Research on Professional Responsibility and Ethics in Accounting, Volume 10 (Research on Professional Responsibility and Ethics in Accounting) (Research ... Responsibility and Ethics in Accounting) 0762312394, 9780762312399, 9780080461335

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RESEARCH ON PROFESSIONAL RESPONSIBILITY AND ETHICS IN ACCOUNTING

RESEARCH ON PROFESSIONAL RESPONSIBILITY AND ETHICS IN ACCOUNTING (formerly Research on Accounting Ethics)

Series Editor: Cynthia Jeffrey Volumes 1–5: Series Editor: Lawrence Poneman Volumes 6–8: Series Editor: Bill N. Schwartz Volume 9: Series Editor: Cynthia Jeffrey

RESEARCH ON PROFESSIONAL RESPONSIBILITY AND ETHICS IN ACCOUNTING VOLUME 10 (formerly Research on Accounting Ethics)

RESEARCH ON PROFESSIONAL RESPONSIBILITY AND ETHICS IN ACCOUNTING EDITED BY

CYNTHIA JEFFREY Iowa State University, Ames, USA

2005

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CONTENTS LIST OF CONTRIBUTORS

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EDITORIAL INFORMATION

ix

INVITED PAPER FINANCIAL REPORTING QUALITY: A FOCUS ON THE ROLE OF THE INDEPENDENT AUDITOR Andrew D. Bailey, Jr. and Audrey A. Gramling

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MAIN ARTICLES ETHICAL TRAINING IN GRADUATE ACCOUNTING COURSES: EFFECTS OF INTERVENTION AND GENDER ON STUDENTS’ ETHICAL REASONING Mohammad J. Abdolmohammadi

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ACCOUNTING SCHOLARS PUBLISHING IN ETHICS JOURNALS: A 30-YEAR LONGITUDINAL STUDY Richard A. Bernardi

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CPAS IN PUBLIC PRACTICE: WHAT CODE DO THEY USE WHEN FACED WITH AN ETHICAL DILEMMA? Marshall K. Pitman and Robin R. Radtke

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THE IMPACT OF THE SARBANES-OXLEY ACT ON THREATS TO AUDITOR INDEPENDENCE Michael K. Shaub v

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CONTENTS

UNETHICAL DECISION-MAKING WITH COMPUTER USAGE IN A UNIVERSITY ENVIRONMENT Bernadette M. Ruf and Stuart B. Thomas THE PLACE OF ETHICS SCHOLARSHIP IN THE U.S. ACCOUNTING ACADEMY: ACCOUNTING DOCTORATES’ RESEARCH PRODUCTIVITY IN ETHICS JOURNALS Richard A. Bernardi, David F. Bean and Paul F. Williams

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INSTRUCTIONAL CASES AN INSTRUCTIONAL CASE IN USING RECEIVABLES AS COLLATERAL FOR A LOAN: HARRISON CHEMICAL CORPORATION Steven M. Mintz and Mahmoud M. Nourayi AN INSTRUCTIONAL CASE IN THE ETHICS OF THE CPA/CLIENT RELATIONSHIP: THE ROADRUNNER AND HOWARD BEAN, CPA Lawrence Webb, Brendan O’Connell, Chris Carr and Mark Higgins

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LIST OF CONTRIBUTORS Mohammad J. Abdolmohammadi

Bentley College, USA

Andrew D. Bailey Jr.

Office of the Chief Accountant, United States Securities and Exchange Commission, USA

David F. Bean

Hagan School of Business, Iona College, USA

Richard A. Bernardi

Gabelli School of Business, Roger Williams University, USA

Chris Carr

Orfalea College of Business, California Polytechnic State University, USA

Audrey A. Gramling

Office of the Chief Accountant, United States Securities and Exchange Commission and Kennesaw State University, USA

Mark Higgins

College of Business, University of Rhode Island, USA

Steven M. Mintz

Department of Economics, Claremont McKenna College, USA

Mahmoud M. Nourayi

Department of Accounting, Loyola Marymount University, USA

Brendan O’Connell

School of Business, James Cook University, Australia

Marshall K. Pitman

Department of Accounting, The University of Texas at San Antonio, USA

Robin R. Radtke

Department of Accounting, The University of Texas at San Antonio, USA

Bernadette M. Ruf

Department of Accounting and Finance, Delaware State University, USA vii

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LIST OF CONTRIBUTORS

Michael K. Shaub

School of Business and Administration, St. Mary’s University, USA

Stuart B. Thomas

Faculty of Management, University of Lethbridge, Canada

Lawrence Webb

Department of Accounting & Finance, Monash University, Australia

Paul F. Williams

College of Management, North Carolina State University, USA

EDITORIAL INFORMATION Managing Editor Cynthia Jeffrey Department of Accounting College of Business Iowa State University Case Editor Steven M. Mintz Department of Economics Claremont McKenna College Editorial Review Board Mohammed Abdolmohammadi Bentley College

Susan Borkowski La Salle University

Elizabeth Dreike Almer Portland State University

Charlies Cullinan Bryant College

Vicky Arnold University of Connecticut

Stan Davis Indiana University – Purdue University Ft. Wayne

Andrew Bailey Securities and Exchange Commission

Todd DeZoort University of Alabama Jesse Dillard Portland State University

C. Richard Baker Adelphi University

Mary Doucet California State University Bakersfield

Richard Bernardi Roger Williams University ix

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EDITORIAL INFORMATION

Dann Fisher Kansas State University

Michael A. Pearson Kent State University

Timothy J. Fogarty Case Western Reserve University

Kent St. Pierre University of Delaware

Marty Freedman Towson University

Robin Radtke University of Texas at San Antonio

Karen Hooks Florida Atlantic University Steve Kaplan Arizona State University Julia Karcher University of Louisville Sara Kenny College of St. Mary, Omaha Jim Lampe Texas Tech University Morley Lemon University of Waterloo Steve Loeb University of Maryland

Sara Reiter SUNY-Binghampton Robin Roberts University of Central Florida Pamela Roush University of Central Florida Bernadette Ruf University of Akron Donald Samelson Colorado State University Mike Schadewald University of Wisconsin – Milwaukee

Dawn W. Massey Fairfield University

Joe Schultz Arizona State University

Mark Mitschow SUNY College at Geneseo

John Sennetti Nova Southeastern University

Bruce Oliver Rochester Institute of Technology

Michael Shaub St. Mary University

Carl J. Pacini Florida Gulf Coast University

L. Murphy Smith Texas A&M University

Editorial Information

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Charles Stanley Baylor University

John Thornton Washington State University

John Sweeney Washington State University

Carol Venable San Diego State University

Bill Thomas Baylor University

Paul Williams North Carolina State University

Linda Thorne York University

George Young Florida Atlantic University

The editors wish to thank the Editorial Board for the reviews they provided this year. In addition to the review board, the editors wish to thank the following ad hoc reviewers: Kelly Richmond Arline Savage Timothy J. Louwers

INVITED PAPER

FINANCIAL REPORTING QUALITY: A FOCUS ON THE ROLE OF THE INDEPENDENT AUDITOR$ Andrew D. Bailey, Jr. and Audrey A. Gramling ‘‘y the [Securities and Exchange Commission] SEC requires public companies to disclose to the public meaningful financial and other information so that investors may judge for themselves if a company’s securities are a sound investment. Only through the steady flow of accurate, comprehensive, and timely information can the public make informed investment decisions’’ (SEC, 2004, p. 6).

A current, and ongoing, priority of the SEC is to ensure that ‘‘investors have accurate, adequate, and timely public access to disclosure materials that are useful, and can be easily understood and analyzed across companies, industries, or funds’’ (SEC, 2004, p. 44). Financial reporting by SEC registrants and their independent auditors serves the public interest and helps protect investors by providing them with relevant, reliable, and understandable (i.e., quality) financial information (Bailey, 2004).1 We define financial reporting broadly to cover not only the primary financial statements, but also accompanying schedules and disclosures. Consistent with the FASB’s (1978) view, financial reporting includes $ DISCLAIMER: As a matter of policy, the Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This publication expresses the authors’ views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.

Research on Professional Responsibility and Ethics in Accounting Research on Professional Responsibility and Ethics in Accounting, Volume 10, 3–34 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1574-0765/doi:10.1016/S1574-0765(05)10001-6

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explanations and interpretations to help users better understand reported financial information. For example, the usefulness of financial information as an aid to investors can be enhanced by management’s explanations of that information. Such explanations might include complete and accurate presentations by management in the Management Discussion & Analysis (MD&A) section of the annual report, footnotes to the financial statements that are in plain English, and detailed descriptions of identified material weaknesses in internal control. The independent auditor is an important determinant of financial reporting quality. Notwithstanding this significant role, the independent auditor is only the last key gatekeeper before dissemination of financial reports to the marketplace. Many other parties play important roles in helping ensure the quality of financial reporting to current and potential investors. As suggested in Exhibit 1, we contend that financial reporting quality is a direct function of the quality of: (1) the reports prepared by management;

Exhibit 1. Determinants of Financial Reporting Quality: A Focus on the Independent Audit. Public Company

Independent Audit Firm

Quality of Management Prepared Reports

Quality Control Culture

Quality of Internal Audit Activities

Financial Reporting Quality

Quality of the Independent Audit

Monitoring Personnel

Quality of Oversight by the Audit Committee

Standard Setters

Tools

Regulators

Other External Monitoring Mechanisms

Financial Reporting Quality: A Focus on the Role of the Independent Auditor

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(2) internal audit activity; (3) oversight by the audit committee; and (4) the audit performed by the independent auditor. Other parties and institutions, although not directly involved in the preparation, oversight, and audit of financial information associated with a particular entity, play critically important roles in determining financial reporting quality. These parties establish the environment in which financial reports are provided to investors, and the rules that must be adhered to in preparing and auditing such reports. These parties and institutions include standard setters (e.g., FASB, PCAOB, SEC), regulators, and other institutions that provide various inspection, discipline, and enforcement mechanisms (e.g., SEC, PCAOB, legal environment, listing exchanges, state boards of accountancy) and other external monitors (e.g., analysts, institutional investors). The purpose of this paper is to review the roles of these parties that have responsibilities that affect financial reporting quality. While we acknowledge and discuss the roles of many parties, our primary focus is on the role of the independent auditor, whom we believe must commit to the independent audit with the mindset of serving primarily the financial markets and the public interest (see also Nicolaisen, 2004). We have two additional objectives. First, we challenge the auditing profession to address the many factors that can positively contribute to or that currently detract from their ability to enhance financial reporting quality. Second, we identify possible academic research opportunities that can contribute to our understanding of the necessary and sufficient determinants of financial reporting quality.

WHAT IS FINANCIAL REPORTING QUALITY? Before discussing the roles of the parties responsible for financial reporting quality, it will be helpful to briefly discuss what is meant by the term financial reporting quality. The characteristics of financial reporting quality are outlined in the professional accounting literature. Because these characteristics are difficult to measure directly, the academic literature has used a variety of proxies (i.e., measures) to capture these characteristics. Characteristics of Financial Reporting Quality in the Professional Accounting Literature A goal of financial reporting is to provide information to investors that is useful for investment decision-making purposes (FASB, 1978).2 Accordingly,

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financial reporting quality can be assessed in terms of whether the information is deemed useful for investor decision making. According to the FASB: The qualities that distinguish ‘‘better’’ (more useful) information from ‘‘inferior’’ (less useful) information are primarily the qualities of relevance and reliability, with some other characteristics that those qualities imply (FASB, 1980, p. 15).

A review of the professional accounting literature (see, in particular, FASB, 1980 for a more detailed discussion) suggests that the characteristics related to relevance include predictive value (e.g., earnings persistence, disaggregated information), feedback value, and timeliness. Characteristics related to reliability include verifiability, completeness, substance/representational faithfulness, and neutrality. Comparability, including consistency, is viewed as interacting with both relevance and reliability to contribute to the goal of decision usefulness. These characteristics are difficult for the financial statement users to observe directly, are typically difficult to measure on an ex ante basis, and hence are often assessed on an ex post basis. The academic literature has used a somewhat imperfect set of proxies to capture various characteristics of financial reporting quality. Measures of Financial Reporting Quality in the Academic Accounting Literature3 The academic literature has used various approaches to measuring financial reporting quality, many of which focus on output or perception measures.4 Some measures tie directly to the characteristics identified by the FASB (1980). For example, Subramanyam (1996) and Barth, Cram, and Nelson (2001) attempt to capture an aspect of relevance by using predictability of future cash flows as a measure of usefulness or quality. Others have used measures related to reliability, including the accuracy of the financial information, as measures of quality. Such measures have included whether a restatement was necessary (e.g., Myers, Myers, Palmrose, & Scholz, 2004), there was compliance of a firm’s financial reports with applicable reporting standards (e.g., Gaeremynck, Van der Meulen, & Willekens, 2003), or the financial statements contained a fraudulent misstatement, possibly causing the registrant to face an SEC enforcement action related to inaccurate financial reporting (e.g., Beasley, 1996). Some researchers have addressed the issue of reliability through measures described as credibility measures. For example, Farber (2005) uses measures of analyst following and institutional holdings as indicative of perceived financial reporting credibility. Mercer (2005) assesses credibility by examining

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investors’ beliefs about management’s competence and trustworthiness related to their financial disclosures. Khurana and Raman (2004) suggest that the ex ante cost of equity capital is an estimable proxy for financial reporting credibility. Finally, the earnings response coefficient (ERC), a measure of the extent to which the market responds to earnings (i.e., earnings quality), has been used as a measure of financial reporting quality (e.g., Balsam, Krishnan, & Yang, 2003), and might be viewed as a quality perception measure. Still, other researchers have used proxies that may be less intuitive as measures of financial reporting quality. For example, Myers, Myers, and Omer (2003) use measures of accruals, including the dispersion and sign of both absolute Jones-model abnormal accruals and absolute current accruals (also see Krishnan, 2003). Accrual measures are thought to be indicative of earnings management, and earnings management is generally believed to lead to lower financial reporting quality (Dechow & Schrand, 2004, p. 58). Other proxies for financial reporting quality attempt to capture some aspect of earnings management, or at least are perceived to be red flag indicators of earnings management. For example, registrants that issue financial reports with earnings that consistently just meet or beat targets or forecasts may have had to manage earnings to do so (Dechow & Schrand, 2004, p. 75; e.g., Kasznik, 1999), and thus may represent lower quality financial reporting. Finally, measures based on assessments made by rating agencies, analysts, or other professional groups have also proxied for aspects of financial reporting quality. For example, Dunn and Mayhew (2004) use the Association for Investment Management and Research (AIMR) analysts’ ratings of disclosure quality as a quality measure (see also Lang & Lundholm, 1993).

DETERMINANTS OF FINANCIAL REPORTING QUALITY In this section, we recognize the many determinants of financial reporting quality. As suggested in Exhibit 1, the actions of management, the audit committee, the internal auditors, and the independent auditor directly affect financial reporting quality, and in turn the activities of these four parties are influenced by the nature of the financial reporting environment. Parties Influencing the Financial Reporting Environment The primary parties who influence the financial reporting environment include standard setters (e.g., FASB, PCAOB, SEC), regulators and other institutions

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that provide various inspection, discipline, and enforcement mechanisms (e.g., SEC, PCAOB, legal environment, listing exchanges, state boards of accountancy) and other external monitors (e.g., analysts, institutional investors). Standard setters (e.g., FASB, PCAOB, SEC) provide the frameworks within which financial statements are prepared and audited. Standards should be effective in helping achieve financial reporting quality, while considering both costs and benefits. Standards should result in consistent application by preparers and auditors, without undue complexity. Accounting standards set the ‘‘floor’’ for accounting and disclosures by management to the users of financial information. (See Hackenbrack and Nelson (1996) and Trompeter (1994) for research evidence on accounting standards as a determinant of financial reporting quality.) In preparing its financial information, the public company, through its management, audit committee, and internal audit function, must be committed to not merely the letter of the accounting standards, but to their intent. Accounting standards, however, might limit the independent auditor’s contribution to financial reporting quality. For example, the precision of the audited numbers may be bounded by the precision of the underlying accounting numbers based on the standards. (However, see Power (1996) for an alternative view that auditors can create auditable numbers without regard to the precision implicit in the accounting standards themselves.) Auditing standards, when properly applied by independent auditors, are intended to reduce the incidence of materially misstated financial statements originating from the public company. Auditing standards set the ‘‘floor’’ for audit processes and procedures. However, we recognize that the auditor’s ability to effectively apply the standards, and contribute to financial reporting quality is influenced by the preparers’ actions. For example, in situations where preparers present accurate, yet somewhat incomplete, disclosures, the auditor may face difficulties in requiring the registrant to present a more complete, and hence more useful or higher quality, disclosure. Regulators act to discourage various behaviors and to provide certain disincentives in an effort to achieve desired actions. Standard setters, in conjunction with regulators, establish principles and objectives, provide guidance where necessary, prohibit certain behaviors, and provide penalties when behavior deviates from the established expectations. A balanced combination of disincentives, guidance, and prohibitions from regulators and standard setters is necessary in affecting financial reporting quality. Institutional investors and analysts have the potential to serve monitoring roles with respect to financial reporting quality. The presence of institutional investors is thought to decrease a firm’s incentives for low-quality financial

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reporting (e.g., earnings management or intentional misreporting via a variety of mechanisms (Dechow & Schrand, 2004)). While the academic literature provides some evidence that institutional investors serve as effective monitors of financial reporting quality (e.g., Bushee, 1998), literature on the effectiveness of analysts as monitors is somewhat more limited (e.g., Hirst & Hopkins, 1998). Other mechanisms, such as our legal environment, enforcement actions by the SEC, enforcement and inspection activities of the PCAOB, oversight activities by state boards of accountancy, and requirements mandated by listing exchanges, provide disciplinary threats for those having a direct role in the preparation, review, and audit of financial information. While these types of mechanisms are often viewed with some discomfort by parties involved in the preparation, oversight, and audit of financial information, it seems clear that penalties and the threat of penalties can influence the behaviors of these parties. (See Gramling, Schatzberg, Bailey, & Zhang (1998) for an example of research showing a relationship between the legal liability environment and auditor behaviors.) Parties with a Direct Role in the Preparation, Oversight, and Audit of Financial Information Management is responsible for preparing financial statements for dissemination to the public. Further, in an effort to enhance financial reporting quality, various sections of the Sarbanes-Oxley Act of 2002 (hereafter SOX) require management to certify the effectiveness of disclosure controls and procedures, as well as internal control over financial reporting. However, management’s role in determining financial reporting quality extends beyond the preparation of financial information and assertion of internal control effectiveness. It is important, for example, to also recognize the strong influence of management in setting the overall tone for the organization, including the importance placed on financial reporting quality (Cohen, Krishnamoorthy, & Wright, 2002). The internal audit function contributes to financial reporting quality through its ongoing audit activities and its relationships with management, the audit committee, and the independent auditor. (See Gramling, Maletta, Schneider, & Church (2004) for discussion on the internal audit function’s relationships with these parties.) The internal audit function has played some role in financial reporting as early as the 1940s (Moeller, 2004), and that role has evolved over time. The nature of internal audit activity today typically includes financial and fraud audits, risk and control self-assessment

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initiatives, control assurance, and compliance work, most of which influence financial reporting quality. The annual audit completed by the independent auditor is an important determinant of financial reporting quality, and the internal audit function can serve as a resource to the independent auditors in completing the annual audit (SAS No. 65 AICPA, 1991; AS 2, PCAOB, 2004a). The work of a competent and independent internal audit function will affect the nature, timing, and extent of the annual independent audit work, including procedures the independent auditor performs when obtaining an understanding of the entity’s internal control, when assessing risk, when gathering substantive evidence, and in performing an internal control assessment. In performing the audit, the independent auditor may, as permitted by auditing standards, rely on work already performed by internal auditors and/or request direct assistance from them (i.e., a specific request for the internal audit function to complete some aspect of the independent auditor’s work). The importance of the internal audit function as a determinant of financial reporting quality is highlighted by recently enacted listing rules for the NYSE, as approved by the SEC, requiring that an entity maintain an internal audit function that would likely interact with both the audit committee and management. This interaction would typically involve the internal audit function providing the audit committee and management with ongoing assessments of the company’s risk management processes and system of internal control (SEC, 2003). Historically, the audit committee has had oversight responsibility of management’s financial reporting. That role has expanded today to typically include engaging and monitoring the external auditor (SOX), overseeing both internal and independent auditor activities (DeZoort, Hermanson, Archambeault, & Reed, 2002), and monitoring the independence of the independent auditor (SOX). SOX has imposed additional requirements on the audit committee that are intended to enhance financial reporting quality. For example, Section 301 of SOX requires the audit committee to establish a whistleblower program to allow for reporting of potential financial accounting problems, and mandates that the audit committee members be independent. Section 407 notes that audit committees should be comprised of at least one member who is a financial expert, thereby increasing the quality (i.e., competence) of the audit committee in its oversight responsibility. Efforts such as Sections 301 and 407 to improve the quality of the audit committee appear warranted given the various academic studies that suggest that financial reporting quality is associated with audit committee quality (e.g., Beasley, 1996; Beasley, Carcello, & Hermanson, 1999; Beasley,

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Carcello, Hermanson, & Lapides, 2000; DeZoort, 1998; McMullen & Raghunandun, 1996).5 The primary role of the independent auditor is to provide an independent audit of the financial reports prepared by management. Through this role, the independent auditor adds credibility to management’s financial reports (Power, 1996). The need for enhanced credibility of management prepared financial reports is best understood within a framework which recognizes the presence of information asymmetries. Information asymmetry between management and owners (as well as other contracting parties) creates a demand for a measure of firm performance (Dechow, 1994). Periodic financial reports are one of the primary mechanisms for communicating information about registrant performance to owners and other individuals outside of the organization (FASB, 1978). The level of reliability of financial reports prepared by management is an important determinant of the usefulness of those reports (FASB, 1980; Wild, 1996). However, it is difficult for outside parties to assess the reliability of the financial information prepared by management (Dechow, 1994). Given the existence of information asymmetries, and the potential for conflicts of interest between company management and the outside users of financial information, an audit by an independent third party can serve as a mechanism to enhance the reliability of the financial information reported by management (e.g., Kinney & Martin, 1994; Watts & Zimmerman, 1986). Several researchers have suggested the mechanisms through which the audit improves the quality of management prepared financial reports. For example, auditors are thought to improve the quality of financial reports through their ability and willingness to be discriminating in examining management’s records and in resisting client pressures (see DeAngelo, 1981). Similarly, Francis, Maydew, and Sparks (1999) propose that an audit improves the quality of financial reports by constraining aggressive and questionable accounting practices of management.

A FOCUS ON AUDIT QUALITY AS A DETERMINANT OF FINANCIAL REPORTING QUALITY While the above discussion suggests there are numerous determinants of financial reporting quality, many investors in the marketplace have an expectation that audit quality is the key determinant of financial reporting quality. However, assessments of audit quality are somewhat problematic for investors. The assessment often occurs on an ex post basis, for example

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when there appears to be evidence of low-quality financial reporting, as in the case of a financial statement restatement or litigation or an SEC enforcement action. A complication when discussing audit quality in such instances is that social norms and points of views greatly influence what is expected from an audit in terms of the assurance level provided (Smieliauskas & Lam, 2004). We recognize that some investors might perceive that an audit is intended to provide absolute assurance that there are no material misstatements in the financial statements (Epstein & Geiger, 1994), without regard to the actions of the other parties responsible for financial reporting quality. From this perspective, an instance of low-quality financial reporting (e.g., a misstatement) would indicate low-quality auditing. Alternatively, auditors and other investors might view an audit as providing reasonable, but not absolute, assurance regarding the accuracy of management’s financial statements. Those with this perspective might not categorize all instances of low-quality financial reporting as evidence of low-quality auditing. Alternatively, audit quality might be assessed on the basis of the process adhered to in completing the audit engagement (i.e., through various input measures). For example, assessments of audit quality might be based on the execution of audit procedures, documentation of audit findings, and compliance with policies and standards. In the following sections we discuss various potential measures of audit quality, and, in some instances, provide examples of academic literature utilizing these measures. Currently, audit quality is measured in both the practice and academic literatures through limited approaches. These approaches attempt to capture the inputs and outputs of the audit process and typically utilize various ex post measures based on publicly available information. As with management’s greater knowledge about their financial reporting quality, the auditor has more insight than the investor about the quality of the audit and the process adhered to in completing an audit engagement. And, like management, the auditor has incentives to retain engagement specific private information about audit quality.

Output Measures of Audit Quality If audit quality is primarily defined on the basis of an output measure, that output measure must, at least loosely, relate to an opinion that appropriately assesses the accuracy of management’s assertions. That is, a possible output measure of audit quality would be whether the opinion is reflective of

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the accuracy of management’s assertions. This approach is used in academic literature by researchers that discuss audit quality in terms of whether, for example, a going concern opinion was issued for a company subsequently declaring bankruptcy (e.g., Mutchler, Hopwood & McKeown, 1997). Some output measures that have been used to proxy audit quality are the same measures researchers use to proxy financial reporting quality. However, these measures do not typically provide unambiguous evidence about audit quality. For example, cases where a restatement occurs after an unqualified audit opinion has been issued have been cited as evidence of low-quality auditing (e.g., Myers et al., 2004, p. 6). Non-compliance with disclosure requirements has also been used as a measure of audit quality (Krishnan & Schauer, 2000). Possibly, the assumption in using such measures to proxy for audit quality is that the independent auditor is the last key gatekeeper before financial information is disseminated to the marketplace, and thus bears ultimate responsibility for the overall financial reporting quality. We question whether such measures are truly measures of audit quality, or whether they are more global measures of overall financial reporting quality, which is dependent on the quality of the many determinants identified in Exhibit 1, including audit quality. Palmrose and Scholz (2004) discussion recognize, for example, that restatements are reflective of both financial reporting quality and audit quality.

Input Measures of Audit Quality The output measures discussed above become more meaningful in a context that recognizes the various inputs to audit quality. That is, what inputs were employed and what processes were used to arrive at the issued audit opinion? Many input measures are obtained on an ex post basis, for example, through quality control reviews that include an assessment of audit workpapers (e.g., Deis & Giroux, 1992), through subsequent litigation outcomes (e.g., Palmrose, 1988), through the results of reviews (e.g., Colbert & Murray, 1998) and, going forward, through the published results of the PCAOB’s newly implemented inspection process. A question arises as to the appropriate inputs to audit quality and how such inputs are assured on an ongoing basis. As suggested in Exhibit 1, the inputs to audit quality, which are an audit firm’s responsibility, result from a firmwide quality control system (Wooten, 2003) that ensures a proper organizational culture, emphasizes the importance of internal monitoring, employs appropriate personnel, and provides proper tools for audit engagement

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performance in accordance with professional standards. Stated somewhat less formally, if audit quality is defined on the basis of inputs, those inputs could be loosely described as the ‘‘right’’ people, applying the ‘‘right’’ tools and procedures in the ‘‘right’’ organizational culture which includes appropriate internal monitoring. Organizational Culture In an effort to promote audit quality, the organizational culture should emphasize the need for judgments and behaviors that exhibit desired qualities such as independence, objectivity, professionalism, persistence, skepticism, and integrity (PCAOB, 2004b). A published code of conduct should support these desired qualities. However, as with any control system, tone at the top is critical (Committee of Sponsoring Organizations of the Treadway Commission, 1994). Firm leadership has to go beyond creating policies, and must demonstrate a commitment to these desired qualities. While developing an organizational culture at either a large multinational audit firm or a smaller firm is not without challenges, its development is imperative to achieving audit quality on a firm-wide basis. Internal Monitoring Within an audit firm, internal monitoring mechanisms are necessary components of a quality control system designed to achieve audit quality (Committee of Sponsoring Organizations of the Treadway Commission, 1994). Such mechanisms include internal reviews, potentially an internal audit function, whistle-blowing programs and other approaches for detecting, reporting, correcting audit quality problems, and continuously improving audit quality. Malone and Roberts (1996) report that an individual auditor’s perception of the strength of a firm’s quality control system, including the nature and results of its internal monitoring, is positively associated with audit quality. Personnel Quality control activities related to human resources management involve policies related to hiring, staffing, promoting, and retaining personnel that ensure that appropriate personnel are available to complete the firm’s audit engagements. These personnel would be both competent and independent, as evidenced by their demonstration of the desired traits and behaviors, including judgment quality. The competencies and skills needed by an auditor to perform a quality audit are obtained through various means including education and experience,

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both of which are expected to enhance competence through increased knowledge, and positively influence judgment quality. Currently, in terms of ensuring technical competence through education, the profession and the firms rely on: (1) an entry level tertiary accounting education, (2) an entry level examination taken predominantly immediately after the completion of the tertiary education, and (3) continuing professional education requirements (CPE) varying by jurisdiction. While formal education is clearly an important mechanism in developing personnel, the importance of on-the-job training should not be overlooked. In terms of the role of experience leading to improved knowledge, and hence improved competence, a number of experience measures are noteworthy. For example, industry specialization or knowledge is an input likely to be associated with audit quality, and can be assessed at both the individual level (e.g., Solomon, Shields, & Whittington, 1999; Taylor, 2000) and at the firm level (see Gramling & Stone (2001) for a review of this literature). Likewise, we would expect that knowledge of the accounting standards, auditing standards, auditing procedures and techniques (e.g., sampling, confirming, etc.), and firm guidance would be important components of auditor competence. A focus on competencies should extend beyond technical accounting and auditing skills. The importance of other individual auditor characteristics, such as professional skepticism, should not be overlooked. We would expect that a reduced level of professional skepticism by individual audit team members would negatively influence overall audit quality. Additionally, an individual auditor’s independence of the client and other stakeholders supports the auditor’s ability to act objectively in performing the audit. Independence in fact and appearance are both thought to be important to audit quality. The authors consider independence in fact and appearance to be an integral part of any definition of audit quality, though a somewhat unique measure of quality because without independence in fact and appearance, any assessment of other quality-related input and output measures will be compromised by the auditor’s lack of independence. Independence in fact allows the auditor to exercise judgment with an objective viewpoint, thus achieving actual audit quality, while independence in appearance leads investors to trust that the auditor is exercising professional judgment in an objective fashion. Independence in fact and appearance, when joined with the auditor’s competence and other professional characteristics, make it possible to achieve both actual and perceived audit quality. The academic literature has provided mixed results with respect to the association of auditor independence with audit quality. Much of this research

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has focused on the issue at a firm level by examining whether non-audit services (a potential impairment to auditor independence) affect audit quality, as typically determined by output measures of financial reporting quality (see e.g., Parkash & Venable, 1993; Firth, 1997; Frankel, Johnson, & Nelson, 2002; Antle, Gordon, Narayanamoorthy, & Zhou, 2002; Ashbaugh, Lafond, & Mayhew, 2003; Kinney, Palmrose, & Scholz, 2004) or audit process measures such as evidence-gathering procedures (e.g., Felix, Gramling, & Maletta, 2005). Other research has examined whether audit firm tenure, a factor thought to influence independence, affects audit quality, as typically proxied by financial reporting quality measures (e.g., Carcello & Nagy, 2004). These academic studies have generally failed to find conclusive evidence of a negative relation between audit firm tenure and quality, but seem to suggest that audit quality is reduced in the early years of the auditor–client relationship. In addition to the competence and independence of personnel, we also recognize the potential effect on audit quality of other personnel-related factors including compensation structures (e.g., Trompeter, 1994), evaluation and promotional structures, workload balance issues, management skills and knowledge (e.g., Tan & Libby, 1997), and employee turnover rates. Tools The tools developed and maintained by the audit firm are designed to assist auditors in enhancing audit quality through performance of an audit in accordance with professional standards. Such tools might include policies and procedures regarding audit methodologies (e.g., Hyatt & Prawitt, 2001; Ballou, Earley, & Rich, 2004), industry specific tools and guidance, and technological resources. Further, these tools would include an audit firm’s policies and procedures that provide guidance on a number of engagement level activities including proper staffing, appropriate supervision and review including partner and manager attention to the engagement (e.g., Wooten, 2003), use of a consultation network which potentially includes the use of specialists (e.g., Kadous, 2000), and client acceptance and continuance criteria, all of which would be expected to be associated with audit quality.

Other Indicators of Audit Quality Academic researchers, in assessing or measuring audit quality, have used measures that are viewed as likely indicators of audit quality. For example, brand name (Big N) and audit firm size have been used as indicator of audit

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quality, with larger (smaller) firms typically categorized as providing higher (lower) audit quality (e.g., Francis et al., 1999). Rationale supporting the use of firm size as an indicator of audit quality is based on larger firms being able to better maintain independence from any individual client, and obtain and develop the tools and personnel necessary for audit quality. Audit fees have also been used as indicators of audit quality (e.g., Craswell, Francis & Taylor, 1995), with higher fees potentially suggesting higher quality (e.g., Palmrose, 1986) and lower fees or low-balling suggesting lower quality, possibly due to impaired independence of the audit firm (e.g., Schatzberg & Sevcik, 1994) and/or a pressure to complete the audit with fewer resources because of the fee constraints (e.g., Gramling, 1999).

POSSIBLE ACTIONS AFFECTING FINANCIAL REPORTING QUALITY The foregoing discussion suggests a number of factors that are relevant to financial reporting quality. In this section, we focus primarily on those related to audit quality; however, we also raise financial reporting quality issues which extend beyond the role of the independent auditor. By identifying a list of these various issues related to financial reporting quality, we hope to encourage parties that have a role in ensuring financial reporting quality to take action. We also recognize that the academic community can provide research yielding meaningful insights for use by those making efforts to continue to enhance financial reporting quality. Note that in raising these various issues, and in identifying possible research areas, our perspective is that of a regulator, and thus a perspective that is focused on protecting investors through providing them with quality financial information on which investment decisions can be based. A View of the Role of Academic Research6 Audit staff in the SEC’s Office of the Chief Accountant (OCA) are involved daily in issues bearing directly on financial reporting quality, including issues of auditor independence, standard setting activities of the PCAOB, and implications of legislative and regulatory mandates. Findings of academic research can be useful in understanding these and other issues of current relevance. However, it is oftentimes difficult to have a clear picture of the academic findings, given that the varied results are frequently conflicting

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and provide little unambiguous direction. This suggests to us the value of integration research. Integration research has two important characteristics – it synthesizes the conflicting research findings and points researchers in directions where additional research (often discovery or application research) would be useful. Ideally, integration research will then make clear the ‘‘settled’’ points. It is at this point that academic research becomes most valuable to the regulators and policy makers in developing and supporting policy decisions. Given the recently proposed agenda of the PCAOB, OCA, in its oversight role, anticipates being involved in auditing standards on many issues. These issues include financial fraud, independent auditor communications with audit committees, concurring or second partner review, auditing relatedparty transactions, use of confirmations in an audit, auditing fair value measurements and disclosures, elements of quality control, and risk assessment (see http://www.pcaobus.org/News_and_Events/News/2004–11-17.asp). Integration research on these topics would be particularly useful for providing a broader understanding of these various standards. Further, auditor independence issues, including related legislative and regulatory mandates, are a focus for the audit staff in OCA. Integrative research touching on the varied research findings with respect to the provision of non-audit services, as well as additional aspects of auditor independence (e.g., auditor rotation, employment relationships, and audit committee pre-approval) would be a useful resource. Finally, application research is viewed as particularly useful for purposes of demonstrating the feasibility and application of rules in place or under consideration.

Enhancing Audit Quality: Opportunities for the Profession and the Academic Community Our earlier discussion posited that audit quality is dependent upon a quality control system that emphasizes the appropriate inputs including organizational culture, internal monitoring, personnel, and tools. The issues we raise, which are summarized in Exhibit 2, are generally categorized along these dimensions. At a fundamental level, we are concerned about the importance of quality control to quality auditing, and interested in the specific aspects of a quality control system that are most significant to audit quality. That is, how important is quality control to audit quality? What quality control factors are most important to audit quality? While these might appear to be

Financial Reporting Quality: A Focus on the Role of the Independent Auditor

Exhibit 2. Audit Quality Issues.

Panel A: Inputs to Audit Quality General Quality Control Issues s How important is quality control to audit quality? s What are the necessary and sufficient quality control factors to audit quality? How important are specific individual components of a quality control system to audit quality? For example, are whistleblowing programs effective in achieving audit quality? If so, what are the appropriate elements of a whistle blowing program? Organizational Culture s How important are objectivity, professionalism, persistence, skepticism, and integrity as determinants of audit quality? s What other factors and traits should an organizational culture emphasize to enhance audit quality? s How does organizational culture foster the traits and behaviors most associated with audit quality? s How can a global auditing firm institute an organization-wide culture focused on audit quality? Internal Monitoring s What elements should an internal monitoring program possess if it is to be successful in achieving audit quality? s How should a firm’s disciplinary processes be structured so as to best promote audit quality? Personnel s What competencies and characteristics (e.g., professional skepticism) should be present on the audit engagement team? What is the appropriate mix of these competencies and characteristics on an audit team? s Should auditors be trained and evaluated on characteristics such as professional skepticism and ethics? s Would requiring a forensic accountant to participate in an audit engagement positively affect audit quality? If so, under what conditions? Would requiring other types of specialists (e.g., valuation, finance, derivatives) to be involved in the audit process serve to increase audit quality?

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s What changes to the current and continuing educational systems might be associated with audit quality? s Is the current CPE model positively associated with audit quality? s In what areas of competency should continuing education requirements be established (e.g., evaluation of information systems and internal controls; prevention and detection of fraud; and evaluation of fair value)? s What approaches to on-the-job training are most helpful to enhancing audit quality? s Which independence requirements are most associated with audit quality? s What incentives, as opposed to disincentives, can be implemented to further encourage auditor independence? s What personnel-related policies (e.g., compensation structures, partner admission criteria, other evaluation tools) are most associated with audit quality? s What are the impediments to retaining appropriate personnel and how can these impediments be mitigated? s Are current engagement staffing models conducive to audit quality? Tools s Has Section 404 of SOX changed assessments of control risk, or assessments of other components of the audit risk model? Have these changes influenced audit quality? s Is audit quality influenced by whether risk assessments are made at the account or assertion level? s What is the ability of alternative risk models to improve audit quality? s How do strategic risk-based auditing approaches affect audit quality? s How effective are substantive analytical procedures in ensuring audit quality? s Do auditors over-rely on analytical procedures when used as substantive tests to the detriment of audit quality? Should auditors be provided definitive direction as to when analytical procedures are appropriate and when analytical procedures should not be used? s What level of reliance should the auditor place on representations from management in order to ensure audit quality? s Are confirmations an effective source of evidence for auditors in substantiating management’s assertions in the financial statements? If yes, to what extent should confirmations be used during an audit?

Financial Reporting Quality: A Focus on the Role of the Independent Auditor

s Will requiring auditors to inquire of the audit committee about information on complaints and concerns (from whistleblowers and others) that have been submitted to the board of directors or audit committee serve to enhance audit quality? s How has, or can, technology be used in the audit process to improve audit quality? s Has SAS No. 99 resulted in a change in the auditor’s attitude about fraud responsibilities that has resulted in increased audit quality? s How useful are the brainstorming sessions and other fraud procedures required by SAS No. 99 in improving audit quality? s What changes in the performance, documentation, and communication of engagement quality control (e.g., concurring partner review) would result in increased audit quality? s What incentives can an audit firm employ to encourage audit quality? For example, would requiring the engagement lead partner and the concurring review partner to personally sign the audit opinion have a positive effect on audit quality? s Would audit quality be improved if auditors were to provide some type of rating regarding the degree of certainty or uncertainty for each of the financial statement line items and disclosures? s Would audit quality be improved if auditors included a discussion on the quality of management’s financial reporting in either a format similar to Management’s Discussion and Analysis or via a rating of the aggressiveness of financial reporting? s Would audit quality be improved if the auditor’s audit report on the financial statements explicitly referred to the auditor’s responsibility (or lack thereof) for an evaluation of other financial information in the annual report or the results of the auditor’s work? Panel B: General Audit Quality Issues Issues related to Assurance Levels s What level of assurance should be implied by an audit? s Should an audit result in the same level of assurance for all financial statement line items and disclosures? s What is reasonable assurance? Is reasonable assurance the appropriate level of assurance, or is a higher or lower level of assurance more appropriate? What factors, if any, preclude absolute assurance by the auditor? What impact should a cost/benefit ratio have on assurance level requirements?

