery
5.00
3.45
Pharmaceutical and health technologies
9.00
6.21
Textiles, clothing, and footwear
8.00
5.52
Electronic and computing
33.00
22.76
Other*
34.00
23.45
Panel C: Types of functional areas (departments) in the organizations
Number
Percentage
Accounting and Finance
11.00
7.59
Research and Development
13.00
8.97
Design of Product and Process
5.00
3.45
Production
42.00
28.97
Marketing
7.00
4.83
Sales
8.00
5.52
Distribution
2.00
1.38
Customer Services
7.00
4.83
Human Resources
10.00
6.90
Information Technology
34.00
23.45
Other**
6.00
4.14
*Eleven participants work in the process manufacturing industry, eight participants work in the Information and Technology industry, and the other work in metal, heavy equipment, magazines, plastic, roadworks products, chemical, packaging, and aerospace products
**One participant does not specify which department s/he works in, while the other participants work at/as general manager, operation, engineering, quality control, manufacturing, and purchasing departments
As shown in Table 1, the participants have had experience in their current position (i.e., work experience) for 10.16 years and have been employed by their respective organizations (i.e., Tenure) for an average of 7.77 years. The participants consisted of 36 females and 109 males, accounting for 24.8 and 75.2% of the sample, respectively. The average age of the participants is 43.18 years.
Variable Measurement
We adopted the delegation of decision rights instrument used by Chong and Wang (2019). The instrument’s items were developed based on Nagar (2002) and O’Connor et al. (2006). The delegation of decision rights scale was measured using a seven-item, seven-point Likert-type scale anchored from 1 “not at all” to 7 “a very large extent.” The scale asks the respondents to rate “To what extent is authority being delegated to you to take the following decisions?” The seven items are as follows: (1) “The hiring and firing of personnel”; (2) “Staff promotion”; (3) “Setting the operating hours”; (4) “Setting the budget”; (5) “Spending items in the budget”; (6) “Spending items outside the budget”; and (7) “Development of new products, projects, and/or services”.
The measurement of displacement of responsibility is adopted from a three-item scale developed initially by Bandura et al. (1996). The instrument was anchored from 1, “strongly disagree,” to 7, “strongly agree.” The scale asks the respondents to rate “To what extent of your agreement to the following statements?” The three items are as follows: (1) “If people are living under bad conditions, they cannot be blamed for behaving aggressively”; (2) “If someone is pressured into doing something, they shouldn’t be blamed for it”; (3) “People cannot be blamed for misbehaving if their friends pressured them to do it”.
The instrument for the whistleblowing mechanism was adapted from Brennan and Kelly (2007). The instrument is measured using a three-item, seven-point Likert-type scale anchored from 1, “strongly disagree,” to 7, “strongly agree.” The scale asks the respondents to rate “To what extent of your agreement to the following statements?” The three items are as follows: (1) “Your company has an adequate formal structure to report any wrongdoing action”; (2) “Your company has an adequate training for employees to identify wrongdoing action”; (3) “Your company has an adequate policy regarding whistleblowing”.
We used Brown et al.’s (2005) ten-item 5-point Likert-type scale ranging from 1 (strongly agree) to 5 (strongly disagree) to measure ethical leadership. The scale asks the respondents to rate their agreement on ten statements, for example, “My supervisor listens to what employees have to say”, “My supervisor disciplines employees who violate ethical standards”, and “My supervisor conducts his/her personal life in an ethical manner”.
We adopted the misreporting instrument used by Chong and Wang (2019). This instrument was developed based on a 6-item, 7-point Likert-type scale, which consists of two items from Roberts and O’Reilly (1974), two items adapted from Fulk and Mani (1986), and two items derived from Smith et al. (2009). The scale asks the respondents to rate their agreement on six statements from 1, “strongly disagree,” to 7, “strongly agree”, for example, “Of the total amount of information (e.g., financial and non-financial information) you receive, how much do you share/pass on to your superior?’, and “How frequently do you find it necessary to alter the content of your progress reports to fit the expectations of your superior?”.
Five control variables, namely age, gender, education, tenure, and working experience, were included because prior studies have shown these demographic variables can influence unethical behavior such as misreporting behavior (Kish-Gephart et al., 2010; Mesmer-Magnus & Viswesvaran, 2005). Tenure is measured as the participants’ work in years with their current employer. The working experience is measured as the participants’ time in years in their current position.
Statistical Techniques
To test the hypothesized moderated mediation model, we adopted a two-step analytical approach combining Partial Least Squares Structural Equation Modeling (PLS-SEM) with Hayes’ (2017) PROCESS macro. Covariance-based SEM (CB-SEM) is commonly used for theory testing because it estimates parameters to best reproduce the observed covariance matrix and provide global model-fit indices (e.g., CFI, NNFI, TLI, RMSEA)9 that allow researchers to evaluate whether a theory-based model is consistent with the data. We chose to use PLS-SEM because it is well suited to complex models with multiple interaction terms and places fewer restrictions on distributional assumptions and can perform adequately with smaller samples (Chin, 1998; Hair et al., 2014; Sarstedt et al., 2021; Wold, 1985). Given the focus on conditional indirect effects, we further employed the PROCESS macro to estimate mediation and moderation effects using bootstrapping, a non-parametric resampling procedure that generates robust confidence intervals and avoids the estimation instability often associated with latent interaction terms in CB-SEM, which are known to be parameter-intensive, sensitive to sample size and distributional assumptions, and can lead to convergency issues, inflated standard errors, or reduced power in modest samples. (Kline, 2023; Marsh et al., 2004).
