168 Int. J. Behavioural Accounting and Finance, Vol. 6, No.

2, 2017

The effects of social influence pressure source and

reporting consequence on financial statement
preparers’ fair value estimate choices

Alisa G. Brink and Fengchun Tang*

Department of Accounting,
School of Business,
Virginia Commonwealth University,
Snead Hall, 301 West Main Street,
P.O. Box 844000,
Richmond, VA 23284, USA
Email: agbrink@vcu.edu
Email: ftang@vcu.edu
*Corresponding author

Ling Yang
Department of Accounting,
College of Business and Economics,
Longwood University,
201 High Street, Farmville, VA 23909, USA
Email: yangl5@longwood.edu
Abstract: This paper investigates whether the source of social influence
pressure interacts with reporting consequence to influence financial statement
preparers’ judgements of fair value estimates. Results from an experiment
suggest that accounting professionals recognise that fair value estimates based
on Level 3 inputs are subjective and unreliable and are hesitant to choose a
Level 3 estimate for financial reporting. However, superior pressure (one type
of social influence pressure) and a positive reporting consequence increase
preparers’ likelihood of choosing a questionable estimate. In addition, social
influence pressure source interacts with reporting consequence to influence
preparers’ intention to choose a questionable estimate. Specifically, superior
pressure has a greater impact on the likelihood of choosing a questionable
estimate if the estimate allows the company to report positive earnings than if
the estimate results in zero earnings. More interestingly, mediation analysis
shows that preparers’ perceptions about the fair value estimate partially mediate
the effect of source of social influence pressure on preparers’ decisions. This
suggests that superiors exert influence through their position power, resulting in
compliant behaviour from preparers, and through personal power, leading to
changes in preparers’ attitudes towards the Level 3 estimates.

Keywords: fair value; financial statement preparer’s decision-making; social

influence pressure.

Reference to this paper should be made as follows: Brink, A.G., Tang, F. and
Yang, L. (2017) ‘The effects of social influence pressure source and reporting
consequence on financial statement preparers’ fair value estimate choices’,
Int. J. Behavioural Accounting and Finance, Vol. 6, No. 2, pp.168–187.

Copyright © 2017 Inderscience Enterprises Ltd.

Effects of social influence pressure source and reporting consequence 169

Biographical notes: Alisa Brink obtained her Ph.D from Florida State
University. Her primary research interests include judgment and decision
making in accounting. She has published articles in academic journals
including Behavioral Research in Accounting, and Journal of Management
Accounting Research, Auditing: A Journal of Practice and Theory, Issues in
Accounting Education, and Journal of Business Ethics.

Fengchun Tang obtained his Ph.D from Washington State University. His
primary research interests include judgment and decision making in accounting
information systems, managerial and financial accounting. He has published
articles in academic journals including Behavioral Research in Accounting,
Journal of Information Systems and Behaviour & Information Technology.

Ling Yang obtained her Ph.D from Virginia Commonwealth University. Her
primary research interests include judgment and decision making in accounting.
She has published articles in academic journals including Behavioral Research
in Accounting and Journal of International Accounting Research.

The Impact of Social Pressure and Estimate Source on Auditors’ and Financial
Statement Preparers’ Fair Value Estimate Choices presented at the 2012
American Accounting Association Annual Meeting in Washington, DC, USA,
the 2012 Virginia Accounting Research Conference in Charlottesville, VA,
USA, and the 2012 International Symposium on Audit Research held in Tokyo,
Japan.

1 Introduction

This paper investigates the effects of two types of social influence pressures and
reporting consequences on financial statement preparers’ fair value estimate choices. Fair
value accounting practices are increasingly common, and fair value is generally
considered the best available method for the valuation of financial assets and liabilities
(Webinger et al., 2013). However, questions about the reliability of fair values arise due
to the judgement that is often required in fair valuation. For example, if fair values from
an active market do not exist, managers may use valuation models that rely on market
inputs and/or unobservable inputs (Altamuro and Zhang, 2013). The unobservable inputs
used in valuation models may reflect management’s assumptions. As managers have
information advantages over auditors and regulators, the reliance on managerial
assumptions in the valuation process opens the door to opportunistic behaviour (Kolev,
2009). Thus, whether financial statement preparers use fair value estimates
opportunistically and the identification of factors affecting the choices preparers make in
the selection and reporting of fair value estimates are issues of practical importance.
The present study investigates two factors that may influence preparers’ choices in
the selection and reporting of fair value estimates. The first factor we examine is the
impact of social influence pressure source on preparers’ selection and reporting of fair
value estimates. Prior research in audit and budgeting suggests that social influence
pressures, particularly inappropriate pressure from superiors, can have a negative impact
on accountants’ behaviour (DeZoort and Lord, 1994; Lord and DeZoort, 2001; Davis et
al., 2006; Chong and Syarifuddin, 2010). Financial statement preparers are responsible
for establishing the initial reliability of financial information (Clor-Proell and Maines,
170 A.G. Brink et al.

