Accounting and Finance 49 (2009) 75–93

Knowledge transfer in project reviews: the effect of

ORIGINAL
M. M. Cheng
Blackwell
Oxford,
Accounting
ACFI
©
1467-629X
0810-5391
Journal
XXX
The ARTICLE
et al.
Authors
compilation
UKPublishing
and Finance
©Ltd
2008 AFAANZ

self-justification bias and moral hazard

Mandy M. Chenga, Axel K-D Schulzb, Peter Boothc

a
Australian School of Business, University of New South Wales, Sydney, 2052, Australia
b
Department of Accounting and Finance Monash University, Caulfield East, 3145, Australia
c
Chancellery University of Technology, Sydney, Haymarket, 2001, Australia

Abstract

In this study, we examine two factors that impact managers’ willingness to share
private information during the project review stage of capital budgeting. Drawing on
the cognitive dissonance theory and the agency theory, we find that both high
perceived personal responsibility and the use of project reviews for performance
evaluation result in a greater tendency for managers to withhold negative private
information. However, we do not find an interaction between these two factors.
Our study makes a contribution to both the academic literature investigating
factors affecting project reviews and the practitioner literature looking at design
and implementation of effective project reviews.

Key words: Project/performance reviews; Knowledge transfer; Management

accounting behaviour research; Capital investment decision

JEL classification: M40

doi: 10.1111/j.1467-629x.2008.00271.x

1. Introduction

Capital budgeting is one of the key processes undertaken by organizations in

planning for the future resource consumption. By its nature, capital budgeting
involves decision-making under uncertainty, as organizations chart out a future
course of action. The challenge for the organizational control system is to provide

The authors would like to acknowledge the support of CPA Australia Research Grant
Scheme, and the comments from the participants of research seminars at the University of
Auckland, the University of New South Wales, Accounting, Behavioural and Organization
Conference 2002 and the Accounting and Finance Association of Australia and New
Zealand Conference 2002.
Received 30 March 2006; accepted 28 April 2008 by Gary Munroe (Deputy Editor).

© The Authors
Journal compilation © 2009 AFAANZ
76 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93

a mechanism that provides both feedback and accountability to managers involved

in the decision process. Post completion reviews provides one such mechanism
(e.g. Langfield-Smith et al., 2006).
According to International Management Accounting Policy Statement 6–Post
Completion Review (issued by the International Federation of Accountants,
1994),1 the main purposes of project reviews include organizational learning
and improving future decisions/project implementations within the organization.
Project reviews allow managers to share/transfer their knowledge gained from
the existing project with/to other managers across space and time, and in doing
so, improve the efficiency and effectiveness of project management in the future.
For example, project managers can report ‘lessons learned’ to a project audit
committee, which in turn can use this information to provide training for other
project managers either within or outside the organizational unit, or to redesign
processes. This view is supported by Busby (1999), who found that project
reviews are generally considered to be effective in disseminating knowledge about
good practices, and to correct and learn from errors.
However, although project reviews allow managers to transfer and share their
information, it does not guarantee the transfer of relevant information, particularly
when the information is private and relates to negative financial consequences.
In that context, it could also have the opposite effect of hindering the decision
process, as managers chose not to share this type of information. We are par-
ticularly interested in the context of negative private information as it provides
a valuable avenue for organizations to learn from previous mistakes. The focus
of our study is to examine two factors that impact on the willingness of manag-
ers to pass on this type of information to the project audit committee in order
for the organization to make better capital budgeting decisions in the future.
The first factor of interest to our study is the degree of involvement that the
manager has with the project under review, such as responsibility for initiating
the project and/or length of active management of the project. It is not uncommon
that managers, who are involved in managing the project under review, are also
involved in the project review process (e.g. Kennedy and Mills, 1992; O’Brien,
1998). Involving these managers can potentially bring in higher levels of
project-specific knowledge compared to independent reviewers. However, we
propose that there are potential negative consequences as self-justification bias

1
Although ‘post completion review’ (PCRs) are usually carried out during the project
outcome period, the International Federation of Accountants (1994) recommends that
for projects with long duration, an interim review is recommended. ‘Interim’ PCRs are
sometimes referred to as project audits or project reviews. In the present study, we adopt the
term project reviews to refer to PCRs that are carried out at later stages of the project, as
well as post-project reviews. Furthermore, we are particularly interested in project reviews
that are carried out later in the life cycle of the project because these are generally of more
value to the organization with respect to learning from past experiences and applying
findings to future projects (Meredith and Mantel 1995).

© The Authors
Journal compilation © 2009 AFAANZ
 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93 77