We assess our measurement (conceptual) model using a PLS approach implemented in WarpPLS Version 7.0 (Kock, 2012). Our model comprises five reflective constructs: delegation of decision rights (DL), displacement of responsibility (DP), whistleblowing mechanism (WB), ethical leadership (EL), and misreporting (MR). Our study evaluates measurement quality by relying on established criteria, such as AVE, composite reliability, Cronbach’s alpha, convergent validity, and discriminant validity (Fornell-Larcker and HTMT).
Reliability was assessed using indicator loadings, composite reliability (CR), and Cronbach’s alpha. For reflective constructs, indicator loadings above 0.50 and CR and Cronbach’s alpha values above 0.60 are considered acceptable (Hair, 2014). Results (not tabulated) from the initial confirmatory factor analysis (CFA) show that all item loadings exceeded 0.50, except for MR1 (the first item of the misreporting scale), which had a low factor loading score of 0.235. This item was dropped for the next round of CFA. Table 2 presents the final results of the CFA. As shown in Table 2, the composite reliability of the scales ranged from 0.893 (i.e., whistleblowing mechanism) to 0.933 (i.e., ethical leadership). In contrast, Cronbach’s (Cronbach, 1951) alpha coefficients ranged from 0.819 (a whistleblowing mechanism) to 0.919 (ethical leadership). These results indicate that the scales have very satisfactory internal reliability.
Development of new products, projects, and/or services
0.704
Displacement of Responsibility (DP)
3.058
1.829
0.889
0.931
0.818
DP1
If people are living under bad conditions, they cannot be blamed for behaving aggressively
0.889
DP2
If someone is pressured into doing something, they shouldn’t be blamed for it
0.898
DP3
People cannot be blamed for misbehaving if their friends pressured them to do it
0.926
Whistleblowing mechanism (WB)
5.805
1.087
0.819
0.893
0.735
WB1
Your company has an adequate formal structure to report any wrongdoing action
0.861
WB2
Your company has an adequate training for employees to identify wrongdoing action
0.895
WB3
Your company has an adequate policy regarding whistleblowing
0.815
Ethical leadership (EL)
4.070
0.747
0.919
0.933
0.584
EL1
My supervisor listens to what employees have to say
0.783
EL2
My supervisor disciplines employees who violate ethical standards
0.581
EL3
My supervisor conducts his/her personal life in an ethical manner
0.732
EL4
My supervisor has the best interests of employees in mind
0.834
EL5
My supervisor makes fair and balanced decisions
0.815
EL6
My supervisor can be trusted
0.781
EL7
My supervisor discusses business ethics or values with employees
0.750
EL8
My supervisor set an example of how to do things the right way in terms of ethics
0.811
EL9
My supervisor defines success not just by results but also by the way that they are obtained
0.768
EL10
When making decisions, my supervisor asks, “What is the right thing to do?”
0.755
Misreporting (MR)*
3.930
1.623
0.866
0.904
0.655
MR2
Of the total amount of information (e.g., financial and non-financial information) you receive, how much of it must be actively changed in some way before sharing or passing it on to your supervisor?
0.694
MR3
There are significant forces that cause me to modify information in some of my communications to my superior
0.722
MR4
Which you feel most accurately describes your own behavior when you are at work:—How frequently do you find it necessary to alter the content of your progress reports to fit the expectations of your superior?
0.878
MR5
Which do you feel most accurately describes your own behavior when you are at work:—How often during a typical work week do you withhold information from your superiors that might be useful to him/her?
0.877
MR6
Which you feel most accurately describes your own behavior when you are at work:—How frequently do you find it necessary to omit particular facts from the information you share/pass on to your superior?
0.855
Note: *MR1 was dropped due to low factor loading (0.235) in the initial CFA.
To have convergent validity, it is recommended that the average variance extracted (AVE) should be greater than 0.50 (Hair et al., 2017). As shown in Table 3, each scale has an AVE statistics score above 0.50, indicating a strong convergent validity of each scale (Chin, 1998; Hair et al., 1998, 2017).
Table 3
Correlations among independent variables vs. with square root of average variance extracted (AVEs) Square Root of AVEs (n = 145)
DL
DP
WB
EL
MR
DL
(0.802)
DP
0.381
(0.905)
WB
0.380
0.015
(0.857)
EL
0.317
0.092
0.507
(0.764)
MR
0.521
0.574
0.092
0.111
(0.809)
The square roots of AVEs are reported in parentheses as shown diagonally (bold-faced)
DL: Delegation of decision rights, DP: Displacement of responsibility, WB: Whistleblowing mechanism, EL: Ethical leadership, MR: Misreporting.