2014). Social influence pressures might affect preparers’ judgement in the selection and
reporting of fair value estimates, thus impairing the reliability of financial reporting.
More importantly, although prior research in accounting demonstrates dysfunctional
results due to inappropriate superior pressure, few studies suggest potential solutions for
these problems (DeZoort and Lord, 1994; Lord and DeZoort, 2001; Davis et al., 2006;
Chong and Syarifuddin, 2010). To curb the negative influence of inappropriate superior
pressure, it is important to understand how accounting professionals react to it and the
underlying mechanism as to how it operates. The present study attempts to fill this gap.
We also examine the impact of reporting consequence on the selection of fair value
estimates. Public companies face tremendous pressures to report positive earnings. Thus,
if the use of a fair value estimate allows a company to report positive earnings, the
company may have strong incentives to choose and use that estimate for financial
reporting even though alternative fair value estimates might be more appropriate.
However, preparers are also bound by codes of ethics that require them not to be unduly
influenced by their self-interests. The presence of incentives in itself does not imply that
preparers will abuse their discretion. While some archival research indicates that fair
value estimates might be used as a tool for earnings manipulation (Aboody et al., 2006;
Hodder et al., 2006; Bartov et al., 2007), other research argues that the opportunistic
reporting of fair value estimates depends on the incentive settings (Valencia, 2011). To
our knowledge, there is no direct behavioural evidence to date indicating that preparers
use fair value estimates as a tool for earnings manipulation. It is not clear whether and
under what circumstances incentives to report positive earnings induce preparers’
opportunistic use of fair value estimates.
We conducted an experiment with Chinese accountants to investigate how social
influence pressures and reporting consequences affect preparers’ selection and reporting
of fair value estimates. Accountants working in public or private companies in China
completed a hypothetical task in which they were advised to use a questionable Level 3
fair value estimate for financial statement reporting purposes. Our results indicate that
preparers are more likely to choose a questionable estimate when pressured by a superior
than when pressured by a peer. Similarly, preparers are more likely to choose a
questionable estimate if the estimate allows the company to report positive earnings. In
addition, the source of social influence pressure interacts with reporting consequence to
influence preparers’ reporting decision in that superior pressure has a stronger impact on
preparers’ choices when the estimate allows the company to report positive earnings.
Our results also show that the perceived reliability1 and relevance of the estimate
partially mediate the influence of source of social influence pressure on preparers’ choice
of fair value estimates for financial reporting. This result suggests that superior pressure
not only results in a compliant behaviour from preparers but also changes their attitudes
towards the Level 3 estimates. Specifically, preparers consider the Level 3 estimates to be
more reliable and relevant as a result of superior pressure. This partial mediation
indicates that preparers are subject to social influence from superiors not only because
superiors have the position power to exert influence but also because they are more
experienced and trusted by subordinates.
Our study contributes to the literature in several ways. First, this study identifies the
behavioural consequences of superior pressure and the underlying mechanism through
which superior pressure influences preparers’ decisions. Prior research primarily
examines superior pressure from the perspective of Milgram’s obedience to authority
theory (Milgram, 1974), which suggests that subordinates will shift responsibility to
Effects of social influence pressure source and reporting consequence 171

superiors and feel less responsibility when under superior pressure. This indicates that
superior pressure will not change subordinates’ attitudes and beliefs. However,
psychology literature suggests that subordinates may respond to superiors with compliant
behaviour without attitude changes or they may couple the compliant behaviour with a
change in attitudes and beliefs. If preparers are under superior pressure only because of
the authority associated with superiors’ hierarchical status (as suggested by Milgram’s
obedience to authority theory), preparers may conform to their superiors without
changing their attitudes towards a fair value estimate. In contrast, if preparers are under
pressure due to the attractiveness and expertise of their superiors, they are more likely to
exhibit a compliant behaviour coupled with attitude changes.
Our research extends prior literature by examining attitude changes as a result of
superior pressure. Our results suggest that superiors may exert influence on preparers
through position power, resulting in compliant behaviour and through personal power,
leading to attitude changes towards fair value estimates. It is important to disentangle
these two mechanisms because different mechanisms imply different remedies for the
same problem (Koonce, 2013). If preparers only respond to superiors due to compliance,
then removing the pressure should fix the problem. However, if superior pressure results
in compliant behaviour coupled with attitude changes, then decision aids are needed to
debias reasoning (Koonce, 2013). Our mediation analyses suggest that both mechanisms
are functioning in affecting preparers’ decisions related to fair value estimates. Thus,
remedies for both mechanisms should be considered in the fair value estimate context.
Second, the findings of this study have implications for perceptions of the use of fair
value estimates. Prior research has expressed concerns that preparers face incentives and
pressures which motivate them to use fair value estimates opportunistically. However, we
find that most of our participants were hesitant to adopt a questionable estimate even
when they are pressured to or have strong incentives to adopt the questionable estimate.
This result should be of interest to regulatory agencies, such as the Public Company
Accounting Oversight Board and the International Auditing and Assurance Standards
Board (IAASB), who have expressed concern over fair value estimates (Johnson, 2007;
IAASB, 2008).
In the next section, we discuss prior literature and develop the hypotheses. Sections 3
and 4 present the experimental methods and results, respectively. Finally, the conclusion
discusses the study’s implications, limitations and provides suggestions for future
research.