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s Should there be differing levels of assurance available in the marketplace? s Is it appropriate to assume that an audit cannot be expected to provide assurance on some issues, e.g., that all related-party transactions will be identified and discovered? If not, what type of assurance should the auditors provide with respect to these items? Effects of Various Environmental Changes on Audit Quality s How have changes to the financial reporting environment affected audit quality? Measures of Audit Quality s Does the newly instituted PCAOB inspections process provide additional audit quality measures? s Can the set of audit quality measures used in the academic literature be expanded? s What is an appropriate output measure of audit quality? s Should audit quality be assessed on the basis of an output measure (e.g., accuracy of audit opinion) or an input measure related to the quality of the audit process?

somewhat fundamental issues, they provide the critical foundation for understanding the determinants of audit quality.

Organizational Culture While guidance, standards, and rules present in the financial reporting environment cannot guarantee a quality audit, they can, when coupled with an appropriate organizational culture, help promote audit quality. Understanding the importance of organizational culture to audit quality is an area where a number of relevant questions can be addressed. What are the qualities that should be emphasized by the organizational culture to best promote audit quality? For example, if as the authors believe, a culture of independence is an essential aspect of audit quality, how can a culture of independence be sustained in a complex client service environment? How can a global firm institute a uniform culture within large national networks as well as worldwide networks that cross many national boundaries? What is the effect on audit quality of the inability to have a uniform culture on a worldwide basis? Is the organizational culture an equally important determinant of

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audit quality in small and large audit firms? Is the achievement of an appropriate organizational culture influenced by audit firm size? Internal Monitoring Additional or increased internal reviews throughout the firms might serve to increase audit quality. We encourage the profession and academics to consider approaches to internal monitoring that would be most successful in improving audit quality. For example, would an enhanced internal review program by audit firms that focuses on independence and audit qualityreducing actions by audit team members (e.g., improper sign-offs) serve to increase audit quality? An approach to an enhanced internal review program could involve self-reporting by individual auditors and follow-up interviews and surveys. Would such an approach benefit audit quality? As part of a monitoring program, a firm needs to implement disciplinary processes. What processes are currently used in the firms? Do these processes positively influence audit quality? What changes to the disciplinary processes would be most beneficial? Personnel With respect to auditor competency, we encourage a continued focus on assuring that auditors develop and maintain crucial competencies. It is obviously important to identify the crucial competencies, and then assess how many and what members of the audit team should possess these competencies. For example, should specialists in particular areas be required to participate in the audit? Would involvement of a forensic accountant in the audit process improve audit quality? If so, under what conditions? Similarly, would requiring specialists with expertise in valuation, or finance, or derivatives to be involved in the audit serve to increase audit quality? Earlier we described the competency development mechanisms currently in place. There are obvious limitations related to each of the mechanisms currently used, and there is relatively little evidence as to how each of the mechanisms influence audit quality. Tertiary education is best able to deliver a broad concept-based understanding of the field, but is limited in its ability to convey the complexities of practice. Thus, while there may be a demand for a strong conceptual base that will last throughout a career, it is insufficient, in itself, to produce a level of practice competence for a sustained period. The entry level examination is basically a test of the minimal knowledge necessary to enter the profession, largely based on the tertiary education as it relates to practice knowledge. No subsequent requirements for reexamination are currently required of practitioners. CPE is the current

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alternative to reexamination. CPE is, in principle, a powerful tool. However, as applied in practice its results, and its association with audit quality, are generally unproven. A variety of possible changes to the current competency development model can be considered and assessed. For example, the following could be developed, and their effect on audit quality could be assessed by both the profession and researchers.
Different tertiary education methods and certification programs that recognize an education obtained through these methods.
Enhanced CPE standards, guidance and rules for individual auditors, including possibly, mandatory assessments to attain CPE credit.
Enhanced CPE requirements as a part of each firm’s quality control process.
Programs of periodic testing based on the documented demands placed on the individual’s competence in the field. Another aspect of competency development is on-the-job training, which likely plays an important role in ensuring audit quality. How is on-the-job training best accomplished to positively affect audit quality? Review and supervision of work performed represent a component of on-the-job training. Which approaches to review and supervision (e.g., review by interview, primary review of workpaper documentation) are most associated with audit quality? Recognizing that individual auditor characteristics such as professional skepticism can be important to audit quality, we question whether audit firms should educate for and evaluate these characteristics. Research on the effects of such training and evaluation could provide useful and interesting insights. With respect to independence, we encourage a continued focus on auditor independence which requires that auditors accept as part of their culture the paramount importance of their independence, in both fact and appearance. The profession’s active participation in and acceptance of a culture of independence is critical to achieving both actual and perceived audit quality. Adherence to the independence requirements of the profession is the minimum that should be expected of the profession. A number of issues warrant investigation by the profession and academic researchers. For example, what is the effect of recent auditor independence requirements issued by the SEC on audit quality? Are there specific difficulties in adhering to these independence requirements? Will the prohibitions on the provision of tax services recently proposed by the PCAOB serve to enhance audit quality?

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Has the audit committee pre-approval process that is required by Section 202 of SOX resulted in increased audit quality? Are there various incentives, as opposed to disincentives, that can be implemented to improve auditor independence? With the recent and ongoing changes to independence requirements the opportunities for analysis are numerous. Regarding the importance of personnel-related factors to audit quality, we believe that it would be beneficial to explore a number of issues related to personnel and engagement management. For example, how important is partner and manager involvement in an engagement to audit quality? Is there a relation between the CPE activities of the audit team members and audit quality? Are the number of hours budgeted and the number of hours actually employed associated with audit quality? Is audit quality affected by the number of hours the engagement team members are working on a daily or weekly basis? Does the size of the engagement team affect audit quality? Further, we encourage audit firms and academic researchers to be creative in developing and assessing compensation metrics, promotion and evaluation tools, hiring policies, partner admission criteria, and other personnelrelated policies that are most effective in encouraging audit quality. Finally, we recognize that the retention of experienced personnel is likely fundamental to audit quality. To what extent is retention of such personnel currently a challenge for the audit firms? What actions can be taken to meet these challenges in a manner that will reflect positively on audit quality? Tools Tools typically represent the procedures, policies, and technologies related to carrying out the audit process (i.e., non-personnel resources). While tools are relevant to most of the phases of the audit process, we focus our discussion on some of the audit phases and activities that will most likely be the subject of standard setting by the PCAOB during the next 12–18 months (see http://www.pcaobus.org/News_and_Events/News/2004-11-17.asp). First, we note a number of issues related to risk assessment and evidence collection. Which risk assessments models are most associated with audit quality? Will audit quality be affected by the level (e.g., account, assertion) at which the assessment is made? What mix of audit procedures will result in high audit quality, and under what conditions? What is the relative importance of substantive analytical procedures vis-a`-vis substantive tests of details in ensuring audit quality? How do various types of evidence (e.g., confirmations, management representations, audit committee inquiries about complaints) influence audit quality? Do alternative audit approaches differentially affect audit quality? What technologies in the audit process

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are most associated with audit quality? What is the importance of the development and use of an appropriate consultation network to audit quality? Second, we raise a number of issues related to fraud procedures performed by the independent auditor. Are the current required fraud procedures sufficient for ensuring audit quality? What required fraud related procedures (e.g., brainstorming, client and management inquiry) are most associated with audit quality? Third, which approaches to engagement quality control (i.e., concurring partner review) will be most effective in achieving audit quality? Finally, we encourage the auditing profession and the academic community to be creative in investigating new tools, or revising current tools, that could improve audit quality. Such tools might include requiring the lead and concurring partners to personally sign each audit opinion, having the auditor provide a certainty rating for each of the financial statement line items and disclosures, allowing for differing levels of opinions, allowing for the possibility of providing ratings of the aggressiveness/conservatism of accounting methods employed by management, or having the auditors provide MD&A type discussion on the quality of reporting by management. (For additional discussion about various approaches to auditor reporting see http://www.pcaobus.org/Standards/Standard_Advisory_Group/Meetings/ 2005/02-16/Auditors%20Reporting%20Model.pdf) General Audit Quality Issues Panel B of Exhibit 2 identifies a number of general audit quality issues that are not directly related to components of a firm’s quality control system. We discuss some of these issues below. In our earlier discussion, we noted a lack of consensus as to what level of assurance is implied by an independent audit. As a starting point for understanding the role of the independent auditor in helping ensure financial reporting quality, we encourage research directed toward fundamental issues related to audit assurance. For example, what level of assurance should the audit provide? Are there factors that preclude assurance levels higher than reasonable assurance (e.g., resource constraints, efficiency concerns)? As a part of this research effort, we would like to see consideration given to whether the level of assurance could or should be the same for each of the individual financial statement line items and disclosures. That is, should different levels of assurance be provided on the basis of whether an account is an estimate? Relatedly, are there some financial statement line items or disclosures for which auditors should not be expected to provide any assurance? Finally, should differing levels of assurance be available in the marketplace?

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The environment in which auditing occurs is constantly being altered by new standards, regulations, enforcement mechanisms, major litigation, and the plaintiffs’ bar directed at the audit firms or individual auditors. As regulators, it is important to understand the effects of these changes on audit quality. For example, Section 404 of SOX resulted in a significant and pervasive change in the professional auditing standards (i.e., the PCAOB’s Auditing Standard No. 2). It is appropriate to evaluate the cost/benefit relationships of such a significant change, and, to consider ways to improve these tradeoffs. Academic research on the effect on audit quality of changes to the financial reporting environment would be helpful in informing these considerations. Further, in order to assist regulators in monitoring audit quality, researchers could direct efforts toward expanding the set of measures used in assessing audit quality. For example, the PCAOB inspections process might yield additional measures of audit quality. A question open for investigation centers on the issue of appropriate input and output measures of audit quality. Assume a situation occurs in which the appropriate inputs are employed (e.g., personnel, tools, etc.) and an audit complies with all applicable standards and policies, and the result of this process is that an unqualified audit opinion is issued. Subsequent to issuing the opinion it is determined that the financial statements are materially misstated (e.g., a restatement occurs). Does this situation represent an audit quality failure, or does the failure reside elsewhere (e.g., with the auditing standards)? Stated differently, should audit quality be assessed on an output basis, an input basis, or some combined metric? While this represents a basic issue it is critical to analyzing audit quality.

Other Aspects of Enhancing Financial Reporting Quality: Additional Research Opportunities Exhibit 3 offers a number of researchable issues that extend beyond a sole focus on the independent auditor as a determinant of financial reporting quality. We do not purport to have developed an exhaustive list. Rather, we have identified examples of issues that are relevant to topics of current importance. The suggestions summarized in Exhibit 3, some of which are discussed below, are primarily directed toward understanding the relative importance of various determinants of financial reporting quality. Evidence suggesting that financial information is not of a sufficient level of quality (e.g., financial statements are restated or an enforcement action by

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Exhibit 3. Financial Reporting Quality Issues.

General Issues s What are the necessary and sufficient determinants of financial reporting quality, and what is the relative significance of each of these factors? (Note that Exhibit 1 describes a set of potential inputs.) The Environment of Financial Reporting s What specific enforcement mechanisms (e.g., transparency, proscriptive regulation, supervision/surveillance, rules enforcement through litigation and fines) are most associated with financial reporting quality? s How have the various requirements of SOX affected financial reporting quality? s Are rules based or principles based accounting and auditing standards more associated with financial reporting quality? s Will new and emerging accounting standards (e.g., fair value accounting) serve to enhance audit quality? Roles of Public Company Parties s Would requiring certification and/or continuing education for audit committee members be effective in increasing financial reporting quality? s Would financial reporting quality be increased if management responsible for preparing the financial statements were required to have a certain educational background or certification? s Are the nature and extent of the relationships between the internal audit function and the other parties responsible for the preparation, oversight, and audit of financial information associated with financial reporting quality?

the SEC indicating the presence of fraud) provides a unique opportunity to understand the levels of responsibility that should be assessed to each of the parties identified in Exhibit 1. That is, for any given failure in financial reporting quality, what is the proportionate responsibility for the problem across the various parties having responsibilities for financial reporting quality? Is it those parties having a direct effect on preparing the reports, for example, management’s application of accounting principles? Or, are the

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factors that influence the financial reporting environment (e.g., legal liability regime, accounting and auditing principles) the primary determinants of financial reporting quality? Relevant research would address the issue of the necessary and sufficient determinants of financial reporting quality, including the relative significance of each. Understanding the causes of such failures will assist in designing and implementing corrective actions. As posited throughout this paper, the actions of regulators, standard setters, and other external monitors are important determinants of financial reporting quality. Understanding the impact of the actions of these parties on financial reporting quality is particularly interesting. For example, SOX comprises many corrective measures directed toward improving financial reporting quality. What is the relation between these measures and financial reporting quality? Further, are any improvements in financial reporting quality resulting from SOX occurring uniformly across both larger and smaller companies? Another area of possible research inquiry relates to filing deadlines. Is there a relationship between the length of time that a registrant has to file its financial statements and audit quality? We note that the importance and nature (e.g., principles based or rules based; complexity) of both accounting and auditing standards to financial reporting quality is a topic of ongoing debate. Further, we question whether financial reporting quality is improved or hindered by having the same set of accounting rules apply to both the top Fortune 500 public companies and the smaller registrants. We encourage research that can intelligently inform these issues. Finally, we recognize that characteristics and actions of management, the internal audit function, and the audit committee are central to financial reporting quality. While there are likely an unlimited number of issues in this area, we raise just three as illustrative examples. First, considering the importance of the audit committee’s oversight role, we question whether requiring certification and/or continuing education for audit committee members would be effective in increasing financial reporting quality. Similarly, would financial reporting quality be increased if management responsible for preparing the financial statements were required to have a certain educational background or various certifications? Finally, we posit that the nature of the relationships between the internal audit function and the other parties responsible for the preparation, oversight, and audit of financial information would be associated with financial reporting quality. Research directed toward understanding the importance of management, the audit committee, and the internal auditors to quality financial reporting would be especially appropriate.

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CONCLUDING COMMENT Financial reporting quality is an important priority for the SEC in achieving its goal of investor protection. While there are many determinants of financial reporting quality, the importance of the independent auditor to achieving financial reporting quality cannot be underestimated. The ability and willingness of the independent auditor to achieve audit quality have recently been called into question in light of the numerous financial reporting scandals. However, we are hopeful that the profession, with assistance from the academic community, will investigate new and existing options that could positively influence audit quality. As the last key gatekeeper before public dissemination of financial information, the independent auditor must commit to the independent audit with the mindset of serving primarily the financial markets and the public interest. Investors should expect no less.

NOTES 1. Hereafter, when we use terms such as financial reporting and financial information we are implicitly assuming that the financial reports and information, as we have broadly defined them, have been, or will be, audited by an independent auditor. 2. We recognize that financial information can be used by parties other than investors, and for purposes other than investment decision-making. However, our focus herein is on investors and investment decision-making. 3. This section is not intended to review the academic findings related to financial reporting quality. Rather, this section is intended to provide examples, rather than an exhaustive listing, of how financial reporting quality has been measured in the academic literature. 4. See Dechow and Schrand (2004) for a related discussion on earnings quality. 5. See DeZoort et al. (2002) for a more complete discussion of the audit committee. 6. Boyer (1997) is relevant to this discussion. Boyer (1997) proposes four separate, yet interrelated, types of research: the discovery of knowledge, the integration of knowledge, the application of knowledge, and the scholarship of teaching. The first two – the discovery and integration of knowledge – reflect the investigative and synthesizing aspects of academic research. The third type, the application of knowledge, moves toward determining how knowledge can be responsibly applied to practical problems. Finally, the scholarship of teaching recognizes that the research becomes consequential only as it is shared with others.

ACKNOWLEDGMENTS We are appreciative of the insights gained from discussions with the audit staff in the SEC’s OCA, most notably, Ed Bailey, Jennifer M. Burns, Brian

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T. Croteau, Amy Hargrett, Vassilios Karapanos, Esmeralda Rodriguez, and Nancy Salisbury.

REFERENCES American Institute of Certified Public Accountants (AICPA). (1991). The auditors’ consideration of the internal audit function in an audit of financial statements. Statement on Auditing Standards (SAS) No. 65. New York, NY: AICPA. Antle, R., Gordon, E. A., Narayanamoorthy, G., & Zhou, L. (2002). The joint determination of audit fees, non-audit fees, and abnormal accruals. Working paper, Yale School of Management. Ashbaugh, H. S., Lafond, R. Z., & Mayhew, B. W. (2003). Do nonaudit services compromise auditor independence? Further evidence. The Accounting Review, 78(July), 611–639. Bailey, A. D., Jr. (2004). Remarks before the 2004 AICPA national conference on current SEC and PCAOB developments. December 6. http://www.sec.gov/news/speech/ spch120604adb.htm Ballou, B., Earley, C. E., & Rich, J. S. (2004). The impact of strategic-positioning information on auditor judgments about business-process performance. Auditing: A Journal of Practice and Theory, 23(September), 71–88. Balsam, S., Krishnan, J., & Yang, J. S. (2003). Auditor industry specialization and earnings quality. Auditing: A Journal of Practice and Theory, 22(September), 71–97. Barth, M. E., Cram, D. P., & Nelson, K. K. (2001). Accruals and the prediction of future cash flows. The Accounting Review, 76(January), 27–39. Beasley, M. S. (1996). An empirical analysis of the relation between board of director composition and financial statement fraud. The Accounting Review, 71(4), 443–465. Beasley, M. S., Carcello, J. V., & Hermanson, D. R. (1999). Fraudulent financial reporting: 1987–1997 An analysis of U.S. public companies. Committee of Sponsoring Organizations of the Treadway Commission. Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Lapides, P. D. (2000). Fraudulent financial reporting: Consideration of industry traits and corporate governance mechanisms. Accounting Horizons, (December), 441–454. Boyer, E. L. (1997). Scholarship reconsidered: Priorities of the professoriate. Carnegie Foundation for the Advancement for Teaching. Bushee, B. J. (1998). The influence of institutional investors on myopic R&D investment behavior. The Accounting Review, 73(3), 305–333. Carcello, J. V., & Nagy, A. L. (2004). Audit firm tenure and fraudulent financial reporting. Auditing: A Journal of Practice and Theory, 23(September), 55–69. Cohen, J., Krishnamoorthy, G., & Wright, A. M. (2002). Corporate governance and the audit process. Contemporary Accounting Research, 19(Winter), 573–594. Colbert, G., & Murray, D. (1998). The association between auditor quality and auditor size: An analysis of small CPA firms. Journal of Accounting, Auditing & Finance, 13(Spring), 135–151. Committee of Sponsoring Organizations of the Treadway Commission. (1994). Internal control – integrated framework (2 Vols.). American Institute of Certified Public Accountants. Craswell, A., Francis, J., & Taylor, S. (1995). Auditor brand name reputation and industry specialization. Journal of Accounting and Economics, (December), 297–322.

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DeAngelo, L. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(December), 183–199. Dechow, P. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics, 18, 3–42. Dechow, P. M., & Schrand, C. M. (2004). Earnings quality. The Research Foundation of CFA Institute. Deis, D. R., Jr., & Giroux, G. A. (1992). Determinants of audit quality in the public sector. The Accounting Review, 67(July), 462–479. DeZoort, F. T. (1998). An analysis of experience effects on audit committee members’ oversight judgments. Accounting, Organizations and Society, 23, 1–21. DeZoort, F. T., Hermanson, D. R., Archambeault, D. S., & Reed, S. A. (2002). Audit committee effectiveness: A synthesis of the empirical audit committee literature. Journal of Accounting Literature, 21, 38–75. Dunn, K. A., & Mayhew, B. W. (2004). Audit firm industry specialization and client disclosure quality. Review of Accounting Studies, 9, 35–58. Epstein, M. J., & Geiger, M. A. (1994). Investor views of audit assurance: Recent evidence of the expectation gap. Journal of Accountancy, 177(January), 60–65. Farber, D. B. (2005). Restoring trust after fraud: Does corporate governance matter? The Accounting Review, 80(April), 539–561. Felix, W. L., Jr., Gramling, A. A., & Maletta, M. J. (2005). The influence of non-audit service revenues and client pressure on independent auditors’ decisions to rely on internal audit. Contemporary Accounting Research, 22(Spring), 31–53. Financial Accounting Standards Board (FASB). (1978). Statement of financial accounting concepts number 1: Objectives of financial reporting for business enterprises. Norwalk, CT: Financial Accounting Standards Board. Financial Accounting Standards Board (FASB). (1980). Statement of financial accounting concepts number 2: Qualitative characteristics of accounting information. Norwalk, CT: Financial Accounting Standards Board. Firth, M. (1997). The provision of nonaudit services by accounting firms to their audit clients. Contemporary Accounting Research, 14(Summer), 1–21. Francis, J., Maydew, E., & Sparks, H. (1999). The role of big-six auditors in the credible reporting of accruals. Auditing: A Journal of Practice and Theory, 18(Fall), 17–34. Frankel, R. M., Johnson, M. F., & Nelson, K. K. (2002). The relation between auditors’ fees for non-audit services and earnings management. The Accounting Review, 77(Suppl.), 71–105. Gaeremynck, A., Van der Meulen, S., & Willekens, M. (2003). Evidence on the impact of auditfirm portfolio characteristics on client financial reporting quality. Department of Applied Economics KU Leuven Working Paper. (August). Gramling, A. A. (1999). External auditors’ reliance on work performed by internal auditors: The influence of fee pressure on this reliance decision. Auditing: A Journal of Practice and Theory, 18(Suppl.), 117–135. Gramling, A. A., Maletta, M. J., Schneider, A., & Church, B. K. (2004). The role of the internal audit function in corporate governance: A synthesis of the extant internal auditing literature and directions for future research. Journal of Accounting Literature, 23, 194–244. Gramling, A. A., Schatzberg, J. W., Bailey, A. D., Jr., & Zhang, H. (1998). The impact of legal liability regimes and differential client risk on client acceptance, audit pricing, and audit effort decisions. Journal of Accounting, Auditing & Finance, 3(4), 437–460.

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Gramling, A. A., & Stone, D. N. (2001). Audit firm industry expertise: A review and synthesis of the archival literature. Journal of Accounting Literature, 20, 1–29. Hackenbrack, K., & Nelson, M. W. (1996). Auditors’ incentives and their application of financial accounting standards. The Accounting Review, 71(January), 43–60. Hirst, D. E., & Hopkins, P. E. (1998). Comprehensive income reporting and analysts’ valuation judgments. Journal of Accounting Research, 36(Suppl.), 47–75. Hyatt, T. A., & Prawitt, D. F. (2001). Does congruence between audit structure and auditors’ locus of control affect job performance? The Accounting Review, 76(April), 263–274. Kadous, K. (2000). The effects of audit quality and consequence severity on juror evaluation of auditor responsibility for plaintiff losses. The Accounting Review, 75(July), 327–341. Kasznik, R. (1999). On the association between voluntary disclosure and earnings management. Journal of Accounting Research, 37(1), 57–82. Khurana, I. K., & Raman, K. K. (2004). Litigation risk and the financial reporting credibility of big four vs. non-big four audits: evidence from Anglo-American countries. The Accounting Review,, 79(April), 473–495. Kinney, W., Palmrose, Z. V., & Scholz, S. (2004). Auditor independence, non-audit services, and restatements: Was the U.S. government right? Journal of Accounting Research, 42(June), 561–588. Kinney, W. R., Jr., & Martin, R. D. (1994). Does auditing reduce bias in financial reporting? A review of audit-related adjustment studies. Auditing: A Journal of Practice and Theory, 13(1), 149–157. Krishnan, G. V. (2003). Does Big 6 auditor industry expertise constrain earnings management? Accounting Horizons, 17, 1–16. Krishnan, J., & Schauer, P. C. (2000). The differentiation of quality among auditors: Evidence from the not-for-profit sector. Auditing: A Journal of Practice and Theory, 19(Fall), 9–25. Lung, M., & Lundholm, R. (1993). Cross-sectional determinants of analyst ratings of corporate disclosures. Journal of Accounting Research, 31(Autumn), 246–271. Malone, C. F., & Roberts, R. W. (1996). Factors associated with the incidence of reduced audit quality behaviors. Auditing: A Journal of Practice and Theory, 15(Fall), 49–64. McMullen, D. A., & Raghunandun, K. (1996). Enhancing audit committee effectiveness. Journal of Accountancy, (August), 79–81. Mercer, M. (2005). The fleeting effects of disclosure forthcomingness on management’s reporting credibility. The Accounting Review, 80(April), 723–744. Moeller, R. (2004). Managing internal auditing in a post-SOA world. The Journal of Corporate Accounting and Finance, 15(4), 41–45. Mutchler, J. F., Hopwood, W., & McKeown, J. M. (1997). The influence of contrary information and mitigating factors on audit opinion decisions on bankrupt companies. Journal of Accounting Research, 35(Autumn), 295–310. Myers, J. N., Myers, L. A., & Omer, T. C. (2003). Exploring the term of the auditor–client relationship and the quality of earnings: A case for mandatory auditor rotation? The Accounting Review, 78(July), 779–799. Myers, J. N., Myers, L. A., Palmrose, Z.-V., & Scholz, S. W. (2004). Mandatory auditor rotation: Evidence from restatements. Working paper. http://ssrn.com/abstract=443980. (June 22). Nicolaisen, D. T. (2004). Remarks before the 2004 AICPA national conference on current SEC and PCAOB developments. December 6. http://www.sec.gov/news/speech/ spch120604dtn.htm

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Palmrose, Z. V. (1986). Audit fees and auditor size: Further evidence. Journal of Accounting Research, (Spring), 97–110. Palmrose, Z. V. (1988). An analysis of auditor litigation and audit service quality. The Accounting Review, 63(January), 55–73. Palmrose, Z. V., & Scholz, S. (2004). The circumstances and legal consequences of non-gap reporting: Evidence from restatements. Contemporary Accounting Research, 21(Spring), 139–180. Parkash, M., & Venable, C. (1993). Audit incentives for auditor independence: The case for non-audit services. The Accounting Review, 68(January), 113–133. Power, M. (1996). Making things auditable. Accounting, Organizations and Society, 21(2/3), 289–315. Public Company Accounting Oversight Board (PCAOB). (2004a). Auditing standard No. 2 (AS 2) – an audit of internal control over financial reporting performed in conjunction with an audit of financial statements. http://www.pcaobus.org/documents/rules_of_the_board/ Standards%20-%20AS2.pdf Public Company Accounting Oversight Board (PCAOB). (2004b). Potential standard – elements of quality control. http://www.pcaobus.org/Standards/Standard_Advisory_Group/Meetings/2004-11-17-18/Quality_Control.pdf Schatzberg, J. W., & Sevcik, G. R. (1994). A multiperiod model and experimental evidence of independence and ‘‘lowballing’’. Contemporary Accounting Research, 11(Summer), 137–174. Securities Exchange (SEC) Act Release No. 48745. (2003). November 4. www.sec.gov Securities and Exchange Commission. (2004). 2004–2009 Strategic plan. http://www.sec.gov/ about/secstratplan0409.pdf Solomon, I., Shields, M. D., & Whittington, O. R. (1999). What do industry specialists auditors know? Journal of Accounting Research, 37(Spring), 191–208. Smieliauskas, W., & Lam, K. C. K. (2004). Quality financial reporting and its relationship to audit quality via an expanded risk model. Journal of Forensic Accounting, V(December), 273–310. Subramanyam, K. (1996). The pricing of discretionary accruals. Journal of Accounting and Economics, 22, 249–291. Tan, H. T., & Libby, R. (1997). Tacit managerial versus technical knowledge as determinants of audit expertise in the field. Journal of Accounting Research, 35(Spring), 97–113. Taylor, M. (2000). The effects of industry specialization on auditors’ inherent risk assessments and confidence judgments. Contemporary Accounting Research, 17(Winter), 693–712. Trompeter, G. (1994). The effect of partner compensation schemes and generally accepted accounting principles on audit partner judgment. Auditing: A Journal of Practice and Theory, 13(Fall), 56–69. Watts, R., & Zimmerman, J. (1986). Positive accounting theory. New York: Prentice-Hall. Wild, J. (1996). The audit committee and earnings quality. Journal of Accounting Auditing and Finance, 11, 247–276. Wooten, T. C. (2003). Research about audit quality. The CPA Journal, 73(January), 48–50.

MAIN ARTICLES

ETHICAL TRAINING IN GRADUATE ACCOUNTING COURSES: EFFECTS OF INTERVENTION AND GENDER ON STUDENTS’ ETHICAL REASONING Mohammad J. Abdolmohammadi ABSTRACT The case-based pedagogy has been the dominant method used in ethics intervention courses. In this study, I provide evidence on whether this method succeeds in improving ethical reasoning of a sample of graduate accounting students. Specifically, 3 weeks out of a 14-week case-based capstone research course in a Master of Science degree in Accountancy was used to cover individual ethics, professional ethics, business ethics, and the case approach to discussing ethical dilemmas. In addition, ethical issues were considered throughout the semester when cases on various accounting topics were discussed. By administering the Defining Issues Test (DIT) at the beginning and the end of the semester, I documented the changes in students’ ethical reasoning as measured by the DIT P-score (principled score). Overall, the intervention resulted in statistically significant gains in the P-score. An analysis by gender indicated that there were no significant differences between females and males at the Research on Professional Responsibility and Ethics in Accounting Research on Professional Responsibility and Ethics in Accounting, Volume 10, 37–62 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1574-0765/doi:10.1016/S1574-0765(05)10002-8

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beginning of the semester, but while the gain in the P-score was statistically significant for male students, it was insignificant for the females. Other variables that were found to have significant effects were class size where smaller classes gained more in their P-score than larger ones and age where younger students (25 years or under) benefitted more from the ethics intervention than older students (26 years and older). Investigation of the effects of other demographic variables such as religion, marital status, grade point average (GPA), ethnicity, and undergraduate courses in philosophy or ethics did not render any significant effects. Implications of the results for accounting education and research are discussed.

INTRODUCTION Accountants have for many years been criticized for their inadequate ethical preparation to withstand increasing client pressure for earnings management, so much so that some scholars (e.g., Lampe & Finn, 1992) have asserted that the profession faces an ethical crisis. Recent well publicized and scandalous business failures such as Enron and WorldCom have once again raised allegations of improper professional conduct by accountants. In fact, charges of fraudulent auditing and obstruction of justice by Arthur Andersen in the case of the failed energy-trading giant, Enron, have tarnished the image of accountants as ethical agents (Brady, Byrnes, Lavelle, McNamee, & Palmeri, 2002). This crisis has led to a series of laws, regulations, and initiatives designed to improve the effectiveness of the audit function and to restore confidence and trust in the accounting profession. For example, the U.S. SarbanesOxley Act was signed by President Bush into law in 2002 (SOA, 2002) to restore confidence in the U.S. capital markets. One of the provisions of the Act was to require disclosure by companies as to whether they have adopted a code of ethics for their senior financial officers (SOA, 2002, Section 406), thus signaling the need for higher levels of ethical standards for company finance professionals, including accountants. Another provision of the Act is that it required the Securities and Exchange Commission to establish the Public Company Accounting Oversight Board (PCAOB) to replace the profession’s own Public Oversight Board (POB), thus regulating accountants in public practice (SOA, 2002, Title I). Compared to the private selfregulatory POB, the new PCAOB, which became operational in early 2003, has the coercive power of the government to deal with issues of rule making and enforcement.1

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The American Institute of Certified Public Accountants (AICPA), too, has initiated a program of emphasizing accountants’ competence and integrity as well as zero tolerance for those members who break the profession’s rules of conduct. However, many argue today as Lampe and Finn (1992) argued over a decade ago that auditors should adhere to higher levels of ethical principles than just following the rules of conduct of the AICPA. Accounting firms have taken notice by ‘‘creating senior positions to oversee ethics and quality, and some are redirecting the chain of command.’’ (Bryan-Law, 2003, p. C12). The current study builds on the premise that auditors’ ethical decisions should be based on higher levels of ethical principles, as defined in Kohlberg’s theory of ethical reasoning and as measured by the DIT, than merely following the rules of conduct of the AICPA. The issue of ethical crisis is not limited to auditors. The image of corporate America has been tarnished as a result of recent business scandals, and companies have scrambled to take steps to raise their ethical standing. For example, Schmitt (2002) reports that many companies have recently added ethics training. However, the author raised a question as to whether these programs will work, a question that can also be raised about ethics training for accountants. This issue is the focus of the current study, which responds to the governmental and private interests in recent years on the need for better training of accountants on ethics and social responsibility. Academics, too, have taken notice. Pete Wilson, the 2002–2003 President of the American Accounting Association (AAA), designated professionalism and ethics as a keystone part of his presidential term with an emphasis on this issue in the 2003 AAA annual meeting. There is also evidence that state boards of public accountancy are increasing the requirements for stand-alone ethics courses as a requirement for practicing as a Certified Public Accountant (CPA). For example, Texas State Board of Public Accountancy (2003) has recently instituted a requirement for all new candidates for the CPA examination that beginning on July 1, 2005 they must have three semester-hours of a stand-alone ethics course (i.e., not just integrated in other courses) on their transcript before they take the CPA examination. The course must include ethical reasoning, integrity, objectivity, independence, and other core values (Texas State Board of Public Accountancy, 2003). From an educational perspective, a question is whether accounting students can be trained in issues of ethics and social responsibility? The answer from a cognitive developmental perspective is generally yes, but we know very little about the extent of the effectiveness of ethics intervention programs in improving students’ ethical cognition or behavior in graduate

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accounting programs. The overall objective of this paper is to provide empirical evidence on whether significant ethical training integrated in a required capstone graduate accounting course called Professional Accounting Research and Policy Formulation improves students’ ethical reasoning. I administered the Defining Issues Test (DIT) at the beginning and the end of the course in four semesters of this required capstone course. Overall, statistically significant improvements in ethical reasoning were observed, but effect sizes were small. In a search for explanations, I analyzed the effects of variables such as age, gender, and class size and found that while younger students (25 years or younger) benefit significantly, the older ones (26 or older) gain very little. Similarly, while male students benefit significantly from the ethics intervention, female students benefit very little. Also, while small class sizes are associated with medium to high effect sizes, larger classes are associated with very small positive to slightly negative effect sizes. Other demographic variables such as religion, marital status, ethnicity, and prior courses in philosophy or ethics did not have any effects on changes in ethical reasoning. In the remainder of the paper, I first briefly describe the background literature as a means of establishing research hypotheses. The cognitive developmental theory of ethical cognition is presented with a focus on the DIT as a means of measuring ethical reasoning. The literature on intervention studies is also briefly reviewed. As well, I identify a metric to measure the effect size of the intervention. The final three sections describe the research method, the results, and a summary and conclusions of the study.

BACKGROUND AND RESEARCH HYPOTHESES The Cognitive Developmental Theory of Ethical Reasoning Since its introduction, much has been written about the cognitive developmental theory of ethical reasoning (e.g., Rest & Narvaez, 1994). The late psychologist, Lawrence Kohlberg developed this theory based on interviews with 72 boys for a doctoral dissertation research at the University of Chicago in 1958 (cf., Kohlberg, 1981). Kohlberg concluded that similar to cognitive developmental stages in children, one could learn to improve his ethical reasoning in stages. Since extensive reviews of this theory have been provided in the literature, I provide only a brief description for the purpose of the current study.

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Kohlberg’s cognitive developmental theory has three levels of moral development with each level subdivided into two stages. Each of the six stages is higher than previous stages of ethical development. The pre-conventional level refers to the self-centered ethics of convenience where the individual obeys the rules to avoid punishment (Stage 1) or to gain personal rewards from others (Stage 2). The Conventional ethics of conformity is the second level, where the individual exhibits group loyalty as a ‘‘nice’’ person (Stage 3) or follows national law and order (Stage 4). The highest level of ethical cognition is the post-conventional level where the individual follows a principle-based ethics of conviction. At this level, the individual follows the written ethics of social contract, natural law, and utilitarianism (Stage 5), or advances to the highest stage of following unwritten global deontological ethical principles of justice, duties, and equal human rights (Stage 6). Kohlberg’s cognitive developmental theory posits that ethical reasoning improves in stages and that one can be trained to improve his ethical reasoning and move to higher stages of ethical cognition. What is needed is a metric to measure the improvement so that levels of ethical cognition can be documented. Kohlberg offered an interview method called Moral Judgment Interview or MJI, which is a method of interviewing individuals just as Kohlberg interviewed boys for his dissertation. However, this interview was very time consuming and its coding into a summary metric was difficult in nature and subjective in the resulting metric. The wide acceptance of Kohlberg’s theory has been due in part to the development of a more efficient method of measurement called the DIT, and the development of a summary measure called the principled score or the P-score. The developer of the metric, James Rest (1986a, p. 196) provides the following description of it: The DIT is based on the premise that people at different points of development interpret moral dilemmas differently, define the critical issues of the dilemmas differently, and have intuitions about what is right and fair in a situation. Differences in the way that dilemmas are defined therefore are taken as indications of their underlying tendencies to organize social experience. These underlying structures of meaning are not necessarily apparent to a subject as articulative rule systems or verbalizable philosophies – rather, they may work ‘behind the scenes’ and may seem to a subject as just commonsensical and intuitively obvious.

The full version of the DIT has six ethical dilemmas that are analyzed by those taking the test in a self-administered, multiple-choice questionnaire format, thus there is no need for interviewing the subjects. Each case is accompanied by 12 questions that ‘‘were designed to represent the different considerations that are diagnostic of different schemes of fairness.’’ (Rest, 1986a, p. 196). The subject indicates the importance of each item in the

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resolution of the dilemma by using a four-level scale (much importance, some, little or none). While several indices have been developed from the scoring of the DIT, the most commonly used score is the P-score, P standing for ‘‘principled moral thinking.’’ (Rest, 1994, p. 13). A measure between 0 and 99, the P-score is ‘‘based on the relative importance that a subject gives to items representing Stages 5 and 6’’ (Rest, 1994, p. 13). Thus, the P-score measures an individual’s standing on Kohlberg’s third level: the post-conventional ethics of conviction. Numerous studies have used the DIT instrument in a variety of contexts. Since the DIT is a proprietary instrument, one must buy and have it scored at the Center for the Study of Ethical Development at the University of Minnesota. This centralized approach to the administration and scoring of the DIT has resulted in a huge database, which has been used to provide classifications of the P-score by various groups. For example, while the average P-score of institutionalized delinquents is documented at a very low 18.9, that of liberal Protestant seminarians is 59.8 (Rest, 1994, p. 14). Also, while college students in general have a P-score of 42.3, graduate students in business average 42.8 on the P-score. This score is directly relevant to the current study because the subject group in the study is graduate business students majoring in accounting. As explained later, this group can be viewed as a pseudo control group for the current study.

