auditors' ethical reasoning some audit conflict and cross cultural evidence 1996 the international...

8/9/2019 Auditors' Ethical Reasoning Some Audit Conflict and Cross Cultural Evidence 1996 the International Journal of Accou…

1/13

The International

Journal of

Accounting

Auditors’ Ethical Reasoning: Some Audit Conflict

and Cross Cultural Evidence

Judy S. L. Tsui

ity University of Hong Kong

Key Words: Audit Conflict, Ethical Behavior, Ethical Reasoning, Culture

Abstract: 7

study examines t he relat io nship betw een di fferent levels of ethi cal reasoning

and ethi cal behavior of Hong Kong audit ors in an audit confli ct sit uati on. Ii ests he hypothesis

that ethi cal reasoning scores

or

Hong Kong auditors wiN be low er than USA audi tors on

the basis of HofstedeS theory of cult ural dt fferences. Ffty experi enced audi tor s from f our

Bi g Six CPA fir ms i n Hong K ong w ho were admi nist ered the Def;ning Issues Test (DI T)

parti cipated in an experiment requiri ng t hem t o make a decision on an audit or-cli ent conflict

situat ion. I t w as ound that t he higher the level of ethi cal reasoning, the lower the li kelihood

that the audit or w ould respond as

acceding

to the cl ient’ s request. Hi gher l evels of eth ical

reasonin g w ere thus associat ed w it h more independent behavi or. I t w as al sofound that Pscores

w ere signt cantl y l ow er than the sample in USA thus suggesti ng t hat cult ural di fferences could

affect levels of ethi cal r easoning.

Ethical concerns in the accounting profession have recently attracted much research

interest (Loeb, 1970; Armstrong, 1984; Ponemon, 1990; Shaub, 1992). In particular,

a significant strand of research in this area focuses on the factors that could affect ethical

behavior of professional accountants (Shaub, 1989; Ponemon, 1990; Ponemon and

Gabhart, 1993). In examining these factors, it is imperative to probe into the cognitive

process (Ponemon, 1990,1992a, 1992b; Ponemon and Gabhart, 1990). Therefore, recent

studies have attempted to “incorporate or expressly consider a psychological framework

for the ethical reasoning process” because the latter was found to be useful in answering

the question w hat makes account ant s more or less ethi cal? (Jones and Ponemon, 1993,

p. 411). These studies that explicitly recognize accountants’ levels of ethical reasoning

(Jones and Ponemon, 1993, p. 412):

corroborate the importance of ethical reasoning as a determinant of judgment, behavior and

action in the practice of accounting and auditing.

Direct all correspondence to: Judy S. L. Tsui, City University of Hong Kong, Department of Accountancy,

83 Tat Chee Avenue, Kowloon, Hong Kong.

The International J ournal of Accounting Vol. 31 No. 1 pp. 121-133.

ISSN: 0020-7063.

All rights of reproduction in any form reserved. Copyright @ 1996 University of Illinois


2/13

122

THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 31 No. 1 1996

An important strand of auditing literature which may benefit from the study of the

role of ethical reasoning is the client-management audit conflict. Audit conflict

situations invariably provide an important source of ethical dilemma situations that

auditors would face (Knapp, 1985; Gul, 1991). In particular, the problem and issue

of the auditor’s ability to resist management pressure in an audit conflict situation have

been a recurring theme in the auditor independence literature (Knapp, 1985; Gul, 1991).

For example, numerous prior studies have investigated the effects of different contextual

variables, such as the client’s financial condition, size of audit fees and management

advisory services, on the auditors’ ability to resist management pressures in audit conflict

situations (Knapp, 1985, 1987; Gul, 1991; Gul and Tsui, 1992). Whether auditors’

different ethical reasoning levels affect their ethical decisions in the context of auditor-

client audit conflict situations have, however, not been studied. This study, therefore,

examines the relationship between the auditors’different levels of ethical reasoning and

their behavior in an audit conflict situation.

This paper also examines whether ethical reasoning levels of auditors are different

depending on cultural contexts. This extension, which is based on Hofstede’s (1990)

cultural theory, is motivated because most ethical reasoning studies of auditors have

been conducted in the USA and Canada. Given cultural and economic environmental

differences between USA and Asian Pacific countries, these North American studies

may not be generalizable to the Asia-Pacific environments, in particular, Hong Kong.