2 Literature review and development of hypotheses

2.1 Fair value estimates

The US Generally Accepted Accounting Principles (GAAP) and International Financial
Reporting Standards (IFRS) have established frameworks for measuring fair value and
provided guidance on the disclosure of fair value measurement. Specifically, IFRS 13 and
US GAAP Codification Topic 820 define fair value as the selling price of an asset or
price paid to transfer a liability in an orderly transaction between market participants at
the measurement date. These standards outline a three-level hierarchy for measuring and
disclosing fair value. The hierarchy ranks the inputs used in the measurement of fair
172 A.G. Brink et al.

value based on their reliability. The most reliable and objective inputs, Level 1 inputs, are
quoted prices of identical assets/liabilities in active markets. Level 1 inputs are publicly
available. Level 2 inputs are inputs based on observable information or prices for similar
assets/liabilities in active or inactive markets, such as the use of comparable piece of
property in valuing a piece of real estate (IFRS 13 paragraph B35). Level 3 inputs are
unobservable inputs which are computed using valuation models or other information
(Ernst and Young, 2009). Level 3 inputs typically involve managers’ assumptions and
judgements and can result in fair values that are more subjective and less reliable than
fair values based on Level 1 or Level 2 inputs (IAASB, 2008).

2.2 Social influence pressures

While all accounting professionals are susceptible to some degree of social influence
pressure, the surrounding organisational environment exerts particular pressure on
financial statement preparers. Preparers may be subject to the policies and oversight of,
or surrounded by, individuals who are not part of the accounting profession (Leicht and
Fennell, 1997; Davis et al., 2006; Suddaby et al., 2009). For example, top management
may put pressure on preparers to manipulate earnings in an attempt to reach earnings
targets. Thus, preparers are likely to experience professional-organisational conflict
which might lead to unethical behaviour. In this study, we investigate two forms of social
influence pressures on preparer decisions: social influence pressure from superiors or
peers.
Superiors and peers are major sources of social influence. The theory of social power
(French and Raven, 1959) identified five sources of social power a person might draw
upon to exert influence: coercive, rewarding, legitimate, expert and referent power.
Superiors have authority to request that subordinates do what they ask (legitimate power)
and reward (rewarding power) or punish (coercive power) subordinates depending upon
their compliance behaviour. In contrast, peers do not have such powers to exert influence.
In addition, superiors are promoted to their position mostly because they have more
experience, skill and knowledge (expert power) and are generally more charismatic
(referent power). Thus, it is reasonable to believe that superiors also have more expert
and referent power than peers in influencing financial statement preparers. Therefore, we
expect preparers to be more sensitive to superior pressure than peer pressure when
advised to use a questionable fair value estimate. Stated formally, we predict the
following hypothesis:
H1: Preparers will be more likely to adopt a questionable fair value estimate
when a superior recommends its use than when receiving the same advice from
a peer.

2.3 Reporting consequences of fair value estimates

We also investigate how preparers’ choice of fair value estimates is impacted by the
reporting consequence of fair value estimates. As mentioned in the ‘Introduction’ section,
public companies face tremendous pressures to report positive earnings. Management has
both personal and corporate incentives to report positive earnings. From a corporate
incentive perspective, for example, management may be pressured to report positive
earnings to attract investors or to avoid violating debt covenants tied to accounting
Effects of social influence pressure source and reporting consequence 173

numbers (Ewert and Wagenhofer, 2005). From a manager’s personal incentive

perspective, companies may have an explicit accounting-based bonus program or stock-
based incentive contract that determines managerial compensation (Ewert and
Wagenhofer, 2005). Incentives to report positive earnings may also stem from pressure to
signal to the market positive information about upcoming tenure decisions or the
manager’s capabilities (Ewert and Wagenhofer, 2005).
The pressure to report positive earnings is particularly prominent in emerging
economies such as China. In China, a firm will be delisted if it reports a loss in three
consecutive years. In addition, firms must maintain positive earnings for three
consecutive years in order to issue equity. Because rights issues are important sources of
capital in China, it is costly for Chinese firms to lose either their listing status or rights to
issue equity (He et al., 2012). Such regulatory requirements create strong incentives for
Chinese firms to manage earnings, and prior literature documents evidence indicating that
Chinese firms manage earnings in order to meet regulatory requirements (Aharony
et al., 2000; Chen and Yuan, 2004; Haw et al., 2005). Due to these incentives, we predict
that preparers will be more likely to adopt a questionable fair value estimate if it will
allow a firm to report positive earnings.
H2: Preparers will be more likely to adopt a questionable fair value estimate if it
allows a firm to report positive earnings.

2.4 The interaction between social influence pressure source and reporting
consequence
We also predict an interactive effect between the source of social influence pressure and
reporting consequence on preparer decisions. SAS No. 99 identifies three categories of
factors that contribute to fraudulent financial reporting:
1 incentive or pressure
2 opportunity
3 attitude or rationalisation to justify the fraud action (Gramling and Myers, 2003).
Individuals are more likely to engage in unethical behaviour when these three conditions
are present (Skousen et al., 2009). Preparers have the discretion to choose a fair value
estimate for financial reporting, allowing preparers the opportunity to use the fair value
estimate opportunistically. When under pressure to use a questionable estimate, preparers
may justify their use of a fair value estimate if the estimate allows the company to report
positive earnings. Such a justification may allow preparers to feel less guilt about
selecting a questionable estimate, because they are able to argue that the selection was
intended to help the company they are working for rather than personal gain. In contrast,
if the questionable estimate does not allow the company to report positive earnings,
preparers may feel there is a lack of adequate justification for the use of the questionable
estimate. We predict that:
H3: Preparers’ likelihood of adopting a questionable fair value estimate will be
influenced by the source of social influence pressure to a greater extent if the
estimate allows the firm to report positive earnings than if the estimate does not
allow the firm to report positive earnings.
174 A.G. Brink et al.