will cause the managers to place less emphasis on, or even ignore negative
project feedback (e.g. Caldwell and O’Reilly, 1982; Aronson, 1995; Ryan,
1995); hence, reducing the effectiveness of project review as a knowledge
transfer tool.
Second, we are interested in the extent to which explicit performance evaluation
attached to performance reviews also affect managers’ willingness to transfer
knowledge. We argue that where project reviews are used to evaluate managerial
performance, a moral hazard problem exists, as managers (acting as agents) are
given incentives not to reveal unfavourable private information. Consistent with
prior literature, which found that moral hazard is the major driving force of
escalation of commitment (e.g. Harrison and Harrell, 1993, 1994; Salter et al.,
2004), we propose that moral hazard will affect managers’ decision to share
unfavourable information regardless of the degree of prior involvement. We
further argue that the degree of personal responsibility and moral hazard have
an interactive effect as the motivation to present a more favourable outcome for
evaluation purposes further adds to the cognitive bias of self-justification.
Using a laboratory experiment, we find support for the main effects of self-
justification bias and moral hazard on the managers’ willingness to share informa-
tion via the project review process. Both higher degree of personal involvement by
the managers and the use of performance review information in performance
evaluation separately and significantly decrease managers’ willingness to share
information via the review process. This suggests that agency theory does not
completely explain managers’ unwillingness to share negative project feedback.
Rather, the manager’s self-justification bias also plays an important role. Our
results have important practical implications, suggesting that obstacles to
knowledge transfer via project reviews can be reduced by either severing the
link between the project review process and the organization’s performance
evaluation system, and/or the rotation of managers (e.g. via a ‘job rotation’ pro-
gram where a new manager steps in and takes charge at some point during the
life of the project). However, the latter approach potentially leads to a reduction
in local knowledge, which might have a negative impact on project performance,
especially if the rotation occurs too frequently. Furthermore, it is also difficult
to rotate other personnel closely associated with the project. An alternative
approach is to lower a manager’s feeling of personal responsibility by sharing
the project responsibility among a group of team members.
The results from the present study also contribute to the management
accounting research literature in a number of ways. First, prior literature invest-
igating the effect of personal responsibility on managerial decision bias has
predominately focused on either agency theory (e.g. Harrison and Harrell, 1993;
Harrell and Harrison, 1994) or the effect of self-justification bias (e.g. Staw,
1976; Cheng et al., 2003). Although Schulz and Cheng (2002) attempt to integrate
the two frameworks in the context of capital budgeting re-investment decisions,
they fail to find a significant moderating role for information asymmetry when
managers who are suffering from self-justification bias escalate their commitment

© The Authors
Journal compilation © 2009 AFAANZ
78 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93

to an unprofitable project. Consistent with their findings, the present study

shows that the effect of self-justification and moral hazard are additive and
not interactive, both adding separately to managerial biases with respect to
unfavourable project information. Second, post-project audits have often been seen
as a useful means of preventing escalation of commitment, and to allow learning
from past projects (especially poorly performing projects). Our study highlights
the risks of biased information feeding into the project audit process due to the
separate but additive effects on managers’ tendencies to withhold unfavourable
information.

2. Literature review and hypothesis development

Project review (or project audit) is a feedback system that monitors the
progress and/or completion of an investment project by systematically comparing
actual performance with budgets and project plans (Kennedy and Mills, 1992;
Chenhall and Morris, 1993). Gordon and Myers (1991) find that a large number
of organizations conducted some form of project review and the frequency
depended on the nature of the project reviewed. Although project reviews have
a number of objectives (refer to Gordon and Myers, 1991), the one that is of
particular interest to our study is to ‘. . . provide information for future capital
expenditure decisions’. In this role, project reviews allow lessons learned from
prior projects to be transmitted to existing and future projects, in particular with
respect to evaluating future projects (e.g. Chenhall and Morris, 1993; Neale,
1995; Van der Veeken and Wouters, 2002).
However, despite the importance of project reviews, there have been few
empirical studies that have considered the benefits of such reviews in general
and the effectiveness of knowledge transfer in particular. Prior, predominantly
practitioner, literature has been focused instead on the technical aspect of
project evaluation, such as surveying the methodology companies used in
evaluating project viability (e.g. Ryan and Ryan, 2002; Akalu, 2003) and the
design processes and features of project reviews (e.g. Mills and Kennedy,
1993a; Neale, 1995). In the accounting analytical research paradigm, a number
of studies have considered the effect of private information and compensation
schemes on managers’ capital investment decisions (e.g. Dutta, 2003). However,
none of these studies has examined the benefits of project reviews, and their
potential role as a knowledge transfer tool.
One of the very few empirical studies in accounting that has examined the
benefits of project reviews was Chenhall and Morris (1993), who show that
project reviews facilitate managerial learning, which, in turn, improved managerial
performance. However, Chenhall and Morris (1993) also find that the degree of
managerial learning was smaller when project reviews were carried out in a
business environment characterized by high uncertainty, reflecting a context
where managers are able to successfully withhold information over the long
term. Chenhall and Morris’ finding suggest that although project reviews are

© The Authors
Journal compilation © 2009 AFAANZ
 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93 79

potentially useful organizational learning tools, managers need to take into

account factors that will mitigate their effectiveness.
In the present study, we are particularly interested in one such impediment;
namely, managers’ tendency to withhold private negative project feedback
during the review of an ongoing project. We explore two specific factors that
potentially affect this tendency in terms of whether the managers involved in
the project review is also (i) the manager who initiated and managed the
project, and (ii) there is a direct link between the performance evaluation of the
manager and information elicited during the post-audit review.

2.1. Eliciting private negative information from the project manager to the
organization: the effect of personal involvement

The rationale for including managers actively involved with the project under
review in the post-review process is based on these managers having private
project information (e.g. information that provides explanations for cost overruns
and performance of various components of the project). Once this information
has been released by the manager, it can be pooled and shared with other managers,
and eventually be embedded within the organization’s knowledge base as part
of the organizational learning process.
However, one impediment to sharing the information is likely to be the
degree of the project managers’ involvement with the project. Specifically,
managers who have greater involvement with the project (e.g. by initiating the
project or having an active role in managing of the project) are argued to have
a greater perceived responsibility for the project. And higher personal responsibility
has been associated with a number of dysfunctional managerial behaviour, such as
the continuation of unprofitable projects in the escalation of commitment literature
(e.g. Schulz and Cheng, 2002).
In the context of information sharing, we postulate that higher project
involvement makes project managers more susceptible to the ‘self-justification
bias’ (also known as ‘sponsorship bias’), which has been documented in both
the accounting and psychology literature. Based on the more general theory of
cognitive dissonance (e.g. Festinger, 1957), prior studies have postulated that
managers who experience a higher level of personal responsibility for a project
are more likely to self-justify the existence and continuation of the project, as
well as to seek out confirming rather than disconfirming information about the
project (Staw, 1976; Aronson, 1995).
Specifically, the theory of cognitive dissonance suggests that negative feedback
(‘dissonant feedback’) about a prior decision generates cognitive dissonance.
One way for managers to reduce such dissonance is to ignore or re-interpret the
dissonant feedback, and continue or even increase their decision commitment
(Festinger, 1957). A number of empirical studies in the escalation literature
support this view. For example, Beeler and Hunton (1997) and Conlon and
Parks (1987) both find that decision responsibility and the need for justification

© The Authors
Journal compilation © 2009 AFAANZ
80 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93

resulted in a preference for retrospective (and, hence, supportive) information.