Empirical evidence suggests that auditors in different countries may have different

ethical perceptions and standards (Cohen, Pant and Sharp, 1993; McKinnon, 1984;

Gul and Tsui, 1993). This view is supported by Hofstede’s (1991) culture theory which

suggests that differences in individuals’ attitudes and behavior across nations are the

result of differences in five cultural dimensions. These five dimensions are: large versus

small power distance, strong versus weak uncertainty avoidance, masculinity versus

femininity, collectivism versus individualism, and long term versus short term

orientation. In particular, the three cultural dimensions of power distance,

individualism, and long term orientation are found to be relevant in distinguishing

differences in accounting behavior between North American and Hong Kong Chinese

managers (Hofstede, 199 1; Gul and Tsui, 1994). The differences in cultural environments

thus give rise to two research issues for this study. First, does ethical reasoning theory

affect ethical behavior in different national cultural environments? This issue will be

examined by evaluating the relationship between ethical reasoning and auditors’

behavior in an audit conflict situation in Hong Kong. Second, are there differences

in the ethical reasoning levels of auditors in the USA and Hong Kong? If so, does cultural

theory (Hofstede, 1991) provide an explanation for the differences? Answers to these

questions may help us evaluate and explain the differences on auditors’ethical reasoning

levels across different national settings. Cohen et al. (1993) summarize the importance

of this type of research in the following words:

A

systematic knowledge of the differences in professionals’ ethical sensitivities and the way

ethical choices are made would be invaluable for formulating guidelines for a firm-wide ethical

policy. It also could provide international firms with a framework with which to identify

potential ethical problem-areas in specific countries (p. 1).

The aims of this study are twofold: to examine the effects of ethical reasoning on

Hong Kong auditors’ behavior in an audit conflict situation, and to explore the notion


3/13

Audit Conflict and Cross Cultural Evidence

123

that there will be differences in the levels of ethical reasoning due to cultural differences.

For this purpose, the ethical reasoning scores of a sample of Hong Kong and USA

auditors are compared. This paper is organized as follows: the next section develops

the first and second hypotheses based on Kohlberg’s Theory of Cognitive Moral

Development and Hofstede’s Culture Theory respectively. This is followed by a section

on the methodology of the study and then concludes with a discussion of results section.

HYPOTHESIS BASED ON KOHLBERG’S THEORY

OF COGNITIVE MORAL DEVELOPMENT

Kohlberg’s (1969) widely accepted work in the study of the cognitive process of moral

reasoning, known as the Theory of Cognitive Moral Development (CMD), forms the

theoretical basis in examining the cognitive process in this study. This theory aims to

explain the human decision

m kingprocess

in influencing ethical behavior. Essentially,

the focus is on the cognitive decision making process as to the reasons why individuals

justify a particular ethical choice.

Kohlberg (1969) posits a stage sequence model in identifying different cognitive levels

of ethical’ reasoning. This model is based on the assumption of cooperative social

organization, i.e., one’s relationship to society, society’s moral rules and expectations

on the basis of justice and fairness. The individual formulates ethical judgments

depending on which stage they are at with respect to the different levels of socio-moral

development (Table 1). In confronting a conflict situation which elicits ethical

judgments, individuals would normally invoke their basic conceptions of social

cooperation and notions of fairness in judging what is right or wrong. At the pre-

conventional levels, individuals would do right by focusing only on the self without

regard for others. For individuals at the conventional level, the focus is on one’s personal

relationship to others in society. At the post-conventional level of ethical development,

an individual follows their own self-chosen principles to guide judgment in order to

be morally right.

A number of empirical studies have examined the ethical reasoning levels of

professional accountants using Kohlberg’s CMD theory (1969). Armstrong (1987) and

Ponemon (1988) found a deficiency in the ethical development of those who enter and

remain in the accounting profession. Specifically, Armstrong (1987) found USA CPAs’

ethical reasoning levels have not matured to the levels comparable to college graduates.

This suggests that college education may not have raised their ethical reasoning levels.

To explain this phenomenon, Ponemon (1988) posited that this deficiency may be due

to the characteristics of the accounting curriculum. It may also be due to the accounting

profession itself preventing an individual from developing an increasing sense of ethical

beliefs during their education or career. Other empirical findings also suggest that

professional accountants do not develop levels of ethical reasoning equivalent to those

who are in similar socio-economic and educational backgrounds (Tull, 1982; Ponemon

1990, 1992a, 1992b; Shaub, 1989; Ponemon and Gabhart, 1990, 1993; Ponemon and

Glazer, 1990; Arnold and Ponemon, 1991; Hiltebeitel and Jones, 1991, 1992; Lampe

and Finn, 1992).