2.5 Compliant behaviour

While superior pressure has been shown to result in compliant behaviour from
subordinates (Davis et al., 2006), it is not clear how it influences subordinates’ attitudes
and behaviour or how it operates. Depending on the nature and depth of changes, we can
classify compliant behaviour into two categories (Festinger, 1953; Kelman, 1958): public
compliance and private acceptance. Public compliance refers compliant behaviour
without changes in attitudes and beliefs, whereas private acceptance occurs when the
individual also voluntarily adopts the influencing agent’s attitudes, beliefs and values.
Public compliance represents a superficial and immediate change, whereas private
acceptance generally leads to more lasting changes (Bruins, 1999).
Superiors may exert social influence on subordinates through different types of power
resulting in different responses from subordinates. A gap in the accounting literature is
the lack of research seeking to identify means of addressing the inappropriate use of
superior pressure. To identify the most effective means of curbing the effects of superior
pressure, we must first have a complete understanding of how subordinates respond to
superior pressure and the underlying mechanism through which it operates. Some
corrective procedures may more effectively curb the negative effects of certain superior
pressures than others. For example, if social influence pressure from a superior produces
compliance behaviour without private acceptance, the company can simply remove the
reward or punishment in order to address the problem. However, if superior pressure
produces compliance coupled with private acceptance, the company may have to find
ways to debias subordinates’ attitudes and behaviours in addition to removing the reward
or punishment.
The psychology literature (Yukl and Falbe, 1991; Munduate and Dorado, 1998; Peiró
and Meliá, 2003) groups the five types of power bases into two general categories:
position and personal power (Boonstra and Bennebroek Gravenhorst, 1998). Position
power stems from a person’s formal position in an organisational hierarchy and implies
authority to reward (rewarding power), punish (coercive power) and prescribe (legitimate
power). Personal power is related to a person’s abilities, skills, experience (expert power)
and charisma (referent power). Prior research (e.g. Kelman, 1958; Bruins, 1999; Raven,
2008) suggests that position power stems from social norms requiring the target of
influence to comply with requests or orders from people in a superior position in a formal
social structure. Thus, position power generally induces superficial changes without
changing subordinates’ beliefs and attitudes (Bruins, 1999). In contrast, personal power
tends to cause deeper changes because it leads to identification or internalisation
(Kelman, 1958; Bruins, 1999). Therefore, social influence via personal power is more
likely to result in private acceptance. We examine the effects of superior pressure on
compliance and investigate whether it operates through position and/or personal power.
RQ1: Does pressure from a superior produce a compliant behaviour with attitude
changes?
Effects of social influence pressure source and reporting consequence 175

3 Method

3.1 Participants
A 2 × 2 between-subjects experiment was conducted to investigate the hypotheses.
Participants were 101 Chinese accountants working in public or private companies.
Of these participants, 57.4% were female, and the mean age was 33.7 years (standard
deviation = 7.08). Participants reported a mean accounting work experience of 6.6 years
(ranging from 0.3 to 21 years; standard deviation = 4.91), 23.8% indicated that they had
received some fair value training (standard deviation = 0.43) and 10.9% indicated some
work experience related to fair value accounting (standard deviation = 0.31).

3.2 Task
An experimental case describing a troubled debt restructuring scenario was developed.2
The experimental case presents information about Associated Industries, a hypothetical
company facing financial difficulties. Associated Industries is the holder of a note
receivable from Delta Company. Delta is struggling to make payments on the note, and
Associated Industries agrees to accept a piece of property as settlement of the debt. The
case also includes an excerpt from Chinese Accounting Standard (CAS) 12 explaining the
use of fair values for troubled debt restructuring and information explaining the three
levels of fair value estimates.3
The next part of the case indicates that Xiao Lin, the accountant responsible for
choosing the fair value estimate to be reported for this property, has obtained two fair
value estimates. Estimate 1 is based on the sales price of a comparable piece of property,
which is approximately the same size and is located in a similar area. The sale of this
property occurred the prior month. Estimate 1 is a Level 2 estimate because it is based on
observable information or prices for similar items in active or inactive markets. Estimate
2 is generated by a model that uses unobservable inputs such as location, size, desirability
and population growth. The weights placed on these factors vary depending on the
assumptions made. Estimate 2 is a Level 3 estimate because it is based on unobservable
inputs. Participants are then provided with a side-by-side comparison of the two estimates
that compares their effect on the loss from debt restructuring and the expected earnings
for the company after this debt restructuring is taken into account. In all treatments, the
Level 3 estimate results in a smaller loss on debt restructuring. Further, the case indicates
that Xiao Lin has been advised to use the Level 3 estimate because of this more
favourable outcome.

3.3 Independent variables

The source of social influence pressure is manipulated at two levels. Xiao Lin receives
advice from a superior (his manager) or a peer (a fellow employee) to use the Level 3
estimate for financial reporting due to its more favourable impact on earnings (the use of
Level 2 estimate for financial reporting will result in a $50,000 loss). Reporting
consequence is also manipulated at two levels. In one treatment, the Level 3 estimate is
$50,000 higher than the Level 2 estimate and allows the company to report zero earnings
in financial reporting after debt restructuring. In the other treatment, the Level 3 estimate
176 A.G. Brink et al.

is $150,000 higher than the comparable estimate and allows the company to report
positive earnings of $100,000 in financial reporting after restructuring.