Similarly, Ryan (1995) reports that decision-makers sometimes re-interpreted
critical events in a more positive light to support their prior commitment.
Biyalogorski et al. (2006) recently found support for a decision responsibility
effect on escalation behaviour with the initial responsibility for the decision
resulting in significantly greater tendency to continue with a losing product
introduction. The framework used by Biyalogorski et al. (2006) is consistent
with Festinger’s cognitive dissonance theory.
Whereas prior literature has predominantly explored the consequence of
self-justification in terms of how these individuals seek out and use confirming
or disconfirming information (e.g. Conlon and Park, 1987; Keil, 1995; Ryan, 1995),
in the present study we are interested in how it manifests itself in willingness
to share negative (and, hence, disconfirming) information. We postulate that
negative information creates cognitive dissonance with the initial decision to
‘green light’ the investment. Consistent with prior work into ‘self-justification
bias’, we further expect that the degree of dissonance between the negative
information and the initial investment decision will be greater for managers
who were involved in making the initial decision and, therefore, perceive a
higher level of personal responsibility for the initial investment decision (Festinger,
1957; Staw, 1976). We hypothesize that the outcome of this increased level of
cognitive dissonance for these managers will be a greater tendency to regard
the negative information as less important to both the initial decision and sub-
sequent decisions and as such a lower likelihood of including this information
in performance reports. Stated more formally:

H1: Managers who perceive a higher level of personal responsibility for the project under
review are less likely to report negative project feedback, compared to those who perceive
a lower level of personal responsibility for the project.

2.2. Eliciting private negative information from the project manager to the
organization: the effect of performance evaluation

Information obtained during the post-review can also be used by the organization
to jointly evaluate the performance of the manager as well as the project.
Although the primary aim of project reviews is to analyse the performance (and
factors contributing to the performance) of the project, the review process can
also be used to evaluate the performance of the project manager with respect to
his or her efficiency and effectiveness in implementing the project. Indeed, as a
project manager’s performance is at least partially reflected in the success of
the projects he or she manages, from the organization’s viewpoint the project
review process is a useful way to gain insight into the project manager’s com-
petence. For example, one of the aims of project review is to gather root causes
for problems and then to make recommendations on how such problems can be
avoided in the future (e.g. Von Zedtwitz, 2002). If the root causes identified

© The Authors
Journal compilation © 2009 AFAANZ
 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93 81

reveal mismanagement on the part of the project manager, it will affect top
management’s perception of the competencies of the project manager.
Using project reviews to evaluate a project manager’s performance gives rise
to the moral hazard problem under agency theory. Agency theory states that a
moral hazard problem exists when the goals of the principal and the agent
conflict (incentive to shirk), and when it is difficult or expensive for the principal to
verify the agent’s behaviour (information asymmetry; Eisenhardt, 1989). When
both incentive to shirk and information asymmetry occur, then agency theory
predicts that the agent will exploit any information advantage to maximize his
or her own welfare at the expense of the principal (e.g. by withholding private
information; Sprinkle, 2003).
A number of prior studies has consistently shown that the problem of moral
hazard exists in capital investment/resource allocation decisions (e.g. Harrison
and Harrell, 1993, 1994; Rutledge and Karim, 1999; Booth and Schulz, 2004).
In particular, Harrison and Harrell (1993) find that managers who are responsible
for a poorly performing project are more likely to continue with an unprofitable
project where both information asymmetry and financial/career incentives are
present. By continuing these failing projects, managers can delay the release of
private negative information (i.e. the project is failing) and, therefore, advance
their personal interests (i.e. financial incentives), which would otherwise be
threatened by the release of this private information.
In the context of project reviews, information asymmetry is likely to already
exist between the project manager and the review committee. Indeed, the existence
of information asymmetry gives rise to the need to use the project review as an
information sharing tool. Where the review is used solely for performance evalu-
ation purposes, the project manager is provided with an incentive not to include
and, hence, reveal negative information, as doing so would negatively affect their
reported performance and, hence, the attached financial incentives. In contrast,
where the purpose of the review is solely for organizational learning, revealing
negative information will not affect their reported performance, as the organiza-
tion is explicitly trying to learn not only from prior successes but also from prior
mistakes. In fact, in such situations the sharing of and critical reflection on such
negative information would be viewed as reflecting positively on the project manager.
As a consequence, we postulate that in the presence of information asymmetry,
the intended use of the information obtained from the review has important
consequences to the sharing of negative information by managers. Where the
primary intention by the organization is to use it as a performance appraisal as
opposed to an organizational learning tool, moral hazard facing the managers
will be higher and, hence, managers are less likely to share negative information in
the context of the former than the latter. Stated more formally:

H2: Managers who are involved in a project review as part of a performance evaluation
process are less likely to report negative project feedback, compared to managers who are
involved in a project review as part of an organizational learning process.

