Psychological Drivers of Financial Misreporting: A Study of Personality, Risk-Taking, and Ethical Culture in Pakistan's Corporate Sector

Abstract

Financial reporting irregularity is still a serious issue to market stability, especially in new emerging economies, where structural governance is often limited. This study aims to shed light on the psychological motives for creative accounting practices (CAP) in Pakistan's corporate world, transcending the conventional focus on institutional explanations. Specifically, it investigates the direct relationships between the Big Five personality traits and CAP, the mediating role of risk-taking behaviour, and the moderating role of the boundary condition of organizational ethical culture. The design used was quantitative cross sectional based on the Trait Activation Theory. The primary data was collected by using structured online survey from 690 accounting, finance and audit professionals around Pakistan. Partial Least Squares Structural Equation Modelling (PLS-SEM) was used as the method for testing the hypothesized moderated mediation framework. Findings indicate that Extraversion, Neuroticism, and Openness to Experience are important positive predictors of CAP. The findings of this study suggest that financial misreporting can be prevented if regulatory compliance is the only focus. Behavioral risk profiling needs to be incorporated into the recruitment process for sensitive positions, and proactive steps need to be taken to create positive ethical climates to help extinguish opportunistic behaviours within organizations