Relevance of the P-Score to Auditors Is the P-score an appropriate scale for measuring auditors’ ethical reasoning? The question emanates from the fact that the P-score provides a measure of ethical reasoning at the post-conventional stages 5 and 6 in Kohlberg’s cognitive developmental theory. However, auditors are perceived to be only required to comply with certain accounting and auditing standards, regulatory requirements, and rules of conduct that may only require reasoning at the conventional stages 3 or 4. There is empirical evidence (e.g., Lampe & Finn, 1992) that practicing auditors show a greater propensity for applying stage 4 reasoning than stage 6 reasoning, where ‘‘Lower stage 6 scores reflect less willingness to deviate from rules in order to follow more abstract self-chosen principles’’ (Lampe & Finn, 1992, p. 55). Consequently, one can question the propriety of the P-score for judging auditors’ ethical reasoning. However, Lampe and Finn (1992) described the state of auditors’ ethical reasoning in the early 1990s and they judged the auditing profession to be in an ethical crisis. Recent business and audit

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scandals indicate that the crisis is still a major problem in the profession and that ethical reasoning at stages 3 and 4 may not be sufficient for auditors to withstand client pressures. While in general higher levels of ethical reasoning may not be sufficient to prevent unethical behavior, the literature indicates that ethical reasoning is indeed correlated with ethical behavior in a positive and statistically significant way (Rest, 1994, p. 21). This finding has also been reported in accounting, but only for a relevant range of ethical reasoning. For example, using simple cases of behavior (e.g., payment for copied handouts on a voluntary basis where there is a budgetary problem at the university), Ponemon (1993) and Bay and Greenberg (2001) find a quadratic relationship, where medium levels of ethical reasoning are associated with higher levels of ethical behavior, but cases of unethical behavior are associated with both low and high levels of ethical reasoning. However, in Bay and Greenberg’s study (2001), the quadratic relationship was limited to male participants. Females P-scores were monotonically related to their behavior. These results indicate that the relationship between ethical reasoning and behavior may not be a monotonically increasing function for all subjects as predicted by the Kohlbergian cognitive developmental model. However, one can argue that auditors trained at higher levels of ethical reasoning will have the ability to comply with the rules of conduct that require stages 3 and 4, but can go beyond this compliance stage. As Shaub (1994a, p. 6) argues ‘‘a higher DIT score may indicate a higher cognitive, or logical, capacity. For auditors, this would reflect itself in superior performance on standard audit tasks.’’ Shaub (1994a, p. 1) concludes that ‘‘y accounting educators can influence the moral reasoning of the profession y by designing ethics education interventions that will help accounting students incorporate more than simply rules in making ethical decisions.’’ Also important to note is that calls have been made in recent years for more principles-based, as compared with rule-based, standards for the accounting profession and the FASB (2002) has responded by issuing a proposal titled Principles-based Approach to U.S. Standard Setting. Using this approach the accountant has the freedom to exercise judgment (Thomas, 2003) and has to keep the underlying principles in mind at all times while judging the proper way of treating a transaction. This is in contrast with the rule-based accounting where the accountant seeks detailed rules and exceptions for treatment of various transactions. Auditing standards may also be changing to become more principle based. The PCAOB has taken steps to establish auditing standards that are less procedural and more principle-based than the past standards by the Auditing Standards Board, including the appointment of a principles

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proponent, Douglas Carmichael, to head the effort. An implication of this is that auditors must be better trained in ethical reasoning at high levels to make ethical judgments and the P-score is a reasonable scale to measure the effects of the training.

Intervention Courses and their Effects Kohlberg’s stage developmental theory implies that intervention should have a sizable effect on improving ethical cognition, and empirical research generally supports this notion. For example, Ries (1992) reported modest gains for psychology students in a semester-long ethics intervention course. Bebeau (1994) reported significant gains from a four-year intervention for dentistry students. A comparison of these two studies indicates that longer term interventions have more significant effects on improving ethical reasoning than short courses. This conclusion is also supported in a large number of early studies reviewed by Schlaefli, Rest, and Thoma (1985). Studies of ethical intervention in accounting curriculum are limited, but the results from undergraduate programs are generally consistent with the extant literature. Using the P-score to compare practicing CPAs and other college graduates, Armstrong (1987) suggested that there was a shortcoming in ethics education in accounting that should be corrected. Consistent with Armstrong’s message, Ponemon and Glazer (1990) found that students from accounting programs with strong liberal arts components had higher P-scores than others. Weber and Green (1991) reported gains in moral reasoning for sophomore-level accounting students from an ethics intervention course and Shaub (1994a) presented evidence indicating that practicing CPAs and auditing students who had taken a business ethics course in college had significantly higher P-scores than those who did not. Collectively, these results suggest that ethical training has a significant effect in increasing the P-score among undergraduate accounting students. In comparison to undergraduate studies very little evidence is reported in the literature, particularly in accounting, with respect to ethical training in graduate programs. A meta-analysis of the ethics literature by Pascarella and Terenzini (1991) indicates that older subjects such as graduate students should be more receptive to ethical training than younger students. Furthermore, ethical reasoning is reported to improve with age and education in the general ethics literature (Rest, 1994, p. 15). Thus, similar to undergraduate students, improvement in ethical reasoning is expected from ethics intervention courses, not just from graduate accounting courses or older students.

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Also important to note is that having established the positive effect that ethical intervention can have on ethical reasoning, the research attention in recent years has been focused on the size of the effect. Review papers on intervention studies in fields other than accounting (e.g., Rest, 1986b; Pascarella & Terenzini, 1991; Rest, 1994) have somewhat subjectively classified intervention studies by their effect on changes in the P-scores from semester-long ethics courses. The general conclusion from these reviews is that intervention studies have only moderate effects on ethical reasoning, with large variation between and within studies. An effect size is defined as the difference between post- and pre-test P-score of a sample divided by the standard deviation of the pre-test (Rest, 1994, p. 20). Generally, an effect size of 0.33 or less is considered to be low, while an effect size of 0.34–0.66 is considered to be moderate leaving 0.67 or higher as a high effect size.2 For example, McNeel (1994) reported that business (and education) students had a high effect size of 0.98 from a semester-long course on ethics as compared with other students who only had a modest effect size of 0.39. This evidence implies that business students can benefit greatly from ethics intervention courses. Other studies of business students have reported mixed results. For example, investigating the differences in ethical reasoning between undergraduate accounting students (and alumni) and liberal arts students, Ponemon and Glazer (1990) found the latter group to have significantly higher levels of ethical reasoning than the former group. Consistent with McNeel (1994), this evidence indicates that business students could benefit more from ethics intervention courses than liberal arts students. With the noted exception of Bebeau’s (1994) study of dentistry students, very little evidence is available in the literature with respect to gains in ethical cognition from intervention courses in graduate programs. I use the general conclusion from the literature to set a directional hypothesis that significant gain is expected from a semester-long intervention course in a Masters of Science in Accountancy (MSA) program. Although this capstone course is a research course, it is one that deals with issues of policy in the accounting profession, and as such covers ethics and code of conduct. The course incorporates several ethical theories, including Kohlberg’s cognitive developmental theory. As described in more detail later, the course also covers individual ethics, professional ethics as well as business ethics and ethics audit services and the case approach to analysis of ethical dilemmas. Consequently, I first set up the following general hypothesis: H1. There will be a significant increase in graduate students’ P-score as a consequence of the ethics intervention course.

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Gender Effects Almost invariably, when there is a discussion of ethical cognition, there is recognition that gender may play a role. Kohlberg’s stage theory was based on interviews with boys. Consequently, it was criticized by one of his close colleagues, Gilligan (1982), on the basis that there is a gender bias toward males in Kohlberg’s work. Gilligan’s main argument was that the ‘‘caring’’ factor that is strong in women’s responses can be evaluated incorrectly because Kohlberg’s system focuses on justice-rules of moral judgment, which are more dominant in males. This argument suggests gender differences in ethical reasoning and behavior. Evidence is not strongly in support of this argument in the non-DIT literature. Crandall, Tsang, Goldman, and Pennington (1999) reviewed this literature and also provided two empirical studies of their own to investigate this issue. They found that as Gilligan (1982) argued, caring was stronger in female subjects than males. However, ethical judgments were not clearly justice oriented or care oriented by gender. Specifically, in one study (the right to raising a baby from a surrogate parenting arrangement), the justice orientation was dominant in judgments of both males and females. However, in a second study (the parenting right to a baby who was switched at birth), the caring orientation was dominant in judgments of both males and females. Other studies support Crandall et al.’s (1999) conclusions. For example, Ford and Richardson (1994, p. 206) reviewed 14 studies and concluded that ‘‘seven [studies] reveal that females are likely to act more ethically than males; at least in some situations ... seven other studies found that sex had no impact on ethical beliefs.’’ Another meta-analysis (Franke, Crown, & Spake, 1997) showed that women are more likely than men to perceive specific hypothetical business practices as unethical. Similarly, Dawson (1997) found that female sales people were more caring than males only in situations where relationships developed, but this difference was moderated by age and years of experience. Finally, Weeks, Moore, McKinney, and Longenecker (1999) found that while in seven of the 19 ethical dilemma vignettes that they investigated, women outperformed men in ethical judgment, both men and women generally displayed more ethical judgments in later career stages than early career stages. A conclusion from the non-DIT literature reviewed above is that females generally match or outperform males in various aspects of ethics. This conclusion can also be drawn from accounting studies. For example, in a survey of 2,196 university students, Ruegger and King (1992) concluded that females were more ethical than males in their perceptions of business ethics situations.

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Ameen, Guffey, and McMillan (1996) found that female accounting students were less tolerant of academic misconduct than their male counterparts. Similarly, in studies of accounting students in the U.S. (Cohen, Pant, & Sharp, 1998) and Canada (Cohen, Pant, & Sharp, 2001) researchers found that women viewed questionable actions in a number of dilemma scenarios to be less ethical, and were less likely to perform the actions, than men. In comparison with the non-DIT literature, research findings related to the DIT P-score are mixed. In a meta-analysis, Rest (1994) reports that generally women attain higher P-scores than men, but the difference is statistically insignificant in many of the studies that were reviewed. Consistent with this literature, studies of undergraduate students and professional accountants have produced mixed gender effect results. For example, Shaub (1994a) reported that female students and female professional auditors’ P-scores were significantly higher than their male counterparts. However, female and male professional accountants who participated in Ponemon and Gabhart’s (1990) study were not statistically different in their P-scores. Similarly, Abdolmohammadi, Read, and Scarbrough (2003) reported that the P-scores of female staff auditors were not significantly different from their male counterparts. These results indicate that college graduates entering the accounting profession (or graduate programs) may have P-scores that are not different between men and women.3 Since the subjects in my study were graduate accounting students, I present a gender hypothesis in the null form as follows: H2a. Female graduate students’ P-score at the beginning of the class will not be different from that of graduate male students. If Hypotheses 1 and 2a are supported, a gender issue question will be whether female and male students benefit equally from an intervention course. There is evidence in the undergraduate ethics training literature indicating that female students gain less from the intervention courses than their male counterparts. For example, in a study of undergraduate business students, Abdolmohammadi and Reeves (2000) found that while male students’ P-scores improved significantly during a semester in which they attended an elective business ethics course called Corporate Social Responsibility, their female counterparts’ P-score did not. Since the course was an elective, a self-selection bias should be taken into account. Nevertheless, these preliminary results suggest the following hypotheses: H2b. Female students’ P-score at the end of the class will not be significantly higher than their P-score at the beginning of the class.

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H2c. Male students’ P-score at the end of the class will be significantly higher than their P-score at the beginning of the class.

RESEARCH METHOD The Ethics Intervention Course The ethics intervention course was a required capstone course in a MSA program at a large business school in Northeastern United States. This is a course that focuses on professional accounting research and policy formulation and is normally taken in the final semester of the two-year MSA program, or the five-year BS/MSA program.4 It is a case-based course intended to prepare students for the tasks of applied research and professional judgment in practice. The course covers issues of ethics and social responsibility in an integrated fashion from the beginning. Integration of ethics into the whole course has been advocated as an effective means of ethical training (cf., Jordan & Stevens, 2001). However, while the discussion of ethical issues is at the general level in the beginning of the course, it takes a more structured format toward the end when three weeks of class time is spent on individual ethics, professional ethics, business ethics and ethics audit, and the case approach to the discussion of ethical dilemma. The integrated ethics training was deemed necessary to provide effective ethical reasoning. Many business courses typically cover ethics in a oneweek module, but the evidence on the effectiveness of short modules on ethical reasoning has been mixed. For example, while early research reported positive effects for limited integration of ethics into business (e.g., Burton, Johnston, & Wilson, 1991) and accounting course (e.g., Hiltebeitel & Jones, 1992), a more recent study (Richards, 1999) reports that the effects of a one-week integration of ethics into a management course was ineffective because student-subjects failed to be critical of questionable business practices during a four-week period after the ethics training. Consequently, Richards (1999, p. 334) concluded that ‘‘it appears that any lasting effect will require the kind of intensive training possible only through a full ethics course or through pervasive integration of ethics topics into the business curriculum.’’ While not a full ethics course my course nevertheless had a significant integration of ethics, including three weeks of ethical theory. In the individual ethics section, various theories such as ethics of selfinterest, harm minimization and utilitarianism are briefly reviewed and Kohlberg’s cognitive developmental model is introduced. An interesting

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observation here is that for the vast majority of students, this is the first time that they are exposed to the Kohlbergian cognitive developmental theory. When asked, only a few students acknowledge some exposure to the theory in the past. A good discussion generally takes place around the question of whether ethics can be taught. Regardless of the length of discussion, students are generally split on this question. That is, while approximately one half of the students agree that ethics can be taught, the other half adamantly opposes this possibility and maintains that individual ethics is formed before one enters college, let alone graduate school. The professional ethics section focuses on the Code of Conduct of the AICPA. The discussion is brief here because students generally have had an exposure to this topic in their auditing course, which is a prerequisite for this course. However, supplementary handouts on contemporary controversial issues such as consulting services by those who also audit the books are discussed in this section. The third section of the intervention focuses on corporate ethics programs and discusses such issues as the tone at the top, training programs, enforcement mechanism, and an ethics officer. This discussion ends with the issue of ethics audits in which internal or independent auditors can assess the quality and effectiveness of the ethics program. The final component of the ethics coverage is a framework for analysis of ethical dilemma cases. This framework focuses on identifying stakeholders, identifying ethical issues, identifying alternative courses of action, and selecting a preferred solution. This framework is then used to discuss business ethics cases.5 For example, a case study called Antelope Financial that deals with the ethics of revenue recognition in an acquisition of a subsidiary with a particularly aggressive policy of granting risky loans is discussed. Students are reminded that all financial cases discussed in the course have an ethics component similar to Antelope’s that should explicitly be considered in their solutions of the cases.

Pre- and Post-Measurement of Ethical Reasoning The full version of the DIT instrument was administered at the beginning and the end of each semester. The pre- and post-testing took place over a four-year study in which four sections of the course were investigated. In total, 67 students were enrolled in these four sections of the course, three of which were taught by the author while a colleague taught the fourth section. Of these, 66 students completed the DIT instrument at the beginning of the semester and 63 completed the DIT at the end of the semester.

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Thirty five of the students were females while 30 were males with two missing data. The average age of the subject group was 28.51 years with a standard deviation of 6.31 (range: 19–43) and there was no significant difference between males and females. The mean GPA of the group was 3.55 out of a maximum of 4 (standard deviation of 0.29 and range of 2.80–4.00) and there were no differences between men and women. While not a Jesuit school, the college in which this study was undertaken had a large body of Catholic students as well as other Christian and non-Christian denominations. Of the 48 students who revealed their religion, 20 were Catholic, 16 were Christians other than Catholic, and the remaining 12 were from various other religions. Of the 30 who revealed their marital status, 10 were married and 20 were not. Fifty-two subjects indicated that they had up to four courses in ethics or philosophy in their undergraduate or graduate studies, while the remaining 15 did not have any such courses. Finally, of the 67 students, 55 were of European or North American cultural background while the remaining 12 were of Asian or other ethnic backgrounds.

RESULTS Test of H1: The Effect of the Ethics Intervention Course Table 1 presents the results of statistical analysis on students’ P-scores. The matched-pair t-test was performed on the differences between pre- and postP-scores as well as the effect size that is presented in the last column. Table 1 is organized by gender, and the one-tailed two-sample t-test was performed to investigate the gender effects on the P-score. In support of the first hypothesis (H1), the pooled data in Table 1 indicates a positive effect from the intervention course where the matched-pair t-statistic of 1.74 is statistically significant at the 0.04 level. It indicates that the intervention course was effective in raising students’ level of ethical reasoning. The matched pair analysis indicates an average increase of 3.01 for the P-score. This difference translates into an effect size of only 19.23 percent. Thus, while statistically significant, the effect size is low (i.e., it is less than 33 percent). The mean pre-P-score of 42.29 is in line with the DIT database average of 42.8 for graduate students in business as reported by Rest (1994, p. 14), and so is the post-P-score of 44.83. The national group of graduate students in business (Rest, 1994) can be viewed as a pseudo control group for the subjects in the current study. This control group shows that the P-scores of

Ethical Training in Graduate Accounting Courses

Table 1.

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The DIT P-score (and Standard Deviations) by Treatment (Pre and Post) and Gender. DIT P-score Mean (Standard Deviation)

Gender

Female (n ¼ 30) Male (n ¼ 34) Pooled (n ¼ 67) One-tailed t-statistic by gender significance

Matched Pair t-test

Pre

Post

Difference

t-statistic

Sig.

Effect Size

43.60 (17.4) 40.60 (13.6) 42.29 (15.6) 0.79 0.78

43.90 (13.5) 45.70 (15.8) 44.83 (14.43) 0.47 0.32

1.90 (14.4) 4.40 (13.5) 3.01 (13.7) 0.70 0.24

0.75

0.23

10.92%

1.71

0.05

32.35%

1.74

0.04

19.23%

 Difference in the pooled versus genders represents missing data.  This is matched-pair difference, thus it does not necessarily correspond to the differences in

the pre- and post-two-sample means.

the students in this study are not different from that of the national average for graduate business students. Thus, the matched-pair comparison of the pre- and post-P-scores provide a reliable measure of the effects of the intervention course. The matched-pair difference indicates a positive and significant increase. The reason for matched-pair difference mean being positive is that more students gained from the intervention course than those who did not. Specifically, 37 of the 63 students who had completed both the pre- and postDIT had gains ranging from 1.6 to 43.23 in their P-scores. This evidence leaves four students whose P-scores did not improve or drop and 22 students whose P-scores dropped up to 36.60 points.6 The fact that more than a third of the students’ P-scores did not improve is a worrisome subject. This evidence is consistent with a prior study in an undergraduate program (Abdolmohammadi & Reeves, 2000), but as discussed in the final section, it presents an interesting and important issue for future research.

Tests of H2a–H2c: Gender Effects The gender-based data in Table 1 indicate support for the three genderbased hypotheses (H2a–H2c). Specifically, according to H2a I expected that there will be no significant difference between female and male graduate

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students’ ethical reasoning at the beginning of the semester. The t-statistic of 0.79, which is statistically insignificant, indicates that females whose preP-score mean was 43.60 were not significantly different from the male students with a pre-P-score mean of 40.60. Similarly, according to H2b I expected that the intervention course will not help females improve their ethical reasoning, and the data support this hypothesis. As Table 1 shows, the mean P-score of female students went from 43.60 to 43.90 with a matched pair difference mean of only 1.90. This difference generated a statistically insignificant t-statistic of 0.75. The effect size was very low at 10.92 percent. Also, consistent with H2c the male students benefitted from the intervention course where their pre-P-score of 40.60 improved to the post-P-score of 45.70 with a matched pair difference of 4.40. This difference generated a t-statistic of 1.71 that was statistically significant at the 0.05 level. The effect size was 32.35 percent, which is still on the low side but approximately three times that of the female students. An interesting observation from Table 1 is that the post means P-score of 43.9 for females and 45.7 for males generate a t-statistic of only 0.47 which is statistically insignificant. On its surface, this finding may be viewed as inconsistent with the other findings that the male and female P-scores at the pre-test were not different and that the males’ P-score gained statistically from the intervention, while females did not. However, as shown in Table 1 this result is perfectly defendable because while not significant, female students’ pre-P-score is greater than that of males (43.60 and 40.60), but the reverse is true for the post-P-scores (43.90 and 45.70). The results simply show that this reversal is statistically significant.

Additional Analysis There are a number of other factors that can have an effect on the P-score. For example, there is an argument that small classes are more beneficial to students than large classes particularly when case discussion is the method of pedagogy (cf. Riggins, 2001). Clearly, class discussion means widespread participation and you cannot have widespread discussion in large classes. Does this mean that students in small sections improve their ethical reasoning in a more statistically significant way than those in larger classes? Ponemon and Felo (1996) reported their observations of a sample of 41 U.S.-based multinational corporations. The found small class sizes in which interactive discussion of cases took place were the most successful in teaching ethics.

Ethical Training in Graduate Accounting Courses

Table 2.

P-scores (and Standard Deviations) by Sections of the Intervention Course.

Measure

Pre-P-score Post-P-score Matched-pair difference t-statistic Significance Effect size

53

Academic Year 98–99 n ¼ 14

99–00 n ¼ 23

00–01 n¼8

01–02 n ¼ 22

43.22 (13.04) 48.11 (14.33) 4.89 (7.64) 2.40 0.03 0.38

48.18 (18.02) 44.45 (13.98)
1.97 (15.81)
0.57 0.57
0.11

33.54 (15.72) 44.27 (9.34) 10.73 (15.19) 2.00 0.09 0.68

38.56 (12.24) 43.23 (16.90) 3.82 (13.08) 1.31 0.21 0.31

F-statistic

Significance

2.51

0.07

0.33

0.81

1.96

0.13

Since the ethics intervention in my study took place in four sections of the course with varying class sizes, I could analyze the data by class to provide preliminary evidence on the differences between classes of varying size. I performed the one-way analysis of variance between the sections in the four academic years as reported in Table 2.7 An interesting pattern emerged from this analysis. While the pre-P-scores differ at a significant, albeit marginal level (F-statistic ¼ 2.51, p ¼ 0.07), the post-P-scores do not. Specifically, the pre-P-score for the semester in the 99–00 academic year was the highest at 48.18 while that of the following year was only 33.54. The big difference between the sections concerning the pre-P-score is striking, although as reported earlier the average for all four sections is in line with the national control group with an average P-score of 42.8. The second analysis is focused on the effect of the intervention by semester. A series of matched-pair t-tests were performed on the data comparing the pre- and post-P-scores by semester as reported in Table 2. This analysis shows that while small classes gained significantly in the P-score, larger classes did not. Specifically, the class with only 14 students in academic year 98–99 improved its P-score from 43.22 at the beginning of the semester to 48.11 at the end, resulting in a matched-pair difference of 4.89 with a t-statistic of 2.40, which is significant at the 0.03 level. The effect size of 0.38 for this course is at the moderate level. The gain in the P-score is even greater for the 00–01 class, where students’ P-scores went from 33.54 to 44.27 with a matched pair increase of 10.73, which translated into a high effect size of 0.68. The statistical significance of this difference was marginal

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at the 0.09, but this may be due to the very small class size of only eight students in the course that semester. In contrast, the relatively large classes in 99–00 and 01–02 show insignificant changes in the P-scores. Indeed there were even slight drops in both average and matched-pair difference P-scores for the year 99–00, resulting in a slight negative effect size. For the 01–02 semester, statistically insignificant increase in the matched-pair difference was observed that translated into an effect size of 0.31, which is on the low side.8 Thus the matched differences ranged from
1.97 for 99–00 to 10.73 for 00–01. However, these differences were not statistically different (F-statistic ¼ 1.96, p ¼ 0.13). The evidence concerning the lack of significant difference between the post-P-scores between classes implies that while students began the semester with varying levels of the P-score, the course was effective in leveling the field of ethical reasoning for them at the end of the semester. An analysis of the data by age provides additional evidence to corroborate this conclusion. The non-accounting DIT literature concludes that the P-score improves with age (Rest, 1994). However, a study in accounting (Shaub, 1994a) found no effect of age on ethical reasoning of accounting students or practicing auditors. Using regression analysis I found that age had a marginally significant effect on the gains in the P-score (F-statistic ¼ 3.71, p ¼ 0.06). To find the source of the effect, I classified age into various groups and found that students 25 years and younger vs. 26 years and older were the source of variation. As reported in Table 3, students 25 years or younger began the semester with a mean P-score of 40.6 which was less than that of the older students (42.8). Although the difference was not statistically significant, this evidence is consistent with the literature that indicates that older people have higher levels of ethical reasoning than younger people. However, the younger students improved their P-score to 48.4 at the end of the semester, while the older students’ P-score slightly dropped to 41.6 resulting in the younger students’ post-P-score being marginally greater than that of the older students (t-statistic ¼ 1.77, p ¼ 0.09). The net result was that on average younger students’ matched pair P-scores improved by 7.0 while the older students had an improvement of only 0.4 and these results were marginally different (t-statistic ¼ 1.83, p ¼ 0.07). This preliminary evidence indicates that ethical intervention courses may have more effect on younger graduate students than older ones. I performed a battery of other tests to investigate the effects of demographic variables such as religion, marital status, ethnicity, as well as previous courses in philosophy or ethics. An analysis of variance of the changes in the P-score between Catholics, non-Catholic Christians and other

Ethical Training in Graduate Accounting Courses

Table 3.

P-score (and Standard Deviation) by Student Age.

Measure

Pre-P score Post-P score Matched-pair difference Effect size

55

25 and Younger n ¼ 27

26 or Older n ¼ 38

40.6 (14.2) 48.4 (16.6) 7.0 (14.5) 0.48

42.8 (16.2) 41.6 (11.9) 0.4 (12.9) 0.06

t-statistic

Significance


0.57

0.57

1.77

0.09

1.83

0.07

denominations rendered insignificant differences. Similarly, marital status did not have any effect, nor did prior courses in ethics and philosophy, where I analyzed the gains in the P-score by the number of ethics/philosophy courses (range: 0–5) and found no significant differences (F-statistic ¼ 1.58, p ¼ 0.19). I repeated the analysis for a dichotomous variable (0 for no course and 1 for any course on ethics or philosophy) and found no effects on the changes in the P-score either. This finding is inconsistent with that of Shaub (1994a), who reported significant effects of such courses on ethical reasoning of practicing auditors and marginal effects for accounting students. Finally, in an effort to investigate the effects of ethnicity (North American and European vs. Asian and others), I compared the P-scores of groups with different backgrounds and found no significant effects on gains in ethical reasoning.

SUMMARY AND CONCLUSIONS The ethical reasoning literature presents evidence indicating that ethical intervention courses produce moderate gains in ethical reasoning in business and non-business undergraduate programs. The current study contributes to this literature by providing evidence from an intervention study in a graduate program in accountancy. A major finding of this study is that ethical intervention is effective in improving students’ ethical reasoning in a graduate capstone accounting course. However, the overall effect size of the improvement is low (i.e., less than 33 percent), although the change is statistically significant. Furthermore, the results show that female students’ P-scores are not significantly different from those of the male students at pre- or postcourse. However, while both females and males’ P-scores improve through

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the ethics intervention, only males’ gains are statistically significant. Additional analysis indicated that while smaller classes gain moderate to high effect sizes in the P-score, larger sections gain very little, if any, but all sections end up with P-scores that are not different from each other. An analysis by student age also showed that younger students begin the course at lower levels of the P-score than older students, but gain significantly more in the P-score from the ethics intervention than older students. No other demographic variable had significant effect on the gains in the P-score. An implication of the research findings is that incorporating ethics intervention in the graduate capstone accounting courses has significant effects on ethical reasoning of graduate accounting students, particularly if used in small class sections. A research question is to investigate innovative ways of cutting cost and yet introducing ethics into the curriculum because many institutions may not afford the cost of offering small classes where the efficacy of the ethics training may be high. For example, ethics intervention modules can be introduced in large classes, with case discussions in laboratory settings for small groups of students. Also, while earlier research indicates a need for live instruction (see Ponemon & Felo, 1996), research is needed on the efficacy of web-based instruction on ethical reasoning. An implicit assumption in this paper is that ethical reasoning has positive impact on ethical behavior. While ethics literature research shows that ethical reasoning is positively correlated with ethical behavior, its strength of correlation is only in the 0.3–0.4 range (Rest, 1994, p. 21). Also, studies in the context of accounting education (e.g., Ponemon, 1993; Bay & Greenberg, 2001) have shown that the relationship between ethical reasoning and ethical behavior is monotonically increasing function but only for a medium range of ethical reasoning, resulting in unethical behavior being associated with both low and high ethical reasoning levels. Bay and Greenberg (2001) suggest that one possible explanation for this result is that other ‘‘emotional’’ factors besides education are necessary for ethical behavior. Rest (1994, p. 23) specifies that factors other than ethical reasoning include ethical sensitivity, ethical motivation, and ethical character. Unfortunately, unlike ethical reasoning for which the DIT instrument can be used for measurement, there is no standard reliable psychometric measure for the other factors of ethical behavior. Consequently, I could not measure the effects of the ethics intervention on factors other than ethical reasoning, and therefore whether the course was effective in improving students’ overall ethical behavior. Future studies are needed to develop measures for, and to investigate the effects of, intervention on all components of ethical behavior, not just ethical reasoning.

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The effect size for all sections taken together was low (i.e., less than 33 percent). When studied on a section-by-section basis, I observed that while the effect size was moderate for the small sections, it was very low for the large sections of the course. Since the four sections of the course that were studied spread over a four-year period, a temporal limitation should be taken into account in interpreting this result. Due to the limited number of students in the MSA program, this course was offered only once a year during the study period, and therefore it was not possible to concurrently introduce the intervention to multiple sections of the course. For larger programs, it may be possible to introduce the intervention into multiple sections of a course and investigate the difference in the same semester in future research. The temporal limitation aside, an interesting observation here is that the section that had negative change in the P-score began the semester with the highest average P-score. Specifically, this section began the semester with a pre-P-score of 48.18, which dropped to 44.45 at the end of the semester. This drop brought the post-P-score in line with the other three sections, an evidence that implies that the ethics intervention may have had a leveling effect on students’ ethical reasoning in all sections. That is students who started with above average P-scores at the beginning of the semester had losses in their P-scores at the end while those who started with below average P-scores gained from the intervention. This is an interesting finding that implies that there may be a limit to the contribution that ethical reasoning intervention can make to improving the P-score. This implication was also supported by an analysis of the effects of age where the younger students who had lower P-scores at the beginning of the semester gained more than the older ones in ethical reasoning. In this case however, the younger students ended up with post-P-scores that were significantly greater than those of the older students. Thus, further research is needed to investigate whether there are optimal levels of the P-score that can be achieved from ethics intervention courses in accounting. While the overall improvement in the P-score indicates an efficacy for the ethics intervention, there is a disturbing finding in the study that indicates that the P-scores of over a third of the students (26 of the 67) either did not improve at all or actually deteriorated over the course of the semester. This evidence is consistent with a study in an undergraduate context where the P-scores of some 35 percent of the students actually deteriorated during a semester-long elective business ethics course (Abdolmohammadi & Reeves, 2000). The authors also reported that 31 percent of the students tracked over the four-year undergraduate business education had deterioration in their

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P-scores, indicating that improvement in ethical reasoning from four-year college is not as universal as has been reported in the literature. These findings indicate that there is a need for future research to provide explanations and solutions for this problem. One can also argue that the P-score has limitations when it comes to measuring changes in ethical reasoning. If so, future research is needed to uncover more accurate means of measuring changes in ethical reasoning. Finally, the ethics literature has been criticized for lack of attention to a phenomenon called social desirability response bias (SDRB) (see Geiger & O’Connell, 2000 for a review). Also called a ‘‘halo effect,’’ SDRB is a tendency toward seeing oneself in a more positive light than one’s peers. Recent studies have reported the presence of SDRB in stock trading under insider information ( Beams, Brown, & Killouh, 2003, p. 318) and in perceptions of ethicalness of various business and academic vignettes (Bernardi, Delroy, LaCross, & Waite, 2003, pp. 46–47; Geiger & O’Connell, 2000, p. 116). The author is unaware of any study in the context of the DIT instrument in which SDRB has explicitly been considered, and he did not consider SDRB in this research either, so it is not clear as to whether SDRB might be a problem in the DIT research. Investigation of this possibility could be a fruitful avenue for future research.

NOTES 1. For example, soon after its establishment, the PCAOB decided to take responsibility for establishing auditing standards, hence ending audit standard setting by the AICPA’s Auditing Standards Board. 2. The low-medium-high classification of the effect size is somewhat arbitrary, but it is widely accepted in the statistical literature. For an example of its use in ethical reasoning gains of students, see McNeel (1994). 3. Ponemon (1992) and Abdolmohammadi et al. (2003) provide selection-socialization as an explanation for this phenomenon. There may be other reasons too, but for the purpose of this study the reasons are not the focus, the fact that there were no differences is the important issue. 4. The three-credit hour course covers material that used to be covered in two three-credit hour courses in the past, one dealing with policy issues and the other dealing with research issues. For the past four years we have combined the course into one. The data set for this study includes data from the policy course when it was offered for the very last time. 5. The use of dilemma ethics cases is pervasive in accounting education. However, some scholars (e.g., Shaub, 1994b) argue that there is an over-reliance on this Socratic Method and accounting educators should consider other methods. Mintz (1995) suggests coverage of virtue ethics in accounting education.

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6. There were only two students with the extreme changes in their P-score of
36.60 and +43.23. Dropping these two outliers resulted in a more reasonable range of
25.16 to +30.00. I performed the various statistical analyses without the two outliers and found no differences from those reported in this section. For example, the t-statistic of the matched-pair was 1.97, which was significant at the 0.05 level. The means difference was 3.00 as compared with the 3.01 in Table 1 for the whole sample. 7. While desirable to analyze these data by gender, the analysis may not be meaningful due to the sample limitation at the semester level. 8. To focus more specifically on the class size effect, I combined the data from the two small classes and those from the two large classes and performed statistical analysis. The results are clearer on the differences between small and large sections. While the differences between the pre- and post-P-scores indicate no significant differences between the subjects, the differences between the matched-pair gains were significant. Specifically, while small classes gained 7 points in the P-score, large classes gained only 0.9 and the t-statistic of 1.88 was significant at the 0.07 level. Also interesting to note is that while the effect size of the intervention was 0.48 (which is moderate) for the small sections, it was only 0.06 for the large sections. Finally, while only 32 percent of the students in the small sections had zero or negative gains in their P-scores, 46 percent of the large sections had this problem. These results suggest that small classes produce higher (and statistically more significant) gains in ethical reasoning than large classes. However, as discussed in the final section, one must keep in mind the limitation due to the small number of sections investigated in interpreting the results.

ACKNOWLEDGMENTS The author gratefully acknowledges the many constructive comments by participants at the 2003 Annual Congress of the European Accounting Association, the Northeast Regional Meeting of the American Accounting Association, the 2003 annual meeting of the American Accounting Association and the 2003 annual meeting of the Society for Business Ethics. I also appreciate the constructive comments from the two anonymous reviewers and from the editor, Cynthia Jeffrey. I acknowledge with great appreciation Dr. William Read’s assistance in collecting data from one of the four sections of the course investigated and Karen Zhang’s able research assistance, as well as editorial assistance from Jeanne DiBona at Bentley College.

REFERENCES Abdolmohammadi, M. J., & Reeves, M. F. (2000). Effects of education and intervention on business students’ ethical cognition: A cross sectional and longitudinal study. Teaching Business Ethics, 4(3, August), 269–284.

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Abdolmohammadi, M. J., Read, W. J., & Scarbrough, D. P. (2003). Does selection-socialization help to explain accountants’ weak ethical reasoning? Journal of Business Ethics, 42(January), 71–81. Ameen, E. C., Guffey, D. M., & McMillan, J. J. (1996). Gender differences in determining the ethical sensitivity of future accounting professionals. Journal of Business Ethics, 15, 591–597. Armstrong, M. (1987). Moral development and accounting education. Journal of Accounting Education, 5, 27–43. Bay, D. D., & Greenberg, R. R. (2001). The relationship of the DIT and behavior: A replication. Issues in Accounting Education, 16(3, August), 367–380. Beams, J. D., Brown, R. M., & Killouh, L. N. (2003). An experiment testing the determinants of non-compliance with insider trading laws. Journal of Business Ethics, 45(4, July), 309–323. Bebeau, M. (1994). Influencing the moral dimensions of dental students. In: J. R. Rest & D. Narvaez (Eds), Moral development in the professions (pp. 121–146). Hillsdale, NJ: Erlbaum. Bernardi, R. A., Delroy, E. L., LaCross, C. C., & Waite, R. A. (2003). Evidence of social desirability response bias in ethics research: An international study. The Journal of Applied Business Research, 19(3), 41–51. Brady, D., Byrnes, N., Lavelle, L., McNamee, M., & Palmeri, C. (2002). Special Report: Accounting in Crisis, http://www.businessweek.com/magazine/content/02_04/ b3767712.htm Bryan-Law, C. (2003). Accounting firms aim to dispel cloud of corporate fraud. The Wall Street Journal (Eastern edition). (May 27), C1, C12. Burton, S., Johnston, M. W., & Wilson, E. J. (1991). An experimental assessment of alternative teaching approaches for introducing business ethics to undergraduate business students. Journal of Business Ethics, 10, 507–518. Cohen, J. R., Pant, L. W., & Sharp, D. J. (1998). The effect of gender and academic discipline diversity on the ethical evaluations, ethical intentions and ethical orientation of potential public accounting recruits. Accounting Horizons, 12(3), 250–270. Cohen, J. R., Pant, L. W., & Sharp, D. J. (2001). An examination of differences in ethical decision-making between Canadian business students and accounting professionals. Journal of Business Ethics, 30(4), 319–336. Crandall, C. S., Tsang, J. A., Goldman, S., & Pennington, J. T. (1999). Newsworthy moral dilemmas: Justice, caring, and gender. Sex Roles, 40(3&4), 187–209. Dawson, L. M. (1997). Ethical differences between men and women in the sales profession. Journal of Business Ethics, 16, 1143–1152. FASB. (2002). Principles-based approach to US standard setting. Norwalk, CT: Financial Standards Board. Ford, R. C., & Richardson, W. D. (1994). Ethical decision making: A review of the empirical literature. Journal of Business Ethics, 13, 205–221. Franke, G. R., Crown, D. F., & Spake, D. F. (1997). Gender differences in ethical perceptions of business practices: A social role theory perspective. Journal of Applied Psychology, 82(6), 920–934. Geiger, M. A., & O’Connell, B. T. (2000). An examination of using surrogate measures to assess social desirability response bias. Research on Accounting Ethics, 6, 107–127.

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Gilligan, C. (1982). In a different voice. Cambridge, MA: Harvard University Press. Hiltebeitel, K. M., & Jones, S. K. (1992). An assessment of ethics instruction in accounting education. Journal of Business Ethics, 11, 37–46. Jordan, K., & Stevens, P. (2001). Teaching ethics to graduate students: A course model. Family Journal, 9(2), 178–186. Kohlberg, L. (1981). Essays on moral development, the philosophy of moral development I and II. San Francisco: Harper & Row. Lampe, J. C., & Finn, D. W. (1992). A model of auditors’ ethical decision process. Auditing: A Journal of Practice and Theory, 11(Supplement), 33–66. McNeel, S. P. (1994). College teaching and student moral development. In: J. R. Rest & D. Narvaez (Eds), Moral development in the professions (pp. 27–50). Hillsdale, NJ: Erlbaum. Mintz, S. M. (1995). Virtue ethics and accounting education. Issues in Accounting Education, 10, 247–267. Pascarella, E. T., & Terenzini, P. (1991). How college affects students: Findings and insights from twenty years of research. San Francisco, CA: Jossey Bass. Ponemon, L. A. (1992). Ethical reasoning and selection-socialization in accounting. Accounting, Organizations and Society, 17(3–4), 239–258. Ponemon, L. A. (1993). Can ethics be taught in accounting? Journal of Accounting Education, 11, 185–209. Ponemon, L. A., & Felo, A. (1996). Key features of an effective ethics training program. Management Accounting, 78(October), 4. Ponemon, L. A., & Gabhart, D. R. L. (1990). Auditor independence judgments: A cognitive developmental model and experimental evidence. Contemporary Accounting Research, 7, 227–251. Ponemon, L. A., & Glazer, A. (1990). Accounting education and ethical development: The influence of liberal learning on students and alumni in accounting practice. Issues in Accounting Education, 5(1), 21–34. Rest, J. (1986a). DIT manual (3rd Ed.). Minneapolis: University of Minnesota. Rest, J. (1986b). Moral development: Advances in research and theory. New York: Praeger Publishers, Inc. Rest, J. (1994). Background: Theory and research. In: J. R. Rest & D. Narvaez (Eds), Moral development in the professions (pp. 1–26). Hillsdale, NJ: Erlbaum. Rest, J., & Narvaez, D. (1994). Summary: What’s possible? In: J. R. Rest & D. Narvaez (Eds), Moral development in the professions (pp. 213–224). Hillsdale, NJ: Erlbaum. Richards, C. (1999). The transient effects of limited ethics training. Journal of Education for Business, 74(July/August), 332–334. Ries, S. I. (1992). An intervention curriculum for moral development. Journal of Moral Education, 21(1), 41–58. Riggins, C. (2001). Smaller learning settings help our kids. The Education Digest, 67(4), 31–32. Ruegger, D., & King, E. W. (1992). A study of the effect of age and gender upon student business ethics. Journal of Business Ethics, 11, 179–186. Schlaefli, A., Rest, J. R., & Thoma, S. J. (1985). Does moral education improve moral judgment? A meta-analysis of intervention studies using the defining issues test. Review of Educational Research, 55, 319–352. Schmitt, R. B. (2002). Companies add ethics training; Will it work? The Wall Street Journal(November 4), B1, B4.