Ponemon (1990) reported a negative relationship between accountants’ positions or

ranks in the firm and their levels of ethical reasoning. The higher the accountants’ranks,

the lower the levels of ethical reasoning. This suggests that different positions or ranks


4/13

124

THE INTERNATIONAL JOURNAL OF ACCOUNTING

Vol. 31, No. 111996

Table 1. Six Stages of Moral Reasoning

Pre Conventional Level

Focus is self.

Stage I: Obedience: You do what you are told primarily to avoid punishment.

Stage 2: Instrumental egotism and simple exchange: Let’s make a deal or only consider the costs and/ or

benefits to oneself.

Conventional Level

Focus is relationships.

Stage 3: Interpersonal concordance: Be considerate, nice and kind and you’ll get along with people.

Focus is on cooperation with those in your environment.

Stage 4: Law and duty to the social order: Everyone in society is obligated and is protected by the law.

Focus is on cooperation with society in general.

Post Conventional Level

Focus is personally held principles.

Stage 5: Societal consensus: You are obligated by whatever arrangements are agreed to and by due pro-

cess and procedure. Focus is on fairness of the law or rule as determined by equity and equality

in the process of developing the rule.

Stage 6: Nonarbitrary social cooperation: Rational and impartial people would view cooperation as

moral. Focus is on fairness of the law or rules derived from genera1 principles of just and right

as determined by rational people.

Source: Adapted from J. Rest (1979)

in the firm’s hierarchy are likely to elicit different ethical inclinations which result from

differences in socialization (Ponemon, 1990). In another study, Ponemon and Gabhart

(1990) found auditors with lower levels of ethical cognitive development to be more

sensitive to factors relating to penalty than to affiliation in making independent

judgments. Ponemon’s (1992b) study also found that the incidences of auditors’

underreporting to be related to their different levels of ethical reasoning. Auditors with

lower P scores underreported their chargeable time much more severely than those with

higher P scores.

The above reasoning suggests that the different levels of ethical reasoning of auditors

would affect their responses in acceding to their client’s request in an audit conflict

situation. More specifically, auditors with higher P scores would be less likely to accede

to the client’s request in an audit conflict situation thus suggesting the following

hypothesis:

Hl

The higher the P score, the less likely that the auditor would respond

as acceding to the client S request in an audit conflict situation.

HYPOTHESIS BASED ON CULTURE THEORY

Culture can be defined as the “collective programming of the mind which distinguishes

the members of one human group from another” (Hofstede, 1980). It reflects typical

behavioral characteristics such as values, customs, beliefs and expression of norms

(Takatera and Yamamoto, 1987; Gul and Tsui, 1993). Culture theory is considered as

a powerful environmental factor that would not only affect the accounting system of


5/13


125

a country but also influence the way the individuals process information. It is also

recognized that cultural differences would manifest themselves in how auditors from

different societies make audit decisions and respond to ethical dilemmas.

Hofstede (1991) identified five cultural dimensions based on his two empirical studies

(1980, 1991) on managerial attitudes and behavior covering 40 countries and 60

countries respectively. Perera (1989) noted that the researcher needs to select the most

pertinent cultural dimension(s) to explain the particular facet of behavior under study.

Since the research reported here compares the differences in ethical reasoning levels

of auditors in the USA and Hong Kong, the pertinent cultural dimensions that

distinguish these two countries are long term orientation, power distance, and

individualism. Long term orientation represents the idea of Confucian dynamism which

consists of the following values: persistence, thrift, having a sense of shame, ordering

relationships by status, and observing this order (Hofstede, 1991). Power distance is

defined as the degree of inequality among people and individualism is defined as the

extent to which individuals are expected to look after themselves and their immediate

families (Hofstede, 1991). A comparison of these three cultural dimensions between

USA and Hong Kong shows these two countries to be different in their respective scores

and relative ranking (Table 2). USA is ranked as being small power distance, short

term orientation, and high individualism, whereas Hong Kong is classified as large

power distance, long term orientation, and low individualism. On the basis of these

cultural differences, it is posited that the ethical reasoning levels in terms of P scores

should also be different.