3.4 Dependent variable

In the third person, we asked participants to indicate the likelihood that the Level 3
estimate would be chosen as the fair value estimate for the property. Participants
indicated the likelihood on a scale from 1 to 7, where 1 = extremely unlikely, 4 = neutral
and 7 = extremely likely. The third-person perspective was used because prior literature
(Fisher, 1993) suggests that an indirect questioning technique is effective in reducing
social desirability bias. Prior literature indicates that when self-report measures are
employed respondents tend to be reluctant to report their true opinion and unconsciously
bias their responses (Zerbe and Paulhus, 1987).

4 Results

4.1 Manipulation checks

After providing estimate choice intentions, participants were asked to indicate the fair
value level that best described each estimate. Descriptions of the fair value levels were
included in the instrument. Among the 101 participants, 10 answered either the Level 2,
Level 3 or both estimate check questions incorrectly. In addition, 11 participants did not
provide a response to the Level 3 estimate check question. The sample size would be
unbalanced across treatments if the 11 participants who did not answer the Level 3
estimate check question are removed. As a result, the participants who provided incorrect
answers for one or both check questions were dropped and those who did not answer the
Level 3 estimate check question remain in the analysis, leaving 91 participants for the
analyses.4

4.2 Descriptives
Panel A of Table 1 presents the descriptive statistics on the mean likelihood of choosing
the Level 3 estimate for financial reporting. Only the mean likelihood of the superior
pressure/positive earnings condition is greater than the midpoint of 4, indicating that most
preparers in our study were hesitant to choose a questionable estimate for the reporting of
fair value. We conduct four simple t-tests to determine whether the mean likelihood for
each condition is significantly different from the midpoint of 4. The results show that the
mean likelihood of the superior pressure/positive earnings condition is significantly
greater than the midpoint of 4 and the mean likelihoods of the peer pressure/zero earnings
condition and the peer-pressure/positive-earnings conditions are significantly lower than
the midpoint of 4. In addition, the mean likelihood of the superior pressure/zero earnings
condition is not significantly different from the midpoint of 4. Overall, these results
suggest that despite the more favourable outcome of using the questionable estimate and
pressure from a superior or peer, most preparers were unwilling to choose the
questionable estimate for financial reporting.
Effects of social influence pressure source and reporting consequence 177

Table 1 ANOVA analysis of preparers’ likelihood of choosing a questionable fair value

estimatea

Panel A: Means (std. deviation) for the likelihood of choosing a questionable fair value estimate
Reporting consequence
Positive
Social influence pressure source Zero earnings earnings Subtotal
Superior pressure 3.95 (0.74) 5.19 (0.93) 4.57 (1.04)
n = 21 n = 21 n = 42
Peer pressure 3.48 (0.64) 3.59 (0.80) 3.53 (0.71)
n = 27 n = 22 n = 49
Subtotal 3.69 (0.72) 4.37 (1.18)
n = 48 n = 43
2 2
Panel B: ANOVA (n = 91; R = 0.438; Adj. R = 0.419)
Source SS df F p-value
b
Social influence pressure source 24.12 1 40.16 <0.001
c
Reporting consequence 10.22 1 17.01 <0.001
Social influence pressure source × reporting 7.17 1 11.94 0.001
consequence
a
Participants indicated the likelihood of choosing the Level 3 estimate. Participants responded using
a seven-point scale anchored by ‘extremely unlikely’ (1) and ‘extremely likely’ (7).
b
Social influence pressure source = 1 for pressure from a superior, and 0 for pressure from a peer.
c
Reporting consequence = 1 if the Level 3 estimate results in positive earnings, and 0 if the estimate
results in zero earnings.

4.3 Hypothesis testing

To test the hypotheses, we first perform an ANOVA analysis using planned contrasts
with the likelihood of choosing the Level 3 estimate (likelihood) as the dependent
variable.5 The independent variables are the source of social influence pressure (superior
pressure or peer pressure) and reporting consequence (the Level 3 estimate results in zero
or positive earnings in financial reporting). Table 1 reports the results. The main effects
of source of social influence pressure and reporting consequence are significant with
p-values ≤ 0.001. The planned contrasts show that preparers are more likely
[F(1,87) = 40.16; p ≤ 0.001] to adopt the questionable fair value estimate when under
superior pressure (mean = 4.57) than when under peer pressure (mean = 3.53). Similarly,
preparers are more likely [F(1,87) = 17.01; p ≤ 0.001] to adopt the questionable estimate
if it allows the company to report positive earnings (mean = 4.37) than if it results in zero
earnings (mean = 3.69).
178 A.G. Brink et al.

Further, a linear regression analysis was performed with likelihood as the dependent
variable. The independent variables are the source of social influence pressure, reporting
consequence and the product of the two. Table 2 reports the results. As expected, the
main effects of source of social influence pressure [β = 0.50; t(88) = 5.83] and reporting
consequence [β = 0.31; t(88) = 3.67] are significant with p-values ≤ 0.001. Thus, H1 and
H2 are supported. In addition, the interaction between the source of social influence
pressure and reporting consequence is statistically significant [β = 0.47; t(87) = 3.46;
p = 0.001]. Thus, H3 is also supported. The main effects must be interpreted with caution
due to the significant interaction. As illustrated in Figure 1, the difference in the mean
likelihood between superior pressure and peer pressure is greater when the estimate
allows the company to report positive earnings. Two simple effect tests are conducted to
examine the difference in the mean likelihood between superior and peer pressure across
reporting consequences. When the questionable estimate allows the company to report
breakeven earnings, the difference in the mean likelihood between superior and peer
pressure is 0.47, which is not statistically significant [F(1,87) = 4.36, p = 0.40]. When the
questionable estimate allows the company to report positive earnings, the difference in
the mean likelihood between superior and peer pressure is 1.60, which is statistically
significant [F(1,87) = 45.77, p < 0.001]. These results suggest that superior pressure has a
stronger impact on preparers’ intention to use the questionable estimate if the estimate
allows the company to report positive earnings.