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Shaub, M. K. (1994a). An analysis of the association of traditional demographic variables with moral reasoning of auditing students and auditors. Journal of Accounting Education, 12(1), 1–26. Shaub, M. K. (1994b). Limits to the effectiveness of accounting ethics education. Business and Professional Ethics Journal, 13(1&2), 129–146. SOA. (2002). Sarbanes-Oxley Act. Public law no: 107–204. Washington, DC: Government Printing Office. Texas State Board of Public Accountancy. (2003). CPA Examination Requirements. http:// www.tsbpa.state.tx.us/eq1.htm Current as of November 11. Thomas, C. W. (2003). Pros and cons of principles-based accounting. Today’s CPA, 30(5), 7. Weber, J., & Green, S. (1991). Principles of moral reasoning: Is it a viable approach to promote ethical integrity? Journal of Business Ethics, 10, 325–333. Weeks, W. A., Moore, C. W., McKinney, J. A., & Longenecker, J. G. (1999). The effects of gender and career stage on ethical judgment. Journal of Business Ethics, 20, 301–313.

ACCOUNTING SCHOLARS PUBLISHING IN ETHICS JOURNALS: A 30-YEAR LONGITUDINAL STUDY Richard A. Bernardi ABSTRACT None of the top 40 journals used by Hasselback, Reinstein, and Schwan to rank accounting’s prolific authors list ethics as an area of interest for manuscripts. Consequently, those who publish in ethics are at a competitive disadvantage in Hasselback et al.’s rankings. The purpose of this research is to provide a list of accounting’s ethics authors as a companion study to Hasselback et al.’s rankings. In this study, 22 ethics journals were analyzed for the 35-year period (1968–2002). While a similar level of coauthoring occurs as in Hasselback et al. only 6.3 percent of accounting’s assistant professors and above, who teach at schools in North America, have one or more publications in the 22 ethics journals this research examines.

Research on Professional Responsibility and Ethics in Accounting Research on Professional Responsibility and Ethics in Accounting, Volume 10, 63–93 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1574-0765/doi:10.1016/S1574-0765(05)10003-X

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INTRODUCTION Recently, Hasselback, Reinstein, and Schwan (2003) ranked the output of accountings professors who are also Ph.D.s teaching at institutions in the United States. Hasselback et al.’s methodology is to first rank each doctoral year group by research productivity using a list of top journals. They then provide data on the effect of coauthoring and the quality ratings of these 40 journals. Hasselback et al. (2003) note that because ‘‘there has not been a recent study ranking journals, some newer journals may not have received the benefit of moving up in the rankings.’’ Compounding the problem is Schultz, Meade, and Khurana (1989) prediction that publications will receive an even greater emphasis in the academic reward process. This implies that colleagues who devote part of their efforts towards research that is not published in top 40 journals (i.e., ethics research) are at a competitive disadvantage in Hasselback et al.’s (2003) rankings. Bernardi (2004) points out that none of the top 40 journals Hasselback et al. (2003) used to rank accounting’s prolific authors list ethics as an area of interest for manuscripts (Cabell, 2000a). The purpose of this research is to ‘‘level the playing field’’ by providing a list of accounting authors who publish in ethics journals as a companion study to Hasselback et al.’s rankings. In this study, I examine the contents 22 ethics journals for the 35-year period from 1968 through 2002.1 Using the number of publications in the ethics journals, this study identifies the top 10 researchers for each doctoral graduation year, for the 30-year period from 1968 to 1997. I also list the top accounting researchers with the rank of assistant professor and above who teach at North American universities or colleges.

LITERATURE With more than a hundred articles rating professional schools or journals (Williams, 2000), it is not surprising that academia uses journal quality ratings as part of their assessment process. For instance, researchers use journal ratings to rate every step in our process from departments and institutions (Windal, 1981), to individual faculty members (Hasselback et al., 2003; Campbell & Morgan, 1987), and their Ph.D. programs (Hasselback & Reinstein, 1995; Jacobs, Hartgraves, & Beard, 1986). Schroeder, Payne, and Harris (1988) suggest that the variety of accounting publications mirrors the diversity and increasing emphasis on

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mission-oriented assessment by institutions. At schools whose mission is primarily teaching undergraduates, faculty may publish fewer articles and in lower tier journals (Andrews & McKenzie, 1978). The tenure and promotion process at institutions without doctoral programs should reflect a lower expectation for publishing; consequently, these schools attract a different faculty than institutions with doctoral programs (Campbell & Morgan, 1987). Indeed, this self-selection process occurs at the entry point in the entire process including the entry level (Chung, Pak, & Cox, 1992). Because faculty and doctoral students publish the largest number of articles from large state institutions (Bublitz & Kee, 1984), many candidates for doctoral programs select these institutions to enhance their marketability after graduation (Chung et al., 1992). Chung et al.’s study also indicates that seven doctoral programs in the United States account for more than one-third of the most prolific scholars. Using research and publications as a quantifiable measure for assessing the quality of faculty, departments and institutions have implications for attracting new faculty (Hasselback & Reinstein, 1995). Ostrowsky (1986) believes that an institution’s research reputation is a key factor in the screening and hiring process for new faculty. The perception of an individual’s research record could depend on the publication history of those who evaluate the record (Morris et al., 1990). The role of research continues to increase in the tenure and promotion process over time. Coe and Weinstock (1969) maintain that publication was already a component for promotion for 85 percent of their sample. Campbell et al. (1983) report that faculty from all institutions believe that research plays a key role in their promotion. Cargile and Bublitz (1986) report that faculty perceive research as being twice (five times) as important as teaching (service) in promotion and tenure decisions. Finally, Morris et al. (1990) note that faculty promotion and tenure decisions are a function of the quantity and quality of the individual’s publications. Jolly et al. (1995) suggest that, because publication in a top 40 journal is a surrogate for research quality, publications in these journals are critical when evaluating faculty mobility as well as promotion and tenure decisions. Hasselback and Reinstein (1995) echo the cautions of Morris et al. (1990) and Hall and Ross (1991) that newer journals are not in the rankings because there has not been a recent study of journal rankings. However, Hasselback et al. (2003) perpetuate the problem for new journals by not expanding their ranking system to include newer journals as Hasselback and Reinstein did in 1995. For instance, Research on Accounting Ethics, which was first published in 1995, is still not part of the 2003 rankings.2

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METHODOLOGY In this research, I use the index in Hasselback’s (2002) Accounting Faculty Directory to identify and classify faculty. This study’s sample includes the 4,890 individuals who graduated from accounting doctoral programs during the 30-year period from 1968 to 1997 (i.e., the same sample as Hasselback et al., 2003). During the research, I identify ethics journals using Sabrin (2002), Cabell’s (2002a, b) and the internet to search out other journals focusing on business ethics. Overall, there are 22 journals publishing business ethics research between 41 years (Business and Society) and two years (Journal of Power and Ethics). In the data-gathering process, I count only full articles appearing in the 22 journals and serials – commentaries, replies, notes and book reviews do not count. The search for ethics articles was manual using Hasselback’s (2002) Accounting Faculty Directory to classify and identify authors by year of doctoral degree. I encountered the same problems as Hasselback et al. (2003) such as misspellings, the use of initials, and several persons with the same name. Like the top 40 accounting journals, ethics journals sometimes provide brief biographies that make identifying the correct authors easier. Table 1 lists the journals included in the study and their first year of publication. As shown in Table 1, accounting authors publish in only 15 of the 22 business ethics journals. I use the criteria Hasselback and Reinstein (1995) provide to create a ranking system and that estimates the ‘‘Quality Rankings’’ for 19 of the 22 ethics journals in Table 1.3 As in Hasselback and Reinstein (p. 71), my model for ranking these journals uses ‘‘acceptance rates and the qualities of [these] y journals’’ from other sources. During the data analysis, I do not provide specifics on all of the individual journals publishing accounting ethics research for the sake of space. Consequently, I divide the 15 journals in which accounting ethics articles appear into four groups (Table abbreviations in parentheses): Group 1 – Research on Accounting Ethics (ROAE) and the Journal of Accounting Ethics and Public Policy (JAEPP); Group 2 – the Journal of Business Ethics (JoBE), the International Journal of Value Based Management, and Teaching Business Ethics; Group 3 – Business and Professional Ethics (B&PE) and Professional Ethics (PE); and Group 4 – Business Ethics: A European Review, Business Ethics Quarterly, Business and Society, Business and Society Review, Ethics and Critical Thinking, Markets and

Accounting Scholars Publishing in Ethics Journals

Table 1.

Ethics Journals by Initial Publication Date.

Title of Journal

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

67

Business and Society International Journal of Value Based Management Business and Society Review Business and Professional Ethics Journal Markets and Morality Business Ethics Quarterly Ethics and Behavior Professional Ethics Research on Accounting Ethics Journal of Business Ethics Ethical Theology and Moral Practice Business Ethics: A European Review Journal of Accounting Ethics and Public Policy Journal of Power and Ethics Teaching Business Ethics Ethics and Information Technology Global Virtue Ethics Review Research on Ethical Issues in Organizations Ethics and Critical Thinking International Business Ethics Review Online Journal of Ethics Electronic Journal of Business Ethics and Organizational Studies

Quality Rating

First Published

1.41 1.22 1.21 1.11 1.05 1.02 1.02 1.01 0.98 0.96 0.94 0.93 0.92 0.91 0.81 0.74 0.69 0.59 0.51 na na na

1962 1988 1972 1981 1998 1991 1999 1992 1995 1982 1998 1992 1998 2000 1997 1999 1999 1999 1987 1999 1999 1999

Notes: a. Highlighting indicates that no accounting faculty members listed in Hasselback (2002) published articles in these journals from initial issue through December 31, 2002. b. The Online Journal of Ethics has not published a new issue since the summer of 2000. c. Teaching Business Ethics and the International Journal of Value Based Management are now part of the Journal of Business Ethics. d. The editors of the International Business Ethics Review and the Electronic Journal of Business Ethics and Organizational Studies did not respond to inquires about their acceptance rates. Morality, Research on Ethical Issues in Organizations, and the Electronic Journal of Business Ethics and Organizational Studies.

These groupings are not an indication of journal quality; rather, they reflect the journal’s history of publishing accounting ethics articles.2 For example, while the eight journals in Group 4 publish about six pages per year of accounting ethics research, six of the other journals publish an average of 108 pages per year with a low of 20 pages each year. Research on Accounting Ethics and the Journal of Accounting Ethics and Public Policy are in Group 1 because their commitment is to publish

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accounting ethics research. Consequently, I list the number of the publications in these journals individually. Group 2 journals, which I refer to as ‘‘JoBE Plus,’’ include the Journal of Business Ethics, the International Journal of Value Based Management and Teaching Business Ethics. The latter two journals will be part of the Journal of Business Ethics beginning in 2004 after several years as separate journals. Finally, Business and Professional Ethics and Professional Ethics make up Group 3 because they have the same editor and a similar focus.

DATA ANALYSIS Table 2a provides a benchmark showing the full-credit articles by doctoral year. As a benchmark, the data indicate that only 6.7 percent of all faculty members with doctorates from 1968 through 1997 have at least one fullcredit ethics article. This compares to 64 percent of faculty with a minimum of one full-credit article in a top 40 journal in Hasselback et al.’s (2003) study (i.e., nearly a 10-fold difference). I adjust the Table 2a data for co-authorship for each individual. The number of authors for each article determines the article credit in Table 2b. For example, if there are two (three) coauthors for an article, then each person receives one-half (one-third) credit for the article. If coauthored articles do not count as much as individually authored articles, then Table 2b provides a benchmark for discounting coauthored articles. I use a cutoff of 0.5 in the rounding process for total coauthored-adjusted articles. Consequently, individuals with article counts of less than 0.5 after adjusting for coauthors do not appear in Table 2b. While there has not been a study that examines the quality and rankings of ethics journals, I use the same criterion as Hasselback and Reinstein (1995) to rank journals that are not part of prior rating systems. This methodology essentially clusters journals with similar acceptance rates and other characteristics (see Table 1). The data shown in Table 2c provide the composite Quality and Quantity (Q&Q) scores after adjusting for coauthors shown in Table 2b. I also use a Q&Q cutoff score of 0.5 to classify individuals in the columns of Table 2c. Average Productivity by Doctoral Year Table 3 combines the overall data for the number of full-credit articles, coauthored articles and Q&Q composite scores articles by each year group

Year of Doctoral Graduation

1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Number of Graduates

Total Articles

Number of Faculty by the Number of Articles Published

0

1

2

3

101 103 143 140 144 151 167 152 134 133 179 131 136 174 177 162 161 171 188 201 205 212 171 193 199 199 198 160 159 146

1 5 17 9 5 6 6 12 13 13 25 11 10 9 37 8 16 20 17 49 34 37 37 26 32 22 27 21 13 8

100 101 135 133 139 146 161 146 129 124 168 125 131 167 159 155 152 155 177 174 183 186 153 180 183 182 182 144 149 140

1 0 6 5 5 4 6 2 4 5 6 3 4 5 7 6 6 13 10 15 14 20 13 9 9 12 11 14 7 5

0 1 0 2 0 1 0 3 0 4 3 2 0 2 6 1 2 2 0 7 6 3 2 3 0 5 3 1 3 0

0 1 0 0 0 0 0 0 0 0 0 0 0 0 3 0 0 1 0 3 1 1 1 0 6 0 0 0 0 1

4,890 100.0

546

4,559 93.3 0

227 4.6 1

62 1.3 2

18 0.4 3

4

5

6

7

0 0 1 0 0 0 0 1 0 0 0 1 0 0 1 0 0 0 0 1 0 2 1 0 0 0 1 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 0 0 1 0 0 1 0 0

0 0 0 0 0 0 0 0 0 0 1 0 1 0 0 0 1 0 0 0 0 0 0 0 0 0 1 0 0 0

0 0 1 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0

9 0.2 4

4 0.1 5

4 0.1 6

4 0.1 7

8

9+

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0

— 0.0 8

3 0.1 9+

69

Totals Percent No. of articles

Distribution According to Number of Articles Published by Year of Doctoral Degree.

Accounting Scholars Publishing in Ethics Journals

Table 2a.

Year of Doctoral Graduation

Totals Percent No. of articles

Number of Graduates

Total Articles

Number of Faculty by Number of Articles Published

0

1

2

3

101 103 143 140 144 151 167 152 134 133 179 131 136 174 177 162 161 171 188 201 205 212 171 193 199 199 198 160 159 146

1 3 11 7 4 4 3 7 6 7 15 6 9 4 21 7 10 12 8 31 20 25 20 16 21 11 19 13 9 8

100 101 138 133 140 148 164 147 131 127 170 127 131 170 161 155 155 159 181 178 190 190 162 183 185 188 187 148 150 140

1 1 3 7 4 2 3 3 2 5 6 3 4 4 12 7 4 12 6 17 11 20 7 8 8 11 7 11 9 5

0 1 0 0 0 1 0 2 0 1 1 0 0 0 3 0 1 0 1 4 3 1 1 1 5 0 2 1 0 0

0 0 1 0 0 0 0 0 0 0 1 1 0 0 1 0 0 0 0 2 1 1 0 0 1 0 1 0 0 1

4,890 100.0

338

4,639 94.9 0

203 4.1 1

29 0.6 2

11 0.2 3

4

5

6

0 0 0 0 0 0 0 0 1 0 1 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0

0 0 1 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0

3 0.1 4

3 0.1 5

1 0.0 6

7

8

9+

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0

— 0.0 7

— 0.0 8

1 0.0 9+

RICHARD A. BERNARDI

1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Distribution According to Number of Articles Adjusted for Coauthorship by Year of Doctoral Degree.

70

Table 2b.

Year of Doctoral Graduation

1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Number of Graduates

Total Articles

Number of Faculty by Number of Articles Published

0

1

2

3

101 103 143 140 144 151 167 152 134 133 179 131 136 174 177 162 161 171 188 201 205 212 171 193 199 199 198 160 159 146

1 3 9 7 3 5 3 6 5 5 14 6 7 2 26 4 11 9 8 29 14 18 16 9 18 7 11 7 7 4

100 101 139 133 141 148 164 147 132 128 170 127 133 172 162 158 155 162 181 180 194 195 164 188 186 192 192 154 152 143

1 1 2 7 3 1 3 4 1 5 7 3 2 2 7 4 4 9 6 15 8 16 6 4 9 7 4 5 7 2

0 1 0 0 0 2 0 1 0 0 0 0 0 0 5 0 0 0 1 4 3 1 0 0 3 0 0 1 0 1

0 0 1 0 0 0 0 0 0 0 1 1 0 0 3 0 1 0 0 2 0 0 0 0 1 0 1 0 0 0

4,890 100.0

274

4,693 96.0 0

155 3.2 1

23 0.5 2

11 0.2 3

4

5

6

7

8

0 0 1 0 0 0 0 0 1 0 1 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 1 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

5 0.1 4

2 0.0 5

— 0.0 6

— 0.0 7

— 0.0 8

9+ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 1 0.0 9+

71

Totals Percent No. of articles

Distribution of According to Number of Articles Adjusted for Coauthorship as Well as Quality and Quantity (Q&Q) by Year of Doctoral Degree.

Accounting Scholars Publishing in Ethics Journals

Table 2c.

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RICHARD A. BERNARDI

and standardizes these data by dividing them by the number of graduates in each year group between 1968 and 1997. One consideration for both this data set and Hasselback et al.’s (2003) data set are the number of journals available to authors throughout the 35-year period. For the current data set, there are only two ethics journals prior to 1981 (Table 1). Four journals began publication in the 1980s and the other 16 from 1991 to 2000 – a dramatic increase in the number of outlets for ethics research. The higher number of ethics articles published by the late 1980s and early 1990s year groups demonstrate this expansion (Table 2a). In Hasselback et al.’s (2003) data, the same phenomenon is apparent; in this case, many of the top 40 journals began publication from 1977 to 1983 – the highest production years for full-credit articles prior to the steady increase to the 200-graduate level in the early 1990s.

Measuring Individual Productivity Again, following Hasselback et al.’s (2003) procedures, I determine the average number of coauthors per article by dividing the total number of fullcredit articles by doctoral graduates for each year between 1968 and 1997 by the number of coauthor-adjusted articles. The data in this study is similar to Hasselback et al.’s data (2.19 versus 2.14). While some might want to compare doctoral year groups (Table 1–4), others (including the authors) may wish to see the performance of individual authors. In the area of individual performance, authors can use the data for tenure, promotion and mobility purposes (Jolly et al., 1995). Consequently, Table 5 lists the 10 most published authors in terms of full-credit articles in the order of their coauthored-adjusted articles and Q&Q scores in the case of ties for each graduation year. Table 5 breaks the total publications in the 15 journals into four groups and presents the number of fullcredit, coauthor-adjusted articles and Q&Q scores with the universities granting their doctorate in accounting and their college/university in 2002. Authors not in Table 5 can approximate their placement by adjusting their full-credit publications for coauthoring and the Q&Q adjustments in Table 1. Highlighting indicates those colleagues who Hasselback et al.’s (2003) also list in the top 10 publishers in their respective doctoral year groups. Of the 318 colleagues Hasselback et al. rank as prolific authors, 35 (approximately 11 percent) also appear in the current research as publishing the most accounting research in ethics journals.

Year of Doctoral Graduation

Number of Graduates

101 103 143 140 144 151 167 152 134 133 179 131 136 174 177 162 161 171 188 201 205 212

Total Articles

Articles/Faculty

Full-Credit Articles

CoauthorAdjusted Articles

Q&Q Composite Score

Full CreditArticles

CoauthorAdjusted Articles

Q&Q Composite Score

1 5 17 9 5 6 6 12 13 13 25 11 10 9 37 8 16 20 17 49 34 37

0.50 3.00 9.91 3.83 2.33 3.66 4.33 5.99 6.24 7.32 13.15 5.52 7.00 2.99 19.31 3.66 9.99 9.31 7.68 25.97 15.83 17.64

0.71 3.23 9.55 4.24 2.54 4.21 4.84 5.95 6.07 6.77 13.25 5.62 7.61 2.89 19.56 3.33 10.23 8.82 7.84 24.82 15.26 17.06

0.01 0.05 0.12 0.06 0.03 0.04 0.04 0.08 0.10 0.10 0.14 0.08 0.07 0.05 0.21 0.05 0.10 0.12 0.09 0.24 0.17 0.17

0.00 0.03 0.07 0.03 0.02 0.02 0.03 0.04 0.05 0.06 0.07 0.04 0.05 0.02 0.11 0.02 0.06 0.05 0.04 0.12 0.08 0.08

0.01 0.03 0.07 0.03 0.02 0.03 0.03 0.04 0.05 0.05 0.07 0.04 0.06 0.02 0.11 0.02 0.06 0.05 0.04 0.12 0.07 0.08

73

1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

Research Productivity by Year of Doctoral Degree: Full-Credit, Coauthored and Q&Q Composite Articles.

Accounting Scholars Publishing in Ethics Journals

Table 3.

74

Table 3. (Continued ) Year of Doctoral Graduation

1990 1991 1992 1993 1994 1995 1996 1997 Totals (Mean)

Number of Graduates

Total Articles

Articles/Faculty

Full-Credit Articles

CoauthorAdjusted Articles

Q&Q Composite Score

Full CreditArticles

CoauthorAdjusted Articles

Q&Q Composite Score

171 193 199 199 198 160 159 146

37 26 32 22 27 21 13 8

19.81 13.31 18.24 9.89 15.64 9.73 7.08 5.50

19.03 12.65 17.55 8.99 14.37 8.86 6.67 5.08

0.22 0.13 0.16 0.11 0.14 0.13 0.08 0.05

0.12 0.07 0.09 0.05 0.08 0.06 0.04 0.04

0.11 0.07 0.09 0.05 0.07 0.06 0.04 0.03

4,890

546

284.37

277.59

(0.11)

(0.06)

(0.06)

RICHARD A. BERNARDI

2.00 1.83 2.41 2.07 2.00 2.40 2.00 2.21 2.44 2.11 2.48 2.00 1.70 2.43 2.08

Average Authors per Article 1.41 1.09 0.95 0.99 1.01 1.00 1.11 1.00 0.97 0.91 1.07 1.01 1.10 0.99 1.04

Average Quality

75

2.14 2.19 2.27 2.29 2.24 2.37 2.27 2.63 2.27 1.97 2.29 2.25 2.31 2.09 1.89

Average Authors per Article

0.97

0.90 1.00 0.97 1.02 1.00 0.93 0.94 0.97 0.95 0.94 0.91 0.92 0.88 0.93 0.93

Average Quality

Year of Doctoral Graduation 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 2.19

Average Number of Authors per Article by Year of Doctoral Degree.

Accounting Scholars Publishing in Ethics Journals

Table 4. Year of Doctoral Graduation 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Mean

Overall Productivity Table 6 shows the distribution for accounting faculty holding the rank of assistant professor or higher with publications in ethics journals, which authors can use as an overall placement tool. Unlike Hasselback et al.’s (2003) data where nearly 50 percent have no publications in the top 40 journals, the current data indicate that approximately 94 percent of accounting faculty members do not publish in this study’s 22 ethics journals.

Best of Breed Table 7 provides additional data to help develop best of breed benchmarks by listing the 47 faculty members with three or more full-credit articles in this study’s 22 ethics journals who hold the rank of assistant professor or higher and teach at a college or university located in North America. The listing considers coauthored-adjusted articles (Q&Q score) when the number of full credit (coauthored) articles is the same. Highlighting indicates the

Year/Name

Full Credit

Accounting RoAE

1

1969 Oliver, Bruce L. Killough, Larry Barrett, Michael J.

3 2 1

1970 Loeb, Stephen Lampe, James McHugh, Joseph A. Jennings, James P. Nichols, Donald R. Robertson, Jack C. Martinson, Otto B. Hillman, A. Douglas

7 4 1 1 1 1 1 1

1971 Milam, Edward E. Miller, Paul B. W. Corman, Eugene J. Bailey, Andrew D. Sundem, Gary L.

2 2 1 1 1

1972 Bollom, William J. Wilson, David A.

1 1

Group Four

Coauth Adj

Q&Q Comp

Doctoral Institution

2002-03 Institution

1

0.50

0.71

Penn St

Penn St

1

2.00 1.00 1.00

2.17 1.06 1.11

U Wash Missouri Colorado

Roch Tec Va Tech Deceased

4.50 3.00 0.50 0.50 0.50 0.33 0.33 0.25

4.18 3.05 0.61 0.49 0.48 0.32 0.17 0.25

Wiscon Michigan Mich St Missouri Oklahoma N Carol G Wash Missouri

Maryland Tx Tec Retired St Louis Tx Christ Tx Aust Old Dom Drake

1.00 0.83 0.50 0.50 0.50

1.04 0.81 0.71 0.49 0.49

LSU Tx-Austin S Calif Ohio St Stanford

Miss St Col Spr Retired Illinois U Wash

1.00 0.50

0.96 0.71

Wiscon Illinois

Wis Osh E&Y

JAEPP

1

1 1

PE BPE

1 2 1

6 3 1

1 1 1 1 1 1

1

2 1 1 1 1 1

RICHARD A. BERNARDI

1968 Smith, Charles

JoBE Plus

76

Table 5. Research Productivity of the Top Ten Doctoral Graduates for the Years 1968-1997.

1973 Epstein, Marc J. Carper, William B. Fetters, Michael L. Lambert, Joyce C. Lambert, S. Joseph

2 1 1 1 1

1974 Ogan, Pekin Davidson, Lewis F. Davis, James R. Frakes, Albert H. Stanga, Keith G.

1 1 1 1 1

1975 Raiborn, Cecily A. Baker, C. Richard Freedman, Martin Merino, Barbara D. Lemon, Morley E. Flesher, Dale L.

4 2 2 2 1 1

1976 Dillard, Jesse F. Boland, Richard J. Lere, John C. Rivers, Richard A. Englebrecht, Ted D. Barrett, Michael J.

9 1 1 1 1 1

1 1 1 2 1 1 1 1 1 1 1 1 1 4 2 1 2 1 1

1

3

6 1 1 1 1 1

0.50 0.50 0.33

0.56 0.48 0.32

Missouri Missouri Mich St

St Louis Gnd Val Kent St

2.00 0.50 0.50 0.33 0.33

2.42 0.71 0.48 0.30 0.30

Oregon Wiscon Wisconsin LSU LSU

Rice Am Cairo Babson New Orl New Orl

1.00 0.50 0.50 0.50 0.50

1.11 0.71 0.48 0.48 0.48

N Carol Penn St Geo St U. Wash LSU

Retired Fl Inter Wash St Tenn

1.83 2.00 1.00 0.83 0.50 0.33

1.76 1.96 1.10 0.81 0.49 0.32

LSU UCLA Illinois Alabama Tx-Austin Cincinn

Loy N Orl Mass Dart Towson N Texas Waterloo Miss

4.16 1.00 0.50 0.33 0.25 1.00

3.95 1.11 0.48 0.30 0.23 1.11

S Carol Case Wt Wiscon Kent St S Carol Colorado

Cent Fla Case Wt St Cloud S Illinois La Tech Deceased

77

1 1 1

Accounting Scholars Publishing in Ethics Journals

Keithley, John P. Lindquist, Stanton Fetyko, David F.

Year/Name

Full Credit

Accounting RoAE

2 2 2 2 2 1 1 1 1 1

1978 Mintz, Steven M. Schwartz, Bill N. DeMoville, Wig B. Giacomino, Don E. Wallace, Wanda A. Munter, Paul Ratcliffe, Thomas Merchant, Kenneth Thomas, C. William

7 6 2 2 2 1 1 1 1

1979 Pearson, Michael Ward, Dan R.

4 2

(Continued ). PE BPE

Group Four

Q&Q Comp

Doctoral Institution

2002-03 Institution

1.50 1.33 1.00 1.00 0.45 1.00 0.50 0.33 0.33 0.33

1.47 1.30 1.10 0.98 0.43 0.51 0.48 0.32 0.32 0.30

Va Tech N Carol Illinois U Wash Ga St Kent St Mich St Arizona Minn Georgia

Penn St N Car St St Joseph Sim Fras Va Tech S Alab Dayton Okla St Saskatch Cen Ark

4.33 2.66 1.50 1.00 1.00 0.50 0.50 0.50 0.50

4.27 2.60 1.40 0.98 0.98 0.71 0.71 0.49 0.49

G Wash UCLA Tx Tech Kentucky Florida Colorado Alabama Berkeley Tx Aust

CS San B Ind S B Tx Pam Marquet Wm & M U Miami Troy St S Calif Baylor

2.66 0.66

2.60 0.64

Kent St La Tech

Kent St La Laf

JAEPP

2 1 1 2

1 1 2 1 1 1 1

1 1 4 5 1

1 1 1

2

2 2 1 1 1 1

1

Coauth Adj

3 1

1

RICHARD A. BERNARDI

1977 Ketz, J. Edward Williams, Paul F. Stagliano, A. J. Etherington, Lois D. Brown, Robert Urbanic, Frank R. Rosenzweig, Ken Hansen, Don R. Irvine, V. Bruce Oxner, Thomas

JoBE Plus

78

Table 5.

1 1 1

1980 Bartlett, Roger W. Gray, O. Ronald Saftner, Donald V. Broom, Lowell S. Rockness, Joanne

6 1 1 1 1

1981 Farrelly, Gail E. Hooks, Karen L. Parker, Larry M. Martin, Charles L. Mayper, Alan G. Adams, Barbara L. Nance, Jon R.

2 2 1 1 1 1 1

1982 Abdolmohammadi, M. Finn, Don W. Kaplan, Steven E. Thompson, James H. Huss, H. Fenwick Gaa, James C. Ruland, Robert G. Gaumnitz, Bruce R. Schultz, Norman O. Heaston, Patrick H.

5 4 3 3 3 2 2 2 2 2

1 1 1 2

4 1 1 1 1 1

1

2 1 1 1 1 1

2 1 2 1 1

3 1 1

2 1

1 1

1 2 1 1 2 2

1 1

1.00 0.50 0.25

1.21 0.49 0.24

U Wash Arkansas Tx Aust

Seattle Retired NYU

4.50 1.00 0.50 0.50 0.50

4.69 1.41 0.56 0.48 0.48

Houston Arkansas Penn St La Tech N Carol

CS Sacr W Florida Toledo Alab Birm N Car Wil

1.00 1.00 0.50 0.50 0.33 0.33 0.33

1.17 0.98 0.49 0.48 0.32 0.32 0.30

G Wash Ga St Houston G Wash Florida Tx A&M Georgia

Rut Nwk Fla Atl Case Wst Towson N Texas S Car St SW Miss

2.83 2.33 2.00 1.33 1.33 2.00 1.00 1.00 0.83 0.58

2.67 2.36 1.94 1.53 1.51 1.92 0.97 0.94 0.80 0.62

Indiana Arkansas Illinois Oklahoma Tenn Illinois Illinois Wiscon Utah Nebraska

Bentley LSU Ariz St Okla City Ga St U Alberta Unknown St Cloud Retired Drake

Accounting Scholars Publishing in Ethics Journals

Weis, W. L. Glezen, G. William Brown, Paul R.

79

80

Table 5. (Continued ). Year/Name

Full Credit

Accounting RoAE

2 1 1 1 1 1

1 1 1 1

1984 Armstrong, Mary Beth Younkins, Edward W. Holtzblatt, Mark A. Pincus, Karen V. Stanley, Charles W. Wolfe, Christopher J. Meredith, Vicki B. Alam, Pervaiz Swingen, Judyth A. Deck, Alan B. Malone, Fannie L.

6 2 2 1 1 1 1 1 1 1 1

3

1985 Siegel, Philip H. Moffeit, Katherine S. Strawser, Jerry R. Bergevin, Peter M. Pavelka, Deborah D.

3 2 2 1 1

1 1 1

PE BPE

Group Four

Coauth Adj

Q&Q Comp

Doctoral Institution

2002-03 Institution

1

0.66 0.50 0.50 0.50 0.50 0.50

0.64 0.49 0.49 0.49 0.48 0.26

Missouri Arizona Alabama Missouri La Tech Arkansas

Det Mer CS Baker Auburn S Florida Tx A&M Auburn

4.00 2.00 1.00 1.00 0.50 0.50 0.50 0.33 0.33 0.33 0.33

4.05 2.10 1.17 0.98 0.49 0.49 0.46 0.37 0.32 0.32 0.32

S Calif Miss Arkansas Maryland Oklah Kent St Kentucky Houston Wiscon Alabama Tx A&M

CaP-SLO Wh Col Roosevelt Arkansas Baylor Tx A&M Ind SE Kent St Fl Gulf C Bellarm Tx-South

1.33 0.83 0.83 1.00 0.50

1.27 0.83 0.81 0.51 0.71

Memphis N Texas Tx A&M Ariz St Missouri

F Dick M W Geo Tx A&M Valdosta Roosevelt

JAEPP

1

1

1

2 2 1

1 1 1 1 1 1 1 1 1 1

1 1 1 1 1

RICHARD A. BERNARDI

1983 Greenberg, Ira S. Doucet, Mary S. Clark, Ronald L. Engle, Terry J. Smith, L. Murphy Wilson, Arlette C.

JoBE Plus

1

1986 Pant, Laurie W. Pasewalk, W. R. Schlachter, Paul J. Coopage, Richard E. Raghunathan, Bhanu Jordan, Charles E. Ott, Richard L. Hill, John W. Elmore, Robert C. McEwen, Ruth Ann Rigsby, John T.

7 1 1 1 1 1 1 1 1 1 1

1

1987 Cohen, Jeffrey R. Tyson, Thomas N. Malone, J. David Roberts, Robin W. Sutton, Steve G. Beets, S. Douglas Patten, Dennis M. McNair, Frances M. Welsh, Mary Jeanne Koh, Hian Chye Collins, Allison B. Ward, Suzanne Pinac

7 4 3 3 3 2 2 2 2 2 2 2

1 1

1 1 1 1 1

6 1 1 1 1 1

1 1 1 1 1 6 2 1 2

3 1

1

1 2 1 1

2 1 2 2 2 1

1

0.50 0.50 0.50 0.50 0.50 0.50

0.56 0.49 0.49 0.49 0.48 0.48

Santa Cl Arkansas Ariz St Missouri Drexel Illinois

Tx A&M Baylor CaP-SLO Bingham Villanova Unknown

2.36 1.00 1.00 0.50 0.50 0.50 0.50 0.33 0.33 0.33 0.33

2.27 1.21 0.96 0.56 0.56 0.51 0.49 0.34 0.32 0.32 0.32

Boston U Tx A&M N Carol Kentucky Pittsburgh La Tech Tx Tech Iowa St Miss Ga Tech Memphis

Suffolk Tx Tech S Th Fl Louisville Toledo S Miss Kansas St Indiana Tenn Tec Suffolk Miss St

2.66 3.00 1.50 1.50 1.00 2.00 2.00 1.00 1.00 1.00 0.83 0.66

2.51 2.92 1.59 1.52 0.98 2.09 1.92 1.04 0.96 0.89 0.80 0.64

Mass Ga State Arkansas Arkansas Missouri Va Tech Nebraska Miss LSU Va Tech Houston LSU

Bost Col St John Fr Texas Tec Cen Flor Okla St Wake For Illinois St Miss St LaSalle Nanyang Houston La Laf

81

1 1 1 1 1 1

Accounting Scholars Publishing in Ethics Journals

Miller, Gary A. Baldwin, Jane N. Carr, Janice S. Reiter, Sara A. Hiltebeithel, Kenneth Lindblom, Cristi K.

82

Table 5. (Continued ). Year/Name

Full Credit

Accounting RoAE

4 3 2 2 2 2 2 2 1 1

1989 Shaub, Michael K. Stevens, Kevin T. Arnold, Vicky Green, Sharon L. Ewer, Sid R. Guffey, Daryl M. Hazera, Alejandro Fogarty, Timothy J. Grasso, Lawrence P. Magnan, Michael L. Herremann, Irene M.

4 4 3 2 2 2 1 1 1 1 1

PE BPE

Group Four

Coauth Adj

Q&Q Comp

Doctoral Institution

2002-03 Institution

2.16 1.50 1.50 1.50 0.83 0.83 0.66 0.66 1.00 1.00

1.89 1.44 1.67 1.54 0.83 0.81 0.64 0.63 0.98 0.96

Penn St Temple Colorado Pittsburgh La Tech Arizona Tx A&M Kent St Syracuse Temple

Richmond LaSalle Massey Duquesne Miss Ariz St W Det Mer Youngs Niagara St Joseph

2.50 1.49 1.00 1.00 0.83 0.66 1.00 1.00 0.50 0.50 0.50

2.64 1.43 0.98 0.96 0.78 0.63 1.02 0.96 0.49 0.49 0.48

Tx Tech Kentucky Arkansas Pittsburgh Miss S Carol Kentucky Penn St Boston U U Wash Kent St

S Mary Tx DePaul Okla St Duquesne SW Miss Clemson Rhode Is Case Wst Unknown Concordia U Calgery

JAEPP

3

2 3 2 1

1 1 1 1

1 1 1 2

1 1 1 1 3

1 2

1

2 1

2 1 2 1 1

1 1 1

RICHARD A. BERNARDI

1988 Geiger, Marshall A. Borkowski. Susan C. Cahan, Steven F. Sisaye, Seleshi Gordon, Gus A. Davidson, Ronald A. David, Jeanne M. Claypool, Gregory A. Ho, Kathy S. Larkin, Joseph M.

JoBE Plus

13 4 3 2 2 1 1 1 1

1 2 1

1991 Yuthas, Kristi Okleshen, Marilyn Hodge, Thomas G. Ragothaman, Srinivasan Edmonds, Cindy D. Ogilby, Suzanne M. Ghosh, Dipanker O’Clock, Priscilla M. Sun, Huey-Lian Jamal, Karim

11 2 2 2 1 1 1 1 1 1

4

5 3 3 3 3 3 3 1 1

3 1 1 2

2 1 1 1 1 7 2

1

1 1 1 1 1 1 1 1

4 2 2 2

1 1 1 1 3 3 3 1 1

10.83 1.49 0.86 1.00 0.66 0.50 0.50 0.50 0.50

9.99 1.44 0.88 1.41 0.63 0.56 0.49 0.48 0.46

NYU Wisconsin Va Tech Wisconsin S Carol St Louis Illinois Baruch Ohio St

Yeshiva DePaul Akron Virginia Clemson Gonzaga Maine HongKong Youngstwn

5.66 1.50 0.83 0.83 1.00 0.50 0.50 0.50 0.50 0.50

5.41 1.44 0.83 0.42 1.11 0.56 0.48 0.48 0.48 0.48

Utah Nebraska Miss Kansas Alabama Wisconsin Penn St Cincinnati Houston Minnesota

Portland Mn S Man La-Monr S Dakota Alab Birm CS Sacram Oklahoma Xavier Morgan St Alberta

3.00 2.25 2.00 2.00 1.50 1.33 1.00 1.00 1.00

2.93 2.34 1.95 1.94 1.44 1.15 0.89 0.96 0.93

Missouri Union Missouri Florida Wash St LSU Maryland Florida St Georgia

Kansas St Roger Wil Wash St Tx San An Andrews SF Aust St Bon Louisvil Lipscomb

83

1992 Fisher, Dann G. Bernardi, Richard A. Sweeney, John T. Radtke, Robin R. Gibson, Ann M. Smith, Aileen Coate, Charles J. Karcher, Julia N. Moore, Perry G. 6 tied at 1, 0.50, 0.49

9 1 1

Accounting Scholars Publishing in Ethics Journals

1990 Pava, Moses L. Hill, Nancy T. Ruf, Bernadette M. Perry, Susan E. McMillan, Jeffrey J. Carnes, Kay C. Daly, Bonita A. Park, Kyungloo Woodlock, Peter D.

