Abstract

The purpose of this research is to examine the effect of two organizational variables, budget goal difficulty and promotion availability, on employee fraud. Limited research shows that difficult, specific goals result in more unethical behavior than general goals :422–432, 2004). We predict that goal difficulty and promotion availability will interact to affect employee fraud. Specifically, we contend that the availability of promotions will have little, if any, effect on employee fraud under easy goals but have a substantial effect on fraud under extremely difficult goals. To test this prediction, we use an experiment in which participants play the role of production employees. All participants are assigned cost goals and are responsible for reporting costs to the organization. Information asymmetry exists such that the organization is unable to assess whether costs have been reported accurately, and any overstatement of costs directly increases the employee’s compensation at the expense of the organization. The results of our experiment support the prediction, even though the cost goal is not tied to current period compensation. Our results have implications for academics and practitioners concerned with factors that affect fraud in organizations