Since ethical reasoning is measured and premised on the basis of justice and fairness

(Kohlberg, 1969), this concept is suggested to be consistent with individualism, small

power distance, and short term orientation. A higher level of ethical reasoning can be

interpreted to be consistent with the dimension of individualism as the post-conventional

level focuses on personally held principles. Thus, collectivism is seen to be incompatible

with the personally held principles of the highest level of post-conventional ethical

reasoning. The cultural dimension of small power distance which is characterized by

more equal relationships among people is congruous with the highest levels of ethical

reasoning: social justice and personally held principles. Since USA is classified by

Hofstede (1991) as relatively low on the dimension of power distance, it is expected

that the auditors’ levels of ethical reasoning be comparatively higher. As short term

orientation exemplifies the characteristics of personal steadiness and stability, saving

face, respect for tradition, and reciprocation of greetings, favors, and gifts, it is

commensurate with higher levels of ethical reasoning which focus on societal consensus

Table 2. A Comparison of Relative Ranking of USA and Hong Kong on Power Distance,

Individualism and Long Term Orientation

Pow er Di stance

Indiv idualism

Long Term Orientation

PDI

IDV LTO

Ranking

Country

Score

Rank i ng Countr y Score Rank i ng Countr y Score

lS

16

HK 68 37 HK 25 2 HK 96

38 USA 40 1 USA 91 17 USA 29

Source: Hofstede (1991)


6/13

126 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 31, No. 1,1996

consensus and social cooperation. Therefore, it is posited that auditors in the USA,

characterized by the three pertinent cultural dimensions: small power distance, short

term orientation, and high individualism, would have higher

P

scores than auditors

in Hong Kong, with large power distance, long term orientation, and low individualism.

Thus, the above reasoning leads to the following hypothesis:

H2: Hong Kong audit ors w il l have low er P scores t han U SA audit ors.

METHODOLOGY

To test Hypothesis 1, a field experiment was conducted. The research instrument was

administered in the offices where the subjects work. Auditors with professional

qualifications and at least four years of audit experience2 are included in the sample

because the task in this field experiment required experienced auditors to make a

decision on an auditor-client conflict situation. It was difficult to select the subjects

by random sampling since the entire research instrument required subjects to devote

approximately 40 minutes to complete the exercise. Therefore, the contact managers/

partners in each of the four CPA firms were approached to select randomly qualified

subjects in their firms to participate in this field experiment. The sample subjects for

Hypothesis 1 came from four Big Six CPA firms in Hong Kong.

A sample size of 50 experienced auditors who are either partners or managers

participated in the study. All subjects are qualified professional accountants. The mean

age of the subjects is 31.02 (range from 27-47) and the mean auditing experience is

8.56 years (range from 4-28). A pilot test on the research instrument with eleven

academics who are professional accountants and had prior auditing experience as well

as ten experienced auditors was conducted prior to the field experiment.

To test Hypothesis 2, a sample of 127 USA auditors3 from a previous study conducted

by Shaub (1994) was selected for comparison with the sample of 50 Hong Kong auditors.

Measurement of Variables

The well accepted4 Defining Issues Test (Rest, 1986) is used to measure the subjects’

cognitive moral development levels.5 Rest’s (1979) DIT is recognized as an appropriate

surrogate to measure the relative importance on Stages 5 and 6 of Rest’s moral reasoning

(Table 1).

The DIT requires participants to analyze six hypothetical ethical dilemmas and rank

order those items that are most significant in influencing the resolution of each dilemma.

A weighting of the scale, from 4 points being the most important to 1 the least important,

is given when the subject ranks from the most important question to the least important

one. The

P

score, being expressed as a continuous percentage from 0 to 100, is used

to measure the relative importance the participants give to moral considerations, i.e.,

aggregating the weightings given to questions in Stages 5 and 6. However, a four story

version is used for Hypothesis 1 of this study because the other two stories are considered

too specific for Western cultures (Ma, 1988).

To check for internal consistency, the DIT scoring procedure includes an M (meaning-

less) score which indicates the extent to which the subjects select items that are lofty

sounding but meaningless. As a rule of thumb, Rest (1993) stated that data obtained from


7/13

Audii Conflict and Cross Cultural Evidence

127

subjects with an M score equal to or greater than eight for the six-story version should

be eliminated from analysis. An M score of five would be the cutoff point for elimination

from the analyses since a four-story version of the DIT was used. Other measures such

as consistency in ranking the items, and those who failed the cutoff were eliminated from

the sample for analysis purposes (see Rest, 1993 for more theoretical justifications).