84

Table 5. (Continued ). Year/Name

Full Credit

Accounting RoAE

2 2 2 2 2 1 1 1 1 1

1994 Mitschow, Mark C. Shafer, William E. Patterson, Denise M. Bean, David F. Coulter, John Henry, Eleanor G. Allen, Paul W. Cote, Jane M. Eikner, A. Elaine Wilder, W. Mark

6 4 2 2 2 1 1 1 1 1

1 1

1995 Douglas, Patricia C. Rogers, Rodney K.

5 2

3

PE BPE

Group Four

Q&Q Comp

Doctoral Institution

2002-03 Institution

1.00 1.00 1.00 0.83 0.58 1.00 1.00 0.50 0.50 0.50

0.98 0.92 0.89 0.79 0.30 0.96 0.92 0.49 0.48 0.48

Florida St Mich St N Texas Florida St Kent St Penn St N Texas Ok State Florida Minn

LSU Brin Yng SF Aust Pacific Robt Mor St Bona St Edward Baltimore Auburn Tx Christ

4.50 2.66 1.50 1.50 0.83 0.50 0.50 0.50 0.50 0.50

4.10 2.56 1.44 1.37 0.52 0.49 0.48 0.48 0.46 0.46

Maryland Houston Ga St Temple Mass St Louis Miss Wash St Arkansas Florida St

Geneseo Peper LA CS Fresno Iona W New En Oswego Miss-Mer Wash St SW Tx St Miss

2.16 0.83

2.10 0.78

Va Com Case Wst

Loyola M Portland

JAEPP

2 2 2 1

Coauth Adj

1 2 1 1

1 1 1

1

3 3 2 2 1

1 1 1 1 1

1

2 1

1

1

RICHARD A. BERNARDI

1993 Louwers, Timothy J. Smith, Sheldon R. Rogers, Violet C. Eakin, Cynthia F. Pastoria, L. Gail Fischer, Michael J. Guess, A. Kay Robinson-Backmon, I. Stanwick, Sarah D. Subramaniam, C.

JoBE Plus

1 1 1 1 1 1 1

1996 Shapeero, Mike P. Eaton, Tim V. Young, George R. Thornton, John M. Reck, Jacqueline L. Almer, Elizabeth D. Herron, Terri L. Gillett, Peter R. Bechtel, Terence W. Tolleson, Thomas D.

2 2 2 1 1 1 1 1 1 1

1997 Elias, Rafik Z. Duncan, James R. Mobus, Janet L. Gelb, David S. Shoaf, Victoria Waldrup, Bobby E. Pacini, Carl J.

3 1 1 1 1 1 1

1 1 1 1 1 1 1 2 1 2 1

1

1 1 1 1 1 1 1 1 1

1

1 1 1 1

1

1.00 0.50 0.50 0.50 0.50 0.50 0.50

0.51 0.61 0.49 0.48 0.48 0.48 0.46

U Conn Kentucky Arkansas Tx Tech Oklahoma Florida Miss St

Ma-Bost DePaul Tenn Mar Wyoming Drake Unknown Roch Tec

1.00 1.00 0.75 1.00 1.00 0.50 0.50 0.50 0.50 0.33

1.06 0.90 0.74 0.98 0.96 0.49 0.49 0.48 0.26 0.32

Va Tech Tenn Tx-Arl Wash St Missouri Ariz St Tx-Arl Kansas Oklahoma N Texas

Bloomsbg Marquet Fl Atlant Wash St S Florida Portland Montana Rutg NB NW of La Tx Wesl

2.50 0.50 0.50 0.50 0.50 0.50 0.33

2.20 0.49 0.49 0.48 0.48 0.48 0.32

La Tech Kentucky N Texas NYU Baruch Missouri Florida St

Cameron Ball St Wash Tac Seton Hall St John’s Delta St Fla Gulf

Accounting Scholars Publishing in Ethics Journals

Bierstaker, James Murphy, Elizabeth A. Williams, P. Richard Fleischman, Gary M. Yetmar, Scott A. Single, Louise E. Karim, Khondkar E.

85

86

RICHARD A. BERNARDI

Table 6. Distribution of Faculty Holding the Rank of Assistant Professor, or Higher, and Teaching at US Schools,a According to the Number of Articles Published: 1968–2002. Number of Faculty

Percentage of All Faculty

Cumulative Percentage

0 1 2 3 4 5 6 7 8 9+

5,480 257 67 20 11 4 4 4 0 4

93.68 4.38 1.15 0.34 0.19 0.07 0.07 0.07 0.00 0.07

93.68 98.05 99.20 99.54 99.73 99.79 99.86 99.93 99.93 100.00

Total

5,851

100.0%

Number of Articles

a

As listed in Hasselback (2002–2003).

colleague whom Hasselback et al. (2003) also recognized as ‘best in breed’ in their rankings. Table 8 uses the data in Table 7 for the 47 faculty members with three or more full-credit articles. Table 8 ranks these authors using the number of coauthor-adjusted articles as the primary sorting key. The rankings also consider the Q&Q scores when the number of coauthored-adjusted articles is the same. While the top three slots are the same, there are significant shifts in the rankings.

DISCUSSION As Hasselback et al. (2003) suggest that, the current research develops an additional benchmark in accounting research for ethics. While I do not argue that the top 40 journals publish some ethics articles, the starting point of this research is that none of these journals indicate that ethics is an area of interest (Cabell, 2002a). The data in this study provide decision makers with a fuller appreciation of the research efforts of individual authors and their contributions to the literature base in ethics. Table 4 indicates that the average number of authors per article in this study is similar to what Hasselback et al. found over the same 35-year period using different journals.

Authors with Three or More Articles (Unadjusted) Published in Ethics Journals between 1968 and 2002.

Year/Name

Full Credit

Accounting RoAE

1. 2. 3. 4.

McGee, Robert W. Pava, Moses L. Yuthas, Kristi Dillard, Jesse F.

5. 6. 7. 8.

JoBE Plus

PE BPE

Grp Four

Doctoral Col/Univ

2002-03 Col/Univ

1 4 3

62 9 7 6

Loeb, Stephen E. Mintz, Steven M. Cohen, Jeffrey R. Pant, Laurie W.

7 7 7 7

1 4 1 1

6 1 6 5

9. 10. 11. 12. 13.

Bartlett, Roger W. Mitschow, Mark Armstrong, Mary Thorne, Linda Schwartz, Bill N.

6 6 6 6 6

2 1 3 3 5

14. 15. 16. 17.

Fisher, Dann G. Abdolmohammadi, M. Douglas, Patricia C. Sharp, David J.

5 5 5 5

4 2 3 1

18. 19. 20. 21. 22. 23.

Lampe, James C. Tyson, Thomas N. Pearson, Michael A. Shafer, William E. Shaub, Michael K. Finn, Don W.

4 4 4 4 4 4

1 1

3

61.50 10.83 5.66 4.16

56.58 9.99 5.41 3.95

Warwick NYU Utah S Carol

Seton Hall Yeshiva Portland Cent Fla

2

4.50 4.33 2.66 2.36

4.18 4.27 2.51 2.27

Wiscon G Wash Mass Boston U

Maryland San Bern Bost Col Suffolk

1 4

1 1

3

1

4.50 4.50 4.00 3.25 2.66

4.69 4.10 4.05 2.97 2.60

Houston Maryland S Calif McGill UCLA

CS Sac SUNY Ge Ca P-SLO York Univ Ind S Bd

2 2 1

1

1 3 2 4

3.00 2.83 2.16 1.65

2.93 2.67 2.10 1.54

Missouri Indiana Va Com MIT

Kansas St Bentley Loyola M W Ontar

2 3 3 1 1

3 1 1

3.00 3.00 2.66 2.66 2.50 2.33

3.05 2.92 2.60 2.56 2.64 2.36

Michigan Ga State Kent St Houston Tx Tech Arkansas

Texas Tec St John F Kent St Peper LA S Mary Tx LSU

2 2

87

Q&Q Comp

JAEPP

62 13 11 9

1 1 1

Coauth Adj

Accounting Scholars Publishing in Ethics Journals

Table 7.

88

Table 7. (Continued ). Year/Name

Full Credit

Accounting RoAE

Geiger, Marshall A. Raiborn, Cecily A. Hill, Nancy T. Stevens, Kevin T.

4 4 4 4

28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47.

Lewellyn, Patsey G. Verschoor, Curtis C. Elias, Rafik Z. Bernardi, Richard A. Oliver, Bruce L. Sweeney, John T. Kaplan, Steven E. Radtke, Robin R. Malone, J. David Roberts, Robin W. Borkowski. Susan C. Gibson, Ann M. Coate, Charles J. Thompson, James H. Huss, H. Fenwick Siegel, Philip H. Smith, Aileen Arnold, Vicky Sutton, Steve G. Ruf, Bernadette M.

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

Grp Four

Coauth Adj

Q&Q Comp

Doctoral Col/Univ

2002-03 Col/Univ

2 4 1 2

1 1

2.16 1.83 1.49 1.49

1.89 1.76 1.44 1.43

Penn St LSU Wisconsin Kentucky

Richmond Loy N Orl DePaul DePaul

1 1 1

2 2 1

2.50 2.50 2.50 2.25 2.00 2.00 2.00 2.00 1.50 1.50 1.50 1.50 1.50 1.33 1.33 1.33 1.33 1.00 1.00 0.86

2.98 2.78 2.20 2.34 2.17 1.95 1.94 1.94 1.59 1.52 1.44 1.44 0.89 1.53 1.51 1.27 1.15 0.98 0.98 0.88

Va Tech N Illinois La Tech Union U Wash Missouri Illinois Florida Arkansas Arkansas Temple Wash St Maryland Oklahoma Tennessee Memphis LSU Arkansas Missouri Va Tech

S Car Aik DePaul Cameron Roger Wil Roch Tec Wash St Ariz St Tx San An Texas Tec Cen Flor LaSalle Andrews St Bonav Okla City Georgia St F Dick Ma S F Austin U Conn U Conn Akron

JAEPP

2 2 1

1 2

1 1 1 1 1 2 3 3 3

2 2 2

1 1 1

PE BPE

1 1

2 1

1 1 1

1 3

3 3 1

1

1

1

1 1

RICHARD A. BERNARDI

24. 25. 26. 27.

JoBE Plus

Authors with Three or More Articles Published in Ethics Journals between 1968 and 2002 Sorted by Coauthored-Adjusted Articles.

Rank and Name 1. 2. 3. 4. 5.

McGee, Robert W. Pava, Moses L. Yuthas, Kristi Bartlett, Roger W. Loeb, Stephen E.

Coauthor Adjusted

Q&Q Composite

Doctoral Institution

2002–2003 Institution

61.50 10.83 5.66 4.50 4.50

56.58 9.99 5.41 4.69 4.18

Warwick NYU Utah Houston Wisconsin

Seton Hall Yeshiva Portland CS Sacram Maryland

Mitschow, Mark C. Mintz, Steven M. Dillard, Jesse F. Armstrong, Mary Beth Thorne, Linda

4.50 4.33 4.16 4.00 3.25

4.10 4.27 3.95 4.05 2.97

Maryland G Wash S Carol S Calif McGill

SUNY Ge San Bern Cent Fla Cal P-SLO York Univ

11. 12. 13. 14. 15.

Lampe, James C. Fisher, Dann G. Tyson, Thomas N. Abdolmohammadi, M. J. Schwartz, Bill N.

3.00 3.00 3.00 2.83 2.66

3.05 2.93 2.92 2.67 2.60

Michigan Missouri Ga State Indiana UCLA

Texas Tec Kansas St St John Fis Bentley Ind S Bend

16. 17. 18. 19. 20.

Pearson, Michael A. Shafer, William E. Cohen, Jeffrey R. Lewellyn, Patsey G. Verschoor, Curtis C.

2.66 2.66 2.66 2.50 2.50

2.60 2.56 2.51 2.98 2.78

Kent St Houston Mass Va Tech N Illinois

Kent St Peper LA Bost Col S Car Aik DePaul

2.50 2.50

2.64 2.20

Tx Tech La Tech

S Mary Tx Cameron

21. Shaub, Michael K. 22. Elias, Rafik Z.

89

6. 7. 8. 9. 10.

Accounting Scholars Publishing in Ethics Journals

Table 8.

90

Table 8. (Continued ) Rank and Name

Coauthor Adjusted

Q&Q Composite

2002–2003 Institution

23. Pant, Laurie W. 24. Finn, Don W. 25. Bernardi, Richard A.

2.36 2.33 2.25

2.27 2.36 2.34

Boston U Arkansas Union

Suffolk LSU Roger Will

26. 27. 28. 29. 30.

Douglas, Patricia C. Geiger, Marshall A. Oliver, Bruce L. Sweeney, John T. Kaplan, Steven E.

2.16 2.16 2.00 2.00 2.00

2.10 1.89 2.17 1.95 1.94

Va Com Penn St U Wash Missouri Illinois

Loyola M Richmond Roch Tec Wash St Ariz St

31. 32. 33. 34. 35.

Radtke, Robin R. Raiborn, Cecily A. Sharp, David J. Malone, J. David Roberts, Robin W.

2.00 1.83 1.65 1.50 1.50

1.94 1.76 1.54 1.59 1.52

Florida LSU MIT Arkansas Arkansas

Tx San An Loy N Orl W Ontario Texas Tec Cen Flor

36. 37. 38. 39. 40.

Borkowski. Susan C. Gibson, Ann M. Coate, Charles J. Hill, Nancy T. Stevens, Kevin T.

1.50 1.50 1.50 1.49 1.49

1.44 1.44 0.89 1.44 1.43

Temple Wash St Maryland Wisconsin Kentucky

LaSalle Andrews St Bonav DePaul DePaul

41. 42. 43. 44. 45.

Thompson, James H. Huss, H. Fenwick Siegel, Philip H. Smith, Aileen Arnold, Vicky

1.33 1.33 1.33 1.33 1.00

1.53 1.51 1.27 1.15 0.98

Oklahoma Tennessee Memphis LSU Arkansas

Okla City Georgia St F Dick Ma S F Austin U Conn

1.00 0.86

0.98 0.88

Missouri Va Tech

U Conn Akron

46. Sutton, Steve G. 47. Ruf, Bernadette M.

RICHARD A. BERNARDI

Doctoral Institution

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Table 6 indicates that only 6.3 percent of accounting faculty members receiving accounting doctorates between 1968 and 1997 have one or more ethics publications in this study’s 22 ethics journals. Another striking contrast between the current data and Hasselback et al.’s (2003) data is the average number of full-credit articles per year group. In Hasselback et al.’s study, the average was 545 (16,336 articles/30 years) articles per year. Compare this to the current study’s total of 546 ethics articles or approximately 15 (546 articles/30 years) articles per year. Notable differences in the available journal sets between Hasselback et al. and the current study include: the number of available journals (i.e., 40 versus 22), the average age of the journals (30.5 versus 11.1 years) and the percent of the journals that exclusively publish accounting ethics research (i.e., 80 versus 9.1). The data provide a benchmark for productivity in ethics that faculty can use in tenure and promotion decisions. The data also support an in kind comparison for those authors who work concurrently in both the traditional areas that Hasselback et al. (2003) examined in their rankings and in the area of ethics. For deans and other decision makers, the study provides a source for comparing research productivity in the area of ethics when considering faculty for merit increases and/or course releases. While my study documents the level of ethics research, this research is more useful to the recent year groups in the study as their careers are just beginning. Finally, the focus of this article is on a set of 22 journals that publish ethics research because the 40 journals used by Hasselback et al. (2003) to rank prolific accounting authors do not explicitly list ethics as an area of interest. Names missing from my listings that anyone conducting ethics research would recognize as significant ethics scholars are Ponemon, Briloff, and Tinker. Ponemon is missing because the majority of his work is in top 40 accounting journals. While starting with 1968 graduates excludes Briloff (e.g., a 1965 graduate), requiring graduation from a U.S. doctoral program excludes Tinker from Table 5 rankings. Nevertheless, the criteria in this research are the same criteria as Hasselback et al. (2003) used. Three limitations of this study include: manually gathering the data, the need to estimate quality rankings and including only ethics journals in the study. Future research should examine perceptions of the quality ratings of ethics journals. Another avenue for future research is examining the productivity in areas other than those in Hasselback et al. (2003) and the current research.

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NOTES 1. There are no articles by accounting faculty in Business and Society for the period between 1962 (i.e., the first year of this journal’s publication) and 1967. 2. Starting with volume nine, Research on Accounting Ethics was renamed Research on Professional Responsibility and Ethics in Accounting to reflect the scope and aims of the journal. 3. The editors of the International Business Ethics Review and the Electronic Journal of Business Ethics and Organizational Studies did not respond to inquires about the acceptance rates of their journals.

ACKNOWLEDGMENT The author wishes to thank Barbara Kenney, Sue McMullen, and John Schlinke for their assistance during the data-gathering process.

REFERENCES Andrews, W. T., & McKenzie, P. B. (1978). Leading accounting departments revisited. The Accounting Review, 53(1), 135–138. Bernardi, R. A. (2004). A commentary on suggestions for providing legitimacy to ethics research in accounting education. Issues in Accounting Education, 19(1), 145–146. Bublitz, B., & Kee, R. (1984). Measures of research productivity. Issues in Accounting Education, 1(1), 39–60. Cabell, D. W. E. (2000a). Cabell’s directory of publishing opportunities in accounting (8th ed.). Beaumont, TX: Cabell Publishing Co. Cabell, D. W. E. (2000b). Cabell’s directory of publishing opportunities in management 2001–2002 (8th ed.). Beaumont, TX: Cabell Publishing Co. Campbell, D. R., Gaertner, J., & Vecchio, R. P. (1983). Perceptions of promotion and tenure criteria: A survey of accounting educators. Journal of Accounting Education, 1(1), 83–92. Campbell, D. R., & Morgan, R. G. (1987). Publication activity of promoted accounting faculty. Issues in Accounting Education, 2(1), 28–43. Cargile, B. R., & Bublitz, B. (1986). Factors contributing to published research by accounting faculties. The Accounting Review, 61(1), 158–178. Chung, K. H., Pak, H. S., & Cox, R. A. K. (1992). Patterns of research output in the accounting literature: A study of the bibliometric distributions. Abacus, 28(2), 168–185. Coe, R. K., & Weinstock, I. (1969). Evaluating journal publication: Perceptions versus reality. AACSB Bulletin, 6(1), 23–37. Hall, T. W., & Ross, W. R. (1991). Contextual effects in measuring accounting faculty perceptions of accounting journals: An empirical test and updated journal rankings. Advances in Accounting, 9, 161–182. Hasselback, J. R. (2002). Accounting faculty directory 2002–2003. Upper Saddle River, NJ: Prentice-Hall.

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Hasselback, J. R., & Reinstein, A. (1995). Assessing accounting doctoral programs by their graduates’ research productivity. Advances in Accounting, 13, 61–86. Hasselback, J. R., Reinstein, A., & Schwan, E. S. (2003). Prolific authors in accounting literature. Advances in Accounting, 20, 95–125. Jacobs, F. A., Hartgraves, A. L., & Beard, L. H. (1986). Publication productivity of doctoral alumni: A time-adjusted model. The Accounting Review, 61(1), 179–187. Jolly, S. A., Schroeder, R. G., & Spear, R. K. (1995). An empirical investigation of the relationship between journal quality ratings and promotion and tenure decisions. Accounting Educators’ Journal, 7(2), 47–68. Morris, J. L., Cudd, R. M., & Crain, J. L. (1990). The potential bias in accounting journal ratings: Evidence concerning journal-specific bias. Accounting Educators’ Journal 3(1), 46–55. Ostrowsky, B. A. (1986). First-time accounting faculty: The job search, acceptance and support processes. Issues in Accounting Education, 1(1), 48–55. Sabrin, M. (2002). A ranking of the most productive business ethics scholars: A five-year study. The Journal of Business Ethics, 36(4), 355–379. Schroeder, R. G., Payne, D. D., & Harris, D. G. (1988). Perceptions of accounting publications outlets: A further analysis. The Accounting Educators’ Journal, 1(2), 1–17. Schultz, J. J., Meade, J., & Khurana, I. (1989). The changing roles of teaching, research, and service in the tenure and promotion decisions for accounting faculty. Issues in Accounting Education, 4(1), 109–119. Williams, D. E. (2000). College and university rankings. Choice, 37(August), 44–45. Windal, F. W. (1981). Publishing for a varied public: An empirical study. The Accounting Review, 56(3), 653–658.

CPAS IN PUBLIC PRACTICE: WHAT CODE DO THEY USE WHEN FACED WITH AN ETHICAL DILEMMA? Marshall K. Pitman and Robin R. Radtke ABSTRACT This study investigates how CPAs in public practice respond to varying ethical situations and the main basis for their responses (professional code, firm code, or personal code). Responses from 151 CPAs suggest that although their responses to ethically sensitive situations are generally consistent with the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct, the reported basis for their decisions was more often their personal code of conduct or the firm’s code. This result implies that CPAs may not refer to the AICPA Code of Professional Conduct as much as they should when faced with ethical dilemmas. Suggestions as to how the profession can better train CPAs to deal with ethical dilemmas and increase familiarity with and usage of the AICPA Code of Professional Conduct are given.

INTRODUCTION CPAs may be bound by several different formal codes of ethics (e.g., American Institute of Certified Public Accountants (AICPA) Code of Research on Professional Responsibility and Ethics in Accounting Research on Professional Responsibility and Ethics in Accounting, Volume 10, 95–122 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1574-0765/doi:10.1016/S1574-0765(05)10004-1

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Professional Conduct1 (hereafter referred to as ‘‘the Code’’), codes of State Boards of Accountancy, codes of State Societies of CPAs, and a firm’s code of conduct). When faced with an ethical dilemma, however, they may ultimately turn to their own personal code of conduct for guidance. While we argue that the more stringent code should be adhered to, given that ethical dilemmas are often not discussed among CPAs, we concede that enforcement of this suggestion may be problematic. Uniform use of the Code would ensure consistency across CPAs, as well as consistency with guidelines and rules developed by the AICPA. In order to investigate how CPAs in public practice make ethical decisions and the basis for those decisions, we surveyed a sample of CPAs in public practice. We gathered responses to potential ethical dilemmas, as well as information about the importance and use of various codes of ethics (professional code, firm code, and personal code). Our results show that ethical responses were generally consistent with the Code, however, CPAs did not always indicate that the Code was used as the primary basis for their decisions. These results are problematic, if we assume that the Code should be used as a reference for guidance in most ethical situations. We offer suggestions as to how the profession can better train CPAs to deal with ethical dilemmas and increase familiarity with and usage of the Code.

BACKGROUND AND RESEARCH QUESTIONS Support for a Code of Ethics The need for codes of ethics in business is generally accepted, even if the effectiveness of codes is somewhat questionable (see Loe, Ferrell, & Mansfield (2000); Schwartz (2001) for reviews of empirical research on code effectiveness). Generally, a code of ethics can be thought of as ‘‘y a written, distinct, and formal document which consists of moral standards used to guide employee or corporate behavior’’ (Schwartz, 2001, p. 248). Possible functions of codes of ethics include educating employees about the proper values of the organization (Benson, 1989) and serving as a foundation to build an ethical culture to govern or manage corporate behavior (Brooks, 2000). Wotruba, Chonko, and Loe (2001, p. 59) list three major purposes that codes of ethics can serve in organizations as, ‘‘y demonstrating a concern for ethics by the organization, transmitting ethical values of the organization to its members, and impacting the ethical behavior of those members.’’

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According to Boatright (2003, p. 401), the benefit of having a written code of ethics is that, ‘‘y a written document enables an organization to clarify standards that may otherwise be vague expectations, left to individual interpretation.’’ This certainly applies to a profession as well. Higgins and Olson (1972, p. 33) suggest that a code of ethics is central to the process of professional self-discipline in the accounting profession in that, ‘‘Members must have a clear understanding of the requirements and underlying philosophy of ethical behavior if they are to be motivated to perform in a manner which will maintain the confidence of a discerning public.’’ Because the accounting profession is afforded monopoly status and accounting itself involves a large amount of judgment and is oriented toward serving the public interest, Preston, Cooper, Scarbrough, and Chilton (1995) suggest that the foundation of the profession rests on a code of ethics and moral schema instead of standardization and regulation. While the Code underwent a major revision in 1988 that resulted in a list of general principles and rules of conduct for CPAs, new interpretations and rulings are constantly being added. Moriarity (2000) suggests that the profession’s self-regulation has improved since the adoption of the new code. The requirement of many state boards of accountancy that all new CPAs take an ethics course and/or pass an ethics examination prior to certification2 and requiring CPAs to correct deficiencies through additional education are consistent with this trend. Penalties associated with violating the Code continue to be invoked, however, and include admonishing the CPA, suspending the CPA’s membership in the state society and the AICPA for up to two years, and expelling the CPA from the state society and the AICPA (Badawi, 2002).

The Problem of Multiple Codes As discussed earlier, CPAs may be bound by multiple codes of ethics and these codes may not always be entirely consistent with respect to suggested behavior. Badawi (2002, p. 72) states, ‘‘y there are several codes, each comprised of numerous technical and ethical guidelines’’ and that CPAs ‘‘y are counted on to conduct themselves according to the ethical rules prescribed in the bylaws or codes of any accounting groups they have joined.’’ Badawi (2002, p. 73) lists as sources of codes such groups as the AICPA, State Boards of Accountancy, State Societies of CPAs, Institute of Management Accountants, Institute of Internal Auditors, Securities and Exchange Commission, and Internal Revenue Service. Many large

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accounting firms may also have a firm code of conduct or ethics. Thus, even though most codes may have much in common, any difference in standards may leave the CPA to question which code is the appropriate one to use. According to the Code, These Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants express the profession’s recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage (AICPA, 2003, CPC, ET y51.02).

The Code governs many different areas, but the Ethics Rulings section is of particular interest. Specifically, Ethics Rulings consist of formal rulings made by the professional ethics division’s executive committee after exposure to state societies, state boards, practice units and other interested parties. These rulings summarize the application of Rules of Conduct and Interpretations to a particular set of factual circumstances. Members who depart from such rulings in similar circumstances will be requested to justify such departures (AICPA, 2003, CPC, Introduction, Other Guidance).

Thus, the AICPA’s position on the Ethics Rulings is quite clear, is easily accessible (in hard copy or via the internet), and should be generally understood by the AICPA membership. Accordingly, CPAs are expected to follow the Code, unless circumstances justify departure. In addition to formal codes of ethics, many organizations have informal codes of ethics (Parker, 1994; Pierce & Henry, 1996; Sims & Keon, 2000), and each individual certainly has a personal code of ethics. Pierce and Henry (1996, p. 426) suggest that employees may also rely upon an informal code, which is defined as ‘‘y accepted behavior in the work-place or peer expectations.’’ Informal codes also arise within professions to guide behavior among members of the profession (Parker, 1994). Additionally, it is logical to assume that personal codes of ethics or values may impact business decisions and several studies confirm this relationship (Allen & Davis, 1993; Nonis & Swift, 2001). Pierce and Henry (1996) found that employees believe they have a strong personal code of ethics and that this code is what they use most in the workplace. Several studies also suggest that personal views and human judgment affect interpretations of and actions related to codes of ethics (Summers, 1996; Mabry, 1999). In terms of how a CPA deals with decision making while being bound by varying codes of ethics, it may be helpful to refer to Ajzen and Fishbein’s (1980) theory of reasoned action. According to their theory, both a CPA’s attitude toward a behavior and perceptions of social pressures concerning a

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behavior influence whether the CPA will engage in a behavior. The ‘‘y relative importance of the attitudinal and normative factors as determinants of intentions’’ (Ajzen & Fishbein, 1980, p. 6) is critical in determining whether the CPA will engage in the behavior. Thus, if the CPA feels, for example, that his/her personal attitude is the most important factor to the exclusion of all others, then the CPA will perform the behavior if he/she is in favor of performing the behavior. This would be consistent with the results of previous studies that indicate that business graduates and executives believe that ethical conduct is primarily influenced by family training (Arlow & Ulrich, 1988; Wiley, 2000), instead of other sources such as professional organizations or college education. While this study has identified three main types of codes of ethics that may potentially bind the CPA (the Code, a firm code, and a personal code), the interconnectedness of these codes (and the permutations thereof, such as the code of a state society or an informal code of a company) may be difficult to ascertain and is beyond the scope of this research. Specifically, there may be overlapping rules or norms that are part of each code and are thus consistent across the codes. Additionally, rules that are part of a formal code (be it the Code or a firm code) may as a consequence of membership or employment, be assimilated into the CPA’s personal code. In either of these situations it may be difficult to ascertain if any one particular code is the basis for an ethical decision.

The Rule-Based CPA Prior research on ethical development has shown that CPAs’ levels of moral development are generally lower than those of non-accountants with similar educational and socio-economic backgrounds (Armstrong, 1984; Ponemon, 1988). Additionally, several studies report the existence of an inverse relationship between level of moral reasoning and position level within the firm (Ponemon, 1990, 1992; Shaub, 1994; Sweeney, 1995) that suggests accounting firm socialization, wherein only those accountants with moral development levels similar to management are promoted within the firm (Ponemon, 1992). More recent studies based on longitudinal data, however, refute this finding (Bernardi & Arnold, 2004; Scofield, Phillips, & Bailey, 2004). The earlier results have been generally reported as a negative finding, but Louwers, Ponemon, and Radtke (1997) suggest that society may expect accountants to have lower levels of moral reasoning, as members of a rulebased profession that is charged with acting in the best interest of the public.

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Specifically, Lampe and Finn (1992) and Lampe (1994) suggest that accountants may self-select into a rule-based profession in which deviation from the rules is discouraged. Thus, if the Code is consistent with the best interest of the public, then the rule-based CPA is meeting society’s expectations. We would, therefore, expect that both CPAs’ ethical decisions are consistent with the Code and that the Code is the basis for these decisions.

Research Questions We examine empirically these two research questions: RQ1. Are CPAs’ ethical decisions consistent with the Code? RQ2. Are CPAs’ ethical decisions based on the Code?

METHODOLOGY Sample In order to investigate this multiple code issue in the context of CPAs’ ethical decisions, we sent a survey questionnaire to 500 members of a large metropolitan chapter of a large state society of CPAs. All participants selected for inclusion in the sample were CPAs in public practice. According to the Code of the state society, all members are subject to both the AICPA and the State Board of Accountancy rules. A total of 151 responses were received for a response rate of 30.2%.3 The average age of the participants was 45.9 (standard deviation ¼ 10.8) and the average years of work experience was 20.1 (standard deviation ¼ 10.1). Of the 147 participants who reported their gender, 49 were female (33.3%) and 98 were male (66.7%). The sample was predominantly Caucasian (123 participants, 83.7% of the 147 who reported ethnicity), with Hispanic participants making up the majority of the remaining participants (20 participants, 13.6%). Analyses were run to investigate possible effects of the control variables age, firm type, and work area within the firm. There were no significant within-variable differences, and thus, for parsimony, pooled results are reported.

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Research Instrument The research instrument contains four main parts and is included in the appendix in its entirety. Part I gathers information on the work experience of the participants and demographic data. Part II asks participants whether they have ever faced an ethical dilemma at work and how they resolved the dilemma. Part III is fashioned after a portion of the survey used by Pierce and Henry (1996, p. 436) and asks questions about the participants’ use and perceived importance of the different types of codes of ethics/conduct: professional, firm, and personal. Part IV asks participants to respond to five ethically sensitive cases and indicate the primary bases for their decisions.

Description and Development of the Cases The five cases in Part IV of the questionnaire were developed to gather specific data in regards to our two research questions (Are CPAs’ ethical decisions consistent with the Code? and Are CPAs’ ethical decisions based on the Code?). All cases were pre-tested with CPAs to ensure that they were clear and easy to understand. Based upon discussions with practicing CPAs as part of the pre-testing of the instrument, it was decided that five cases were probably the maximum that could be asked to ensure a reasonable response rate. Also based on these discussions, the final mixture of cases was decided upon from an initial group of 10 case concepts. These five cases were chosen to ensure inclusion of both timely and relevant issues that were integrally related to the research questions and represent some of the major issues facing the accounting profession today including client retention and risk, management advisory services, confidentiality, independence, and an aggressive client. The cases were based on three different sources: discussion with a practicing CPA (case 1), Ethical Rulings or interpretations of the Code (cases 2–4), and press coverage of a recent audit failure (case 5). Each of the cases is briefly discussed below. The first case deals with the CPA having to decide whether to retain a long-term client. This case is not Code based, but represents a recent dilemma faced by a practicing CPA. It is specifically included in the survey as a control to see if accountants attempt to look to the Code for guidance in situations that are not covered in the Code. In this case, the CPA had fulfilled his/her professional responsibility, as set forth by the appropriate section of Statements on Responsibilities in Tax Practice4 (TS y600.03) by informing the client of a significant error and its impact on the tax liability

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in a previously filed tax return. After an extended period of time, the client had not filed a corrected tax return, nor did the financial records indicate the additional tax liability. The participants were asked if they would retain this long-term client. It was anticipated that the answer would be no; they would not retain the client. The second case is concerned with whether the CPA should undertake an investment management and advisory service for a current client who requests the CPA to have complete discretionary authority over the client’s investments. The CPA was asked if they would accept the client for the investment management and advisory service subject to the client’s stipulation. The basis for this case is an interpretation to the Code (ET y101.05). This interpretation indicates that the CPA’s independence would be impaired for an attest client, and, accordingly, it was anticipated that the participants would answer no; they would not accept the client for this service with the specified condition. Case 3 is concerned with whether the CPA can provide certain confidential information contained in prior years’ filed joint tax returns to a divorcing spouse, even though in the past the firm has dealt with the other spouse. The CPA is asked if they would provide the information to the requesting spouse, in spite of the client spouse’s directive not to do so. The basis for this case is an Ethical Ruling of the Code (ET y391.05). According to the Ruling, both spouses are considered to be the CPA’s clients and, accordingly, the CPA could release the information contained in the prior years’ filed tax returns to either spouse without violating the Code’s Rule on Confidential Information. Therefore, it was anticipated that the participants would answer yes; they would give the information to the requesting spouse. In the fourth case, a practicing CPA is faced with the issue of whether to agree that his/her spouse (not part of the CPA’s firm) should perform certain services for an attest client for a contingent fee. This case is based on an Ethical Ruling of the Code (ET y391.038). This ruling permits the CPA’s spouse to perform the service for a contingent fee for the CPA’s attest client without violating the Code’s Rule on contingent fees.5 Therefore, it was anticipated that the participants would answer yes; they would agree that their spouse should accept a contingent fee for a service performed for the CPA’s attest client. In the final case, the CPA is asked whether he/she would retain an audit client, whose fees accounted for more than 10% of the firm’s fees, that uses very aggressive revenue recognition policies (so aggressive that the financial statements are on the verge of being misleading). The recent Enron business failure is the basis for this case; however, an interpretation of the Code

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(ET y102.05) may also be applied. The CPA may be subordinating his/her judgment to the client in favor of the high audit fee. If that is so, the client should not be retained. Accordingly, it was anticipated that the participants would answer no; they would not retain the client.

RESULTS Preliminary Results An interesting result is that even though the mean work experience of the participants is more than 20 years, 86 (57.0%) of the participants reported that they had never faced an ethical dilemma at work. This response may of course be a function of the fact that each participant may have a different conception of what constitutes an ethical dilemma, although the questionnaire gave the interpretation of ‘‘y a situation where there was uncertainty about ethical obligations or when considerations of ethics came into conflict with the practical demands of business.’’ If an individual does not recognize that a moral issue exists, he/she will not invoke the moral decision-making process. Thus, recognition of an ethical issue is a necessary step in analyzing ethical dilemmas and reaching ethical decisions. Velasquez and Rostankowski (1985) suggest that moral issues exist if freely performed actions may harm or help others; the individual must recognize that he/she is a moral agent. Previous research (Dreike & Moeckel, 1995) suggests that even though ethical situations may be developed to be consistent with the Velasquez and Rostankowski (1985) definition, many subjects may not actually perceive that the situations actually contain an ethical issue (only 56% of the situations were viewed as containing an ethical issue by the 66 auditors in the study). Mere recognition of a moral issue does not guarantee that the moral decision-making process will be undertaken. The issue must also be judged to be of high-moral intensity. Jones (1991) posits six components of moral intensity: magnitude of consequences, social consensus, probability of effect, temporal immediacy, proximity, and concentration of effect. As suggested by Jones (1991), moral intensity will likely vary significantly among moral issues, with most issues warranting only low levels and only a few high levels. Hooks and Tyson (1995) include the notion of moral intensity in their analysis of the issues of workplace changes in public accounting resulting from increasing gender diversity. Moral intensity has been included as a critical factor in numerous other business ethics studies including Douglas,

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Davidson, and Schwartz (2001), May and Pauli (2002), and Paolillo and Vitell (2002), for example. Given the importance of recognizing an ethical issue, the data was partitioned based on whether participants reported that they had faced an ethical dilemma. No significant effects were found for this variable. In Part III of the questionnaire, the responses to the first two questions are especially enlightening.6 When asked, ‘‘Which code of ethics is the most important in guiding employee behavior in your firm?’’ 23 participants responded the firm’s code, 55 the profession’s code, and 72 their personal code. Additionally, when asked, ‘‘Which code of ethics do you use the most?’’ only 12 responded the firm’s code, 38 the profession’s code, and 100 their personal code. Thus the vast majority, 100 (66.7%) indicated that they use their own personal code of ethics the most in the workplace.

Discussion of Research Questions Participants’ responses to the five case scenarios are shown in Table 1. As mentioned above, three of the cases are representative of issues actually addressed in the Code (cases 2–4), one issue is modeled after the Enron situation as well as the Code (case 5), and one issue is not Code based (case 1). The anticipated responses, either from an ethical basis or based on the Code, should have been no to cases 1, 2, and 5 and yes to cases 3 and 4. The percentage of responses consistent with the anticipated response ranges from a low of 2.7% for case 4 to a high of 70.0% for case 2. When the ‘‘probably’’ responses are combined with the anticipated responses, these percentages range from a low of 8.7% for case 4 to a high of 86.0% for case 2, with the other percentages being 52.0%, 68.0%, and 81.1% for cases 1, 3, and 5, respectively. Thus, in four of the five cases, over half of the participants responded either that they would or probably would choose the ethically anticipated or Code-based response. Table 2 shows the primary basis used for each case decision. With cases 2–4 being specifically based on the Code and case 5 also being related to the Code, the anticipated basis for each question is indeed the Code. Case 1 is not based on the Code and the anticipated basis is each participant’s personal code of ethics. Responses in Table 2 do not match the majority figures reported for the case responses above. In fact, in only case 4 (dealing with whether a non-CPA spouse may perform contingent fee services for an attest client) the percentage of participants indicating the Code as the basis for their decision is over 50%. It should be noted, however, that more than 80% of the participants did not give the Code based response anticipated for this

Case 1

2

3

4

5

Case Description

Yes

Probably Yes

Unsure

Probably No

No

Total

The CPA must decide whether to retain a long-term client who refuses to file a corrected tax return The CPA must decide whether to undertake an investment management and advisory service with a client who wants to give the CPA complete discretionary authority over the client’s investments The CPA must decide whether to provide prior years’ joint tax returns to one spouse even though the other spouse has directed the CPA not to do so The CPA must decide whether to permit his/her business person spouse to perform a service for a contingent fee for one of the CPA’s attest client The CPA must decide whether to retain a long-term audit client (accounting for more than 10% of the firm’s fees) whose aggressive revenue recognition policies are on the verge of causing the financial statements to be misleading

10 (6.7%)

30 (20.0%)

32 (21.3%)

57 (38.0%)

21 (14.0%)

150

2 (1.3%)

5 (3.3%)

14 (9.3%)

24 (16.0%)

105 (70.0%)

150

53 (35.3%)

49 (32.7%)

24 (16.0%)

12 (8.0%)

12 (8.0%)

150

4 (2.7%)

9 (6.0%)

10 (6.7%)

32 (21.3%)

95 (63.3%)

150

2 (1.4%)

6 (4.1%)

20 (13.5%)

77 (52.0%)

43 (29.1%)

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Table 1. Responses to Case Scenarios.

