Article: Tuesday, 26 April 2016

World-shaking accounting scandals often originate in financial reporting from internal accountants. By studying internal accountants’ brain activity, Professor Frank Hartmann of Rotterdam School of Management, Erasmus University (RSM) discovered that some misreporting comes from a neurological make-up that makes them more vulnerable to social pressure from managers promoting their own personal interests. Hartmann says the results shed a different light on who should – and who shouldn’t ‒ be hired for internal accountants’ positions.

How the brain's sensitivity for emotions causes accounting fraud

Internal accountants, those working within businesses ‒ often called financial controllers ‒ can become stuck between a rock and hard place. The company’s top management expects them to preserve the integrity of financial reporting at all times. Unit managers, on the other hand, are known to exert considerable social pressure on controllers to paint a prettier financial picture of their projects. This can be to the benefit of the organisation, for example when a risky but promising project is rescued by reporting its costs in the ‘wrong’ year.

Managers often pressure their controllers to manipulate financial reporting because of personal interests such as securing a promotion or a bonus, or avoiding being fired. This type of pressure is hard to resist by some controllers because of their neurological characteristics, as Prof. Hartmann’s team shows in their research.

More active mirror neurons

Reactions to emotional pressure are linked to mirror neuron activity, which as been observed in several parts of the brain, Hartmann says. The level of activity of this mirror neuron system varies between individuals and is largely innate. People with a naturally more reactive mirror neuron system detect other people’s emotions more easily and tend to adjust their behaviour accordingly.

When managers benefit

To find out how this brain function affects financial reporting, the researchers first measured the natural responsiveness of the mirror neuron system in the brains of financial controllers. They did this by making an electroencephalogram (EEG), which traces electric impulses in the brain using electrodes placed on the scalp, while these controllers were observing movie clips of people showing various emotional facial expressions.

The financial controllers were also asked to judge several scenarios in which a manager tries to change the financial reporting by either telling the financial controller it was for personal interest, or by asking the financial controller to change the reporting to benefit the organisation. The results showed that people with a very responsive mirror neuron system were more likely to agree to the manager’s suggestions when the manager personally benefits from it. When managers gave organisational reasons for having the financial numbers changed, the effect was minimal.

Better to be cold and aloof

Hartmann says this study shows that financial controllers don’t start out with bad intentions. They simply cannot help giving in to social pressure because of the way their brains function; some controllers simply think they are doing the right thing and give in to the manager’s emotional pressure without conscious deliberation.

Hartmann points out that the findings of this study question the wisdom of an industry-wide call for more socially competent financial controllers that function in close co-operation with their managers. Rather, the study makes a case for the often-loathed stereotype of the accountancy professional as a ‘cold and aloof’ character, he says. Having these unsociable characteristics might actually be beneficial because such people respond less readily to inappropriate social pressure.

Neurologically unsuited

The sector should be aware that some people are neurologically less well suited to being financial controllers, Hartmann says, and this cannot simply be countered by new rules or appeals for ethical behaviour. The results also support the current renewed interest in getting people with autistic spectrum disorder into jobs that demand high-level data processing and great integrity, he concludes.

Prof. Frank Hartmann

Professor of Accounting

Nijmegen School of Management

Profile picture of Prof. Frank Hartmann
Pile of books with vibrant bookmarks protruding from various pages, symbolizing in-depth research.

Related articles

RSM Discovery

Want to elevate your business to the next level using the latest research? RSM Discovery is your online research platform. Read the latest insights from the best researchers in the field of business. You can also subscribe to the newsletter to receive a bimonthly highlight with the most popular articles.

Do you want to learn more about this subject?

Check out these RSM education programmes

Your contact for more information:

Danielle Baan

Science Communication and Media Officer

Portrait of Erika Harriford-McLaren

Erika Harriford-McLaren

Corporate Communications & PR Manager

Erasmus University campus in autumn, showcasing its iconic red trees, viewed from across the campus pool.