To obtain data for Hong Kong auditors, the first component of the research

instrument consists of a Social Opinion Survey (DIT). The subject was given four cases

and was requested to decide on what one should do after each case. Upon a decision

made in each case, the subject was asked to rate the importance of each of the twelve

statements given after each case in making the initial decision. The subject was also

requested to rank the four most important statements. Subjects were administered the

English version of the DIT even though their first language (in most cases) would not

be English. It is considered appropriate in these circumstances because these subjects

are qualified accountants and are well versed in English.6

The second component of the research instrument for Hong Kong auditors is entitled

the Auditors’ Decision Making Questionnaire. To evaluate the auditors’ responses to

the audit conflict, subjects were presented with an auditor-client conflict situation based

on the case developed by Knapp (1985) and used by Gul (1991) to study the ability

of the auditors to resist the client’s pressure in such conflict situations. In the case, the

auditor disagrees with management on the materiality of certain unrecorded liabilities.

The subject was requested to role-play as the auditor of the company and indicate the

likelihood of ignoring the unrecorded liabilities.

A continuous scale from O-100 is used to measure the extent to which the auditor

will ignore the unrecorded liabilities as management had recommended. The lower the

likelihood that the auditor will ignore the unrecorded liabilities, the lower the extent

that the auditor will accede to the client’s request and the more independent is the

auditor. Conversely, the higher the likelihood that the auditor will ignore the unrecorded

liabilities, the greater the extent that the auditor will accede to the client’s request, the

less independent is the auditor.

To assess whether the auditor has previously encountered similar auditor-management

situations, the participant was asked to indicate whether they had experienced similar

situations and to describe the one that was most memorable. A copy of the adapted

case is given in Appendix A. The research instrument used for the USA auditors to

test Hypothesis 2 is the three-story version of the Defining Issues Test.7

Data Analysis

Linear regression and t test are used as the methods of analysis for Hl and H2

respectively. To test for the relationship in Hl the following linear model is employed:

Y = (Y+ /31x1 + p2x2 p3x3

where

Y = Auditors’ response to accede to the client’s request

X1 = Ethical reasoning score

XZ = Number of years of experience

X3 = Gender

Hl: 01 0


8/13

126

THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 31, No. 1,1996

Table 3. Descriptive Statistics for Variables in the Model

Standard

Variables

Mean Deviation

Range

Ethical Reasoning (ER) X1 30.10 14.87 2567.5

Experience (EXP) X2 8.56 4.65 4.0-28.0

Gender (GEN)

X3

Auditor’s Response (AR) Y 24.60 23.77 0.0-90.0

Two variables, number of years of experience (X2) and gender (X3) are added to the

linear model to control for their possible confounding effects on the dependent variable

(Kleinbaum, Kupper and Muller, 1988). Table 3 presents the descriptive statistics for

the variables in the model. To test for the relationship in Hypothesis 2, a t test is used

to compare the mean scores for Hong Kong and USA auditors.

DISCUSSION OF RESULTS

The results in Table 4 support the directional hypothesis that the greater the core,

the less likely that the auditor would respond as acceding to the client’s request (negative

coefficient value). It means that the higher the ethical reasoning level, the less likely

that the auditor would accede to the client’s request in an audit conflict situation.

Inference can be made as to the extent to which the auditor is or is not independent.

Such an indirect measure of auditor independence is documented in the literature (for

example, see Knapp, 1985). Therefore, one can infer from the above evidence that the

higher the ethical reasoning, the more likely it is that the auditor will be independent

in an audit conflict situation. It was also found that years of experience and gender

had no effects on the dependent variable. These findings are consistent with earlier

studies concluding that there is a systematic and important positive correlation between

individuals’ levels of ethical reasoning and ethical behavior (Brabeck, 1984; Ponemon,

1992b).

Since independence is a crucial concept in the accounting profession’s Code of

Professional Conduct in the USA, UK, Australia, Hong Kong, and other countries,

this finding has important implications concerning ethical behavior of the members

of the accounting profession. Educators should be encouraged to undertake research

on how different types of ethics intervention can promote ethical reasoning. With higher

ethical reasoning levels, the accounting profession can be assured that professional

Table 4. Summary Results of Linear Regression for Main Effects on the Dependent Variable

Hypothesis

Coefficient Siandard

Sigificance

Number Vari able Val ue

Error

P

HI: XI Ethical Reasoning

-0.23 0.23

*

X2

Experience -0.23 0.73

NS

X3

Gender

-0.03 7.70

NS

RZ = 6.6

Note: * Significant at p < 0.10


9/13


Table 5.

Comparisons to DIT P Score Norms

129

Hong

ong

US

Number of subjects 50 127

Mean Score 30.10 39.2

Standard deviation 14.87 15.24

Now f = 3.60 (p < 0.0 I, one-tailed).

will act independently in auditor-management conflicts. This will be a right step toward

promoting higher ethical standards of the members of the accounting profession.