© The Authors
Journal compilation © 2009 AFAANZ
82 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93

2.3. The interaction between personal involvement and the purpose of

project review

It is unclear from the prior literature whether the negative effect of personal
responsibility and using the project review to evaluate performance are additive
or whether the two factors interact. Prior empirical studies in the accounting
literature provide mixed evidence (Harrell and Harrison, 1994; Schulz and
Cheng, 2002). In particular, Harrell and Harrison (1994) find a moral hazard
effect in the context of managers being told that they were responsible for the
project and, hence, controlled for self-justification effects by pegging their
study to a context of responsible managers. Yet the subsequent study by Schulz
and Cheng (2002) demonstrated that Harrell and Harrison (1994) might have
inadvertently weakened the level of responsibility successfully created by
studies, such as Staw (1976) (refer to Schulz and Cheng, 2002, for a discussion).
However, Schulz and Cheng (2002) fail to find a separate moral hazard effect,
which can potentially be attributed to a weaker moral hazard manipulation.2 As
such, it remains unclear whether incentives have an independent addition effect
to the level of responsibility.
The psychological literature also points to different predictions. On the one
hand, the effect of self-justification biases and moral hazard might be additive
as the former is a cognitive bias related to how managers process information,
whereas the latter provides managers with a motivational force not to share
negative information in order to maximize their personal utility. To the extent
that these are separate effects, we would not expect an interaction between the
level of personal responsibility and the purpose of the project review.
In contrast, personal responsibility and project review purposes might interact.
Prior literature on motivated reasoning suggests that individuals’ cognitive pro-
cesses are affected by their motivation. In particular, people’s desire to arrive at
a favourable outcome can lead to biases, such as selective memory search and
underestimation of the importance of unfavourable events (e.g. Kunda, 1990;
Browstein, 2003). Indeed, a high level of motivation to achieve a certain outcome
is said to provide a trigger for the operation of a set of cognitive biases that
allow individuals to arrive at a conclusion they prefer (Kunda, 1990). In the
current context, the use of project reviews to evaluate managerial performance
is likely to increase managers’ motivation to draw favourable conclusion about
the project’s outcome. As such, it would add to the devaluating of the importance
of negative information expected from the self-justification bias discussed
previously and, therefore, result in a greater reluctance by these managers to
share negative project information. On balance we postulate the latter and, hence,
propose an interaction effect. Stated more formally:

2
Schulz and Cheng (2002) did not provide subjects with explicit incentive to continue the
existing project; hence, lowering the incentive to shirk – an important antecedent to moral
hazard.

© The Authors
Journal compilation © 2009 AFAANZ
 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93 83

H3: The relative difference in tendency to report negative project feedback between managers
perceiving a high level of personal responsibility for the project and managers perceiving a
low level of personal responsibility will be greater when the intended use of the project
feedback is performance evaluation of the managers than when the intended use is organiza-
tional learning.

3. Research method

3.1. Research design and subjects

To test the proposed hypotheses, we conducted an experiment with a 2 × 2

between subjects design. The dependent variable was the degree to which two
negative project feedback items were included in the review.3
Experimental subjects were 129 middle managers who were undertaking an
MBA at a major Australian university. All subjects were enrolled in the same
management accounting subject, which was part of the core of the MBA program.
All subjects were volunteers and were given a random chance of winning a
bookshop coupon. Their rewards were not linked to their responses in the
experiment. The average age of the subjects was 30 years, and the average
work experience was 8 years. As mature subjects with real-world business and
management experience, the subjects were considered to have the appropriate
background for the decision-making task used in this experiment.

3.2. Experimental task

The experiment consisted of two stages: an initial investment decision followed

by the completion of a project review report. Subjects assumed the role of a
national marketing manager for a fast food company and were randomly
assigned to one of the four experimental groups. In the First Stage (initial
investment decision – 3 years prior to the current decision period), subjects
were either asked to make a decision to invest in one of two available projects
(high personal responsibility) or were told that their predecessor had made the
initial investment decision (low personal responsibility). The act of making the
initial investment decision is expected to increase the feeling of volition and,
therefore, personal responsibility in the subjects (Schulz and Cheng, 2002), as
well as indicating to these subjects that they have been responsible for the
project for a long time (3 years).4 This manipulation of personal responsibility
was consistent with previous studies in the self-justification literature (e.g.
Staw, 1976; Ghosh, 1997; Beeler, 1998; Schulz and Cheng, 2002).

3
Details of the feedback items will be discussed later.
4
As will be discussed later, subjects in the low personal responsibility were told that they
have taken over the project just before the project audit.

© The Authors
Journal compilation © 2009 AFAANZ
84 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93

The projects involved an intensive marketing campaign for a fast food product.
All subjects were given information relating to the two products, such as the
products’ previous sales and earnings figures, and a probability distribution of
expected internal rate of return over the next 3 years.5 This manipulation of
personal responsibility was consistent with previous studies in the self-justification
literature, which found that decision choice could induce high personal respon-
sibility (e.g. Staw, 1976; Ghosh, 1997; Beeler, 1998; Schulz and Cheng, 2002).
After all subjects had made (or were given) the initial investment decision, they
were given further information indicating that 3 years after the initial investment
decision, the chosen investment project was not performing as well as expected.
For example, subjects were told that the average internal rate of return of the
project was 14 per cent, which was below the company hurdle rate of 15 per cent
and the original expected return of 20.25 per cent. Furthermore, prospective
information was provided indicating that the expected internal rate of return for
the next 2 years (16 per cent) would be below those of an alternative investment
project (19 per cent).6
The Second Stage of the experiment involved asking subjects to complete a
project review report by indicating the likelihood that they would include a list
of information statements (representing major factors that have contributed to
the project’s performance) in the review report. Subjects were also told the
purpose of the project review, either for reviewing the project itself in order to
facilitate organizational learning (the ‘organizational learning’ condition), or to
evaluate managerial performance (the ‘performance evaluation’ condition).
Consistent with previous studies that have examined the agency effect on decision
biases (e.g. Harrell and Harrison, 1994), subjects in the performance evaluation
group were given a substantial ‘incentive to shirk’ (to receive a favourable
performance evaluation and a substantial year-end performance bonus).7
Subjects were then asked to indicate whether they would include each informa-
tion statement in the review report. Four information statements were provided:
two negative feedback statements and two positive feedback statements. Positive
feedback refers to feedback information that had a profit-increasing impact on
the project and was consistent with the initial investment decision. Negative