We assess the scales’ discriminant validity by comparing the AVE statistics’ square roots with the correlation among the latent variables (Chin, 1998; Fornell & Larcker, 1981) and using the heterotrait–monotrait (HTMT) ratio. It is recommended that the square root of the AVE of each construct should be higher than its correlation with other constructs in the model (Hair et al., 2017), and the value of HTMT should be less than 0.90 (Henseler et al., 2015). Table 4 presents the results of the discriminant tests, revealing strong discriminant validity.
Table 4
Heterotrait–monotrait (HTMT) ratios
DL
DP
WB
EL
DP
0.424 (p < 0.001)
WB
0.443 (p < 0.001)
0.065 (p < 0.001)
EL
0.355 (p < 0.001)
0.115 (p < 0.001)
0.588 (p < 0.001)
MR
0.609 (p < 0.001)
0.645 (p < 0.001)
0.179 (p < 0.001)
0.148 (p < 0.001)
HTMT ratios suggest good discriminant validity if a value is less than 0.90 and best discriminant validity if a value is less than 0.85 (Henseler et al., 2015)
DL: Delegation of decision rights, DP: Displacement of responsibility, WB: Whistleblowing mechanism, EL: Ethical leadership, MR: Misreporting.
In our study, common method bias may arise because the same participant provides all responses to a set of survey items (Podsakoff et al., 2003). Procedural and statistical approaches are used to mitigate common method bias (Jordan & Troth, 2020; Speklé & Widener, 2018). For the procedural approach, the online survey questionnaire is pre-tested (i.e., soft-launched) using Qualtrics. Next, the returned pre-tested questionnaires are reviewed and revised to improve the clarity of the questions. Finally, an information sheet outlines the study’s research objectives, and instructions are included to increase response accuracy. The statistical approach uses Harman’s single-factor test outlined by Podsakoff and Organ (1986). SPSS Version 27 is used. The unrotated factor solution yields five factors with an eigenvalue greater than one. The factor analysis of the five factors explains 68.35% of the variance. The first factor accounts for only 31.35% of the variance. In addition, we assessed potential common method variance using a full collinearity variance inflation factor (VIF) approach (Kock, 2015). A VIF below 3.3 indicates that a construct is unlikely to be substantially affected by common method bias. The VIFs of our construct were as follows: delegation of decision rights (1.684), displacement of responsibility (1.531), whistleblowing mechanism (1.489), ethical leadership (1.383), and misreporting (1.785). As all VIFs are well below the 3.3 threshold, common method bias is unlikely to distort the relationships observed in the data. We conclude that the absence of common method bias, as shown by the results, in which no single factor explains most of the variance (Podsakoff & Organ, 1986; Widener, 2007).
H1 predicts that the relationship between the delegation of decision rights and misreporting is mediated by displacement of responsibility. We rely on Mackinnon’s (2008) four-step procedure and PROCESS macro (Model 4) to test our mediating effect hypothesis. Mackinnon’s (2008) four steps to establish mediation effect require that there is a significant relationship (a) between delegation of decision rights and misreporting, (b) delegation of decision rights and displacement of responsibility, (c) displacement of responsibility and misreporting, and (d) a significant coefficient for the indirect path between delegation of decision rights and misreporting via displacement of responsibility. We use the bootstrap method to test whether the last condition (i.e., Step (d)) satisfies.
As shown in Table 5, in the first step of Mackinnon’s (2008) procedure, there is a positive and statistically significant relationship (β = 0.503, t-value = 6.048, p < 0.001) between delegation of decision rights and misreporting (see Model 1 in Table 5). In the second step, the relationship between delegation of decision rights and displacement of responsibility is positive and statistically significant (β = 0.362, t-value = 3.520, p < 0.001, see Model 2 in Table 5). In step three, the relationship between displacement of responsibility and misreporting is positive and statistically significant (β = 0.349, t-value = 4.791, p < 0.001, see Model 3 in Table 5). In step four, the results (untabulated) based bootstrap approach by relying on Hayes’s (2017) PROCESS macro (Model 4) on a bootstrap sample of 5,000 reveal that the mediating role of displacement of responsibility on the relationship between the delegation of decision rights and misreporting is statistically significant because the bootstrap confidence interval does not straddle zero (indirect effect, β = 0.127, SE = 0.039, 95% CI: 0.054–0.212). Taken together, these results support H1, indicating that displacement of responsibility mediates the relationship between delegation of decision rights and managers’ misreporting behavior. As such, delegated managers use displacement of responsibility to rationalize their misreporting behavior, allowing them to feel morally right while engaging in it (Bandura, 1986). This result is consistent with our theoretical expectations and prior studies (Alnuaimi et al., 2010; Beaudoin et al., 2015; Chen et al., 2016; Detert et al., 2008; Hystad et al., 2014; Knoll et al., 2016; Mayhew & Murphy, 2014).