The findings from Table 5 also provide additional cross-cultural evidence on the issue

of ethical development of auditors. In general terms, it confirms that the theory of ethical

reasoning has application in a different cultural environment. However, the analysis

of the cores provides some interesting insights. As seen from Table 5, the mean

score for the sample of auditors in Hong Kong is significantly lower than their

counterparts in the USA @ < 0.01). The fact that the average core for Hong Kong

auditors is significantly lower than the average score for USA auditors suggests that

such differences can be explained in terms of the different dimensions of culture as

postulated by Hofstede (199 1). These differences in cores are the result of the different

collective attitudes and perceptions of accountants from various socio-economic

environments. In the USA, the higher cores for the sample of USA auditors are

characterized by pertinent cultural dimensions of small power distance, short term

orientation, and high individualism which are commensurate with the basic underlying

premises of higher ethical development of Kohlberg’s CMD: fairness and justice. In

Hong Kong, the lower Pscores for Hong Kong auditors are consistent with large power

distance, long term orientation and low individualism.

Recently, Cohen et al. (1993) have emphasized that guidelines for a firm-wide ethical

policy should explicitly consider the possible influence of international cultural factors

on ethical perceptions. The evidence from this study gives further support to the findings

of Ponemon’s (1990) and Ponemon and Gabhart’s (1990) studies that on average,

partners’ and managers’ ethical reasoning levels may not represent the highest levels

in Kohlberg’s stage sequence model in different socio-economic environments.

Limitations of this study include the non-random selection of subjects and that Hong

Kong subjects are employed by only the Big Six firms. Generalizing the results to other

subjects and settings should be viewed with caution.

CONCLUSION

This study investigated the effects of ethical reasoning on the auditors’ responses in

acceding to the client’s request in an audit conflict situation and the cross-cultural

explanations for the differences in levels of ethical reasoning. Using linear regression,

the results showed that ethical reasoning is a major determinant in explaining the

variability in the auditors’ responses in such conflict situation. In addition, the mean

ethical reasoning core obtained in a non-western context is found to be significantly

lower than the USA sample obtained in previous study. This can be explained by

significant differences in cultural dimensions. Many accounting researchers have urged

that multinational public accounting firms need to consider the impact of cultural


10/13

130

THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 31 No. 1 1996

factors on their employees’ ethical sensitivity and ethical decision making. It has been

suggested that an awareness of such cultural differences could ensure that the reward

or compensation system in CPA firms be consistent with cultural differences so as to

ensure individuals’ ethical behavior (Cohen et al., 1993). It is only with such integration

of cultural issues within the firm’s control system that ethical standards could be

maintained at an international as well as national level. Otherwise, accountants’

reputation and credibility would be at stake. The results from this study add further

evidence to the literature of ethical reasoning in an accounting context in a non-western

cultural environment. Future research could consider testing culture as a variable in

an empirical ethical decision making model.

Acknowledgment: The author is grateful to comments given by John K. Courtis, Ferdinand

A. Gul, Bertrand Horwitz and Bikki Jaggi.

APPENDIX A

AUDITORS’ DECISION MAKING QUESTIONNAIRE

This questionnaire is part of a research project which aims to identify and examine

some of the factors that could affect auditors’ decision making. Note that there are

no right or wrong answers to these questions which merely ask for your own perceptions

on a range of issues. We appreciate that normally you would require more information

than is provided here before you make such decisions. However, for purposes of this

study, we ask you to make your decisions based on the limited information provided.

Please be assured that the questionnaire is anonymous and the information obtained

will be kept strictly confidential. None of the information collected is sufficiently detailed

to identify you or your firm.

Assume That You Are the Audito r of Dayson Development Ltd.

Dayson Development Ltd. is a Hong Kong manufacturer specialising in electronic

toys. In the current year’s audit, a dispute has arisen between you and the management

of Dayson over the materiality of certain unrecorded liabilities discovered by you during

the audit. Dayson’s Chief Financial Officer argues that the total amount of unrecorded

liabilities is immaterial and therefore it is unnecessary to make adjusting entries in the

financial statements. Dayson’s management believes that it should know as well as

anyone what financial statement readers would or would not deem to be a material

amount. In your opinion, the amount is material and adjustments should be made in

the financial statements.

1. As the auditor, how likely is it that you will IGNORE the unrecorded liabilities?

Please indicate your choice by marking with an X on a specific point on the

following scale.

0 IO

20 30 40

50

60

70

80

90 100

Very low

Very

high

likelihood

likelihood


11/13


131

2.