Table 2 Linear regression analysis of preparers’ likelihood of choosing a questionable fair

value estimatea

Step 1: Dependent variable: preparers’ likelihood of choosing a questionable fair value estimate
Standardised
Model coefficients t p-value
b
Social influence pressure source 0.50 5.83 <0.001
c
Reporting consequence 0.31 3.67 <0.001
Step 2: Adding the moderation term
Standardised
Model coefficients t p-value
Social influence pressure source 0.23 2.09 0.040
Reporting consequence 0.05 0.49 0.624
Social influence pressure source × reporting 0.47 3.46 0.001
consequence
a
Participants indicated the likelihood of choosing the Level 3 estimate. Participants responded using
a seven-point scale anchored by ‘extremely unlikely’ (1) and ‘extremely likely’ (7).
b
Social influence pressure source = 1 for pressure from a superior, and 0 for pressure from a peer.
c
Reporting consequence = 1 if the Level 3 estimate results in positive earnings, and 0 if the estimate
results in zero earnings.
Effects of social influence pressure source and reporting consequence 179

Figure 1 Interaction of social influence pressure and reporting consequence on preparers’

likelihood of choosing a questionable fair value estimate.

a
Participants indicated the likelihood of choosing the Level 3 estimate for financial reporting.
Participants responded using a seven point scale anchored by ‘extremely unlikely’ (1) and
‘extremely likely’ (7).
b
The source of social influence pressure was manipulated between subjects at two levels: social
influence pressure from a superior or peer. cReporting consequence was manipulated between
subjects at two levels: the estimate allows the company to report positive earnings versus zero
earnings

4.4 Mediation analysis

RQ1 asks whether pressure from a superior produces compliant behaviour with attitude
changes. To investigate this question, we conduct mediation analysis to test whether
perceived relevance and/or reliability mediates the effect of social influence pressure on
preparers’ selection and reporting of fair value estimates. Both relevance and reliability
(referred to as representational faithfulness in the conceptual framework) are primary
qualities underlying the usefulness of accounting information. Moreover, relevance and
reliability can be used to build stakeholders’ interest in the link between the current
economic constructs of the firm and its future net cash flows (Maines and Wahlen, 2006).
Participants were asked to indicate on a scale of 1–7 the relevance (where
1 = extremely irrelevant and 7 = extremely relevant) and reliability (where 1 = extremely
unreliable and 7 = extremely reliable) of the Level 3 estimate. If superiors exert influence
only through position power, superior pressure should only result in a public compliance.
Therefore, the source of social influence pressure should influence preparers’ decisions to
adopt the questionable estimate, but it should not affect preparers’ perceptions of the
reliability of that estimate. In other words, preparers’ perceived reliability of the estimate
will not mediate the impact of source of social influence pressure on preparers’ intention
to choose the questionable estimate. In contrast, if superiors exert influence only through
personal power, preparers’ perceptions about the reliability of the estimate should fully
mediate the impact of the source of social influence pressure and reporting consequence
on preparers’ decision to choose the questionable estimate. Finally, if both mechanisms
are at work, preparers’ perceptions about the reliability of the estimate should play a
partial mediation role. Figure 2 depicts the predicted mediating effect.
180 A.G. Brink et al.

Figure 2 Potential mediating effects

First, we examine the role of perceived relevance. We conduct an ANOVA analysis using
planned contrasts with perceived relevance of the Level 3 estimate as the dependent
variable. The independent variables are the source of social influence pressure and
reporting consequence. The main effects of source of social influence pressure and
reporting consequence are significant with p-values ≤ 0.05. The planned contrasts show
that preparers indicate a higher level of perceived relevance for Level 3 estimate [F(1,87)
= 12.83; p = 0.001] when under superior pressure (mean = 4.34) than when under peer
pressure (mean = 3.69). Similarly, preparers indicate a higher level of perceived
relevance for Level 3 estimate [F(1,87) = 4.78; p = 0.032] if it allows the company to
report positive earnings (mean = 4.21) than if it results in zero earnings (mean = 3.79).
We follow the approach proposed by Baron and Kenny (1986) to examine the
potential mediating role of perceived relevance. As shown in Table 3, the effects of social
influence pressure source (β = 0.35; t = 3.65; p ≤ 0.001) and reporting consequence
(β = 0.22; t = 2.31; p = 0.024) on perceived relevance are statistically significant.
In addition, social influence pressure source (β = 0.49; t = 5.67; p ≤ 0.001) and reporting
consequence (β = 0.31; t = 3.52; p = 0.001) significantly influence likelihood.
Furthermore, after perceived relevance is added to the model, perceived relevance
(β = 0.34; t = 3.80; p ≤ 0.001) significantly influences likelihood while the effects of
social influence pressure source and reporting consequence on likelihood remain
significant. The standardised coefficients for social influence pressure source and
reporting consequence decrease after perceived relevance is added to the model. These
results suggest that perceived relevance partially mediates the effect of social influence
pressure source and reporting consequence on likelihood. To further test the mediation
effects, we perform mediation analyses using Haye’s Process macro (Hayes, 2013). The
untabulated results also confirm the mediation effect of perceived relevance. Specifically,
Sobel’s test indicates that the indirect effects of social influence pressure source (0.29;
Z = 2.78; p = 0.006) and reporting consequence (0.23; Z = 2.07; p = 0.038) on likelihood
through perceived relevance are statistically significant.