5
The information provided would suggest that the two investment projects were very
similar in their expected financial effect on the company. This is deliberate as previous
literature suggests that difficult decisions were more likely to induce commitment to (and,
hence, personal responsibility for) the decision choice (e.g. Kiesler, 1971).
6
The provision of historic and prospective information to indicate the chosen project’s poor
performance is also consistent with prior studies in the self-justification literature (e.g.
Harrison and Harrell, 1994).
7
Information asymmetry exits in all conditions, where subjects were told that the feedback
contained in the information statements was private and not available to anyone else in the
company.

© The Authors
Journal compilation © 2009 AFAANZ
 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93 85

Table 1
Summary list of feedback items

Item Impact on project Summarized feedback description

1 Decreased profit You have underestimated customer preference for an

alternative product; therefore, overestimated expected
sales (inconsistent with initial investment decision)
2 Decreased profit You have underestimated capital expenditure costs
(inconsistent with initial investment decision)

Description of the feedback is much more comprehensive in the actual research instrument.
Furthermore, subjects were told that the effect of each of the factors on profit was roughly the same.

feedback refers to feedback information which had a profit-decreasing impact

on the project and was inconsistent with the initial investment decision.
Although our research interest lies in managers’ bias against negative project
feedback, positive feedback statements were also incorporated in the instrument
to provide a more ‘balanced’ view of the project, and to avoid ‘leading’ subjects
in their decisions. A summary of the two negative feedback statements provided
to subjects is shown in Table 1.8 After all the experimental materials were collected
a post-test questionnaire was administered, including demographic questions
and manipulation questions (discussed later).

3.3. Dependent and independent variables

The dependent variable, subjects’ tendency to include/exclude information in

the project review report, was measured using two negative feedback items as
discussed earlier. Responses were measured on 7-point Likert scales (1 = Definitely
No and 7 = Definitely Yes).
The two independent variables are personal responsibility (high versus low)
and the aim of the project review (performance evaluation versus organizational
learning). As discussed previously, to manipulate personal responsibility, subjects
in the ‘high responsibility’ treatment were asked to make the initial investment
decision. Prior literature has argued that volition is an important factor that
drives decision commitment and, therefore, a sense of responsibility (Kiesler,
1971; Schulz and Cheng, 2002). Furthermore, the high responsibility subjects
were also told that they have been responsible for the project since their initial
decision 3 years ago. In contrast, subjects in the ‘low responsibility’ treatment
did not make the initial decision, and were told that they had taken over the
project just before they were asked by the Project Audit Committee to complete

8
To add clarity, we have specified in the experimental task that the items affect profit
positively/negatively.

© The Authors
Journal compilation © 2009 AFAANZ
86 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93

a project review report. Therefore, it is expected that subjects in the low

responsibility treatment were unlikely to feel significant responsibility towards
the project.
To manipulate the aim of the project review, subjects in the ‘organizational
learning’ treatments were told that the project review report would be presented
to the Project Audit Committee, who would use the report solely for organizational
learning. Furthermore, they were told that information arising from the project
review process would not be used, now or in the future, in any evaluation of the
subjects’ performance as project managers. Subjects in the ‘performance evalu-
ation’ treatment were told that the project review report would be presented to
the Project Audit Committee, who would then use the information for performance
evaluation purposes. Furthermore, they were told that the information from the
project review would directly and significantly affect subject’ opportunity to
receive a substantial year-end bonus, as well as future career prospects. In
addition, all subjects were told that the feedback information statements they
received regarding the project were available only to themselves and not anyone
else in the organization, unless subjects decided to include the feedback informa-
tion in their project review report.

3.4. Pilot test

A pilot study was conducted with 203 intermediate undergraduate students

enrolled in a management accounting course. The results from the pilot study
were substantially the same as the results from the current study. Based on the
pilot study, several refinements were made, including clarification of the mean-
ing of the feedback statements, strengthening of the ‘project review purpose’
manipulation, and the removal of references to feedback statements related to
non-controllable events.

3.5. Manipulation check

The manipulation of the two independent variables was assessed by asking

subjects two manipulation check questions in the post-test questionnaire. The
first question asked whether subjects were responsible for the initial decision
to invest in one of the two investment projects. The second question asked
subjects to indicate the purpose of the project review. Twenty-three subjects
responded incorrectly to the manipulation questions and were excluded from
subsequent analysis, leaving 106 usable responses.9
Furthermore, consistent with earlier research studies that have manipulated
the personal responsibility variable (e.g. Schulz and Cheng, 2002), two additional

9
The occurrence of the manipulation check errors is not systematic across the treatments.
Furthermore, including them in our sample does not change the findings of our study.
Hence, we exclude them from the study.

© The Authors
Journal compilation © 2009 AFAANZ
 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93 87

questions were included to assess subjects’ perception of personal responsibility.

