In a May 2010 Harvard Business Review article, Dana Carney (assistant professor at Columbia University) answers questions about her research that examines the relationship between a sense of power and the ability to deceive others. Although I highly recommend reading the actual paper (which is very well written, I might add), let me summarize the basics of the study here and then pose a few questions we might try to answer in financial reporting.

Using an experimental methodology, the authors randomly assigned participants to one of two groups who had to negotiate salary payments for three workers. Half of the participants were assigned to be a boss, essentially having the last say on how much workers were paid (a form of the dictatorship game). The other half of the participants were assigned to be a worker. Bosses were seated individually in a large office with windows and a big desk. Workers were seated in a small cubicle with no windows. After looking over the details of the job descriptions, etc., the worker had to walk into the boss’s office and discuss salaries with the boss, who was sitting behind the desk. After the discussion, the boss decided how much would be paid to all workers, including the participant-worker.

All of this first scenario set the stage for what was to happen next. Participants were told they were needed to participate in a second study. In this study, participants were led into a room and sat in front of a computer screen. They were told that within a minute, the computer screen would tell them either to take $100 inside a book on the desk or not to take that $100. People told to take the $100 needed to hide it somewhere out of sight. Participants were told that after five minutes, a person would enter the room who had no idea whether they had actually taken the $100. If participants could convince the person that they had not taken the $100, they could keep the $100, regardless of what the computer had told them to do. This meant that if participants followed the instructions about taking the $100, half of the participants would be telling the truth and half of the participants would be telling a lie. The incentive for all participants was to persuade the person that they had not taken the $100. If they did persuade the person, participants could keep the $100 and were entered into a random drawing for an additional $500.

The authors wanted to know whether people assigned to the POWER group in the first study would be better than those assigned to the WEAK group at deceiving the questionner in the second study. The authors hypothesized that being in a powerful setting makes it less difficult to lie because of the emotional and chemical changes in the body that power seems to cause. The authors measured physiological changes and asked many debriefing questions to get at the mental state of participants. Based on the deception attempts, coded body language indicative of lying (also called deceptive tells), and a saliva analysis of a hormone that often elevates after lying situations, the authors provide convincing data suggesting that power is likely to make it easier for a person to lie.

Of course this is way too brief of a summary, but I hope you get the idea (and want to read the paper yourself). After reading the paper, I wondered whether there were any testable hypotheses that would relate earnings restatements to the number of “deceptive tells” a CEO or CFO might display in a video earnings announcement. Or, is their a relationship between the number of syllables per second spoken by a CFO in relation to a pointed conference caller’s question and the likelihood of an earnings restatement. Or perhaps even better, does the market somehow pick up on these deceptive tells in conference calls and react? I also wonder about audit implications, but those sound to invasive to even imagine for right now. So, I’ll stop here. Take a look at this study and tell me what you think.