Table 3 Mediation analysis for perceived relevancea

Panel A: Dependent variable: perceived relevance

Model Standardised coefficients t p-value
b
Social influence pressure source 0.35 3.65 <0.001

Reporting consequencec 0.22 2.31 0.024

Effects of social influence pressure source and reporting consequence 181

Table 3 Mediation analysis for perceived relevancea (continued)

Panel B: Dependent variable: preparers’ likelihood of choosing a questionable fair value

estimate
Step 1
Standardised
Model coefficients t p-value
Social influence pressure sourceb 0.49 5.67 <0.001
c
Reporting consequence 0.31 3.52 0.001
Step 2: Addition of perceived relevance
Model Standardised coefficients t p-value
Social influence pressure source 0.37 4.29 <0.001
Reporting consequence 0.23 2.76 0.007
Perceived relevance 0.34 3.80 <0.001
Panel C: Means (std. deviation) for preparers’ perception about the relevance of the Level 3
estimate
Reporting consequence
Social influence pressure source Zero earnings Positive earnings
Superior pressure 4.29 (0.78) 4.40 (0.82) 4.34 (0.79)
n = 21 n = 20 n = 41
Peer pressure 3.41 (0.64) 4.05 (1.00) 3.69 (0.87)
n = 27 n = 22 n = 49
3.79 (0.82) 4.21 (0.93)
n = 48 n = 42
a
Participants indicated the perceived relevance of the Level 3 estimate using a seven-point scale
anchored by ‘extremely irrelevant’ (1) and ‘extremely relevant’ (7).
b
Social influence pressure source = 1 for pressure from a superior, and 0 for pressure from a peer.
c
Reporting consequence = 1 if the Level 3 estimate results in positive earnings, and 0 if the estimate
results in zero earnings.
A similar procedure was performed to examine the role of perceived reliability. We
conduct an ANOVA analysis using planned contrasts with the perceived reliability of the
Level 3 estimate as the dependent variable. The independent variables are the source of
social influence pressure and reporting consequence. The main effects of source of social
influence pressure and reporting consequence are significant with p-values ≤0.005.
The planned contrasts show that preparers indicate a higher level of perceived reliability
for Level 3 estimate [F(1,87) = 12.07; p = 0.001] when under superior pressure
(mean = 3.95) than when under peer pressure (mean = 3.43). Similarly, preparers indicate
a higher level of perceived reliability for Level 3 estimate [F(1,87) = 8.86; p = 0.004] if it
allows the company to report positive earnings (mean = 3.91) than if it results in zero
earnings (mean = 3.46). As shown in Table 4, perceived reliability partially mediates the
effect of social influence pressure source and reporting consequence on the likelihood of
choosing the Level 3 estimate for financial reporting. Sobel’s test (results untabulated)
also suggests that the indirect effect of social influence pressure source (0.36; Z = 2.99;
182 A.G. Brink et al.

p = 0.003) and reporting consequence (0.35; Z = 2.63; p = 0.009) on likelihood through

perceived reliability are statistically significant.

Table 4 Mediation analysis for perceived reliabilitya

Panel A: Dependent variable: perceived reliability

Model Standardised coefficients t p-value
Social influence pressure sourceb 0.33 3.38 <0.001
c
Reporting consequence 0.27 2.85 0.005
Panel B: Dependent variable: preparers’ likelihood of choosing a questionable fair value
estimate
Step 1
Model Standardised coefficients t p-value
Social influence pressure sourceb 0.49 5.83 <0.001
c
Reporting consequence 0.31 3.67 0.001
Step 2: Addition of perceived reliability
Model Standardised coefficients t p-value
Social influence pressure source 0.35 4.46 <0.001
Reporting consequence 0.18 2.42 0.018
Perceived reliability 0.47 5.80 <0.001
Panel C: Means (std. deviation) for preparers’ perception about the reliability of the Level 3
estimate
Reporting consequence
Social influence pressure source Zero earnings Positive earnings
Superior pressure 3.62 (0.50) 4.29 (1.06) 3.95 (0.88)
n = 21 n = 21 n = 42
Peer pressure 3.33 (0.48) 3.55 (0.67) 3.43 (0.58)
n = 27 n = 22 n = 49
3.46 (0.50) 3.91 (0.95)
n = 48 n = 43
a
Participants indicated the perceived reliability of the Level 3 estimate using a seven-point scale
anchored by ‘extremely unreliable’ (1) and ‘extremely reliable’ (7).
b
Social influence pressure = 1 for pressure from a superior, and 0 for pressure from a peer.
c
Reporting consequence = 1 if the Level 3 estimate results in positive earnings, and 0 if the estimate
results in zero earnings.

4.5 Differences in perceived relevance

Prior literature argues that Level 3 estimates are more value relevant than Level 2
estimates under certain circumstances (Song et al., 2010; Altamuro and Zhang, 2013).
Preparers may choose to use the Level 3 estimate because they perceive it to be more
relevant than the Level 2 estimate. We asked participants in the experiment to indicate
the relevance of each of the two fair value estimates on a scale of 1–7 (where
1 = extremely irrelevant and 7 = extremely relevant). A difference score is constructed by
Effects of social influence pressure source and reporting consequence 183

subtracting the score for Level 3 estimate from the score for Level 2 estimate. A positive
difference indicates that participants perceive the Level 2 estimate to be more value
relevant than the Level 3 estimate. Only 1 out of 91 participants indicated that the Level 3
estimate was more relevant than the Level 2 estimate. This result suggests that almost all
of our participants perceived the Level 3 estimate to be less relevant than the Level 2
estimate.