Table 5
Results for mediation hypothesis (H1)
Predictors
Mode1 1
Model 2
Model 3
MR
DP
MR
Coefficient
t-value
Coefficient
t-value
Coefficient
t-value
DL
0.503
6.048***
0.362
3.520***
0.376
2.767***
DP
-
-
-
-
0.349
4.791***
Age
− 0.038
− 3.033**
− 0.019
− 1.200
− 0.032
− 2.764***
Gender
0.477
1.861
0.622
1.959
0.260
1.505
Education
0.337
1.277
1.256
3.836
− 0.101
0.402
Tenure
0.025
0.782
− 0.038
− 0.953
− 0.038
1.315
Experience
− 0.025
− 0.902
0.009
0.260
− 0.028
− 1.121
R2
0.396***
0.270***
0.509***
Note that all the independent variables were mean-centered to ensure the direct interpretation of the regression coefficient of the main effect can be done in terms of the original variables (Dawson, 2014)
*p < 0.05; **p < 0.01; ***p < 0.001
Model 1: MRi = β0 + β1DLi + Control_Variables + ei.
Model 2: DPi = β0 + β1DLi + Control_Variables + ei.
Model 3: MRi = β0 + β1DLi + β2DPi + Control_Variables + ei.
DL: Delegation of decision rights, DP: Displacement of responsibility, MR: Misreporting.
Control_Variables are age (years), gender (male vs. female), education (bachelor’s degree or lower vs. master’s degree or higher), tenure (years), and work experience (years).
Test of H2
We relied on Hayes’s (2017) PROCESS Model 15, using a bootstrap sample of 5000, to test hypotheses H2 and H3.
H2 expects that the whistleblowing mechanism moderates the relationship between a delegation of decision rights and misreporting. This prediction is supported by the results in Panel A of Table 6, which shows a negative and significant coefficient of the interaction effect of the whistleblowing mechanism and delegation of decision rights on misreporting (DL × WB = − 0.155, p = 0.021, 95% CI: − 0.286 to − 0.024). That is, the positive effect of the delegation of decision rights on misreporting is weakened when the whistleblowing mechanism is highly effective. This result suggests that delegated managers are less likely to misreport when whistleblowing mechanisms are perceived as highly effective. Thus, H2 is supported.
Table 6
Results for H2 and H3
Panel A: Regressiona
Coefficient
Standard error
t-value
p-value
LL95% CI
UL95% CI
DL
0.398
0.085
4.664
0.000
0.229
0.566
DP
0.314
0.065
4.853
0.000
0.186
0.443
WB
− 0.141
0.103
− 1.336
0.174
− 0.346
0.063
DL x WB [H2]
− 0.155
0.066
− 2.337
0.021
− 0.286
− 0.024
DP x WB [H3]
0.137
0.063
2.169
0.032
0.012
0.262
Age
− 0.033
0.011
− 2.913
0.004
− 0.055
− 0.011
Gender
0.241
0.233
1.033
0.303
− 0.220
0.701
Education
− 0.191
0.250
− 0.761
0.448
− 0.686
0.305
Tenure
0.038
0.029
1.346
0.181
− 0.018
0.095
Experience
− 0.025
0.025
− 0.987
0.325
− 0.074
0.025
Panel B: Conditional effects of DP on misreporting at three levels of WB
WB
Effect (b)
Standard error
t-value
p-value
LL95% CI
UL95% CI
− 1.087
0.166
0.108
1.537
0.127
− 0.048
0.379
0.000
0.341
0.065
4.853
0.001
0.186
0.443
1.087
0.463
0.079
5.879
0.001
0.307
0.619
Notes: LL: lower limit; CI: confidence interval; UL: upper level; SD: standard deviation; S.E.: standard error; DL: delegation of decision rights; DP: displacement of responsibility; WB: whistleblowing mechanism.
R2 = 0.537, p < 0.001.
Misreporting regressed on:
aBootstrap sample size = 5000.
Test of H3
H3 argues that whistleblowing mechanisms moderate the relationship between the displacement of responsibility and misreporting, such that the positive relationship between the displacement of responsibility and misreporting is weaker (stronger) when the whistleblowing mechanism is high (low). The results from Panel A of Table 6 indicate a positive and statistically significant interaction between displacement of responsibility and whistleblowing mechanism (DP × WB = 0.137; p = 0.032; 95% CI: 0.012–0.262). The results in Panel B of Table 7 further show that displacement of responsibility is not significantly associated with misreporting when the whistleblowing mechanism is at a low level of effectiveness, but becomes significant and positive as the effectiveness of whistleblowing mechanisms increases to medium and high levels. This result contradicts our theoretical expectation, as prior studies have found that firms with highly effective whistleblowing mechanisms tend to reduce misreporting. Employees are more likely to blow the whistle (Brennan & Kelly, 2007), which is associated with lower misreporting. Therefore, H3 is not supported. Our result suggests that the effectiveness of whistleblowing mechanism does not deter managers’ misreporting as predicted when the link between displacement of responsibility and misreporting is being explored. We explore the underlying reasons why the whistleblowing mechanism does not function as an effective formal control for the linkage between displacement of responsibility and misreporting in our supplementary analyses section for additional empirical evidence and theoretical explanations.