Subjects were asked to indicate (on 7-point scales) ‘To what extent did you feel
that [the chosen project] was a reflection on yourself’ and ‘How responsible did
you feel for [the chosen project]’s performance’. These two questions were
then summed to form a perceived personal responsibility scale (theoretical range
2–14), which had an acceptable Cronbach alpha of 0.749. Analyses of responses
from across the treatment groups (not tabulated) confirmed that subjects in
the high personal responsibility groups perceived their responsibility as signific-
antly higher (mean = 9.673) than subjects in the low personal responsibility
group (mean = 7.725, t = 3.550, p = 0.001). Furthermore, subjects in the high
responsibility treatment groups perceived their level of personal responsibility to be
significantly higher (t = 7.375, p = 0.000) than the mean of the scale (average of 7
on the aggregation of two 7-point scales). In contrast, subjects in the low personal
responsibility treatment group perceived their level of personal responsibility is
not statistically different (t = 1.075, p = 0.086) from the mean of the scale. These
findings provide support for a difference in the perceived level of personal respons-
ibility between the high and low personal responsibility treatments.
Finally, analyses were conducted on the demographic data collected in the
post-test questionnaires. No significant differences were found in the distribution of
work experience (in years) and gender across the treatments. However, there were
some significant differences in the distribution of Age. Further analysis showed that
Age was not correlated with our dependent variable; therefore, it is suggested that
the Age variable is unlikely to explain the between-subject differences of the
dependent variable. Finally the distribution of mode of study (full time/part time)
differed across treatments. Further analysis showed that variation in mode of study
was not related to the decision to include negative information.

4. Results

4.1. Descriptive statistics

To analyse subjects’ tendencies to include/exclude different types of negative

project feedback, we summed the response scores for the two feedback items into one
variable: ‘willingness to share negative feedback’.10 The descriptive statistics (means
and standard deviations) for the treatment groups are presented in Table 2.

4.2. Hypothesis testing

Hypothesis 1 predicts that managers who perceive a higher level of personal

responsibility for the project under review are less likely to report negative

10
The Cronbach’s alpha for these two items was 0.713, suggesting that it is acceptable to
sum them into a single variable.

© The Authors
Journal compilation © 2009 AFAANZ
88 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93

Table 2
Means (standard deviations) of negative feedback scores

Organizational learning Performance evaluation Total

High personal responsibility 9.448 7.308 8.436

(2.613) (3.403) (3.173)
n = 29 n = 26 n = 55
Low personal responsibility 11.038 9.720 10.392
(2.236) (2.390) (2.384)
n = 26 n = 25 n = 51
Total 10.200 8.681
(2.549) (3.165)

Theoretical range is 2–14, where higher score means subjects are more likely to disclose the relevant
feedback item.

Table 3
Analysis of variance (dependent variable = negative feedback scores)

SS d.f. MS F-ratio p

Personal responsibility 105.808 1 105.808 14.531 0.000

Project review purpose 79.026 1 79.026 10.853 0.000
Interaction 4.464 1 4.464 0.613 0.435
Error 742.712 102 7.281

d.f., degrees of freedom; MS, mean square; SS, sum of squares.

project feedback than those managers who perceive a lower level of personal
responsibility for the project. As predicted, our results showed that subjects in
the low responsibility treatment were significantly more likely to report negative
project information (mean = 10.392) than their high personal responsibility
counterparts (mean = 8.436). The two-way analysis of variance shows a significant
main effect for personal responsibility (F = 14.531, p = 0.000; Table 3); hence,
we support Hypothesis 1.
Hypothesis 2 investigates whether managers who perceive high levels of
personal responsibility for the project under review are less likely to report
negative project feedback if the project reviews are used for their performance
evaluation than organizational learning. Table 2 shows that the level of informa-
tion sharing is lower (mean = 8.681) for managers whose project review was
used for performance evaluation purposes than for managers whose project
review purpose was organizational learning (mean = 10.200). Our results show
a significant main effect for project review purpose (F = 10.853, p = 0.000), and
provides support for Hypothesis 2.

© The Authors
Journal compilation © 2009 AFAANZ
 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93 89

Finally, Hypothesis 3 predicts that the relative difference in tendency to report

negative project feedback between managers perceiving a high level of personal
responsibility for the project and managers perceiving a low level of personal
responsibility will be greater when the intended use of the project feedback is
performance evaluation of the managers than when the when the intended use
is organizational learning. We do not find empirical support for this hypothesis
(F = 0.613, p = 0.435).

5. Discussion and conclusion

It has been increasingly well recognized that knowledge is an important

organizational resource, and as such, management accountants have responsibilities
to manage this resource at least as well as other more ‘tangible’ organizational
resources, such as financial and physical assets (e.g. Dess et al., 2004). The
important role of management accountants in helping organization to gain
knowledge by learning from its past operations is reflected in their involvement
in the project review process. For example, Kennedy and Mills (1992) find that
a majority of companies involve their accounting staff in their project reviews.
Yet we have argued in this study that there are a number of potential obstacles
to learning from project reviews based on the manager’s willingness or lack of
willingness to share past private information. Consistent with Chenhall and
Morris (1993), this is likely to be the case where environmental uncertainty
provides managers with the opportunity to withhold private information for
longer periods of time. In our study, we explored two impediments to the
effectiveness of project reviews in the form of personal responsibility and the
link between the project review and the formal performance evaluation system
of the organization. We hypothesized two separate effects using self-justification
theory for the former and agency theory for the latter. Specifically, we stipulated
both main effects for self-justification bias and the moral hazard as well as an
interaction effect for the two factors for managers’ unwillingness to report
negative project feedback during the project review process.
Our results lend support to both of our main effect hypotheses. Personal
responsibility for the project and the purpose of the project of the review had
significant separate effects on the manager’s willingness to incorporate negative
project information in the project review. Managers with higher personal
responsibility for the initial project decision were significantly less willing to
disclose this type of information than managers with lower personal responsi-
bility. Likewise, where the performance evaluation was the purpose of the review,
managers were significantly less likely to disclose negative project information
than when the purpose of the review was organizational learning. We did not
find empirical support for an interactive effect between the level of personal
responsibility and the purpose of the project review.
Our results show that the intended use of the review information is an import-
ant consideration as managers exhibited information sharing impediments when