5 Conclusion

Although controversial, the use of fair value accounting practices continues to increase.
Management may have strong incentives to maintain positive earnings and may use fair
values to manage earnings to avoid reporting losses (He et al., 2012). Thus, preparers
may face tremendous pressure from management to act unethically, and it is of great
importance to understand how financial statement preparers’ judgements and decisions
are influenced by pressures from superiors or peers when faced with choices regarding
fair values.
Results from our experiment indicate that accounting professionals in the role of
financial statement preparers recognise that fair value estimates based on Level 3 inputs
are subjective and unreliable and, thus, are generally unwilling to choose a Level 3
estimate for financial reporting. However, superior pressure and a positive reporting
consequence increase preparers’ likelihood of choosing a questionable estimate.
Preparers are particularly subject to the influence of superior pressure when the estimate
allows the company to report positive earnings. In addition, the mediation analysis
indicates that preparers’ perceptions about the fair value estimate partially mediate the
effect of social influence pressure source on preparers’ decisions. This suggests that
superiors exert influence through position power resulting in compliant behaviour from
preparers and through personal power leading to changes in preparers’ attitudes towards
the Level 3 estimates.
This study is subject to several limitations. First, the participants in our study are
Chinese accounting professionals. As people from cultures with high degrees of power
distance tend to be more sensitive to superior pressure, the results may be different in
other cultures. Future research could examine superior pressure in a different culture.
Second, the participants in our study are relatively less experienced in fair value
measurement. The extent to which additional experience with fair value measurement
influences professional accountants’ fair value choices and its interactions with other
variables would be an interesting topic for future research. Third, we investigate two
sources of social influence pressures in our study: superior and peer pressure. However,
we did not include a true control group with no social influence pressure present. As a
result, our results address the incremental differences between social influence pressure
sources (superior versus peer), but they do not address how participant responses differ in
the presence of pressure as compared to the absence of pressure. Future studies could
investigate the impact of various forms of social pressures on preparer judgements
compared to the absence of social pressure.
We elected to investigate perceptions of the reliability of fair value estimates.
The revised conceptual framework uses the term ‘representational faithfulness’ rather
than ‘reliability’ (International Accounting Standards Board, 2010). While the term
‘reliability’ has been replaced in the framework, we felt that it was a more widely
184 A.G. Brink et al.

understood phrase amongst our participants. However, our results’ generalisability to

perceptions of representational faithfulness is limited to the extent that our participants’
interpretation of reliability differs from their interpretation of representational
faithfulness. Future research could investigate the extent to which perceptions of
reliability and representational faithfulness differ in the context of fair value accounting.

Acknowledgements

The authors would like to acknowledge the helpful comments of anonymous reviewers,
Lori Fuller, Robson Glasscock, Carolyn Norman, Lisa Victoravich and Benson Wier.
This paper has also benefited from comments from participants at the 2012 American
Accounting Association Annual Meeting, the 2012 Virginia Accounting Research
Conference, and the 2012 International Symposium on Audit Research.

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Notes
1 In 2010, the International Accounting Standards Board (IASB) and the Financial Accounting
Standards Board issued their joint project on revised conceptual framework. In the revised
framework, the qualitative characteristic of ‘reliability’ was replaced by ‘representational
faithfulness’ (IASB, 2010). While the term ‘reliability’ has been replaced, there is still the
concern and confusion about these two terms. Erb and Pelger (2015) argued that “it might also
be framed in a context of uncertainty and risk in a context of three levels of fair value
estimates” (p.34). Thus, we use the term ‘reliability’ in this study.
2 The case for this study is a modified version of the case used by Brink et al. (2016). In the
development of case, clarifications and refinements were made based on a series of pilot tests.
Then, feedback was obtained to ensure that the setting was realistic, and the values were
plausible. The back-translation method was used for translating the experimental instrument
into Mandarin Chinese.
Effects of social influence pressure source and reporting consequence 187

3 A debt restructuring scenario was selected because it has been identified as a potential tool for
earnings manipulation in China (Feng, 2002; Jiang et al., 2010; Peng and Bewley, 2010; He
et al., 2012). Under CAS 12, gains or losses on debt restructuring, based on the fair values of
the assets used to settle the debt, are recognised in income.
4 Results are not changed if those participants who did not answer the Level 3 manipulation
check question are dropped. Specifically, the main effects of social influence pressure
(β = 0.48; t = 5.05; p < 0.001) and reporting consequence (β = 0.24; t = 2.50; p = 0.015) and
the interaction (β = 0.39; t = 2.84; p = 0.006) are statistically significant. Results are also not
changed if all participants are included in the analysis. Specifically, the main effects of social
influence pressure (β = 0.47; t = 5.75; p < 0.001) and reporting consequence (β = 0.33;
t = 3.96; p < 0.001) and the interaction (β = 0.49; t = 3.68; p < 0.001) are statistically
significant.
5 An ANCOVA analysis conducted with demographic variables as covariate variables (e.g.
gender, age, education, work position, certificates, accounting experience, employer type, etc.)
indicates no statistically significant covariates. Therefore, the control variables are removed
from the analysis.