The influence of sunk costs, personal responsibility and culture on the tendency of accountants to facilitate escalation of commitment

Abstract

Purpose – This purpose of this study is to further the study of escalation of commitment by considering the supportive role of accountants in providing reports that favour continuation of unprofitable projects and whether this role is influenced by culture. Research on the escalation of commitment suggests that the decision to commit resources to a failing project is due to several factors that include sunk costs, personal responsibility and culture. Design/methodology/approach – This study employs a between-subjects design to examine accountants’ willingness to provide a report that facilitates continuation of an unprofitable project. The manipulated independent variables are sunk cost (present or absent), the level of reporting responsibility (high or low) and culture (Pacific Islands or Australia). Findings – Our results show that the presence of sunk cost is a motivation for accountants to provide reports that favour continuation of an unprofitable project. The results on cultural difference are also consistent with the contention that culture is influential in decision-making with respect to providing reports that favour continuation of an unprofitable project. We do not, however, find evidence consistent with a personal responsibility affect using the manipulation defined in this study. Research limitations/implications – Consistent with this type of research, the results must be interpreted with respect to the specific design choices used in the experiment. Practical implications – Continued research is needed to examine the impact of sunk costs and specific attributes of culture, such as the willingness to follow superiors, on the escalation of commitment to unprofitable projects. The mitigation of such effects through education of accountants to provide reports that do not favour continuation of unprofitable projects would, for example, be of interest to aid agencies and others investing in projects in developing economies in particular. Originality/value – While previous research generally examines the decision-making role of managers in escalation of commitment to unprofitable projects, this study examines the supportive role that accountants play in facilitating managers’ escalation decisions. This issue is studied within a context examining the potential cultural impact of respect for authority.

Pengaruh Informasi Investasi Dan Overconfidence Terhadap Eskalasi Komitmen

“…Arkes dan Blumer (1985) dalam Fokufuka (2014) mengemukakan bahwa dalam hal manajemen proyek, sunk cost adalah kerugian pasti dan seorang individu akan lebih suka opsi dengan kemungkinan kerugian yang lebih besar, jika masih ada peluang dari hasil yang menguntungkan. Maksudnya disini adalah manajer akan membuat keputusan meningkatkan komitmennya pada keadaan informasi negatif atau rugi dengan harapan mendapatkan imbal hasil positif di masa datang.…”

“…Maksudnya disini adalah manajer akan membuat keputusan meningkatkan komitmennya pada keadaan informasi negatif atau rugi dengan harapan mendapatkan imbal hasil positif di masa datang. Hubungan antara kesediaan manajemen untuk melanjutkan proyek yang gagal dan keberadaan sunk cost secara empiris diperiksa oleh Garland (1990), yang menemukan bahwa persentase sunk cost yang lebih tinggi dapat mengarah pada kemauan yang lebih besar untuk melanjutkan proyek yang gagal (Fokufuka, 2014).…”

Escalation of Commitment: Supporting Role from Accountants

“…In the phenomenon of escalation of commitment, there is a possibility of managers making escalation of commitment decisions due to the influence of information (cash flow statements, expense reports, profit projections, etc.) provided by accountants (Fukofuka, Fargher, & Wang, 2014). The ambiguity of information provided by accountants, especially related to negative feedback on investment projects can also trigger managers' escalation of commitment.…”

“…Decision makers may be overly influenced by cognitive biases that cause them to interpret situations in ways that inhibit the recognition of problems so that they perform escalation of commitment behavior (Keil et al, 2007). The manager might not be doing escalation of commitment if the information provided by the accountant will not lead to the continuing unfavorable project (Fukofuka et al, 2014).…”

“…The results of previous studies indicate that the presence of sunk costs increases the likelihood of escalation of commitment (Sharp & Salter, 1997;Whyte, 1993). As long-term projects develop, the level of sunk cost will definitely increase but the benefits of the project remain uncertain (Fukofuka et al, 2014). (Whyte, 1993) states that while from a rational economic point of view sunk costs are irrelevant to future decisions, the presence of sunk costs in the context of decisions can influence decision-makers to take risks.…”