Table 7
Results of regression of misreporting on delegation of decision rights, displacement of responsibility, whistleblowing mechanism, and ethical leadership (Full sample = 145)
Where MRi is misreporting; WBi is whistleblowing mechanism; ELi is ethical leadership, Control_Variables include (years), gender (male vs female), education (bachelor’s degree or lower vs master’s degree or higher), tenure (years), and work experience (years), DLi is delegation of decision rights; DPi is displacement of responsibility, and ei is the error term.
Test of H4
H4 predicts that there is a two-way interaction between whistleblowing mechanisms and ethical leadership on misreporting. To test H4, we employ the following hierarchical multiple regression model (Schoonhoven, 1981; Southwood, 1978, see also Cohen et al., 2013) as follows:
where MRi is misreporting; DLi is delegation of decision rights; DPi is the displacement of responsibility; WBi is a whistleblowing mechanism; and ELi is ethical leadership. Control_Variables include (years), gender (male vs. female), education (bachelor’s degree or lower vs master’s degree or higher), tenure (years), and work experience (years), and ei is the error term.
The results shown in Table 7 reveal that the two-way interaction between whistleblowing mechanism and ethical leadership (WB*EL) is negative and statistically significant (β10 = − 0.169, p = 0.017) on misreporting. This result demonstrates that whistleblowing mechanism and ethical leadership jointly negatively affect misreporting.
The whistleblowing mechanism and ethical leadership are dichotomized by their respective means to explore the nature of the two-way interaction. Table 8 and Fig. 2 reveal the nature of the two-way interaction of whistleblowing mechanisms and ethical leadership in misreporting.
Table 8
Mean scores for managers’ misreporting across whistleblowing mechanism (high vs. low) and ethical leadership (high vs. low) (n = 145)
Low ethical leadership
High ethical leadership
Low whistleblowing mechanism
Mean = 3.782
Mean = 4.067
SD = 1.475
SD = 1.705
N = 44
N = 18
Cell 1
Cell 2
High whistleblowing mechanism
Cell 3
Cell 4
Mean = 4.216
Mean = 3.876
SD = 1.409
SD = 1.802
N = 25
N = 58
Fig. 2
Two-way interaction between whistleblowing mechanism and ethical leadership on misreporting (n = 145)
It is important to note that when whistleblowing mechanisms are weak, ethical leadership alone does not effectively deter unethical behavior, leading to increased misreporting. This indicates that formal whistleblowing systems must support ethical leadership to create a deterrent effect against misreporting. These findings show that when whistleblowing mechanisms are weak (i.e., low whistleblowing mechanism situations), misreporting rises even when strong ethical leadership is present. Conversely, when whistleblowing mechanisms are strong (i.e., high whistleblowing mechanism situations), misreporting declines as ethical leadership becomes stronger.
In conclusion, our study provides compelling evidence that ethical leadership alone is insufficient to prevent misreporting. Instead, a combination of ethical leadership and effective whistleblowing mechanisms is vital to nurturing a strong ethical environment. These findings underscore the need for organizations to establish a leadership-driven ethical culture and effective reporting systems to adequately reduce unethical behaviors.
Supplementary Analyses
As noted earlier, our result for H3 was not supported and contradicted our theoretical prediction. Our supplementary analysis aims to explore the effectiveness of the whistleblowing mechanism and to understand under what circumstances it becomes an effective formal control in the presence of displacement of responsibility.
Based on our full sample (n = 145), we dichotomized displacement of responsibility and whistleblowing mechanism at their respective means to create low and high sub-samples. We rely on ANOVA to test for the differences between groups. Figure 3 illustrates the pattern of results across conditions. The results presented in Table 9, Panels A and B, reveal that the difference between the mean score of misreporting in the high whistleblowing mechanism and low displacement of responsibility cells (i.e., Cell 2 = 3.151, see Panel A of Table 9) is statistically significant (mean difference = − 2.020, p < 0.001, see Panel B of Table 9) less than that of those in the high whistleblowing mechanism and high displacement of responsibility cell (i.e., Cell 4 = 5.171, see Panel A of Table 9). This suggests that misreporting is high when both the whistleblowing mechanism and displacement of responsibility are high.
Table 9
Mean scores for managers’ misreporting: Displacement of responsibility and whistleblowing mechanism—Full sample (n = 145)
Panel A: Mean score of misreporting across displacement of responsibility (high vs. low) and whistleblowing mechanism (high vs. low)
Low whistleblowing mechanism
High whistleblowing mechanism
Low displacement of responsibility
Mean = 3.359
Mean = 3.151
SD = 0.241
SD = 1.282
N = 34
N = 49
Cell 1
Cell 2
High displacement of responsibility
Cell 3
Cell 4
Mean = 4.479
Mean = 5.171
SD = 1.205
SD = 1.498
N = 28
N = 34
Panel B: Multiple comparisons: Bonferroni
Mean difference
Standard error
p-value
Cells 1 and 2
0.208
0.313
1.000
Cells 1 and 3
− 1.120
0.358
0.013
Cells 1 and 4
− 1.812
0.340
0.001
Cells 2 and 3
− 1.328
0.332
0.001
Cells 2 and 4
− 2.020
0.313
0.001
Cells 3 and 4
0.692
0.358
0.332
Fig. 3
The two-way interaction between displacement of responsibility and the whistleblowing mechanism on misreporting
We provide three plausible explanations for this result. First, moral disengagement theory suggests that individuals are more likely to engage in unethical behavior, such as misreporting, when they can justify their actions by displacing blame onto others. Higher displacement of responsibility provides managers with an excuse to lessen their guilt and discomfort (Bandura, 1986, 1990, 1999; Bandura et al., 1996) and reduce psychological stress (Hochman et al., 2021). This displacement helps alleviate cognitive dissonance (Bandura, 1990; Bandura et al., 1996; Detert et al., 2008), which can trigger and amplify moral disengagement.