Note: Ethically anticipated or Code-based responses are shown in bold. Additionally, note that some participants did not respond to all questions.

105

106

Table 2. Case

2

3

4

5

Case Description

The CPA must decide whether to retain a long-term client who refuses to file a corrected tax return The CPA must decide whether to undertake an investment management and advisory service with a client who wants to give the CPA complete discretionary authority over the client’s investments The CPA must decide whether to provide prior years’ joint tax returns to one spouse even though the other spouse has directed the CPA not to do so The CPA must decide whether to permit his/her business person spouse to perform a service for a contingent fee for one of the CPA’s attest client The CPA must decide whether to retain a long-term audit client (accounting for more than 10% of the firm’s fees) whose aggressive revenue recognition policies are on the verge of causing the financial statements to be misleading

Primary Basis for Decision

Total

Firm Code

Professional Code

Personal Code

27 (18.8%) 28 (19.2%)

48 (33.3%) 40 (27.4%)

69 (47.9%) 78 (53.4%)

144

30 (20.8%)

68 (47.2%)

46 (31.9%)

144

21 (14.3%)

83 (56.5%)

43 (28.5%)

147

38 (26.0%)

65 (44.5%)

43 (29.5%)

146

146

Note: Anticipated bases for responses are shown in bold. Additionally, note that some participants did not respond to all questions.

MARSHALL K. PITMAN AND ROBIN R. RADTKE

1

Primary Basis for Decision by Case.

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case. Thus, while the answers for cases 2–5 could have actually been found in the Code, the majority of the participants instead used either their personal code of conduct or the firm’s code of conduct, with the personal code of conduct being the more frequently used of the two. Even though the majority of participants chose the Code based response (for cases 2, 3, and 5), many did not use the Code as the basis for their response. This suggests that in other situations, use of a basis other than the Code may lead to a response inconsistent with the Code. Statistical analysis of responses to the four Code based cases and their decision bases was conducted using binomial tests.7 For this purpose, the data were recoded into two groups: the Code-based responses including the corresponding ‘‘probably’’ responses as one group and the responses inconsistent with the Code and the corresponding ‘‘probably’’ responses as the second group. The ‘‘unsure’’ responses were thus eliminated for data analysis, since they did not represent a response that was either consistent or inconsistent with the Code.8 Table 3 reports the combined numbers and p values for each case. Results for cases 2, 3, and 5 were significant at p ¼ 0:000; respectively, and consistent with the Code-based response, while case 4 was also significant at p ¼ 0:000; but as discussed earlier, responses were inconsistent with the Code. Thus, the answer to the first research question (Are CPAs’ ethical decisions consistent with the Code?) is yes, in three of the four cases included in the study. Similarly, binomial tests of the primary bases used for the four Code-based case decisions were also analyzed and are presented in Table 4. The data were recoded such that the Code, as the anticipated decision basis, represented one group of data and the other two possible bases (firm code and personal code) were combined into the second group. The binominal tests for cases 3–5 were insignificant, which indicates that these results may have been due to chance or random responses. The binomial test for case 2 was significant at p ¼ 0.000, but in the opposite direction from what was expected; participants chose their own personal code over 50% of the time, when the Code would have been the most authoritative decision basis for this case. This indicates that there was no consensus usage of the Code as the decision basis for each case. As a result, the answer to the second research question (Are CPAs’ ethical decisions based on the Code?) is no, not in the four cases included in this study. Discussion of Results Analysis of case 1 was performed separately from the other cases, since case 1 is not Code based. Binomial tests were performed for both the responses and

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Table 3. Case

1

3

4

5

Case Description

Yes and Probably Yes

No and Probably No

p Value

The CPA must decide whether to retain a long-term client who refuses to file a corrected tax return The CPA must decide whether to undertake an investment management and advisory service with a client who wants to give the CPA complete discretionary authority over the client’s investments The CPA must decide whether to provide prior years’ joint tax returns to one spouse even though the other spouse has directed the CPA not to do so The CPA must decide whether to permit his/her business person spouse to perform a service for a contingent fee for one of the CPA’s attest client The CPA must decide whether to retain a long-term audit client (accounting for more than 10% of the firm’s fees) whose aggressive revenue recognition policies are on the verge of causing the financial statements to be misleading

40

78

0.001

7

129

0.000

102

24

0.000

13

127

0.000

8

120

0.000

Note: Ethically anticipated or Code-based responses are shown in bold. Additionally, note that some participants did not respond to all questions.

MARSHALL K. PITMAN AND ROBIN R. RADTKE

2

Results of Binomial Tests of Responses to Case Scenarios.

Case

Results of Binomial Tests of Primary Basis for Decision by Case. Case Description Personal Code

1 2

3

4

5

The CPA must decide whether to retain a long-term client who refuses to file a corrected tax return The CPA must decide whether to undertake an investment management and advisory service with a client who wants to give the CPA complete discretionary authority over the client’s investments The CPA must decide whether to provide prior years’ joint tax returns to one spouse even though the other spouse has directed the CPA not to do so The CPA must decide whether to permit his/her business person spouse to perform a service for a contingent fee for one of the CPA’s attest client The CPA must decide whether to retain a long-term audit client (accounting for more than 10% of the firm’s fees) whose aggressive revenue recognition policies are on the verge of causing the financial statements to be misleading

p Value

Primary Basis for Decision

69

Firm and Professional Code Professional Codes

Firm and Personal Codes

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Table 4.

0.738 40

105

0.000

68

76

0.560

83

63

0.116

65

80

0.245

Note: Anticipated bases for responses are shown in bold. Additionally, note that some participants did not respond to all questions.

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the decision bases, as described above. Results showed that case 1 was significant at p ¼ 0:001 (see Table 3) and consistent with the ethically anticipated response. The basis for case 1 should be each participant’s personal code of ethics, as mentioned above, but a binomial test on the decision basis used for case 1 showed insignificant results (see Table 4). Over half (52.1%) of the participants reported using either the firm code or the Code as a basis for their responses to case 1, even though this case is not covered in the Code and may not be included in firm codes either.9 Thus, as a control case, case 1 mirrors the results for cases 2, 3, and 5 in that the correct response was chosen using a basis other than the professionally authorized code. Results for cases 2 and 4 warrant additional discussion. For case 4, as reported above, nearly 85% of the participants reported that they did not agree that their spouse should perform services for a contingent fee for a current attest client, even though this is allowed under the Code (ET y391.05). At the same time, however, over half of the participants reported that they used the Code as a basis for their decision in case 4. This signals that with respect to this issue, the Code is not consistent with both the views of CPAs in public practice and public opinion. In developing the questionnaire, case 4 was not intended to be a ‘‘trick’’ question and was not singled out as being drastically different from the other cases when the instrument was pre-tested with a small group of CPAs in public practice. There are at least two possible reasons for the responses received. First, although the Code states that spouses of CPAs are permitted to perform the service, they are certainly not required to do so. Second, there may have been confusion in CPAs’ minds about this rule and the independence rule regarding direct financial interest in an attest client. It is most likely that participants were not knowledgeable of the requirements of the Code with respect to this issue. Case 2 represents the opposite of the phenomenon observed in case 4. In case 2, a full 86.0% indicated that they would not accept a client who gave them investment funds with the caveat that they maximize return on investment. This response is consistent with the Code’s requirement. At the same time, however, only 27.4% indicated that they used the Code as the basis for their decision, while over half of the participants reported using their personal code as a decision basis. In this situation, one might wonder whether the Code has been incorporated into what one would call their personal code of ethics. In other words, since this behavior is quite obviously contrary to the function of a CPA, this rule has now become part of the individual’s own ethical thought process, as was discussed previously. The interconnectedness of the various codes of ethics is, without a doubt, very difficult to determine.

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CONCLUSION Results of this study suggest that, although CPAs’ responses to ethically sensitive situations are generally consistent with the Code, the reported basis for their decisions was more often their personal code of conduct or the firm’s code. This suggests that CPAs may not refer to the Code when faced with ethical dilemmas. While use of their personal codes led to decisions consistent with the Code in the current study, there is no guarantee that this will always be the case, since the CPA may have arrived at the Code based decision by chance or luck. These results are somewhat troubling given the increased scrutiny of the accounting profession following the recent deluge of corporate collapses. Recommendations Based on the results of the current study, it appears that CPAs need to become more familiar with the Code and more aware that it should be used as a basis for guidance when faced with situations with an ethical component. General suggestions for the profession include familiarization of new recruits with the Code as soon as they join the accounting firm. As mentioned previously, about half of the State Boards of Accountancy require all new CPAs to take an ethics course and/or pass an ethics examination prior to certification and some states are moving toward requiring an ethics course prior to sitting for the CPA exam. Most of the time, the required course is the AICPA Ethics course, which is based directly on the Code. While this trend is encouraging, it would most likely be beneficial to have this ethics training immediately at the commencement of employment for all new employees. Additionally, the AICPA’s Division of Professional Ethics publishes and revises Ethical Rulings and interpretations on a regular basis in order to help CPAs maintain compliance with the Code’s ethical and technical concepts (Badawi, 2002). These publications answer questions and help explain particular rules and would also be of use in continuing ethics education. Additionally, Ashkanasy, Falkus, and Callan (2000) suggest that the onus is on senior management to encourage use of the formal code of ethics by employees in order to promote a greater sense of an ethical community within the organization. In a survey of employees in the public sector in Australia, they found that use of a formal code by others in the organization was the main predictor of code use by any one individual. In other words,

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the more employees who use the code, the more likely any one employee will observe others’ use of the code and will, thus, be more likely to use the code him/herself. This recommendation is certainly applicable to the accounting profession and individual accounting firms as well. Another important aspect in promoting use of a formal code of ethics in any organization is the ‘‘clear support of top-level management’’ (Boatright, 2003, p. 402). It seems, however, that even though firm training may espouse the virtues of ethics, partners of many public accounting firms may not lead by example. Consistent with the results of the current study, it appears that auditors involved in recent accounting scandals and resultant business failures may have used their personal code of conduct as a basis for their decisions. Unlike the current study, in these cases, their decisions were obviously not consistent with the Code, but rather were focused on promoting self interest. Thus, even though previous research suggests that accountants may self-select into a rule-based profession in which deviation from the rules is discouraged (Lampe & Finn, 1992; Lampe, 1994), recent examples suggest otherwise. Future research into the inner workings of public accounting firms should attempt to examine this behavior, in efforts to stem the tide of unethical behavior within the accounting profession.

Limitations Limitations of the current study include the sample being drawn from one large metropolitan chapter of a state society of CPAs. Any regional biases present in this sample may limit the generalizability of the results to other CPAs. Another limitation lies in the fact that responses from participants may suffer from a social desirability bias wherein they respond in an ethical manner because they believe that’s what the researcher expects them to do. As mentioned earlier, 86 (57.0%) of the participants reported that they had never faced an ethical dilemma at work. Also, nearly 85% of the participants reported that they would not allow their spouse to perform services for a current attest client, even though this is allowed under the Code (presumably to avoid the appearance of a conflict of interest). A potentially confounding factor exists in the interconnectedness of the various codes of ethics. As mentioned previously, some codes may have overlapping rules (such as the Code and a firm code) or some rules included in a formal code may become part of an individual’s personal code as a consequence of membership or employment. Additionally, as is the case with many surveys, no incentive was provided to participants to submit

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serious and honest responses. Limitations typically associated with exploratory research and survey instruments apply to this study as well. Concluding Remarks Notwithstanding these general limitations, the results of this study suggest that even though most CPAs are probably making ethical decisions consistent with the recommendations of the Code, they may not be using the Code as a basis for these decisions as often as they should. Given the increased scrutiny currently besieging the accounting profession, adherence to ethical standards adopted in the Code is paramount in order to protect the public interest. If the accounting profession continues to be denigrated by implications of ethical misconduct, the rights and privileges afforded the profession may be revoked, changing the nature of the accounting profession for some time to come.

NOTES 1. The Code of Professional Conduct may be found in the AICPA Professional Standards (AICPA, 2003) as the ET section. 2. Each State Board of Accountancy lists requirements for sitting for the CPA examination, as well as becoming certified on its website. All websites can be accessed via the National Association of State Boards of Accountancy website at www.nasba.org. 3. The current response rate of 30.2% is consistent with that of many previous mail questionnaires (Kerlinger, 1986; Cooper & Emory, 1995). Alreck and Settle (1995, p. 35) state, ‘‘Mail surveys with response rates over 30 percent are rare.’’ Additionally, no indication of non-response bias was found based on a comparison of the first and last 10% of the participants. 4. The Statements on Responsibilities in Tax Practice may be found in the AICPA Professional Standards (AICPA, 2003) in the TS section. 5. A similar Ruling (ET y591.374) provides the same answer for a CPA’s spouse receiving a commission from the CPA’s attest client. 6. Note that the sum of the responses is 150, as one participant did not answer these two questions. 7. Parametric tests showed qualitatively similar results and owing to potential violations of assumptions underlying these tests, are not shown in the body of the paper. 8. For example, for case 1, the ethically anticipated response is ‘‘no.’’ Therefore, the 21 ‘‘no’’ responses were combined with the 57 ‘‘probably no’’ responses, for a total of 78. This group was compared with the ‘‘yes’’ and ‘‘probably yes’’ responses, which summed to 40. Using a binomial test with the expected group percentages of 50/50, case 1 is significant at p ¼ 0:001:

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9. The authors attempted to acquire ethics codes from several of the Big 4 firms, but at the time of inquiry were unable to do so, as the firms contacted stated that their ethics codes were proprietary in nature.

ACKNOWLEDGMENTS The authors would like to acknowledge the helpful comments of workshop participants at the University of Texas at San Antonio and the insightful comments of James Groff, Karen Hooks, Tim Louwers, John McEnroe, David Ricchiute, and two anonymous reviewers.

REFERENCES Ajzen, I., & Fishbein, M. (1980). Understanding attitudes and predicting social behavior. Englewood Cliffs, NJ: Prentice-Hall. Allen, J., & Davis, D. (1993). Assessing some determinant effects of ethical consulting behavior: The case of personal and professional values. Journal of Business Ethics, 12, 449–458. Alreck, P., & Settle, R. (1995). The survey research handbook. New York, NY: McGraw-Hill. American Institute of Certified Public Accountants (AICPA). (2003). AICPA professional standards. New York, NY: AICPA. Arlow, P., & Ulrich, T. (1988). A longitudinal survey of business school graduates’ assessments of business ethics. Journal of Business Ethics, 7, 295–302. Armstrong, M. (1984). Internalization of the professional ethic by certified professional accountants: A multidimensional scaling approach. Unpublished Ph.D. dissertation, University of Southern California, Los Angeles, CA. Ashkanasy, N., Falkus, S., & Callan, V. (2000). Predictors of ethical code use and ethical tolerance in the public sector. Journal of Business Ethics, 25, 237–253. Badawi, I. (2002). Accounting codes of conduct, violations and disciplinary actions. Review of Business, 23(Winter), 72–76. Benson, G. (1989). Codes of ethics. Journal of Business Ethics, 8, 305–319. Bernardi, R., & Arnold, D. (2004). Testing the ‘‘Inverted-U’’ phenomenon in moral development on recently promoted senior managers and partners. Contemporary Accounting Research, 21, 353–367. Boatright, J. (2003). Ethics and the conduct of business. Upper Saddle River, NJ: Prentice-Hall. Brooks, L. (2000). Business & professional ethics for accountants. Cincinnati, OH: South-Western College Publishing. Cooper, D., & Emory, E. (1995). Business research methods. Chicago, IL: Richard D. Irwin. Douglas, P., Davidson, R., & Schwartz, B. (2001). The effect of organizational culture and ethical orientation on accountants’ ethical judgments. Journal of Business Ethics, 34, 101–121. Dreike, E., & Moeckel, C. (1995). Perceptions of senior auditors: Ethical issues and factors affecting actions. Research on Accounting Ethics, 1, 331–348.

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Higgins, T., & Olson, W. (1972). Restating the ethics code: A decision for the times. The Journal of Accountancy, 133(March), 33–39. Hooks, K., & Tyson, T. (1995). Gender diversity driven changes in the public accounting workplace: A moral intensity analysis. Research on Accounting Ethics, 1, 267–289. Jones, T. (1991). Ethical decision making by individuals in organizations: An issue-contingent model. Academy of Management Review, 16, 366–395. Kerlinger, F. (1986). Foundations of behavioral research. Fort Worth, TX: Holt, Rinehart and Winston. Lampe, J. (1994). The impact of ethics education in accounting curricula, In: L. Ponemon (Ed.), Proceedings of the Ernst & Young research on accounting ethics symposium (pp. 220–236). Binghamton, New York. Lampe, J., & Finn, D. (1992). A model of auditors’ ethical decision process. Auditing: A Journal of Theory and Practice, 11(Supplement), 33–59. Loe, T., Ferrell, L., & Mansfield, P. (2000). A review of empirical studies assessing ethical decision making in business. Journal of Business Ethics, 25, 185–204. Louwers, T., Ponemon, L., & Radtke, R. (1997). Examining accountants’ ethical behavior: A review and implications for future research. In: V. Arnold & S. Sutton (Eds), Behavioral accounting research: Foundations and frontiers (pp. 188–221). Sarasota, FL: American Accounting Association. Mabry, L. (1999). Circumstantial ethics. American Journal of Evaluation, 20, 199–212. May, D., & Pauli, K. (2002). The role of moral intensity in ethical decision making. Business and Society, 41, 84–117. Moriarity, S. (2000). Trends in ethical sanctions within the accounting profession. Accounting Horizons, 14, 427–439. Nonis, S., & Swift, C. (2001). Personal value profiles and ethical business decisions. Journal of Education for Business, 76(May/June), 251–256. Paolillo, J., & Vitell, S. (2002). An empirical investigation of the influence of selected personal, organizational and moral intensity factors on ethical decision making. Journal of Business Ethics, 35, 65–74. Parker, L. (1994). Professional accounting body ethics: In search of the private interest. Accounting, Organizations and Society, 19, 507–525. Pierce, M., & Henry, J. (1996). Computer ethics: The role of personal, informal, and formal codes. Journal of Business Ethics, 15, 425–437. Ponemon, L. (1988). A cognitive-developmental approach to the analysis of certified public accountants’ ethical judgments. Unpublished Ph.D. dissertation, Union College, Schenectady, NY. Ponemon, L. (1990). Ethical judgments in accounting: A cognitive-developmental perspective. Critical Perspectives in Accounting, 1, 191–215. Ponemon, L. (1992). Ethical reasoning and selection-socialization in accounting. Accounting, Organizations and Society, 17, 239–258. Preston, A., Cooper, D., Scarbrough, D., & Chilton, R. (1995). Changes in the code of ethics of the U.S. accounting profession, 1917 and 1988: The continual quest for legitimation. Accounting, Organizations and Society, 20, 507–546. Schwartz, M. (2001). The nature of the relationship between corporate codes of ethics and behaviour. Journal of Business Ethics, 32, 247–262. Scofield, S., Phillips, T., & Bailey, C. (2004). An empirical reanalysis of the selection-socialization hypothesis: A research note. Accounting, Organizations and Society, 29, 543–563.

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Shaub, M. (1994). An analysis of the association of traditional demographic variables with the moral reasoning of auditing students and auditors. Journal of Accounting Education, 12, 1–26. Sims, R., & Keon, T. (2000). The influence of organizational expectations on ethical decision making conflict. Journal of Business Ethics, 23, 219–228. Summers, C. (1996). Realities of decision-making and social issues: Implications for developing and implementing ethics guidelines. The Science of the Total Environment, 184, 17–23. Sweeney, J. (1995). The moral expertise of auditors: An exploratory analysis. Research on Accounting Ethics, 1, 213–234. Velasquez, M., & Rostankowski, C. (1985). Ethics: Theory and practice. Englewood Cliffs, NJ: Prentice-Hall. Wiley, C. (2000). Ethical standards for human resource management professionals: A comparative analysis of five major codes. Journal of Business Ethics, 25, 93–114. Wotruba, T., Chonko, L., & Loe, T. (2001). The impact of ethics code familiarity on manager behavior. Journal of Business Ethics, 33, 59–69.

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APPENDIX PUBLIC ACCOUNTING ETHICS QUESTIONNAIRE Part I Type of Firm:

Title:

_____ Sole Practitioner

_____ Partner

_____ Small Local Firm (less than 10 accounting professionals)

_____ Principal

_____ Medium Local Firm (10 to 25 accounting professionals)

_____ Shareholder

_____ Large Local Firm (more than 25 accounting professionals)

_____ Manager

_____ National Firm other than Big 5

_____ Senior

_____ Big 5 Firm

_____ Staff _____ Other _________

Area: _____ Audit/Assurance _____Tax _____Consulting _____Other ___________________ Certifications: ____CPA ____CMA ____CIA ____CFE ____CFM ____CFP ____Other (specify)__________ Number of Years as a Professional Accountant: ________ Number of Years Certified as a CPA: ________ Number of Years with Current Firm: ________________________ Age: __________

Gender:

_____ Female

Ethnic origin: _____ Caucasian (non Hispanic) _____ Hispanic _____ African-American _____ Native American Indian or American Eskimo _____ Asian or Pacific Islander

_____ Male

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1.

Does your firm have a formal code of ethics/conduct/responsibility (hereafter referred to as Firm’s Code)? _______Yes

2.

_______ No

_______ Unsure

Have you ever faced an ethical dilemma at work? (In other words, a situation where there was uncertainty about ethical obligations or when considerations of ethics came into conflict with the practical demands of business.) _______Yes

3.

_______ No (Please skip to question #6)

Briefly describe the dilemma (If you have faced multiple dilemmas, please focus on the most recent or important one.)

4.

How did you resolve the dilemma described in question 3 above? ________ I made an ethical choice. Briefly describe what you did. ________ I made an unethical choice. Briefly describe what you did. ________ I have yet to deal with the dilemma. (Please skip to question #6)

5.

a.

If you made an ethical choice, why? (Please check all that apply) ________ It was the right thing to do. ________ I was influenced by my boss and/or co-workers. ________ I was influenced by my firm’s code. ________ I was influenced by the Code(s) of Conduct of my professional certification(s).

b.

If you made an unethical choice, why? (Please check all that apply) ________ I didn’t care about making the right choice. ________ I was influenced by my boss and/or co-workers. ________ My firm either doesn’t have a code or I just don’t know about it.

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Regardless of whether your firm has a code, how important do you feel a code of ethics either is or might be in influencing your ethical decisions in the workplace? ________ I know the difference between right and wrong and would make the right decisions regardless of a firm’s code. ________ Since I am an agent or employee of the firm, the firm’s code would influence my decisions greatly. ________ I am most motivated by monetary payoffs and would make the decisions that benefit me the most.

Part III Each of the following questions is based on your perceived difference between your firm’s code, the Code(s) of Conduct of your professional certification(s), and your personal code of ethics (your own concepts of right and wrong). Professional

1.

Firm’s

Certification(s)

Personal

Code

Code(s)

_______

_______

_______

_______

_______

_______

Code

Which code of ethics is the most important in guiding employee behavior in your firm?

2.

Which code of ethics do you use the most?

-----------------------------------------------------------------------------------------------------------------

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MARSHALL K. PITMAN AND ROBIN R. RADTKE Strongly Agree 1.

Disagree

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

_____

I am familiar with my firm’s formal code.

5.

Disagree

In my opinion, many people in my firm act unethically.

4.

Unsure

There are opportunities in my firm to act unethically.

3.

Agree

These codes help prevent unethical behavior.

2.

Strongly

I am familiar with the Code(s) of Conduct of my professional certification(s).

6.

I have a strong personal code of ethics.

Part IV 1. Your firm has provided various professional services, including tax preparation, for the Namtip Company for over 25 years. While performing some accounting services for the current year, you discover the previous year’s tax return contained a major error that would result in Namtip having a significant tax liability. You inform the CEO and CFO of Namtip of your discovery and its impact on the tax liability. Six months pass and Namtip has not asked you to file a corrected return nor do they reflect the additional tax liability in their accounting records. Do you retain Namtip as a client? ______Yes

_____Probably yes _____Unsure

_____Probably no _____No

Primary Basis for Your Decision (please check only one): _____Firm’s Code

_____ Professional Certification(s) Code(s) _____Personal Code

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2. In the past, your firm has provided traditional professional services: audit and attestation, tax planning and preparation, and accounting (bookkeeping). After much thought, your firm decides to extend its services to investment management and advisory services. Several members of the firm have obtained additional certifications and licenses to assist in providing this new service. One of the firm’s individual clients is interested in you performing this service with the following caveat: the client wants to give you the money and let you maximize the return on the investment. Do you accept the client for this service with the caveat? ______Yes

_____Probably yes _____Unsure

_____Probably no _____No

Primary Basis for Your Decision (please check only one): _____Firm’s Code

_____ Professional Certification(s) Code(s) _____Personal Code

3. Your firm has prepared the joint tax return for Spouse A and B for several years. The firm was engaged by and has dealt solely with Spouse A. Divorce proceedings are now under way and Spouse B has approached you with requests for confidential information relating to the prior tax returns. Spouse A has directed you not to comply with Spouse B’s request. Would you provide Spouse B with the requested information? ______Yes

_____Probably yes _____Unsure

_____Probably no _____No

Primary Basis for Your Decision (please check only one): _____Firm’s Code

_____ Professional Certification(s) Code(s) _____Personal Code

4. Your spouse is a businessperson who performs certain services on a contingent fee basis. One of your attest clients is in need of those services commonly performed by your spouse. Do you permit your spouse to perform the services for your attest client? ______Yes

_____Probably yes _____Unsure

_____Probably no _____No

Primary Basis for Your Decision (please check only one): _____Firm’s Code

_____ Professional Certification(s) Code(s) _____Personal Code

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5. Your firm has audited Outflow for several decades. The fees generated by this client are more than 10% of the total fees earned by your firm. Over the past several years Outflow’s management has been very aggressive in recognizing revenue. You have had several meetings with management expressing your concern that you believe the financial statements are on the verge of being misleading due to the aggressive revenue recognition policies. Management states the financial statements are in accordance with GAAP. You consult with your partners and they are also concerned about the financials. Do you retain Outflow as a client? ______Yes

_____Probably yes _____Unsure

_____Probably no _____No

Primary Basis for Your Decision (please check only one): _____Firm’s Code

_____ Professional Certification(s) Code(s) _____Personal Code

Please write any comments you have with respect to this questionnaire. Thank you for your participation in this study.

THE IMPACT OF THE SARBANES-OXLEY ACT ON THREATS TO AUDITOR INDEPENDENCE Michael K. Shaub ABSTRACT The purpose of this paper is to examine the impact in the United States of the Sarbanes-Oxley Act of 2002 on the five threats to auditor independence: self-interest, self-review, advocacy for clients, intimidation by clients, and trust or familiarity threats. Using a model of trust, independence and professional skepticism developed by Shaub ((2004). Research on Professional Responsibility and Ethics in Accounting, 9, 169–188.), the analysis concludes that only self-review threats have been substantially addressed, and even in that case self-review exposures remain. Suggestions are provided for dealing with threats left unaddressed by SarbanesOxley, as well as for future research to test Shaub’s framework.

INTRODUCTION The Sarbanes-Oxley Act was passed by Congress and signed by the President during the summer of 2002 in an attempt to address a number of Research on Professional Responsibility and Ethics in Accounting Research on Professional Responsibility and Ethics in Accounting, Volume 10, 123–138 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1574-0765/doi:10.1016/S1574-0765(05)10005-3

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issues involved in regulating the capital markets. Among these issues, one of the most important addressed by the Act was the issue of auditors’ independence of the public companies they audit. Auditor independence has been repeatedly examined over the past decade by regulatory and standard-setting bodies around the world. Though countries differ culturally in their views of some of the specifics of the auditor’s role, independence is believed almost universally to be among the most important characteristics an auditor can possess, and one that contributes significantly to the reliability of financial information. One approach to addressing auditor independence problems that has found wide acceptance internationally has been the ‘‘threats and safeguards’’ approach. This approach has found support in the United States as best described by the conceptual framework of the Independence Standards Board (2001). Though not universally accepted as an effective method of enforcing independence (Turner, 2001), the threats and safeguards approach offers a conceptually appealing method of describing the hindrances to auditor independence and the methods available for strengthening it. According to the threats and safeguards approach, there are five basic categories of threats to auditor independence: self-interest, self-review, advocacy for clients, intimidation by clients, and trust or familiarity threats. The relative importance of each of these threats varies based on the details of the individual audit firm–client relationship, but most of the threats exist in every auditor–client arrangement. The purpose of this paper is to examine the impact in the United States of the Sarbanes-Oxley Act of 2002 on the threats to auditor independence. Sarbanes-Oxley was implemented, in part, to increase the effectiveness of auditor oversight of corporate reporting in the American capital markets by strengthening auditor independence. This paper analyzes the extent to which Sarbanes-Oxley can be expected to accomplish that goal. The next section of the paper describes the threats and safeguards approach to understanding auditor independence and elaborates on the five threats to auditor independence. The following section provides a brief summary of relevant portions of the Sarbanes-Oxley Act. Next, the Sarbanes-Oxley provisions’ impact on each of the threats is examined by using an example of an auditor independence measure from the auditing literature (Shaub, 2004). The paper then provides a discussion of continuing independence vulnerabilities and of the profession’s responsibility to insure that independence is safeguarded in those areas that remain unaddressed in the legislation. This is followed by suggestions for future research within the proposed framework and by concluding remarks.

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THREATS TO AND SAFEGUARDS OF AUDITOR INDEPENDENCE The Independence Standards Board (ISB) was formed in the United States in 1997 through a cooperative effort of the U.S. Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants (AICPA). The purposes of the ISB were to promulgate independence standards applicable to auditors of public companies and to develop a conceptual framework for auditor independence. The board had eight members, four from public accounting and four ‘‘outsiders’’ with significant financial expertise. While the demise of the ISB is beyond the scope of this paper, understanding why it died is important to understanding the practical impacts of the threats and safeguards approach to the regulation of auditor independence. Glazer and Jaenicke (2002) describe the ‘‘pathology’’ of the ISB in detail. The AICPA and the large accounting firms were largely resistant to independence initiatives such as restrictions on adjunct services and auditor rotation, because they remained unconvinced that they improved independence, and because they would clearly have a material impact on the firms’ revenue streams. However, the ISB’s commitment to the threats and safeguards approach undermined its support within the SEC, largely because the SEC saw it as an ineffective method for enforcing auditor independence in the capital markets. In fact, the SEC’s chief accountant, Lynn Turner, expressed concern that this approach would allow accounting firms to determine their own level of independence without an objective outside evaluation (Turner, 2001). With the issuance of new auditor independence rules by the SEC, the ISB’s relevance was called into question, and the board was shut down in July 2001. Regardless of its enforceability from a regulator’s perspective, the threats and safeguards approach represents the most coherent approach put forth so far to describe the problems inherent in market attempts to insure auditor independence. As a result, it has found wide acceptance internationally. The Canadian Institute of Chartered Accountants (2003, para. 39–51) has adopted this approach as its preferred method of addressing auditor independence issues, basing its new independence standard on the independence rule in the International Federation of Accountants’ Code of Ethics for Professional Accountants (IFAC, 2003). The threats and safeguards approach recognizes five potential threats to auditor independence: self-interest, self-review, advocacy for clients,

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intimidation by clients, and trust or familiarity threats. The CICA’s independence standard states that self-interest threats can arise from financial interests linked to the client, while self-review threats arise when auditors provide assurance on their own work (CICA, 2003, para. 40–41). An advocacy threat ‘‘occurs when a firm, or a person on the engagement team, promotes, or may be perceived to promote, an assurance client’s position or opinion to the point that objectivity may be, or may be perceived to be, impaired (CICA, 2003, para. 42).’’ An auditor that ‘‘may be deterred from acting objectively and exercising professional skepticism’’ by actual or perceived threats from a client is subject to an intimidation threat (CICA, 2003, para. 44). And familiarity threats or trust threats arise from having a close relationship with a client in which a practitioner ‘‘becomes too sympathetic to the client’s interests (CICA, 2003, para. 43).’’ Safeguards are intended to ‘‘mitigate the effects of threats (ISB, 2001, para. 19).’’ Safeguards may include authoritative guidance and prohibitions, audit firm policies, institutional arrangements, environmental conditions, and effective corporate governance (ISB, 2001, para. 20). Since the ISB defines institutional arrangements as including ‘‘the threat of disciplinary action and legal liability (ISB, 2001, para. 20),’’ the Sarbanes-Oxley Act provides safeguards in that category and in providing authoritative guidance and prohibitions. In addition, including provisions in the Act that strengthen the financial literacy and independence of audit committees provides corporate governance safeguards. Shaub (2004) develops a framework anchored in the trust literature that suggests that auditors, over time, become increasingly interdependent with their clients, resulting in a movement from rational trust to emotional trust. Shaub develops a potentially testable model that predicts that the five threats to auditor independence discussed in the current paper, and the extent of information asymmetry between the client and the auditor predict the auditor’s independence. This independence, in turn, helps to predict auditors’ professional skepticism. Shaub’s (2004) model of trust, independence and professional skepticism is presented as Fig. 1.

THE SARBANES-OXLEY ACT AND AUDITOR INDEPENDENCE The Sarbanes-Oxley Act provides an assortment of limits on auditors’ behavior that are intended to address some of the threats to auditor

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SelfInterest + +

SelfReview

Common Goals

+

+

-

+ +

Strength Of Relationship

-

-

Advocacy

+ Independence

+ -

-

+ Personal Relationships

Time

Auditors Hired by Client

+ Intimidation

+ + +

Size

Audit Fee

Adjunct Fees

Professional Skepticism

-

-

Trust Or Familiarity Client Size

Information Asymmetry

Fig. 1.

Shaub’s (2004) Model of Auditors’ Trust, Independence, and Professional Skepticism.

independence that have led, directly or indirectly, to well-publicized audit failures. Though numerous provisions of the Act impact external auditors and corporate accountants, this paper focuses on the provisions that directly impact auditor independence. Section 201 restricts auditors of public companies from providing a wide variety of services to public companies. Bookkeeping, financial information

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systems design, and appraisal and valuation services are prohibited. The Act also bans actuarial, human resources, broker–dealer, and legal services. Expert services can be provided only if they are related to the audit, and functioning as management or as a director, even temporarily, is banned. Internal audit services, which were previously limited to 40% of all internal auditing for large companies but had no limit for smaller public clients, are now completely forbidden. All other consulting services provided by the auditor must be pre-approved by the audit committee. Firms will not be independent if any of the audit partners on the engagement receive compensation based on selling adjunct services to that client (SEC, 2003). The lead and concurring partners on the audit engagement must rotate every five years, and may not rotate back on to the client for five years. Other audit partners with a significant role in the engagement must rotate every seven years, but are only required to stay gone for two years. Audit firms with fewer than five audit clients or fewer than ten partners are exempt from these rules, but will undergo a special triennial review by the Public Company Accounting Oversight Board (SEC, 2003). Finally, auditors will no longer be able to go to work for their clients in roles that oversee financial reporting matters, such as the CEO, CFO, controller, or chief accounting officer. The SEC now requires a one-year waiting period before the former auditor is allowed to assume one of those roles (SEC, 2003).

THE IMPACT OF SARBANES-OXLEY ON INDEPENDENCE THREATS The Sarbanes-Oxley Act helps to address some of the threats to auditor independence laid out in the ISB’s conceptual framework (ISB, 2001) more effectively than others. Fig. 2 presents a potential auditor independence measure developed by Shaub (2004). This measure provides a practical tool to help identify some of the strengths and weaknesses of Sarbanes-Oxley in its attempt to address auditor independence. As will become evident in this analysis, Sarbanes-Oxley is much more effective in addressing self-review threats than any of the other categories of threats to auditor independence. Shaub (2004) suggests two potential measures of self-interest threats: the significance of the client to the auditor (both in absolute amount of the fee and in relative percentage of the fee compared to other clients), and marketing relationships shared by the auditor and the client. Unless audit clients are

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Self-interest • Significance of client Absolute amount of fee Fee as a percentage of office audit fees • Marketing relationships Self-review • Percent of internal audit work outsourced to accounting firm • Fees received for accounting services • Consulting fees • Number of systems designed for the client by CPA firm consultants • Actuarial and other valuation services provided to the client Advocacy for Clients • Fees for tax services • Representation before the IRS Intimidation by Clients • Client ranking in office and firm-wide • Former CPA firm partner as CEO, CFO, or in other influential position Trust or Familiarity • Number of former CPA firm auditors employed by client • Length of service • Close friendship between partner and important client personnel • Close friendship between manager and important client personnel

Fig. 2.

Potential Components of an Auditor Independence Measure Based on Five Threats to Independence Identified by the ISB. Source: Shaub (2004).

assigned to auditors by a government agency, no legislation can be expected to effectively address the issue of a client’s significance to the firm without having serious ripple effects on the free market. It is unreasonable to expect legislation to preclude auditors from accepting a client that is large relative to its other clients. However, Sarbanes-Oxley also does not seriously limit marketing relationships between auditors and their clients that tend to link the two firms’ goals. This can lead to the type of deep interdependence between auditors and clients that Shaub (2004) sees as endangering independence. Sarbanes-Oxley is much more effective in addressing self-review threats. As can be seen in Fig. 2, potential measures of the extent of self-review done by auditors include:
Percent of internal audit work outsourced to the accounting firm
Fees received for accounting services

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Consulting fees
Number of systems designed for the client by CPA firm consultants
Actuarial and other valuation services provided to the client Sarbanes-Oxley specifically addresses four of these five issues – internal audit work, accounting services, financial systems design, and actuarial and other valuation services. While the Act allows a variety of consulting services, as long as they are pre-approved by the audit committee, it represents a serious attempt to address the types of self-review threats that have long hindered auditor independence. One self-review threat that remains unaddressed by Sarbanes-Oxley is the inherent self-review present when an auditor serves a client for multiple years. Though auditors become more knowledgeable about the client and gain efficiencies in the audit by continuing as the auditor for many years, they inherently review their own work from prior periods. Many of the highprofile frauds coming to light in recent years are the result of financial statement restatements necessitated, in part, because auditors failed to detect material misstatements in earlier periods. Continuing auditors are potentially less likely to perform a detailed review of prior year financial statements, and they would encounter significant incentives against revealing material misstatements that they had missed in earlier periods. Since, the Sarbanes-Oxley Act does not require rotation of audit firms, but only audit partners, the public must rely on one auditor within the audit firm reviewing the work of another auditor within the firm from an earlier period. Shaub (2004) suggests that advocacy for clients can be proxied by fees for tax services and the extent to which Certified Public Accountants (CPAs) provide clients with representation before the Internal Revenue Service (IRS) in the United States. Of course, this is an incomplete measure of the extent to which CPA firms serve as advocates for their clients. CPA firms often lobby standard-setting bodies on behalf of their clients, presenting the client’s point of view on an issue, presumably because the auditor agrees. It is understandable that this would be a difficult characteristic to measure in a CPA firm. In addition, Shaub suggests that audit firms should use this measure themselves internally, and it is unlikely that these firms would be interested in characterizing their lobbying for clients as an advocacy threat to independence. Sarbanes-Oxley does not address this type of advocacy, nor does it preclude most tax services; SEC staff explicitly supported auditors providing a variety of tax services in proposing the rules to implement Sarbanes-Oxley (SEC, 2003).