As the auditor, have you encountered cases that are similar to Q. 1 above in which

you were involved in an audit conflict situation with client management?

YES 0, If so, please indicate approximately how many cases?

Please describe briefly the most memorable audit conflict case which

you have encountered.

O Cl

NOTES

1. The word “ethical” is used interchangeably with “moral” in this study.

2. The contact partners/ managers of CPA firms who participated in this experiment confirmed

that auditors with at least four years of audit experience in Hong Kong would normally

handle auditor-client conflict situations.

3. Shaub’s (1994) sample of 127 auditors came from four offices of a single Big-Six CPA firm

in southwestern U.S.A. No significant differences in

P

scores were found among the four

offices.

4. The DIT has been validated in over 500 studies in every state in the U.S.A. and from over

20 countries outside the U.S.A. Test-retest reliability is generally in the high .7Os or .8Os.

Alpha Cronbach is also in the high-70s as well. Rest believes that Alpha Cronbach should

be considered a lower bound to reliability rather than an estimate because the stories are

factorially complex and are not equivalent across them. Rest (1979) has also validated the

DIT in a number of ways including predictive validity (pp. 96-97), face validity (p. 98),

criterion group validity (pp. 107-126), longitudinal change studies (pp. 126-145), convergent-

divergent validity (pp. 146-200), experimental enhancement studies (pp. 204-214) as well as

discriminant validity (pp. 201-203).

5. The Moral Judgment Interview developed by Colby and Kohlberg (1987) is also recognized

as one of the very reliable and valid instruments to measure cognitive moral development.

However, the DIT is adopted because it is an objective recognition instrument which is

considered more scientific, valid, and reliable.

6. Those participants who can understand Chinese are given the translated Chinese version

(Ma, 1988) as a reference.

7. Rest (1986) found that the three-story version has a very high correlation with the six-story

version though the shorter version has a slightly lower reliability level. The more stories being

used, the higher the reliability.

REFERENCES

Armstrong, M.B. 1984. I nternali zation of

the

Professional

Ethi c by Cert i fi ed Publi c Account ant s:

A M ult idi mensional Scali ng Approach.

PhD dissertation, University of Southern

California.

~.

1987. “Moral Development and Accounting Education.” Journal of Accounting

Education, (Spring): 27-34.

Arnold, D. and L. Ponemon. 199 1. “Internal Auditors’ Perceptions of Whistle-Blowing and the

Influence of Moral Reasoning: An Experiment.” Audit ing: A Journal of Pract ice and

ZYheory, Fall): 1-15.

Brabeck, M. 1984. “Ethical Characteristics of Whistle-Blowers.”

Journal of Research i n

Personal i t y, 18: 41-53.

Cohen, J. L. Pant and D. Sharp. 1993. “Culture-Based Ethical Conflicts Confronting

Multinational Accounting Firms.”

Accounting Horizons, (September): 1-13.


12/13

132 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 31, No. 1,1996

Colby, A. and L. Kohlberg. 1987. The

M easurement of M oral Judgment . New

York: Cambridge

University Press.

Gul, F. A. 1991. “Size of Audit Fees and Perceptions of Auditors’ Ability to Resist Management

Pressure in Audit Conflict Situations. Abacus, (September): 162-172.

Gul, F.A. and J. Tsui. 1992. “An Empirical Analysis of Hong Kong Bankers’ Perceptions of

Auditor Ability to Resist Management Pressure in an Audit Conflict Situation.” Journal

of Int ernat i onal Accounti ng Audi t ing and Taxati on, l(2): 177-190.

~. 1993.

“A Comparative Study of Auditors’ Attitudes to Uncertainty Qualifications:

An Empirical Test of the Strong Versus Weak Uncertainty Avoidance Hypothesis.”

I nt ernat i onal Journal of Accounti ng, 28(4): 356-364.

- .

1994. The Consequences of Wu Lun on Budget ary Part i cipat i on, Management

Account i ng Syst ems and M anageri al Performance i n Chi nese M anufact uri ng Enterpri ses.

Unpublished paper.

Hiltebeitel, K. and S. Jones. 1991. “Initial Evidence on the Impact of Ethics Integration in

Accounting Education.”

I ssues n Account i ng Educat i on,

6(Fall): 262-275.

~. 1992. “An Assessment of Ethics Instruction in Accounting Education.”

Journal of

Business Ethics, 11: 37-46.

Hofstede, G.H. 1980. Cul t ures Consequences. Beverly Hills: Sage.

-. 199 1. Cult ures and O rganizat ions: Softw are of the M ind. London: McGraw-Hill.