Second, the self-concept maintenance theory (Mazar et al., 2008) predicts that people who value morality and honesty (Aquino & Reed, 2002; Sanitioso et al., 1990) are motivated to act in ways that preserve a positive moral self-image. However, when such individuals act dishonestly, they may rationalize minor misreporting to align with their self-image of being “good” and “moral.” This ethical dissonance (Barkan et al., 2015; Hochman et al., 2016) is typically resolved by adopting mechanisms that reduce tension, enabling individuals to maintain their positive self-image while gaining personally from dishonest acts (e.g., Hochman et al., 2016; Peer et al., 2014; Sachdeva et al., 2009). Prior studies (e.g., Gu et al., 2013; Hochman et al., 2016) suggest that the ability to justify (rationalize) helps defuse ethical dissonance. Thus, we postulate that high displacement of responsibility reduces ethical dissonance, and the formal control (i.e., whistleblowing mechanism) allows managers to maintain a positive self-image by acting as a ‘moral person’ and ‘moral manager.’
Third, moral disengagement theory predicts that the presence or absence of formal control may be irrelevant to managers with high responsibility displacement, as they do not experience heightened guilt or discomfort (Bandura, 1986; Bandura et al., 1996). Formal controls might backfire by signaling distrust, prompting managers to retaliate through misreporting (Christ, 2013; Christ et al., 2008, 2012). As Christ (2013, pp. 171–172) notes, formal controls can provoke retaliation, and perceived distrust can heighten employees’ tendency to engage in opportunistic behavior. Therefore, the highest levels of misreporting occur in situations with both high displacement of responsibility and strong whistleblowing mechanisms. When individuals perceive themselves as having less personal accountability due to high responsibility displacement, they are more likely to misreport. While whistleblowing mechanisms are designed to deter unethical behavior, they may be ineffective when moral disengagement is substantial. Once responsibility has been displaced, individuals have already rationalized their unethical actions, and external controls such as whistleblowing may have little effect on reducing misreporting. This aligns with Bandura’s (1999) assertion that once moral disengagement is triggered, external controls (such as whistleblowing mechanisms) may have little to no effect on reducing unethical behavior.
Conclusion
This study examines the effectiveness of whistleblowing mechanisms and ethical leadership as formal and informal controls, respectively, in the relationships between a delegation of decision rights and the displacement of responsibility for managers’ misreporting behavior. Our results reveal that displacement of responsibility plays a mediating role in the relationship between delegation of decision rights and managers’ misreporting behavior. Specifically, managers with delegated decision rights use displacement of responsibility to rationalize their misreporting behavior, allowing them to feel morally justified while engaging in misreporting (Bandura, 1986). This result is consistent with our theoretical expectations and prior studies (Alnuaimi et al., 2010; Beaudoin et al., 2015; Chen et al., 2016; Detert et al., 2008; Hystad et al., 2014; Knoll et al., 2016; Mayhew & Murphy, 2014).
Our results also indicate that whistleblowing mechanisms mediate the relationship between a delegation of decision-making and misreporting. Specifically, our results reveal that robust whistleblowing mechanisms mitigate the direct positive effect of decision rights delegation on misreporting, meaning managers are less likely to misreport when strong whistleblowing systems are in place. However, we also observe that whistleblowing mechanisms have a significant but positive moderating effect on the relationship between displacement of responsibility and misreporting. This finding shows that while whistleblowing systems might reduce the likelihood of misreporting through their impact on responsibility displacement, they fail to deter misreporting when managers rationalize their actions. Taken together, while whistleblowing mechanisms act as a deterrent in the context of high delegation of decision rights, they become ineffective as preventive controls when managers can rationalize their misreporting through responsibility displacement. These results suggest that whistleblowing systems alone cannot prevent unethical behavior when there are opportunities for rationalization, highlighting the need for more comprehensive control mechanisms to address moral disengagement in organizations.
Our findings have several important implications for organizational practice. First, formal controls, such as whistleblowing mechanisms, are less effective when delegation of decision rights and displacement of responsibility are high, as employees can shift accountability to external authorities or structures. In contrast, combining formal and informal controls—effective whistleblowing mechanisms alongside strong ethical leadership—is most effective in high-delegation contexts when displacement of responsibility is low. This highlights the critical role of rationalization in shaping the effectiveness of management control systems and underscores the need for interventions that limit opportunities for responsibility displacement.