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However, it is unclear what the long-range impact of the Act will be on CPA firms’ representation of their clients before the IRS, particularly with respect to tax shelters. The Public Company Accounting Oversight Board (PCAOB) is quite concerned with the extent to which marketing tax shelters may be impairing auditors’ independence. During the summer of 2004, the PCAOB hosted a roundtable to discuss the appropriateness of auditors providing tax services to their clients, giving particular attention to CPA firms’ marketing of tax shelters. This led to proposed rules that prohibit marketing of aggressive tax shelters and providing tax services for senior officers in a financial reporting oversight role. In general, however, Sarbanes-Oxley itself does little to practically impact advocacy threats. Shaub (2004) intimates that intimidation threats are more likely to be present when a client is important to the individual office and firm-wide, and when a former CPA firm partner serves as CEO, CFO, or in another influential position. Legislation cannot impact the relative importance of clients; accounting firms will always be subject to intimidation threats from important clients, just as public companies are always subject to pressures to meet earnings targets. However, Sarbanes-Oxley effectively addresses the issue of a former CPA firm partner serving in an influential position by banning auditors from taking on these types of roles for their clients for a one-year period after leaving the accounting firm. This is a more stringent requirement than was imposed by the Independence Standards Board in ISB Standard No. 3, ‘‘Employment with Audit Clients.’’ (ISB, 2000). That standard requires auditors to recognize the threat that exists when a former CPA firm partner becomes the controller, CFO, or CEO of the client, but it does not preclude the partner from taking that step. So Sarbanes-Oxley directly seeks to reduce opportunities for clients to intimidate their CPA firms. In addition, Section 303 of the Sarbanes-Oxley Act makes it a felony for management or the board of directors ‘‘to take any action to fraudulently influence, coerce, manipulate, or mislead’’ an auditor. This provision is designed to minimize the coercive influence that a powerful client might have over an auditor. Trust or familiarity threats can be measured by the number of former CPA firm auditors employed by the client, the length of the auditor–client relationship, and close friendships between the partner or manager and important client personnel, according to Shaub (2004). Sarbanes-Oxley does not address the number of former auditors employed by the client; it only precludes one being hired at the highest level of financial leadership in the company for a period of one year. It does, however, address the familiarity

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threat present when a partner or manager who is intimately familiar with the audit approach moves into a top-level financial position with the client. The Act also does not mandate audit firm rotation; Congress and the SEC settled for requiring rotation of all partners involved in the engagement, which could potentially have a modest impact on the threat of familiarity. The Act makes no attempt to erect barriers to personal relationships that may develop in the course of an audit and thus represent a familiarity threat. In summary, Sarbanes-Oxley has only a modest impact on trust or familiarity threats. Hence, the Sarbanes-Oxley Act has a significant effect on self-review threats, and a moderate effect on intimidation and familiarity threats. The Act is less effective in addressing self-interest and advocacy threats. Sarbanes-Oxley’s impact on the threats to auditor independence is summarized in Fig. 3.

Threat

Sarbanes-Oxley Act’s Effectiveness in Addressing the Threat

Continuing Independence Vulnerabilities

Self-interest

Ineffective

Significance of client Marketing relationships

Self-review

Effective

Consulting services not banned by Sarbanes-Oxley Continuing audit firm’s review of its own prior year workpapers

Advocacy for Clients

Ineffective

Lobbying regulators and standard-setters Providing tax services Recommending tax shelters

Intimidation by Clients

Moderately Effective

Importance of retaining clients to profitability and promotion Former firm auditors who wait a year to become CFO

Trust or Familiarity

Moderately Effective

Long tenure as the audit firm Large numbers of former accounting firm auditors employed by client Friendships

Fig. 3. Impact of the Sarbanes-Oxley Act on Threats to Auditor Independence.

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DEALING WITH UNADDRESSED THREATS TO AUDITOR INDEPENDENCE It is quite possible that the accounting profession could decide to ignore the remaining threats to auditor independence, since Congress and the SEC decided not to address them. Additional legislation related to auditor independence is unlikely in the near future, and the profession may decide that Congress has now prioritized the threats for them. However, the remaining threats represent the most significant vulnerabilities for CPA firms when it comes to compromised independence. They must be addressed through profession-wide and firm-specific policies, rather than waiting for future failures to lead to additional sanctions and regulation. Self-interest threats are naturally among the most difficult to address through self-regulation rather than external regulation. Accounting firms can address these types of threats by establishing ‘‘independence partners’’ who will critically evaluate the relationships the firm maintains with its clients. These partners, who could serve a role similar to that of technical partners, could also develop internal measures of independence similar to the measure in Fig. 2 that would be required as part of the client acceptance and retention decision. Recent SEC sanctions of some of the largest public accounting firms for extensive violations of auditor independence rules indicate that these firms have lacked the structure necessary to detect and correct independence violations (SEC, 2000). Audit firms should also develop training that will sensitize auditors to the natural self-interest threats to independence that exist with important clients. The primary remaining self-review threat is the variety of consulting services still permitted by Sarbanes-Oxley with audit committee preapproval. Most of the largest accounting firms are addressing this threat by spinning off their consulting practices, in most cases changing the names of those practices to communicate distance between the auditors and consultants, and to provide a new branding. It is critical to addressing selfreview threats that there is structural independence between these firms, and that the ‘‘spinning off’’ is not simply window dressing to disguise substantial interfirm entanglements. And, as mentioned earlier, since Sarbanes-Oxley does not require audit firm rotation, audit firms must build in processes that will allow a ‘‘fresh look’’ at prior year financial statements before financial statement restatements are required. Advocacy threats perhaps represent the greatest danger to auditor independence in the near future. Accounting firms continue to take positions on

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behalf of their clients with regulators, and the presence of the PCAOB is unlikely to change that trend. As CPA firms are more limited in the other ways they can attach themselves to their clients, it is likely that audit clients will view this type of advocacy as genuine client service. CPA firms should establish policies on accounting and auditing issues that are informed by the practical experience of their clients, but that are intellectually independent of their clients’ self-interest. But an even greater advocacy threat exists because most auditors also provide extensive tax services to their clients. Tax accountants serve as advocates for their clients’ positions before the IRS. Audit firms are unlikely to spin off their tax practices to strengthen independence. In fact, auditors, clients, and even the SEC see a natural interaction between audit and tax services provided by a CPA firm. But recent headlines about troubling tax shelters designed or promoted to executives by the CPA firms at Sprint and other companies reveal the dangers inherent in auditors providing tax services as well (Blumenstein, Lublin, & Young, 2003). As described earlier, the PCAOB has proposed ethics rules to address this issue in the wake of a roundtable discussion it held during the summer of 2004. It can be argued that providing tax services actually touches on all five of the major threats to auditor independence. It is a self-interest threat in that the client is much more significant to the auditor in total fees, and in the fact that marketing relationships are established like the marketing of services to directors and executives. It is a self-review threat in that the auditors are reviewing their own firm’s tax work in evaluating the tax provision in the audit. A client that provides the audit firm with significant tax fees and access to its directors and executives is also more likely to present an intimidation threat to independence. Finally, providing audit and tax services is likely to increase the number of accounting firm personnel who eventually go to work for the client, as well as deepening the level of personal ties between the accounting firm and the client, introducing additional familiarity threats. Sarbanes-Oxley does not eliminate intimidation threats. Auditor training, particularly for new staff and new managers, should make these auditors aware of the dangers of client intimidation. Lawrence and Shaub (2004) show that managers are generally less willing to confront clients than most other auditors. Perhaps this is because client satisfaction is critical to the partner promotion decision, and Behn, Carcello, Hermanson, and Hermanson (1997) provide evidence that client satisfaction is lower when auditors demonstrate greater professional skepticism. And even though

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Sarbanes-Oxley requires that audit firm personnel wait a year after leaving the firm before assuming a primary financial role with a client, this does not mean that auditors will stop accepting important roles in client organizations. Accounting firms should continue to train their auditors to be aware of the intimidation threats present when former audit firm personnel that the auditors may have worked for assume critical roles with the client, both in and out of financial leadership. Addressing intimidation threats remains a significant challenge to the accounting profession. KPMG’s recent willingness to stand up to Kirk Gorman, the CFO of audit client Universal Health Services, and insist that he be fired for trying to shift responsibility for the company’s accounting practices on to the accounting firm, could be an example of taking this responsibility seriously (Seltzer, 2003). However, this behavior could also be interpreted as risk-shifting behavior designed to protect the firm from legal liability and to remind the public that the financial statements are management’s responsibility. Finally, familiarity threats are largely unchanged because Sarbanes-Oxley does not mandate audit firm rotation. It is reasonable to expect that audit firm rotation will not be required in the near future. SEC staff have tried to put teeth into individual auditor rotation by requiring that all audit partners involved with the client be rotated. However, the practical impact of the accounting firm’s long-term relationship with the client may overwhelm the ‘‘fresh look’’ that individual auditor rotation is supposed to provide.

FUTURE RESEARCH TO TEST THE FRAMEWORK Many opportunities exist to test the research framework suggested by this paper. Experimental research that manipulates levels of threats to auditor independence could offer important insights into influences on auditor behavior. Team settings for this type of research may perhaps shed additional light on independence, since many of the decisions impacted by independence are made in groups, such as the brainstorming process required by SAS 99 (AICPA, 2001) to help identify fraud risks. Instrument development will also be an important next step in this research. A diagnostic instrument for independence could be developed using firm-specific measures for client continuance decisions and the measures suggested in Shaub (2004) (see Fig. 2) as a starting point. This instrument should specifically measure the threats and safeguards to firm independence and individual auditor independence present in a given situation.

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Perhaps just as important is the development of a measure of individual auditor professional skepticism. In Shaub’s (2004) model (see Fig. 1), independence is ultimately important because it impacts audit quality through its influence on professional skepticism. This seems to get closer to the concept of ‘‘independence in fact’’ rather than ‘‘independence in appearance.’’ And though both are important, arguably only ‘‘independence in fact’’ impacts actual audit quality rather than perceived audit quality. Shaub’s contention that auditor–client information asymmetry reduces auditor independence (see Fig. 1) because the auditor must depend on the client for information introduces interesting research questions. The AICPA and individual CPA firms have long argued that providing adjunct services to clients increases the auditor’s understanding of the client, making it less likely that the auditor will be misled. But how does the auditor maintain independence when the provision of these services ratchets up self-interest, self-review, and familiarity threats? Is the proper way to balance these threats to eliminate adjunct services in a manner similar to Sarbanes-Oxley’s provisions? Future research may shed light on the best ways to insure auditor independence while maximizing auditor knowledge.

CONCLUSION The Sarbanes-Oxley Act will significantly impact the structure and procedures of audit firms for years to come. It is perhaps the most noteworthy attempt to provide institutional safeguards to protect auditor independence in the United States. But no legislation is able to provide all the safeguards necessary to strengthen auditor independence, and Sarbanes-Oxley is most effective in addressing self-review threats. The accounting profession and individual accounting firms must take responsibility for addressing the remaining threats to auditor independence. The accounting profession has the opportunity to mitigate some advocacy and intimidation threats by establishing more specific auditing and quality control standards, and by clearly defining inappropriate advocacy. These may be the types of issues that will determine the willingness of the PCAOB to allow the AICPA and practicing auditors to significantly impact professional standards in the future. The SEC’s new focus on audit committee quality also provides an opportunity for the profession to work together with regulators to minimize intimidation threats by improving communication between the auditor and the audit committee.

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However, the self-interest and familiarity threats will likely have to be addressed by audit firms and individual auditors. In the end, accounting is a profession, and auditors must be relied upon to exercise restraint, and to act in the interests of financial statement users, and not just their own interests. Audit firms have the opportunity to demonstrate their commitment to independence by instituting more stringent independence reviews, particularly on long-time clients. It falls to these firms, and to the accounting educators who prepare auditors, to teach them to say no to their clients and to their own self-interest when appropriate. Of course, other issues remain. Audit firms are still compensated directly by their clients, making them subject to intimidation threats from important clients, especially those who have been clients for many years. And the Sarbanes-Oxley Act does not address the independence issues of most audit firms, since the restrictions only apply to that small minority of firms that audit publicly traded clients. The Sarbanes-Oxley Act provides necessary, but not sufficient, safeguards to auditor independence. It is the responsibility of the accounting profession and of individual auditors to provide the additional safeguards necessary to insure that auditors remain sufficiently independent of their clients.

REFERENCES American Institute of Certified Public Accountants. (2001). Statement on auditing standards no. 99: Consideration of fraud in a financial statement audit. New York: AICPA. Behn, B., Carcello, J., Hermanson, D., & Hermanson, R. (1997). The determinants of audit client satisfaction among clients of big 6 firms. Accounting Horizons, 11(March), 7–24. Blumenstein, R., Lublin, J., & Young, S. (2003). Sprint forced out top executives over questionable tax shelter. The Wall Street Journal, (Wednesday, February 5), A1, A8. Canadian Institute of Chartered Accountants (CICA). (2003). Appendix A to public interest and integrity committee report – rules of professional conduct, section 204, (September 3) Toronto, Ontario: CICA. Glazer, A., & Jaenicke, W. (2002). A pathology of the independence standards board’s conceptual framework project. Accounting Horizons, 16(December), 329–352. Independence Standards Board (ISB). (2000). Independence standard no. 3: Employment with audit clients. (July). Independence Standards Board (ISB). (2001). Staff report: A conceptual framework for auditor independence. (July). International Federation of Accountants. (2003). Code of ethics for professional accountants. New York: IFAC. Lawrence, J., & Shaub, M. (2004). Exercising professional skepticism through client confrontation: An exploratory study. Unpublished working paper, University of Nebraska.

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Securities and Exchange Commission. (2000). Independent consultant finds widespread independence violations at PricewaterhouseCoopers. Press release no. 2000-4. (January 6). At http://www.sec.gov. Securities and Exchange Commission. (2003). Commission adopts rules strengthening auditor independence. Press release no. 2003-9. (January 22). At http://www.sec.gov. Seltzer, J. (2003). Universal health stock tumbles after CFO is ousted. Reuters.com (Friday, February 14). Shaub, M. (2004). Trust as a threat to independence: Emotional trust, auditor-client interdependence, and their impact on professional skepticism. Research on Professional Responsibility and Ethics in Accounting, 9, 169–188. Turner, L. (2001). Independence: A covenant for the ages. Speech by Chief Accountant Lynn Turner to the International Organization of Securities Commissions. (June 28). At http://www.sec.gov/news/speech/spch504.htm.

UNETHICAL DECISION-MAKING WITH COMPUTER USAGE IN A UNIVERSITY ENVIRONMENT Bernadette M. Ruf and Stuart B. Thomas ABSTRACT The current study investigates factors that affect ethical decisions of business students when dealing with computer usage in a university environment. The ethical decision-making model tested in the study focuses on university environment factors, personal environment factors, situational factors, and moral judgment. Four case scenarios of different situations that students have encountered or will mostly likely encounter while at university were used. The findings indicate that perceived degree of cheating, likelihood of being caught, influence of significant others, and moral judgment are related to ethical decision-making. However, the importance of these factors on ethical decision-making varies depending on the case scenarios. The implications of these results are discussed.

INTRODUCTION The ubiquitous presence of unethical behavior in the university setting raises concerns for faculty and future employers. Based on a recent report by Duke Research on Professional Responsibility and Ethics in Accounting Research on Professional Responsibility and Ethics in Accounting, Volume 10, 139–165 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1574-0765/doi:10.1016/S1574-0765(05)10006-5

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University’s Center for Academic Integrity, three-quarters of college students confess to cheating at least once. Students identified pressure and opportunity as reasons for cheating and believe that cheaters ‘‘never pay the price’’ (Kleiner & Lord, 1999). Students’ perception that cheaters never pay should be of particular concern for business colleges. Prior studies have found that business students tend to believe that they need unethical behavior to complete their degrees successfully (Lane & Schaupp, 1989) and that they are more tolerant of cheating than non-business students (Roig & Ballew, 1994). The Report of the National Commission on Fraudulent Financial Reporting (1987) calls for greater emphasis on ethics in accounting education. Hosmer (1985), however, suggests that a lack of understanding of the nature of ethics in management is hindering the incorporation of ethics into business education. Identifying factors that affect ethical decisions students encounter will help universities understand the behavioral aspects of inappropriate or unethical use of computers and provide a starting point for developing and implementing programs to reduce unethical behavior. The purpose of this paper is to investigate factors that contribute to unethical decision-making when dealing with computer usage in a university environment. While computer usage does not necessarily change the ethical decisions that students face in college, it does provide students with greater opportunities to perform actions that may be difficult with manual methods (Parker, Swope, & Baker, 1990). Because computers create a less personal environment and a greater distance between the individuals and the task, computer usage may make ethical decisions more ambiguous than in the past. Furthermore, social norms for use of new technologies may not be well established yet. Understanding what factors play a role in influencing ethical decisions with computer usage is important, given the use of computers in the university environment today. Prior research on collegiate cheating has largely been conducted using survey studies and has focused either on factors that are associated with the frequency of student cheating1 or on attitudes toward cheating (Ford & Richardson, 1994; Crown & Spiller, 1998; and Loe, Ferrell, & Mansfield, 2000). Crown and Spiller’s (1998) review of collegiate cheating studies concluded that these studies were deficient in testing theoretical research models and recommended that future studies incorporate current models from business ethics research. Other research on ethical decision-making with college students has used case studies. With the exception of software piracy issues (Eining & Christensen, 1991; Thong & Yap, 1998), these studies have focused on how students respond to a given unethical decision in a business

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environment rather than on situations that could occur in a university environment. The current study differs from and builds on prior research in two ways. First, the current study addresses Crown and Spiller’s (1998) criticism of prior research by empirically testing a behavioral ethical decision-making model in a university environment. While several models on ethical decisionmaking in organizations have been proposed (Brommer, Gratto, Gravander, & Tuttle, 1987; Ferrell & Gresham, 1985; Hunt & Vitell, 1986; Jones, 1991; Trevino, 1986), few of these models have been empirically tested (Ford & Richardson, 1994). Furthermore, the complexity of these models has made it infeasible to test a complete model (Thong & Yap, 1998). Hence, the current paper tests a behavioral model that is based on the prior models but focused on salient factors in a university environment. Second, the study uses ethical computer issues that students have encountered or will most likely encounter during their time at the university. The remainder of the chapter is organized as follows. First, key terminology is defined. The behavioral model employed in the current paper and the hypotheses to be tested are presented next. The development of the research instrument and data collection activities are outlined and then analyzed. Finally, key findings and contributions are summarized, and suggestions are offered regarding future research.

TERMINOLOGY AND DEFINITIONS Three definitions are central to the chapter: ethical decisions, moral judgment, and moral intent. Understanding how we define ethical decisions is important, given that individuals can differ greatly on what constitutes an ethical decision and whether an act is considered ethical or unethical. For this paper, we adopt Jones’ (1991) definition that ‘‘ethical decisions are decisions that are both legally and morally accepted by the larger community. Conversely, an unethical decision is either illegal or morally unacceptable to the larger community (emphasis added, p. 367).’’ Hence, while some decisions may be considered unethical, they are not necessarily illegal and vice versa. This distinction is important in a computer environment, because copying from a web site that is not copyrighted is legal; however, such copying may be unethical in a homework assignment. Furthermore, given the rapid changes in technology, social norms and legality may not yet be well established or well communicated, making it unclear whether a decision is unethical.

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Moral intent and moral judgment are adopted from Rest’s (1986) ethical decision-making model. Rest identified four stages in the ethical decisionmaking process: (1) recognize the moral issue (Does the situation have moral content?); (2) make a moral judgment (Do you think the situation is ethical or unethical?); (3) establish moral intent (What would you do in the situation?); and (4) engage in moral behavior (What was the actual behavior?). Moral judgment is referred to as an individual decision on whether a situation is ethical or unethical. Moral intent is defined as whether or not a person would conduct an unethical act. Note, in this study all the situations presented are unethical in a university environment.

ETHICAL DECISION-MAKING RESEARCH MODEL While numerous ethical decision-making models exist in the literature, only a few focus on both ethical decision-making and organizational behavior (Brommer et al., 1987; Ferrell & Gresham, 1985; Hunt & Vitell, 1986; Jones, 1991; Trevino, 1986). With the exception of Hunt and Vitell’s model, these models have not been empirically tested. Given that the purpose of most of these models is to systematize prior research findings, the models have more similarities than differences and mainly differ in terms of which components of the model are emphasized. Based on these theoretical models, a behavioral model is proposed next. The behavioral model is divided into four components that influence the ethical decision-making process: university environment factors, personal environment factors, situational factors, and moral judgment. Within these components salient factors for students at a university are identified in the remainder of this section (see Fig. 1).

University Environment Factors Work environment factors influencing managers’ ethical decision-making were identified by Brommer et al. (1987) as corporate goals, stated policy, and corporate culture. Similar to a business organization, universities have their own environment. Hence, in a university setting the policies and culture of the university may influence students’ ethical acts. University policies include honor codes and computer use policies. Factors in the university culture are student cheating behavior, sanctions for misbehavior, peer and faculty reporting on unethical behavior, and monitoring of student behavior.

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An Ethical Decision-Making Research Model

University Environment Factors • Awareness of university policies • Perceived degree of cheating at the University • Likelihood that an act will be identified • Severity of the punishment Personal Environment • Significant others

Ethical Issues • Copying spreadsheet

Moral Intent

• Copying program • Sharing e-textbook • Copying songs

Situational Factors • Time • Money

Moral Judgment

Fig. 1.

An Ethical Decision-Making Research Model.

All of these environmental factors can play a role in whether or not students recognize an unethical issue and how they decide to respond to the issue. To understand how environmental factors affect ethical decision-making, Dillard and Yuthas (2002) propose Giddens’ Structuration Theory. They describe structuration theory as ‘‘a conceptual framework useful for describing how ethical considerations affect and are affected by social structures and agency’’ (p. 8). Structuration Theory argues that ‘‘what actors think and do is, in part, a function of the structures operating in their social world’’ (p. 5). Three structures are presented in structuration theory: legitimation, signification, and domination. Legitimation structures are cultural norms and values that influence moral conduct within a community. Signification structures articulate moral code as social norms with accompanying rights and obligations. Domination structure enforces the rewards and/or sanctions associated with adherence to and the violation of the social

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norms. While one person cannot easily change these structures, purposeful actions can either reinforce or undermine the extant structures. With regard to legitimation structures, cultural norms and values within a university culture reflect the attitudes and values of the students, faculty, and administration. Collective norms, standard of behavior, and a value system that guides behavior are provided by the organizational culture (Deal & Kennedy, 1982). Trevino (1986) argues that organizations that have a strong culture clearly communicate what is and what is not appropriate behavior, while a weak culture creates subcultures that conflict with the beliefs of the total organization. Appropriate behavior does not necessarily have to be ethical behavior; rather it is behavior that the organization neither condones nor reprimands. In a university environment, students’ perception of what behavior is tolerated in the university will indicate attitudes and culture of the university. Hence, it is expected that a student’s perception of whether other students cheat will be positively related to the likelihood of acting unethically. H1. Perception of the level of cheating occurring at a university is positively related to moral intent. Based on Giddens’ (1976) Structuration Theory, signification structure moral codes of conduct in an organization will influence the agents’ behavior if they are articulated. Research on the effectiveness of codes of ethics in organizations has shown that when corporate codes of conduct are well communicated and are enforced, the codes increase the level of awareness and reporting of unethical incidents (Loe et al., 2000). Similarly, universities have a set of policies defining what inappropriate student behavior is and indicate the punishment for such behavior. The question that arises is: Do universities effectively communicate and enforce these codes? Typically, students are required, when they enroll in the university, to sign a form indicating that they have read and understood these policies. However, unless universities provide a reminder to students about their policies, students probably will not remember them. Hence, it is expected that students not familiar with the universities’ codes will be more likely to conduct an unethical act. H2. Knowledge level of the university’s computer user policies is negatively related to moral intent. Another factor in the university environment is the use of sanctions. Based on Giddens’ (1976) domination structures, rewards and/or sanctions will influence whether individuals adhere to or violate social norms.

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To understand how sanctions affect student behavior, Deterrence Theory (Gibbs, 1975) has been used. Deterrence Theory suggests that misconduct will be deterred if individuals perceive that they will be caught and punished. Most individuals will refrain from illegal acts that are actively enforced. McCabe and Trevino (1993) found that increasing the perceived likelihood of being reported as well as increasing the severity of the penalty further reduces the probability students will cheat even if an honor code is present. Hence, if students believe that they are unlikely to be caught or that they will bear no social stigma if they are caught, then they will believe that their behavior is condoned. In addition, students’ perception of the severity of punishment is also important. The greater the perceived severity of the punishment, the less likely an individual will be willing to risk unethical behavior (Zimring & Hawkins, 1973). Based on Deterrence Theory, it is expected that students will be more likely to indicate that they would participate in an unethical behavior (moral intent) if they believe that they will not get caught and that, if caught, the punishment will not be severe. Hence, the following hypotheses are proposed: H3. The perceived likelihood that an unethical act is detected at the university is negatively related to moral intent. H4. The perceived severity of punishment at the university is negatively related to moral intent. Personal Environment Factors Personal environment refers to the influence of other individuals on one’s behavior. These individuals, called ‘‘significant others’’ or ‘‘referent others,’’ include friends, peers, and family members. Several theories have been proposed to explain the influence of significant others. Trevino (1986) argued that, based on Social Learning Theory, individuals’ behavior will be influenced by their peers rather than formal punishment from conventional society. Individuals may choose to associate with a peer group that has similar attitudes, or they may change their attitudes to conform to the peer group. Ferrell and Gresham (1985) used Differential Association Theory to explain how the influence of significant others affects ethical decision-making. Differential Association Theory assumes that unethical behavior is learned from the interaction between individuals who are a part of an intimate group or role set (Sutherland & Cressey, 1970). The more interaction that occurs within this group, the more likely individuals will follow what the group thinks rather than what their own inclinations are.

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Based on a survey of prior research (11 studies) on ethical decision-making in business, Loe et al. (2000) found that significant others were highly negatively correlated with unethical decision-making. Consistent with these findings, McCabe and Trevino (1995) found that perceived peer cheating was the most important factor in predicting cheating behavior among business students. Other studies have shown that, if peers are perceived to view cheating positively, the probability of cheating increases (Eve & Bromley, 1981; Michael & Miethe, 1989). Furthermore, the views of peers have been found to have greater influence than one’s own personal beliefs on business professional behavior (Zey-Ferrell, Weaver, & Ferrell, 1979; Zey-Ferrell & Ferrell, 1982). Hence, based on the above discussion, it is expected that, if students are embarrassed that significant others will find out they were acting unethically (moral intent), they would be less likely to conduct that act. H5. The influence of significant others is negatively related to moral intent. Situational Factors Trevino (1986) identified external pressures as one of the situational factors that influence moral behavior. Basing her argument on Rest’s (1986) work, Trevino argues that external pressures such as time, money, or competition will negatively influence individuals’ moral behavior. Individuals may perceive an act as unethical, but given external pressures, they view the benefits of conducting that act as outweighing the consequences. From a university perspective, rewards or benefits that students typically value are time and money. Time is considered one of the primary influences on the quality of decisions (Ahituv, Igbaria, & Sella, 1998). Prior researchers have argued that time pressure influences decision outcomes because individuals under time pressure fail to consider all the alternatives and the consequences of their decision (Svenson, Edland, & Slovic, 1990). Thus, students experiencing time pressure to complete a task may consider that an unethical act that saves time outweighs any potential adverse consequences. As time pressure increases, the potential benefit of the unethical act increases. The second perceived benefit examined in this study is financial. Given that pursuing a college education reduces students’ current earning opportunities, an unethical act that saves or makes money for students could potentially benefit them to the extent that they are not concerned with possible adverse consequences. Hence, as the amount of money increases, the potential benefit of the unethical act increases.

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Based on the above discussion, it is expected that students will be more likely to indicate that they would participate in an unethical behavior (moral intent) if they expect to benefit from it. H6. The amount of time spent on a project is positively related to moral intent. H7. The amount of money made or saved by conducting an unethical act is positively related to moral intent. Moral Judgment Based on Rest’s (1986) four stages of ethical decision-making, individuals’ assessment of whether an issue is ethical or not takes place prior to the individuals establishing moral intent. While numerous theoretical ethical decision-making models have incorporated moral judgment in their models (e.g., Hunt & Vitell, 1986; Ferrell & Gresham, 1985; Jones, 1991; Rest, 1986; Trevino, 1986), their assessment of moral judgment has varied. In Rest’s, Trevino’s, and Jones’ models, moral judgment is based on an individual’s level of cognitive moral development. Based on a review of studies on moral development and behavior that utilized the Defining Issues Test (Rest, 1979), Thoma and Rest (1986) conclude that, while there is a positive relationship between moral judgment and behavior, ‘‘the strength of the relationship is moderate’’ (p. 135). One of the problems with using moral development as a measure is that individuals operate within a range of moral development stages (Rest, 1979) and that range is context-dependent (Jones, 1991). Other researchers have assessed moral judgment in terms of whether or not an individual considers a particular behavior as ethical or unethical. In Hunt and Vitell’s model (1986), moral judgment is defined as an individual’s belief that a particular alternative is the most ethical alternative. They argue that moral judgment is determined by an individual’s deontological and teleological evaluation and that moral judgment will impact behavior through the intervening variable of moral intent. Thong and Yap (1998) provide support for this assertion. Consistent with Hunt and Vitell (1986), moral judgment is defined in the current paper as an assessment of whether an act is considered ethical or unethical. It is expected that students who consider that an act is unethical will be less likely to say that they would perform the act. H8. A student’s perception of whether a behavior is unethical is positively related to moral intent.

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METHODOLOGY A case instrument was developed to test the above hypotheses. There were two versions of the case instrument relating to the two treatment conditions: low benefit and high benefit. Benefit refers to the amount of time spent on a project or the amount of money that could be made or saved by acting unethically. To reduce demand effects (due to the possible reluctance of students to report their position on unethical behavior to their teacher), the researcher administered the cases to students taught by other instructors. The instrument contained four parts: (1) a background questionnaire; (2) four case scenarios on ethical issues dealing with computer usage; (3) four case questionnaires; and (4) a post-experiment questionnaire. The instrument was reviewed by colleges and then piloted two times on students. Students were asked about clarity of the questions, understanding, and problems. The cases were designed to represent various ethical dilemmas that students may experience in a university setting. As noted by Trevino (1992), case studies are useful for testing the influence of hypothesized variables on subjects’ decisions in hypothetical decision situations. The cases were based on real-life university experiences. The questions in the instrument were mainly taken directly from instruments used in prior studies. Subjects Five senior business classes at a large public university in the Midwest participated in the study. Of the 131 subjects participating in the study, two students failed to complete all parts of the study and were dropped from the analysis. Descriptive data on the subjects are presented in Table 1, (panel A). Seventy-six males and 55 females participated in the study. The average age of the subjects was 24 years. Twenty-six (19 percent) of the subjects were not employed. The average reported grade point average was 3.21. For those who were employed, the average number of hours worked per week was 24. Procedure Subjects were informed that the research instrument was an opinion survey on computer issues, that the university had approved the study, and that their response would not be identifiable. Furthermore, they were told that a summary of the results would be presented to them later in the semester. Subjects were given the instrument and instructed to read each case and

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Table 1. Subjects’ Descriptive Information.

Panel A Age GPA Gender Male (N) Female (N) Total

Mean Response

Standard Deviation

Minimum

Maximum

24.25 3.21

4.64 0.47

18 2

46 4

76 55 131

Panel B Moral Intenta

Low Benefit

High Benefit

Case Case Case Case

42.57 39.69 67.27 33.56

46.03 49.01 68.87 28.80

a

A (spreadsheet copying) B (program copying) C (sharing electronic text) D (downloading songs)

(33.76) (35.89) (34.52) (37.90)

(35.67) (35.26) (36.74) (36.37)

Likert scale for moral intent is 0% (never) to 100% (always).

complete the case questionnaire, post-experiment questionnaire, and background questionnaire in the order that they were received, and to turn each part over when it was completed. A case questionnaire followed each case. This procedure was chosen to ensure that the students did not go back and change answers. Furthermore, the cases were randomized to avoid possible order effects on responses to the cases, and the treatment condition, low benefit, and high benefit, was also randomized. Administration of the instrument took approximately 15 min. Cases Four cases were selected to reflect different ethical decisions students might encounter while in college (see the appendix). The first two case scenarios dealt with copying an assignment from a friend. In both scenarios, students were told that they have already been working on the assignment for either 10 or 20 hours (low/high benefits). In the first scenario (Case A), the student worked with a friend on the spreadsheet assignment and copied the final product, while in the second scenario (Case B) the student had not done additional work on the assignment but had just copied another student’s program. The third case scenario (Case C) dealt with a student saving

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money by sharing access to an electronic textbook.2 The student could save either $40 or $80 (low/high benefit). In the last case scenario (Case D), the student could make money by using a university account to download songs and sell them to other students. The student could make $50 or $100 (low/ high benefit). In addition to selecting cases that represent real-life university experiences, the cases also reflect situations where social norms differ. As stated earlier, an unethical decision is either illegal or unacceptable to the larger community. For new ethical situations, social norms and legality may not be established. For instance, Case A (copying a spreadsheet) and Case B (copying a program) represent ethical situations that have existed in a university environment for a long time, and one would expect that social norms exist for these situations. On the other hand, Case C (sharing an electronic textbook) and Case D (downloading songs) deal with ethical computer scenarios that have arisen in the past five years due to advances in technologies. Hence, social norms may not be as well established. For instance, the study was conducted prior to the court decision on whether downloading songs from Napster.com was legal and prior to the university developing downloading policies.

Measurement of the Variables University Environment Factors Four university environment factors were measured in the study: knowledge of university policies, perceived degree of cheating taking place at the university, likelihood of being caught, and severity of the punishment.3 Information on the subject’s familiarity with the university’s policies was measured on a five-point Likert scale with a range from 1 (Not aware) to 5 (Have it memorized). Subjects were asked: ‘‘How familiar are you with [the university’s] computer usage policies?’’4 Perceived degree of cheating was also measured on a five-point Likert scale from 1 (never) to 5 (frequent). Subjects were asked: ‘‘How frequently do you believe students cheat on assignments or exams at [the university]?’’ Familiarity with university policy (UnivPolicy) and perceived degree of cheating (UnivCheat) were measured on the background questionnaire. Data on the likelihood of being caught and the severity of the punishment were collected on the case questionnaire. To assess likelihood that an act would be identified (Caught), subjects were asked: ‘‘If you hand in the copied disk,5 what is the likelihood that the professor will discover what you

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did?’’ Caught was measured on a scale from 0% (Never) to 100% (Always). Severity of the punishment (Punish) was assessed by asking the subjects: ‘‘If the professor discovers that you copied the disk, what is the likelihood that the professor will punish/penalize you?’’ Punish was measured on a ninepoint Likert scale from 1 (Not at all) to 9 (Extremely severe). Personal Environment Factors Pressure from significant others was assessed by two questions on the case questionnaire. Subjects were asked: ‘‘If you were caught copying the disk, how embarrassed would you be if your friends found out?’’ They were also asked: ‘‘If you were caught copying the disk, how embarrassed would you be if your parents or significant other found out?’’ Responses were measured on a nine-point Likert scale from 1 (Not at all) to 9 (Extremely). Because the responses were highly correlated ðcorr: ¼ 0:72Þ; we used the average of the subjects’ response to these questions as the measure for pressure from significant others (SigOthers). Moral Judgment Data on moral judgment were collected in the post-experiment questionnaire after students had finished all cases. Moral judgment was assessed for each case, by asking the subjects, for example, to ‘‘Think back to the case involving the spreadsheet. One option was handing in the copied disk you worked on with a classmate as your own. How would you classify this behavior?’’ Moral judgment was measured on a five-point Likert scale, 1 (unethical) to 5 (ethical). Moral Intent Data on moral intent were collected on the case questionnaire. Moral Intent was assessed for each case by asking the subjects, ‘‘Given this situation, what is the likelihood that you will hand in the copied disk?’’ Moral intent was measured on a scale from 0% (Never) to 100% (Always). Control Variables With the exception of the Brommer et al. model, demographic variables have not been included in other researchers’ models on ethical behavior. On the other hand, demographical attributes have received the most attention with survey research on academic cheating. Attributes receiving the most attention are gender, age, student ability, and personality. Early research on gender differences indicated that males are more prone to cheating than females (see Bushway & Nash, 1977, for a review of these studies), while

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more recent research indicates that gender differences have dissipated (Crown & Spiller, 1998). With regards to computer-related ethical scenarios, a study using business students indicated that women were better than men at recognizing unethical behavior described in certain information systems scenarios (Khazanchi, 1995). Similarly, Sims, Cheng, and Teegen (1996) found a gender difference with regards to attitudes toward illegally copying software. In contrast to these findings, Hay, Larres, Oyelere, and Fisher (2001) found that in only one of 18 computer-related scenarios presented did females and males differ on moral intent. While age has been found to be related to cheating, the findings have been conflicting. Some studies have found that older students cheat more (Ruegger & King, 1992; Michael & Miethe, 1989); others have found that younger students cheat more (Haines, Diekhoff, LaBeff, & Clark, 1986; Baird, 1980), and still others show no relationship (Daniel, Blount, & Ferrell, 1991; Antion & Michael, 1983). One attribute consistently found to be related to cheating is student ability (Daniel et al., 1991; Antion & Michael, 1983). Student ability has typically been measured as grade point average. Students with lower grade point averages have consistently been found to cheat more (Bunn, Caudill, & Gropper, 1992; Haines et al., 1986). Lastly, research findings on ethical decision-making and personality trait measures, such as locus of control, Type A behavior, etc., have also been inconclusive. Identifying attributes related to unethical behavior is important if one can pre-select individuals. However, from a practical perspective a university cannot pre-select students based on these attributes and has little control over attracting students with these attributes. With the exception of grade point average, a university would be faced with a lawsuit if it used any of these attributes to identify students. Given that the demographic variables (age and gender) have been found to be related to moral intent, albeit somewhat inconsistently, these variables will be treated as control variables and included in the research model when they are correlated with moral intent. Because grade point average has been consistently found to be related to cheating, it was included in the research model for all cases.

DATA ANALYSIS AND RESULTS In Table 1 (panel B), average and standard deviation are reported on subjects’ response to moral intent. For Case A, copying a spreadsheet, the average likelihood of the subjects to copy the spreadsheet was 42 percent

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when they had been working on the project for 10 h and 46 percent when they had been working on the project for 20 h. For Case B, subjects indicated that there was, on average, a 39 percent chance that they would copy a program after they had been working on the project for 10 h compared to the reported average of 49 percent for subjects working on the project for 20 h. For Case C, the average likelihood of subjects indicating that they would take money for sharing the electronic textbook when they would save $40 and $80 was 67 and 68 percent, respectively. For Case D, the average likelihood that the subjects would profit by downloading songs and selling them was 33 percent when receiving $50 and 28 percent when receiving $100. The likelihood of conducting an act was not significantly different for any of the cases. As noted earlier, only the individual characteristics found to be related to moral intent were treated as control variables. Pearsons correlation analysis was conducted to identify whether age and grade point average are related to moral intent. An ANOVA was used to assess whether gender was related to moral intent. The results are presented in Table 2. Younger subjects were more likely to copy a program (Case B, po0:05) and share the electronic textbook (Case C, po0:01) than older subjects. Subjects with a lower GPA were more likely to copy a spreadsheet (Case A, po0:01) and download songs (Case D, po0:01) than subjects with a higher GPA. Males were more likely to share the electronic textbook (Case C, po0:01) and download songs (Case D, po0:01) than females ðpo0:05Þ: Based on these findings, age and gender were included as control variables in the respective models. Table 3 presents the minimum, maximum, mean, and standard deviation of subjects’ responses. Subjects’ responses to their familiarity with the university’s computer usage policy and the frequency of cheating at the university was on average 2.54 (0.09) and 3.06 (0.08), respectively. The findings indicate that, on average, students were fairly familiar with the university policies and thought that students cheated often on assignment or exams at the university. Subjects varied on how they responded to the individual cases. The average moral intent score, the likelihood of acting unethically, was greatest for sharing the electronic textbook (x ¼ 68:1 percent, s:d: ¼ 3:04) and significantly different from the other cases. Moral intent was significantly lower for downloading songs (mean ¼ 31:09 percent, s:d: ¼ 3:17) than for the other cases. The average moral intent score for the spreadsheet and program cases were similar, 44.26 percent and 44.53 percent, respectively. The perceived level of whether an act was ethical, moral judgment, was significantly higher for sharing the electronic textbook (x ¼ 3:56; s:d: ¼ 0:1) than for the other cases. Moral judgment was significantly lower for copying

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Table 2.