© The Authors
Journal compilation © 2009 AFAANZ
90 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93

the project review also forms part of the manager’s performance evaluation process.
Overall, our study further shows that where sharing of negative information is
of importance to the organization, the most effective project review design
features is the combination of a manager with low personal responsibility for
the project, and where the project review process is independent from the
performance evaluation process. However, the latter is not necessarily feasible
in practice as project information is unlikely to be ‘forgotten’ by a project manager’s
supervisor during performance evaluation (the ‘curse of knowledge’). An
alternative is to ensure that the responsibility for a project is shared between
managers so no one manager believes that he or she is totally responsible for
project performance. In these circumstances, personal responsibility is likely to
remain low (even though collective responsibility should be high).
The contributions of our study to the research literature are twofold. First,
our study provides an extension to a limited number of studies that examine
project reviews, an important stage of the capital budgeting process. In particular,
we provide evidence that the personnel involved as well as the purpose of the
review have significant effects on managers’ willingness to include negative
information in project reviews. Our study demonstrates that an understanding
of the effects of accounting control on managerial behaviour can be better
achieved by considering both psychological-based theories (e.g. self-justification
theory) and economic-based theories (e.g. agency theory). As several researchers
have pointed out (e.g. Eisenhardt, 1989; Waller, 1995; Sprinkle, 2003), a multiple
theory approach, in particular combining perspectives from psychological theories
and economic-based agency theories, can provide a more comprehensive under-
standing of managerial behaviour.
Our results also have important implications for practitioners responsible for
the project review processes. Previous studies on project review practices has
found that organizations often assign the responsibilities of preparing project
review reports to an accountant associated with the project being reviewed, or
to a small team of people drawn from those involved in the project (e.g. Mills
and Kennedy, 1993b; Farragher et al. 1999). Although this practice might be
the logical result of limited organizational resources, our results highlight the
risks of biased information sharing among project review personnel who were
also personally responsible for the project.
The usual limitations associated with laboratory studies apply to the current
research. For example, although we have endeavoured to capture the essential
elements of capital budgeting decisions and project review processes, the experi-
mental task represents a much-simplified decision-making context. As such, it
omits some of the complex and often political factors involved in this kind of
decisions. Furthermore, for the low personal responsibility treatment we have
only looked at the decision point where a new manager came into the project
just before the project review. The effect of personal responsibility might be
different where the manager has taken over the project earlier, such that they
are partially responsible for some of the events contributing to the project

© The Authors
Journal compilation © 2009 AFAANZ
 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93 91

performance. Indeed, it might be more appropriate to view the concepts of

‘responsibility’ and ‘involvement’ as a continuous scale. As project work is
often non-linear in nature, a person might be involved with some parts of the
project (e.g. idea generation or brought in to complete the project) but not all
stages of the project. The degree of personal responsibility might, therefore,
vary depending on the tasks undertaken by this individual and his or her tenure.
In our study, we only manipulated personal responsibility as a dichotomous
scale and did not consider various factors that might influence the degree of
personal responsibility. Finally, we did not control for social desirability bias,
such that participants in our performance evaluation treatment might be
unwilling to withhold negative feedback items despite the negative financial
implications associated with reporting such items. However, this limitation
works against rather for our hypotheses and, therefore, does not reduce the
validity of our findings.
The current research represents a preliminary step in investigating the potential
impediments to the effectiveness of project reviews. Future studies can look at
other feedback characteristics that might affect managers’ decision to share and
transfer the information; for example, whether the feedback is based on objective
data or subjective judgement. In addition, the way managers attribute the causes
of project failure might also affect their knowledge sharing behaviour. For
example, managers might be less willing to share information that is directly
attributed to personal mismanagement of the project, but more willing to report
feedback that can be ‘blamed’ on a second party. Another potentially fruitful
research avenue relates to the other design features of project reviews, such
as team-based project reviewers versus individuals, the timing of the project
review and the extent of information dissemination after the project review
process and the subsequent effects on both individual and organizational learning.
Finally, consistent with earlier studies such as Harrell and Harrison (1994), our
study only examines the situation where information asymmetry exists and is
‘water-tight’. However, in a real-world setting, there might be varying degree of
information asymmetry. Future research can investigate whether our findings
and indeed escalation behaviour in general still exist if there is only a moderate
level of information asymmetry.

References

Akalu, M., 2003, The process of investment appraisal: the experience of 10 large
British and Dutch companies, International Journal of Project Management 21, 355 –
362.
Aronson, E., 1995, The Social Animal (W.H. Freeman and Company, New York).
Beeler, J. D., 1998, The effects of counter-explanation on escalation of commitment: an
experimental assessment of individual and collective decisions, Advances in Accounting
Behavioural Research 1, 85 –99.
Beeler, J. and J. Hunton, 1997, Effects of user participation in systems development:
A longitudinal field experiment, MIS Quarterly 21 (4), 359–388.