Second, our results suggest that management controls function as behavioral nudges. Delegation shapes descriptive norms by signaling what is typically done, whistleblowing mechanisms codify injunctive norms by specifying what the organization approves or disapproves of, and ethical leadership models desirable ethical behavior. Understanding these normative influences allows organizations to design controls that integrate both psychological factors (e.g., employees’ perceptions, motivations, and rationalizations) and structural factors (e.g., policies, reporting channels, and authority distribution), fostering an ethical organizational climate and reinforcing accountability.
Third, our findings support the use of techniques, such as accountability pressure, to mitigate misreporting. When managers perceive that they are personally accountable for their decisions, they are less likely to rationalize unethical behavior and more likely to invest effort in ethical decision-making (Chong et al., 2021; Dalla et al., 2019; Fehrenbacher et al., 2020; Kramer & Maas, 2020; Lerner & Tetlock, 1999). Accountability pressure, combined with ethical leadership and effective whistleblowing mechanisms, can further strengthen governance by reducing opportunities for rationalization, promoting integrity, and minimizing unethical practices.
Our study has several limitations that suggest directions for future research. First, our sample was drawn from middle-level managers in the manufacturing sector, which may limit the generalizability of the findings. In addition, while we focus on manufacturing firms, which often have formalized structures and male-dominated workforces, future research could examine other industries, such as financial services, public, and non-profit organizations. Second, survey-based measures may be subject to scale restriction and social-desirability bias (Parker & Kyj, 2006; Prien & Liske, 1962; Randall & Fernandes, 1991), which future studies could address using multi-source data or social-desirability scales (Reynolds, 1982). Third, the study relies on a cross-sectional design, limiting causal inference. Longitudinal designs or multi-source data could strengthen causal evidence. Fourth, the dynamics of delegation and responsibility displacement were examined in organizations with at least 100 employees; smaller organizations may yield different results, and our results may not generalize to smaller or flatter organizations where middle-level managers supervise fewer subordinates. Future research should replicate and extend our model in small firms. Fifth, with respect to whistleblowing mechanisms, we do not differentiate among specific reporting channels (e.g., online platforms, telephone hotlines, or external tip lines), which may vary in their effectiveness. Moreover, while this study focuses on the presence and perceived adequacy of whistleblowing mechanisms as a form of formal control, we do not examine whether organizations take action following whistleblowing reports or the effectiveness of such actions. Prior research suggests that follow-up actions, enforcement, and the protection of whistleblowers are central to the deterrent effect of whistleblowing systems (e.g., Stubben & Welch, 2020; Wilde, 2017). Accordingly, future research could distinguish between the availability of reporting channels and organizational responses to reported misconduct, as well as examine how the type and administration of reporting channels influence misreporting behavior. Finally, we treat displacement of responsibility as a general mechanism without distinguishing among potential targets of displaced blame. Recent work suggests that the nature of the external agent, human or algorithmic, may affect responsibility shifting (Hinrichs et al., 2012; Jolly et al., 2025). Future studies could compare different targets, such as supervisors, coworkers, or algorithmic systems, to clarify boundary conditions and contextual effects.
Acknowledgements
We thank Kevin Baird, Katlijn Haesebrouck, Mario Schabus, David Smith, John Sands, and three anonymous referees for their helpful comments and suggestions on earlier drafts of this paper. Comments from participants in the research seminars at the University of Western Australia are appreciated. An earlier version of this paper was presented at the 2021 Global Management Accounting Research Symposium hosted by Copenhagen Business School, the 2021 EIASM Conference on Performance Measurement and Management Control, and the 2024 Asia Pacific Management Accounting Association Annual Conference. The second author acknowledges the funding support from the Indonesia Endowment Fund for Education Scholarship and the University of Western Australia Scholarship for International Research Fees.
Declarations
Conflict of interest
The authors declare that they have no conflict of interest.
Research Involving Human Participants and/or Animals
The research project has received ethical approval (RA/4/20/4525) from the Human Research Office at the University of Western Australia.
Informed Consent
The authors confirmed that informed consent was obtained from all participants involved in the research.
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Please respond to each question/statement below by selecting one of the numbers from 1 to 7 that is appropriate for you. To what extent is authority being delegated to you to make the following decisions?
None at all
A great deal
The hiring and firing of personnel
1
2
3
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5
6
7
Staff promotion
1
2
3
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5
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7
Setting the operating hours
1
2
3
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7
Setting the budget
1
2
3
4
5
6
7
Spending items in the budget
1
2
3
4
5
6
7
Spending items outside the budget
1
2
3
4
5
6
7
Development of new products, projects, and/or services
1
2
3
4
5
6
7
Displacement of Responsibility
Please indicate the extent of your agreement to the following statements by choosing one of the numbers from 1 to 7:
Strongly disagree
Strongly agree
If people are living under bad conditions, they cannot be blamed for behaving aggressively
1
2
3
4
5
6
7
If someone is pressured into doing something, they shouldn’t be blamed for it
1
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7
People cannot be blamed for misbehaving if their friends pressured them to do it
1
2
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5
6
7
Whistleblowing Mechanism
Please indicate the extent of your agreement to the following statements by choosing one of the numbers from 1 to 7:
Strongly disagree
Strongly agree
Your company has an adequate formal structure to report any wrongdoing action
1
2
3
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5
6
7
Your company has an adequate training for employees to identify wrongdoing action
1
2
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7
Your company has an adequate policy regarding whistleblowing
1
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Ethical Leadership
Please indicate your agreement with the following statements.
