Financial Accounting and Transparency of Information

A common theme in current corporate governance is to increase managers’ accountability. In contrast, this paper emphasizes the need for less accountability in certain situations and consequently introduces the concept of "allowance for failure". This concept refers to the style in which the decision maker’s environment— such as capital market, corporate governance, and management control system—deals with potential failures (e.g., project or investment failures). The argument that allowance for failure is important is illustrated by the example of failing projects, drawing on the escalation of commitment literature. It is hypothesized that allowance for failure indirectly reduces project escalation. The relationship is mediated by managers’ perceived threat in case of project failure. We propose an accountability framework with two dimensions: rewards versus penalties and processes versus outcomes. We show that auditors’ current regulatory accountabilities generally are in the form of penalties.