© The Authors
Journal compilation © 2009 AFAANZ
92 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93

Biyalogorski, E., W. Boulding, and R. Staelin, 2006, Stuck in the past: why managers
persist with new product failures, Journal of Marketing 70, 108 –121.
Booth, P., and A. Schulz, 2004, The impact of an ethical environment on managers’ project
evaluation judgements under agency problem conditions, Accounting, Organizations and
Society 29, 473 –488.
Browstein, A., 2003, Biased predecision reasoning, Psychological Bulletin 129, 545– 568.
Busby, J., 1999, An assessment of post-project reviews, Project Management Journal 30,
23–29.
Caldwell, D., and C. O’Reilly, 1982, Responses to failure: the effects of choice and
responsibility on impression management, Academy Management Journal 25, 121 –136.
Cheng, M., A. Schulz, P. Booth, and P. Luckett, 2003, The effects of hurdle rates on the
level of escalation of commitment in capital budgeting, Behavioural Research in
Accounting 15, 63 –85.
Chenhall, R., and D. Morris, 1993, The role of post completion audits, managerial learning,
environmental uncertainty and performance, Behavioural Research in Accounting 5,
170–186.
Conlon, E., and P. Parks, 1987, Information requests in the context of escalation, Journal of
Applied Psychology 72, 344 –350.
Dess, G., G. Lumpkin, and M. Taylor, 2004, Strategic Management: Text and Cases
(Irwin-McGraw-Hill, New York).
Dutta, S., 2003, Capital budgeting and managerial compensation: incentive and retention
effects, Accounting Review 78, 71–93.
Eisenhardt, K. M., 1989, Agency theory: an assessment and review, Academy of Manage-
ment Review 14, 57–74.
Farragher, E., R. Kleiman, and A. Sahu, 1999, Current capital investment practices,
Engineering Economics 44, 137–149.
Festinger, L., 1957, A Theory of Cognitive Dissonance (Stanford University Press, Palo
Alto, CA).
Ghosh, D., 1997, De-escalation strategies: some experimental evidence, Behavioural
Research in Accounting 9, 89 –112.
Gordon, L., and M. Myers, 1991, Postauditing capital projects, Management Accounting 72,
39–42.
Harrell, A., and P. Harrison, 1994, An incentive to shirk, privately held information and
managers’ project evaluation decisions, Accounting Organizations and Society 19, 741–
757.
Harrison, P., and A. Harrell, 1993, Impact of adverse selection on managers’ project evalu-
ation decisions, Academy of Management Journal 36, 635–643.
International Federation of Accountants, 1994, International Management Accounting
Policy Statement 6: Post Completion Review (IFAC, New York).
Keil, M., 1995, Pulling the plug: software project management and the problem of project
escalation, MIS Quarterly 19, 421– 447.
Kennedy, J. A., and R. Mills, 1992, Post-completion auditing: a source of strategic
direction? Management Accounting 70, 26–31.
Kiesler, C. A., 1971, The Psychology of Commitment (Academic Press, New York).
Kunda, Z., 1990, The case for motivated reasoning, Psychological, Bulletin 103, 480 –198.
Langfield-Smith, K., H. Thorne, and R. W. Hilton, 2006, Management Accounting 4e:
Information for Managing and Creating Value, 4th edn (McGraw-Hill, Sydney, NSW).
Meredith, J., and S. Mantel, 1995, Project Management: a Managerial Approach, 3rd edn
(John Wiley & Sons, Toronto, ON).
Mills, R., and J. A. Kennedy, 1993a, Post-completion auditing in practice, Management
Accounting 71, 22–26.
Mills, R., and J. K. Kennedy, 1993b, Experiences in operating a post-audit system,
Management Accounting 71, 26–29.

© The Authors
Journal compilation © 2009 AFAANZ
 M. M. Cheng et al. /Accounting and Finance 49 (2009) 75–93 93

Neale, C., 1995, Post-completion audits: avoiding the pitfalls, Managerial Auditing Journal
10, 17–24.
O’Brien, M., 1998, The Curse of Knowledge in Capital Investment Postaudit, PhD disserta-
tion (University of Technology, Sydney, Sydney, NSW).
Rutledge, R., and K. Karim, 1999, The influence of self-interest and ethical considerations
on managers’ evaluation judgement, Accounting, Organizations and Society 24, 173 –
184.
Ryan, P., 1995, Why some venture capitalists escalate and others don’t in the same
investment situation, Academy of Management Journal 38, 337–341.
Ryan, P., and G. Ryan, 2002, Capital budgeting practices of the Fortune 1000: how have
things changed? Journal of Business and Management 8, 355–364.
Salter, S., P. Lewis, and L. J. F. Valdes, 2004, Aqui No Se Habla Agencia. An examination
of the impact of adverse selection and framing in decision-making: a US/Mexico com-
parison, Journal of International Financial Management and Accounting 15, 93 –117.
Schulz, A., and M. Cheng, 2002, Persistence in capital budgeting reinvestment decisions –
personal responsibility antecedent and information asymmetry moderator: a note, Accounting
and Finance 42, 73–86.
Sprinkle, G., 2003, Perspectives on experimental research in managerial accounting,
Accounting, Organizations and Society 28, 287–318.
Staw, B. M., 1976, Knee-deep in big muddy: a study of escalating commitment to a chosen
course of action, Organizational Behaviour and Human Decision Performance 16, 27 –
44.
Van der Veeken, H., and M. Wouters, 2002, Using accounting information systems by oper-
ations managers in a project company, Management Accounting Research 13, 345 –370.
Von Zedtwitz, M., 2002, Organizational learning through post-project reviews in R&D,
R&D Management 32, 255 –267.
Waller, W., 1995, Decision-making research in managerial accounting: return to behavioural-
economics foundations, in: R. H. Ashton and A. H. Ashton, eds, Judgement and Deci-
sion Making Research in Accounting and Auditing (Cambridge University Press, New
York), 29–54.

© The Authors
Journal compilation © 2009 AFAANZ