Strongly disagree
Strongly agree
My supervisor listens to what employees have to say
1
2
3
4
5
My supervisor disciplines employees who violate ethical standards
1
2
3
4
5
My supervisor conducts his/her personal life in an ethical manner
1
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5
My supervisor has the best interests of employees in mind
1
2
3
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5
My supervisor makes fair and balanced decisions
1
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5
My supervisor can be trusted
1
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My supervisor discusses business ethics or values with employees
1
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My supervisor set an example of how to do things right way in terms of ethics
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5
My supervisor defines success not just by results but also by the way that they are obtained
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When making decisions, my supervisor asks, “What is the right thing to do?”
1
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Misreporting
Please respond to each of the following questions by choosing one of the numbers from 1 to 7.
None at all
A great deal
Of the total amount of information (e.g., financial and non-financial information) you receive, how much do you share/pass on to your superior?*
1
2
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7
Of the total amount of information (e.g., financial and non-financial information) you receive, how much of it must be actively changed in some way before sharing or passing it on to your supervisor?
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7
Never
Always
How frequently do you find it necessary to alter the content of your progress reports to fit the expectations of your superior?
1
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7
About how often during a typical work week do you withhold information from your superiors that might be useful to him/her?
1
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7
How frequently do you find it necessary to omit particular facts from the information you share/pass on to your superior?
1
2
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4
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7
Strongly disagree
Strongly agree
There are significant forces that cause me to modify information in some of my communications to my superior
Occupational fraud is referred to as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” (ACFE, 2024, p. 104).
ACFE (2024, p. 10) highlighted three main types of occupational fraud: asset misappropriation, financial statement fraud, and corruption. Despite financial statement fraud schemes being identified as the least common (5% of schemes), it is the most costly category of occupational fraud (U.S. $766,000) per case when compared to asset misappropriation (U.S. $120,00 per case) and corruption (U.S. $155,000 per case). Financial statement fraud refers to “A scheme in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports (e.g., recording fictitious revenues, understating reported expenses, or artificially inflating reported assets)” (ACFE, 2024, p. 104). Our study focuses on the “managers’ action of intentionally withholding or misrepresenting information” (Chong & Wang, 2019, p. 279).
Misreporting in Chong and Wang (2019) refers to a manager deliberately withholding, distorting, falsifying, or manipulating organizational information to deceive stakeholders or gain illegitimate advantages.
Responsibility rationalization, in the context of Chong and Wang’s (2019) study, is treated as an important variable of personality trait acting as a moderator because prior studies (e.g., White-Ajmani & Bursik, 2014) demonstrate that individuals’ unethical behaviors can be influenced by, and vary according to, their propensity for moral disengagement (See Bandura, 1990; Bandura et al., 1996; Moore et al., 2015). Responsibility rationalization is specifically defined as “the ability of individuals to use displacement and/or diffusion of responsibility as an excuse for their unethical behaviors” (Chong & Wang, 2019, p. 8).
Displacement of responsibility requires the presence of an external target, such as a supervisor, policy, or algorithm, to absorb agency (Hinrichs et al., 2012; Jolly et al., 2025), and thus becomes especially salient in hierarchical or delegated decision contexts. Moral disengagement, by contrast, can occur without any external authority because it operates through internal cognitive reinterpretations of wrongdoing.
Babalola et al., (2016, p. 311) find that “ethical leadership moderated the relationship between frequent change and turnover intention such that the relationship was positive only when ethical leadership was low”. Loi et al. (2012) find that ethical leadership positively moderated the negative relationship between procedural justice and job insecurity.
Previous studies have shown that the data quality does not differ between an online survey and a paper-based survey method (Croteau et al., 2010; Deutskens et al., 2006).
Qualified participants refer to Qualtrics’ online panel members who passed the screening questions. In Qualtrics’ primary survey, a total of 1,929 online survey questionnaires were sent to potential qualified participants (i.e., Qualtrics’ panel members) who were in the U.S. The sample screening resulted in 1,500 unqualified participants being dropped, resulting a drop-out rate was 77.76%. In addition, the record showed that 274 participants did not answer their online survey questionnaires completely and hence were also excluded from the sample. Thus, the qualified participants who completed the survey questionnaire were 155.
We incorporated one of the reviewer’s suggestion by re-estimating our analyses using the three “frequency”-based misreporting items (Items 3, 4, and 5 of the misreporting measurement scale). The findings using the 3-item scale are substantively unchanged from those obtained with our original composite misreporting measure.
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