Jones, S.K. and L.A. Ponemon. 1993. A comment on “A Multidimensional Analysis of Selected

Ethical Issues in Accounting.” Z eAccounting Review, 68(2): 411-416.

Kleinbaum, G., L.L. Kupper and K.E. Muller. 1988. “Applied Regression Analysis and Other

Multivariate Methods.” PWS Kent.

Knapp, M.C. 1985. “Audit Conflict: An Empirical Study of the Perceived Ability of Auditors

to Resist Management Pressure.” The Accounti ng Revi ew , (April): 202-211.

___. 1987. “An Empirical Study of Auditor Committee Support for Auditors Involved

in Technical Disputes with Client Management.” The Accounti ng Revi ew , (July): 202-211.

Kohlberg, L. 1969. “Stages and Sequences: The Cognitive Developmental Approach to

Socialization.” Pp. 347-480 in

Handbook of Social i zat i on Theory and Research,

edited

by D.A. Goslin. Chicago: Rand McNally.

Lampe, J. and D. Finn. 1992. “A Model of Auditor’s Ethical Decision Process.”

Auditing: A

Journal of Practi ce & Theory,

1 (Supplement): 33-59.

Loeb, S.E. 1970. A Behavi or Study of CPAs Ethi cs. PhD dissertation, University of Wisconsin.

Ma, H.K. 1988. “Objective Moral Judgment in Hong Kong, Mainland China, and England.”

Journal of Cross-Cul t ural Psychology, 19(l): 78-95.

McKinnon, J. 1984. “Cultural Constraints on Audit Independence in Japan.” The International

Journal of Accounti ng,

(Fall): 17-43.

Perera, M.H.B. 1989. “Towards a Framework to Analyze the Impact of Culture on Accounting.”

I nternati onal Journal of Accounti ng, 4( 1): 42-56.

Ponemon, L.A. 1988. A Cognit iv e-D evelopmental Approach to he Anal ysis of Cert i j i ed Publi c

Accountant s’ Ethi cal Judgment s. PhD dissertation, Union College of Union University.

~.

1990. “Ethical Judgments in Accounting: A Cognitive-Developmental Perspective.”

Cri t i cal Perspecti ves on Accounti ng, 1: 191-215.

~.

1992a. “Ethical Reasoning and Selection Socialization in Accounting.” Accounting,

Or gani zati ons and Societ y,

17(April/ May): 239-258.

~.

1992b. “Auditor Underreporting of Time and Moral Reasoning: An Experimental-

lab Study.”

Contemporar y Account i ng Research, 9( 1): 171-189.

Ponemon, L.A. and D.R.L. Gabhart. 1990. “Auditor Independence Judgments: A Cognitive-

Developmental Model and Experimental Evidence.”

Contemporary Accounting Research,

7(l): 227-251.

___.

1993.

“Ethical Reasoning in Accounting and Auditing.”

CGA-Canada Research

Foundation.

Ponemon, L.A. and A. Glazer. 1990. “Accounting Education and Ethical Development: The

Influence of Liberal Learning on Students and Alumni in Accounting Practice.”

I ssues

i n Accounti ng Educati on, (Fall): 21-34.

Rest, J.R. 1979. Development in Judging M oral I ssues. Minneapolis: University of Minnesota

Press.


13/13


133

~.

1986. Moral Development: Advances in Research and Theory. New York: Praeger.

~.

1993.

Guide for the Defining Issues Test - How to Use the Optical Scan Forms and

the Centre’s Scoring Service.

Centre for the study of Ethical Development: University of

Minnesota.

Shaub, M.K. 1989.

An Empirical Examination of the Determinants of Auditors’ Ethical

Sensitivity. PhD dissertation, Texas Tech University.

___. 1992.

An Analysis of Factors Affecting the Moral Reasoning of Auditors and Auditing

Students. Unpublished paper, University of Nebraska.

1994. “An Analysis of the Association of Traditional Demographic Variables with the

Moral Reasoning of Auditing Students and Auditors.” JournaI of Accounting Education,

12 l): l-26.

Takatera, S. and M. Yamamoto. 1987. The

Cultural Significance of Accounting in Japan.

Paper

presented at Workshop on “Accounting and Culture” of the European Institute for

Advanced Studies in Management, Brussels, December.

Tull, G. 1982. A Study of Moral Development of Selected Employees in Certain Public

Accounting Firms. PhD dissertation, Louisiana State University.

auditors' ethical reasoning some audit conflict and cross cultural evidence 1996 the international...

Documents