Correlations and ANOVA on Demographics and Moral Intent.

Cases A B C D

Age

GPA


0.13
0.21
0.30
0.14


0.29
0.14
0.09
0.24

ANOVA on Gender and Moral Intent Cases A B C D

F Value 2.16 0.53 4.38 4.12

 po0:05:  po0:01:

program (x ¼ 1:68; s:d: ¼ 0:07) than for the other cases. Average moral judgment scores for the cases downloading songs and copying spreadsheets were similar, 2.63 and 2.43, respectively. Standard deviations were fairly consistent across the cases except for the perceived level of embarrassment if significant others found out. This variable was much higher for the downloading songs case (2.6) than for any of the other cases (copying spreadsheet, 0.23; copying program, 0.23; and sharing electronic textbook, 0.16). This finding suggests that subjects’ opinions vary greatly on whether significant others play a role in their decision process and may suggest a lack of developed social norms regarding downloading songs.

Hypotheses Testing To test the hypotheses, a general linear model (GLM) was run for each case. For all analyses, the 0.05 alpha level was used to denote significance. The results are presented in Table 4. To ensure that co-linearity problems did not exist, a multicolinearity diagnosis was conducted. The GLM model for Case A had the highest explanatory power with an R2 of 0.53. The R2 for Case B, Case C, and Case D were 0.37, 0.26, and 0.40, respectively.

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Table 3.

155

Descriptive Statistics of Subjects’ Responses. Minimum

Mean

Standard Deviation

5 5

2.54 3.06

0.09 0.08

Case A — Copying spreadsheet Moral intent 0 Caught 0 Punished 1 SigOthers 1 Moral judgment 1

100 100 9 9 5

44.26 54.11 6.70 4.50 2.43

3.05 2.48 0.19 0.23 0.10

Case B — Copying program Moral intent 0 Caught 0 Punished 1 SigOthers 1 Moral judgment 1

100 100 9 9 4

44.53 43.98 7.71 5.67 1.68

3.05 2.24 0.13 0.23 0.07

Case C — Sharing electronic textbook Moral intent 0 Caught 0 Punished 1 SigOthers 1 Moral judgment 1

100 100 9 9 5

68.10 27.22 3.80 2.20 3.56

3.04 1.98 0.19 0.16 0.10

Case D — Downloading songs Moral intent 0 Caught 0 Punished 1 SigOthers 1 Moral judgment 1

100 100 9 9 5

31.09 40.62 5.66 3.41 2.63

3.17 2.38 0.21 2.60 0.11

UnivPolicy UnivCheat

1 1

Maximum

UnivPolicy – familiarity with university’s computer usage policy. UnivCheat – perceived degree of cheating at the university. Moral intent – the likelihood that the subject will cheat. Caught – perceived likelihood that the cheating act would be found out. Punished – perceived severity of the punishment if the cheating act was found out. SigOthers – perceived level of embarrassment if friends, parents, or significant others found out that the subject had been caught cheating. Moral judgment – perceived level of whether an act is unethical or ethical.

University Environment Factors The first hypothesis (H1) asserts that the perceived level of cheating at the university is positively related to moral intent. Perception of the level of cheating (UnivCheat) was significantly positively related to the likelihood

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Table 4. Results of General Linear Models. Source

GPA Age Gender High/low motivator University policy University cheat Caught Punished Significant others Moral judgment Adjusted R2 Case Case Case Case

Case A (P4F)

Case B (P4F)

Case C (P4F)

Case D (P4F)

0.03 — — 0.389 0.073 0.024 0.003 0.334 0.001 0.000 0.53

0.259 0.776 — 0.393 0.428 0.000 0.001 0.963 0.002 0.044 0.37

0.612 0.020 0.245 0.702 0.949 0.264 0.413 0.662 0.025 0.000 0.26

0.282 0.935 0.282 0.521 0.319 0.075 0.583 0.686 0.982 0.000 0.40

A ¼ copying spreadsheet. B ¼ program copying. C ¼ sharing electronic textbook. D ¼ downloading software.

that a student would copy the spreadsheet (Case A) and copy the program (Case B). The correlation coefficients for UnivCheat were 6.40 ðpo0:02Þ for Case A and 9.78 ðpo0:001Þ for Case B. UnivCheat was not significantly related to moral intent for sharing the electronic textbook (Case C) and downloading songs (Case D). These results provide support for H1 in the cases of spreadsheet copying and program copying. The second hypothesis (H2) posits that students who are more familiar with the university’s computer usage policies are less likely to conduct an act that would violate these policies. Familiarity with university usage policies (UnivPolicy) was not significantly related to moral intent for B through D. For Case A, UnivPolicy was positively related to moral intent ðcoef: ¼ 4:70Þ at the 0.07 alpha level. Hence, H2 was not supported. The third hypothesis (H3) asserts that the perceived likelihood of being caught is negatively related to moral intent. The perceived likelihood of being caught (Caught) was significantly negatively related to the likelihood of conducting an act in Cases A and B with a correlation coefficient of
0.35 ðpo0:003Þ and
0.40 ðpo0:001Þ; respectively. Perceived likelihood of being caught was not significantly related to moral intent for Cases C and D. Hence, H3 is supported in the cases of copying spreadsheets and programs. The fourth hypothesis (H4) posits that the perceived severity of the punishment of an act is negatively related to the likelihood of conducting that

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act. Perceived severity of the punishment was not significantly related to moral intent in any of the cases. Hence, H4 is not supported. Personal Environment Factors The fifth hypothesis (H5) predicts that the influence of significant others is negatively related to moral intent. Significant others (SigOthers) is negatively related to moral intent for Case A (coef: ¼
3:96; po0:001), Case B (coef: ¼
3:43; po0:002), and Case C (coef: ¼
4:57; po0:025). Subjects who would be embarrassed if significant others found out they were caught conducting an act were less likely to conduct the act. For Case D, downloading songs, significant others was not related to moral intent. Hence, H5 is supported for three of the four ethical case scenarios. Situational Factors Hypothesis 6 and Hypothesis 7 assert that, as the benefits a student receives from conducting an unethical act increase, the likelihood of the student conducting that act also increases. Time spent on a homework assignment was manipulated in Case A and Case B. The amount of time spent on an assignment was not significantly related to moral intent in either case. Hence, H6 is not supported. The amount of money saved or money earned was manipulated in Cases C and D. Again, the manipulation of money in the cases did not relate to moral intent. Hence, H7 is not supported. Moral Judgment Hypothesis 8 proposes that moral judgment (whether an act is ethical) is positively related to moral intent. Moral judgment was significantly positively related to the likelihood of acting unethically in all cases. Hence, subjects who perceived an act as less ethical were less likely to conduct the act than were subjects who perceived it as more ethical. For Cases A, B, C, and D, the correlation coefficients were 11.60 ðpo0:001Þ; 6.95 ðpo0:03Þ; 10.25 ðpo0:001Þ; and 13.04 ðpo0:001Þ; respectively. These findings provide support for H8.

DISCUSSION In response to the call to use theoretical models to investigate ethical decision-making in a university environment (Crown & Spiller, 1998) and to place greater emphasis on ethics in accounting education, the current study investigates computer ethical decisions students encounter in a university

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environment. Building on prior research in business ethics, the study tests a behavioral model that incorporates university environment factors, personal environment factors, situational factors, and moral judgment. Overall, the study provides support that university environment factors (perceived degree of cheating and likelihood of being caught), personal environment (influence of significant others), and moral judgment play an important role in explaining moral intent (the likelihood a student would conduct an unethical act). However, the findings suggest that the importance of these factors on moral intent vary depending on the characteristics of the ethical decision. University environment factors were assessed in terms of perceived level of cheating, knowledge of university policies, likelihood of being caught, and severity of the punishment. In the situations that dealt with older technology issues, i.e., copying an assignment (Cases A and B), moral intent was found to be related to the degree of cheating perceived by students to exist at their university and the likelihood that their university would discover the act. These findings support structuration theory with respect to legitimation structures and domination structures. As argued earlier, legitimation structures reflect the attitudes and values of the students in terms of what is considered ethical behavior. Students’ perception of the degree of cheating that takes place in the university will reflect what is tolerated at the university. Domination structures deal with the influence of rewards or sanction on an individual’s behavior. While the severity of the punishment was not related to moral intent, the perceived likelihood of being caught was. Support for significance structures was not found. Significance structures reflect the moral codes of conduct that are articulated by an organization. In this study, students’ knowledge level of the university’s policies was used to indicate whether the university effectively communicated moral codes of conduct. Akaah (1993) argues that organizational norms exert more influence on employee behavior than written rules or regulations. It may be that significance structures were influential, but not after accounting for the effects of perceived degree of cheating. Another possible reason for our lack of findings is that we did not test students on the specific university policies but rather asked them how familiar they were with the policies, leaving the possibility that they overstated their knowledge. Domination structures deal with the influence of rewards and/or sanctions on whether individuals adhere to social norms. While students’ perception of the severity of the punishment was not related to moral intent, the likelihood of being caught was related to moral intent. This finding is consistent with Dickson’s (1978) argument that an individual’s expectation about the probability of an event’s detection is more important than the expected consequence.

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Consistent with Social Learning Theory and Differential Association Theory, personal environment (influence of significant others) was significantly related to moral intent for three of the four case scenarios. The significant others variable was not related to the case on downloading songs. As noted earlier, students varied greatly on how they responded to the question on significant others with regard to downloading songs, possibly indicating a lack of consensus on this variable or a lack of developed social norms. Given that the influence of significant others has been found to be one of the most influential factors on moral intent, future research is needed to understand how new technologies influence ethical decisionmaking. Situational factors were not related to moral intent. Unlike the pilot study, subjects did not significantly differ as to how they responded to the two treatment conditions. These findings could be due to the fact that subjects did not respond to the motivational stimuli (time or money) either because the stimuli were not considered large enough payoffs or that the subjects did not pay enough attention to the amounts. A limitation of the study is that an exit interview on whether time and money played a role in their decision was not conducted. Since the experiment was held during the class period, exit interviews were not possible because of time constraints. Further research is needed to identify when situational factors become important in student decision-making. Moral judgment, an assessment of whether an act is ethical or unethical, was related to moral intent. This finding is consistent with prior research. Unlike the other research variables examined, the relationship between moral judgment and moral intent is consistent across all cases. Furthermore, for the two cases that dealt with new technology issues, moral judgment appears to be the most influential variable in determining moral intent. Given the difference in the results across the different ethical scenarios, further research is needed to understand what role-specific aspects of an ethical situation (e.g., task characteristics) play in influencing moral intent. One of the difficulties with conducting experimental studies on ethics is getting subjects to provide an honest (i.e., non-biased) response to the cases provided. We chose to design our cases so the subjects were the central character in the case and reported on how they would act. Prior research indicates that subjects perceive their peers to be more likely to conduct an unethical act than themselves (McCabe & Trevino, 1995). Making the subjects the central character of each case may have caused a conservative response bias, reducing our chances of finding support for our hypotheses.

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CONCLUSION Given that numerous reports on students’ attitudes indicate that cheating is acceptable and sometimes necessary, identifying and understanding the factors that deter unethical behavior is important for universities and faculty members. Deterring students from cheating not only requires that students be aware of whether or not a behavior is condoned but also be aware that the university or professors are monitoring their behavior. There are several ways in which universities and faculty members can monitor student behavior. For example, new technologies are available that enable faculty members to scan student papers for plagiarism. Utility programs are available to test whether or not program files are similar. By maintaining a database of old projects handed in, faculty members can quickly check for copying incidents. Students’ perception that they could be caught may significantly deter unethical behavior. The finding that perception of the degree of cheating at the university and the likelihood of being caught are related to moral intent suggests that the method faculty members use to deal with cheating may also be important in reducing cheating at universities. The manner in which faculty members respond to cheating has not been documented. However, anecdotal evidence suggests that faculty members are leery of responding too severely to students’ unethical behavior because of the large amount of time required to prosecute students and the desire to avoid lawsuits. In one case at St. Thomas University in Florida, a student was convicted by the university honor society for cheating and, upon graduating, sued the professor and university for loss of ability to obtain a job (Kleiner & Lord, 1999). Future research is needed to investigate how faculty behavior deters cheating. In addition, universities response to cheating varies greatly from taking legal action to adopting stronger disciplinary policies to requiring students to read and sign a computer usage policy or code of ethics policy upon entry to the university. Changing students’ perception that they will not be caught can be accomplished in several ways. Informing students that they will be monitored (e.g., their papers will be tested for plagiarism) will raise their awareness. Typically, when students enter a university, they read and sign a computer usage policy or conduct policy. While this informs students of what is considered important, students do not tend to remember that they signed a document, let alone remember the contents of the document. Providing students with continual reminders of acts that are considered unethical is needed. This can be done by posting flyers on unethical behavior to classroom walls or having unethical behavior defined in each syllabus. Finally,

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incidences in which students have been caught cheating should be highly publicized around the university campus with care taken not to include details allowing the reader to identify those involved. This publicity will contribute to students’ perception that the university is proactive in catching cheaters. As noted earlier, social norms for new technology may not be well established yet. Hence, individuals cannot rely on social norms (university environment factors) and must rely on personal environmental factors. Furthermore, new technology issues may affect whether subjects view the cases unethical (moral judgment). The findings indicate that university environmental factors play a much greater role in explaining moral intent with older technology issues than newer issues. In conclusion, the study builds upon prior work investigating students’ unethical behavior in universities. This study was designed in response to the call for more collegiate studies using theoretical research models (Crown & Spiller, 1998) and to the increasing role of ethics in the accounting curriculum (Coate & Frey, 2000). The study provides support for providing informational programs on what is considered unethical behavior and making students aware that faculty members are actively watching their behavior. Given the continual introduction of new technologies in the university environment, future research is needed to help understand students’ development of ethical judgment with new technologies.

NOTES 1. Frequency of cheating is assessed by the number of times a student has cheated while at college. 2. A different version of this case has been used in a prior study (Hofferd & Ruf, 2001). 3. The scales used to measure the variables were selected based on what was considered most appropriate for the questions being asked. Using different scales to measure different constructs is common. 4. Note, instead of ‘‘university,’’ the actual university name was used for all questions. 5. The specified act was indicated for each of the cases.

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APPENDIX Case Scenarios Case on Sharing Work and Copying Spreadsheets You have been given a very difficult spreadsheet project for your computer applications course. Because this course is required, you must receive at least a C in the course. You have been working for 10 (20) hours on the assignment and still have not figured it out. You need to hand this project in to pass the course. You agree to meet a classmate in the computer lab to work on the project. Your professor had stated in the beginning of the course that students may work together to solve problems with projects; however, the spreadsheet they hand in must be their own work. You and your classmate start out sitting at adjacent computers, both testing things out on your own computer. When your classmate gets the first step, you move over to discuss how it was done and what needs to be done next. Since you are not a good typist, it is quicker for your classmate to test things out. After four hours, you and your classmate finally complete the assignment. Since you have both worked on the assignment together and you are late for your next class, you just decide to copy the file from your classmate. Case on Copying Computer Program For the last assignment of your computer course, you are required to design a computer program. You have been working on the program for 10 (20) hours and have not been able to figure it out. You have been doing very poorly in this computer course and need to get an ‘‘A’’ on this assignment to get a decent grade for the course. You suddenly remember that your friend Pat took this course a year ago and got an ‘‘A.’’ You have helped Pat a number of times with some courses, and you are sure that Pat would gladly help you with this project as a payback for all your help in the past. Pat recognizes the project from last semester right away. Pat makes some modifications to the program from last semester and gives you a copy of it. Case on Sharing Access to Electronic Textbook Your professor has required you to buy an electronic textbook that is available only on the web. The cost is $60 ($120). To save on money, two other students in your class have offered to split the cost of the electronic

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book with you and share the password needed to access the book. When signing up for the electronic textbook, you have to agree not to share the material with other people. By sharing the textbook, you will be able to save $40 ($80). Case on Downloading Songs Spring semester has been extremely stressful this year. You would like to get away for spring break but are a little short on cash. You need to find a way to make some extra money that is not too time consuming. One day you discover that there are sites in other countries where you can download free copies of songs, just like Napster used to provide. You come up with a brilliant idea on how to make money. Using your university account you can make and sell CDs to students. The students can select the songs they want you to copy to the CD. To see if students would be interested in this, you send a flier around in one of your classes offering a customized music CD. Based on the responses to the flier, you will make $50 ($100).

THE PLACE OF ETHICS SCHOLARSHIP IN THE U.S. ACCOUNTING ACADEMY: ACCOUNTING DOCTORATES’ RESEARCH PRODUCTIVITY IN ETHICS JOURNALS Richard A. Bernardi1, David F. Bean and Paul F. Williams ABSTRACT While there has been research that assesses the research productivity of doctoral programs, the existing research uses journals that do not include ethics as a principal area of interest for manuscripts. In an era that witnessed the Enron/Arthur Andersen scandal, among other publicized ethical lapses, the resultant expectation would be for an increased focus/ emphasis on ethics in mainstream accounting research. Given the hue and cry about ethics and the acknowledged/conferred responsibility of academia for the development of ethical graduates, perhaps ethics should be one of the primary research themes and paradigms in accounting scholarship. To the extent that this is an acknowledged and accepted Research on Professional Responsibility and Ethics in Accounting Research on Professional Responsibility and Ethics in Accounting, Volume 10, 167–192 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1574-0765/doi:10.1016/S1574-0765(05)10007-7

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destination, it is essential to know where we currently stand on this important journey. This research provides data on the level of productivity in accounting ethics research for the graduates of doctoral programs in accounting from 1969 through 1998. We rate this productivity using the research published in 21 ethics journals, which were analyzed for the 35-year period (1968–2002). The study identifies the doctoral programs graduating the largest number of scholars publishing ethics research.

There are over a 100 articles that rate professional schools or journals (Williams, 2000). In accounting, journal ratings have been used to rank Ph.D. programs by their graduates’ publication rates (Hasselback & Reinstein, 1995; Jacobs, Hartgraves, & Beard, 1986) and to rate accounting departments and institutions (Windal, 1981). However, Bernardi (2004) reports that none of the top 40 journals used by Hasselback, Reinstein, and Schwan (2003) to rank accounting’s prolific authors declare ethics as a manuscript area of interest (Cabell, 2000a). Furthermore, only four of the 132 accounting journals in Cabell’s (2000a), indicate ethics as an area of interest for manuscripts. In an era of public outcry over the ethics of Enron et al. and the accompanying reform measures, it is disturbing to note the dearth of publishing opportunities in accounting journals for ethics scholarship. Bringing ethics into the mainstream as an integral component of accounting research and scholarship, and its associated journals necessitates an act of leadership and commitment on the part of both research institutions and journal editors. The purpose of this study is to identify those accounting Ph.D. programs that are preeminent in graduating accounting scholars that publish ethics research to determine whether ethics scholarship is systematically directed by the existing U.S. academic structure. Consistent with prior Ph.D. program assessment research, the prominence of Ph.D. programs is based on the publication rates of their graduates. In this research, we identify the doctoral programs graduating the most prolific accounting ethics scholars for the 30-year period (1969–1998).

MOTIVATION Many prospective accounting Ph.D. students have a concept of their scholarly interests prior to starting their programs. A program’s scholarly

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productivity in particular areas is often used to limit search costs and arrive at a final selection. The authors, as well as many active researchers in academia, have been asked to recommend/advise students as to what are quality Ph.D. programs with an ethics research agenda. Our responses are typically driven by our familiarity with those actively engaged in ethics research. However, this approach is not suitable because it fails to reveal where, within the institutional structure of the academy, ethics scholarship is being encouraged and developed. As a result, we perceive a need for empirical evidence, particularly because none were encountered during our review of the literature. Unlike other professions or even other business disciplines such as management and marketing, most accountants do not consider ethics to be a field in which to invest intellectual capital (see Bernardi (2004) for a more complete discussion). Of the 6,200 accounting academics teaching accounting in North America (Hasselback, 2002), only 168 (2.7 percent) identify ethics as a research area. Furthermore, none of the top 40 journals used by Hasselback et al. (2003) in their rankings of prolific authors include ethics as a potential area of interest for manuscripts (Cabell, 2000a). This suggests the question of which is the cause and which is the effect? We believe that the growth of ethics literature in accounting and the number of individuals engaged in this line of scholarship has been hampered by the lack of a recognizable outlet, which the profession views as being legitimate (Bernardi, 2004). In fact, several colleagues related stories about their chairs or deans telling them that they should stop wasting their time publishing in lower tier journals, which include ethics journals. Their chairs/deans recommended that they devote their time to publishing in ‘‘A’’ journals if they expected to be tenured and/or promoted. Given this environment, it is not surprising to note the paucity of journal space available for ethics scholarship and the unwillingness/reluctance of accounting academicians to expend severely limited time in a research venue that is both underappreciated and unrecognized. This is exceedingly odd behavior for a supposedly learned discipline that presumes to be a true profession. There is a large and very noticeable disconnect between the accounting academic community’s protestations and abhorrence about unethical behavior and their actions in this important area. Since ethical presuppositions are pervasive in U.S. accounting research and practice (e.g., quality of earnings, stock options, etc.), some would argue that there is not a need to designate or recognize it as a specific and separate ‘‘scholarly area.’’ The authors do not share this view, since the ethical presuppositions underlying accounting research and practice require critical examination in situ. The

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economic naturalism that underlies all U.S. accounting research, relegates ethical behavior to the uninteresting or irrelevant (Shearer, 2002; Williams, 2000, 2004). However, behaving ethically is the essence of meaningful professional lives (May, 1992). Thus, we find this limited, positive economic view to be seriously flawed as an exclusive frame within which to understand professional behavior. The academic journal is the principal means through which scholars communicate and establish the intellectual content of their respective disciplines (Hargens, 1988). Because academicians communicate their scholarly efforts to others primarily through journal articles, it is reasonable to assert that the number of journal articles in a particular ‘‘interest area’’ is a powerful indicator of a Ph.D. program’s or an individual’s ‘‘scholarly interest.’’ The most effective strategy to understand the scholarly content of a discipline and to identify the scholarly priorities is to investigate the content of the discipline’s journals. This we do in order to determine where ethics scholarship is being systematically developed.

THE STRUCTURE OF THE U.S. ACCOUNTING ACADEMY In the last 40 years, philosophers, historians, and sociologists of science have come to view the scientific process not as a problem of the logic of induction but as one of social construction. All knowledge structures, including scientific knowledge, are products of the social contexts within which they are created. The philosopher Helen Longino (1990, pp. 75–76) describes scientific knowledge as: [S]ocial knowledge. It is produced by processes that are intrinsically social, and once a theory, hypothesis, or set of data has been accepted by a community, it becomes a public resource. It is available to use in support of other theories and hypotheses and as a basis of action. Scientific knowledge is social both in the ways it is created and in the uses it serves.

Consequently, what passes for knowledge within any discipline is dependent upon how that particular discipline is organized socially. Within the sociology of science there has been extensive work documenting the social structures that influence the content of various disciplines (e.g., Knorr-Cetina, 1981; Fuchs & Turner, 1986; Whitley, 1984). All scholarly/ scientific fields are stratified (for a summary of this research see Williams & Rodgers, 1995). That is, they are organized in a hierarchical manner; they

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produce a small elite who perform the gatekeeping function of determining what the research standards are for the discipline, and what constitutes knowledge admissible to the existing corpus of knowledge in the discipline (see, e.g., Blissett, 1972). Two characteristics of the elite in most fields are the extent of their productivity, measured as either number of publications or citations in the most prestigious journals, and the prestige of the school from which they received their doctoral degrees. These factors are obviously not independent – prestige begets prestige. But within any discipline, that which leads to prestige for any single scholar is determined by what the structure of the discipline determines as ‘‘prestige’’ earning activity. The U.S. accounting academy is not an exception to the stratification that occurs in other scholarly disciplines. There is a fairly extensive literature that has investigated the structure of the U.S. academy and the result of this investigation is the confirmation that there is an elite in academic accounting, which determines what is acceptable scholarly activity, and therefore, who is admitted to the elite. There exists a set of elite doctoral programs in the United States. If a scholar has not received his/her Ph.D. from one of these schools, their chance of becoming a gatekeeper is virtually nil (Williams & Rodgers, 1995; Rodgers & Williams, 1996; Lee, 1995, 1997; Lee & Williams, 1999). In the last 35 years, only one accounting scholar, who was not a graduate of one of the elite schools, has achieved any status as gatekeeper over the content of the discipline’s corpus of knowledge (Williams, Jenkins, & Ingraham, 2004). What is most striking about the U.S. structure, unlike that of the natural sciences and most social sciences, is that it is not replicated in the rest of the world (Lukka & Kasanen, 1996; Lowe & Locke, 2005). The structure of the U.S. academy is very much an American phenomenon. The schools, whose graduates overwhelming comprise the elite that perform the gatekeeping function in the U.S. academy are, for the most part, schools that were founding members of the American Accounting Association. Williams and Rodgers (1995) study of the gatekeepers at The Accounting Review identified only 15 schools whose graduates achieved the editorial power to act as significant gatekeepers: Berkeley, Carnegie Mellon, Chicago, Cornell, Illinois, Iowa, Michigan, Michigan State, Minnesota, Ohio State, Rochester, Stanford, Texas, Washington (Seattle), and Wisconsin.2 Lee (1997) found this slate of degree schools to be prominent on the editorial boards of the other acknowledged prestigious U.S. journals as well. Through time, these elite graduates have transformed legitimate accounting scholarship into a subdiscipline of neo-classical economics (Reiter & Williams, 2002; Williams, 2003). Today, U.S. accounting is dominated by

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a small set of elite schools. Their domination is a function of their facility for mimicking the research techniques and assumptions of monetarist finance. Other forms of scholarship (e.g., those informed by psychology or sociology) have largely been expunged from the corpus of accounting knowledge (Williams et al., 2004). To the extent that ethics scholarship is not a valued activity for graduates of these elite doctoral programs, there is small likelihood that ethics will be regarded as an area for serious scholarly effort. The current structure of the U.S. academy organizes accounting scholarship in a particular way. If ethics scholarship is not an integral part of that structure, then ethics will receive short shrift when the issue is the scholarly agenda for accounting. One question that should be addressed is whether the ‘‘gatekeeper’’ schools have editorial power out of proportion to the number of accounting Ph.D.s they have produced over the years. The answer to this is constrained because information about international schools is limited; obviously the total population of Ph.D.s includes the world. Rodgers and Williams (1996) provide a graph that compares authors in The Accounting Review by degree school as a proportion of authors versus proportion in the population of Ph.D.s; their conclusion is that graduates of elite schools are disproportionately represented. Additionally, the current editorial boards of The Accounting Review, Journal of Accounting Research, and Journal of Accounting and Economics have the following percentages of elite graduates serving on the editorial boards of our three top journals at the beginning of 2005: The Accounting Review: Approximately 80 percent of the editors and 70 percent of the editorial board are graduates of elite schools. Journal of Accounting Research: All of the editors and approximately 75 percent of the editorial board are graduates of elite schools. Journal of Accounting and Economics: All of the editors and approximately 70 percent of the editorial board are graduates of elite schools.

Consequently, of the most influential editors of our three leading journals, over 90 percent are graduates of elite schools. One can calculate the proportion of elites in the total population using the number of overall graduates or just the number of recent graduates. Hasselback (2002–2003) provides the total number of Ph.D. graduates by school. Based on these data, the proportion of elite graduates in the entire history of accounting doctoral education is approximately 30 percent. However, this proportion has been shrinking over time; 40 years ago, the elite schools accounted for nearly all of the accounting graduates (Rodgers & Williams, 1996). Additionally, many of the older elite school graduates are no longer teaching. If one compares more recent data, the graduates of

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elite Ph.D. programs comprise approximately 22 percent of the Ph.D. graduates for the period 1980–2003. Journal of Accounting Research and Journal of Accounting and Economics are proprietary journals; consequently, they can choose whomever they want to serve as editors on their editorial boards. However, 70 percent of The Accounting Review’s editorial board membership graduated from elite Ph.D. programs that comprise only 22 percent of the recent U.S. graduates. It is surprising that this dichotomy has not incensed the membership of the accounting academy into making structural changes, since they currently subsidize a reputation system that precludes the majority from participation. That ethics may not be an important area of accounting scholarship is borne out by recent analyses of a larger set of scholarly accounting journals. Hasselback and Reinstein’s (1995) and Hasselback et al.’s (2003) analyses of publications, in what some consider the top 40 accounting journals, has been the consensus measure of research reputation for accounting faculty and departments. However, a review of Cabell’s (2000a) shows that none of these top 40 journals indicate that ethics is an area of interest in terms of manuscript submissions (Bernardi, 2004). The absence and/or lack of statement about ethics as an area of interest for the top 40 journals effectively serves to diminish the efforts and accomplishments of ethics researchers. AACSB (2001) requires that ethical issues be covered in an undergraduate curriculum. While AACSB does not require a specific ethics course, they do interpret this requirement to mean that ethical issues can be covered by ‘‘interweaving them throughout other required curricular elements’’ (p. 16). Consequently, one would anticipate that this exposure would encourage faculty to do research in ethics that is evidenced by publications. After all, to teach ethics presumes in interest and an in-depth knowledge of the area. Hasselback’s 2002–2003 Faculty Directory (2002) shows that only 168 (2.7 percent) of approximately 6,200 professors (assistant, associate, and full) who teach accounting in North America declare ethics to be an area of research interest (Bernardi, 2004). Even allowing for errors associated with incorrectly processing the information, errors or omissions on the part of accounting departments and individual faculty this ratio is quite small. The authors find the apparent disconnect between: (1) the accounting profession’s concerns about ethics, (2) incorporation of the importance of ethics in the mission statements of academic institutions/accounting departments, and (3) the research efforts/outputs in ethics for accounting faculty to be disappointing. Entities tend to emphasize as prestige standards the activities at which they have been successful (Gross, 1970). Thus prestige is often a self-reinforcing standard (Morris, Cudd, & Crain, 1990). This is troublesome as the

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presence of so few accounting faculty declaring ethics as an area of research interest suggests that perhaps senior faculty may attach little or no prestige to research in the ethics area. Institutional recruiting is also impacted by perceived prestige as there is often cross-hiring between institutions/departments that are perceived to embrace similar levels of prestige rankings (Nikolai & Bazley, 1975). Furthermore, Ostrowsky (1986) found institutional research reputation to be the central factor in screening and final choice by faculty candidates.

METHODOLOGY Our study examines the population of 4,933 individuals graduating from accounting doctoral programs during the 30-year period of 1969–1998. The database that identifies and classifies faculty in this study is the index in Hasselback’s (2002) 2002–2003 Accounting Faculty Directory. We include the data for doctoral year groups through 1998; subsequent year groups were excluded because the time lag, since they received their doctoral degrees, has not been long enough to clearly indicate ethics scholarship as a primary scholarly commitment. Ethics journals were identified from Sabrin (2002) and Cabell’s (2000a, b). In addition, the internet was used to search out other journals focusing on business ethics. Overall, 21 journals dealing with business ethics were identified. The years of publication for these journals ranged from two years (Journal of Power and Ethics) to 41 years (Business and Society). In the datagathering process, the authors counted only full articles appearing in the 21 journals and serials; commentaries, notes, and book reviews were not counted. The search for journal articles was done manually using Hasselback’s 2002–2003 Faculty Directory (2002) to identify the authors’ doctoral programs. The authors encountered the same problems noted in Hasselback et al. (2003) (e.g., misspellings, the use of initials, and several persons with the same name). Like accounting journals, ethics journals provide brief biographies of the authors that assisted in properly identifying the correct author. Table 1 lists the journals included in the study and their first year of publication. As shown in Table 1, six of the 21 journals contained no publications by accounting authors; consequently, we limit the scope of our further discussion to the 15 journals with articles by accounting authors. During the data analysis, we divided the remaining 15 journals in which accounting ethics articles appeared into four groups (abbreviations used in the tables in parentheses):

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Table 1.

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Ethics Journals by Initial Publication Date.

Title of Journal 1. Business and Society 2. Business and Society Review 3. Business and Professional Ethics Journal 4. Journal of Business Ethics 5. Ethics and Critical Thinking 6. International Journal of Value Based Management 7. Business Ethics Quarterly 8. Business Ethics: A European Review 9. Professional Ethics 10. Research on Accounting Ethics 11. Online Journal of Ethicsa,b 12. Electronic Journal of Business Ethics and Organizational Studies 13. Teaching Business Ethicsc 14. Ethical Theology and Moral Practicea 15. Journal of Accounting Ethics and Public Policy 16. Markets and Morality 17. Ethics and Information Technologya 18. Global Virtue Ethics Reviewa 19. International Business Ethics Reviewa 20. Research on Ethical Issues in Organizations 21. Journal of Power and Ethicsa

First Published 1962 1972 1981 1982 1987 1988 1991 1992 1992 1995 1995 1996 1997 1998 1998 1998 1999 1999 1999 1999 2000

a

No accounting faculty members listed in Hasselback (2002) published articles in these journals from initial issue through December 31, 2002. b The Online Journal of Ethics has not published a new issue since the summer of 2000. c Teaching Business Ethics has now been incorporated into the Journal of Business Ethics.

Group 1 – Research on Accounting Ethics (ROAE) and the Journal of Accounting Ethics and Public Policy (JAEPP);3 Group 2 – Teaching Business Ethics (TBE) and the Journal of Business Ethics (JOBE); Group 3 – Business and Professional Ethics (B&PE) and Professional Ethics (PE); Group 4 – Business Ethics: A European Review, Business Ethics Quarterly, Business and Society, Business and Society Review, The Electronic Journal of Business Ethics and Organization Studies, Ethics and Critical Thinking, International Journal of Value Based Management, Markets and Morality, and Research on Ethical Issues in Organizations.

These groupings are not meant as an indication of journal quality; rather, they reflect a journal’s history of publishing accounting ethics articles.4 Research on Accounting Ethics and The Journal of Accounting Ethics and Public Policy are in Group 1 due to their commitment to publishing accounting

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ethics research; publications in these journals are shown individually. Group 2 was formed because Teaching Business Ethics will again become part of the Journal of Business Ethics beginning in 2004 after seven years as a separate journal. Business and Professional Ethics and Professional Ethics make up Group 3 because they have the same editor and a similar focus. Finally, the nine journals in Group 4 published approximately six pages per year of accounting ethics research, while the other six journals published 108 pages per year on average. One might perceive the potential outlets for accounting research as shrinking, given the data in Table 1; however, the answer depends on timeframe – short term or longer term. The number of journals is decreasing after 2000 because of the incorporation of Teaching Business Ethics into the Journal of Business Ethics and the cessation of publication of the Online Journal of Ethics. However, Table 1 also indicates that, after adjusting for Teaching Business Ethics and the Online Journal of Ethics, 17 ethics journals have been added since 1972. Consequently, between 1972 and 2000, the number of ethics journals increased by about one journal every two years (17 new journals/28 years). As part of our analysis, we decided to control for the impact a Ph.D. program has had on accounting education. One possibility would be to use the age of the program. A problem with this option is that several of the programs are small and/or have had breaks in their graduation rates. Additionally, programs established at the same time but differing in the number of graduates would not be treated equally. For instance, while the Ph.D. in accounting programs at Stanford and Illinois were both established in 1939, Illinois has graduated 330 Ph.D.s to Stanford’s 72 (Hasselback, 2002). Consequently, age could treat programs unevenly even though one would anticipate that Illinois’ graduates should have 4.6 (330/72) times as many publications as Stanford’s graduates. We made the choice to use the number of graduates from an accounting program as a control mechanism to standardize our data.

DATA ANALYSIS Top 50 Percent of Doctoral Programs The first step in the data-gathering process was to determine the number of ethics articles for each doctoral granting institution; for those graduates who

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received their doctoral degrees between 1969 and 1998 (i.e., 30 years) and who teach at institutions in the United States. Table 2 provides a benchmark showing the full-credit articles for all doctoral granting institutions whose graduates have published five or more articles in ethics journals (i.e., the sum of all graduates productivity); highlighting stratifies the sample into approximately equal thirds. Also shown in Table 2 are the journals in which these full-credit publications occurred, the coauthored adjusted articles and the number of graduates who have authored ethics articles. Forty-seven (51.6 percent) of the 91 institutions granting doctoral degrees in accounting located in the United States (Hasselback, 2002) have a total ethics productivity of at least five articles; of these, 23 (48.9 percent) programs have 10 or more articles to their credit. Table 2 also presents the relative proportions of ethics articles as a percent of the total number of full-credit articles (503). The data indicate that publications in Teaching Business Ethics/Journal of Business Ethics (Research on Accounting Ethics) account for 41.4 (31.0) percent of the total full-credit publications. This difference is attributable to the 13 year difference in their initial publication dates (Table 1, 1982 versus 1995). Business and Professional Ethics/Professional Ethics (Group 3 journals) and the Group 4 journals account for approximately the same level of publications (9.9 and 10.7 percent respectively), which was the reason for combining the nine journals in Group 4. While we only included data for those programs with over four publications, this restriction does not create a problem with data interpretation as the total number of ethics publications is 546 full-credit articles and 294.7 coauthored adjusted articles. Table 2 captures 92.1 percent (503/546) of the full-credit articles and 91.8 percent (267.3/291.2) of the coauthored adjusted articles in ethics authored by graduates of doctoral programs in the United States. Consequently, the graduates from 51.6 percent of the schools granting Ph.D.s in accounting are authoring 92.1 (91.8) percent of the full-credit (coauthored) articles in ethics. Note that only four elite doctoral programs (bold face) are included in Table 2 indicating that the dominant programs setting the discipline’s intellectual agenda are not graduating doctoral candidates with an interest in ethics scholarship. While Wisconsin graduates were tied for authoring the highest number of ethics articles (24), 11 of these articles are attributable to just two graduates, one of whom (with 7 articles) received his Ph.D. in 1970 (i.e., barely fit into the sample).5

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Table 2.

Most Prolific Institutions: 1968–2002 with Four or More Articles (Unadjusted).

Doctoral Institution

24 24 22 21 17 17 16 16 16 15 14 14 13 13 13 13 12 11 10 10 10 10 10

Accounting ROAE

JAEPP

4 13 8 2 6 3 1 5 5 1 6 4 3 4 2 4 5 6 2 2 6 1 3

2 – 2 2 – 1 – 1 2 1 – 1 1 – 3 – 1 1 – 1 1 2 1

TBE JOBE

PE B&PE

Other Eight

Coauthor Adjusted

Total Authors

13 6 4 17 6 12 9 4 8 8 5 5 8 5 4 9 2 2 5 4 2 4 5

1 4 5 – 5 – – 3 1 2 – 4 – – 2 – 2 2 1 2 1 1 –

4 1 3 – – 1 6 3 – 3 3 – 1 4 2 – 2 – 2 1 – 2 1

12.48 12.41 11.16 8.97 9.98 7.39 13.33 8.15 8.11 7.23 8.50 7.35 8.25 6.82 6.65 6.49 6.49 5.66 6.16 6.00 5.16 5.16 4.31

13 14 12 13 8 7 3 12 10 10 8 8 6 9 9 2 5 9 7 6 6 9 8

RICHARD A. BERNARDI ET AL.

Wisconsin Missouri Arkansas Louisiana State University Houston South Carolina New York University Kentucky Georgia State Kent State Illinois Virginia Tech Maryland Louisiana Tech Mississippi University of Utah George Washington North Texas Penn State Texas Tech Florida Michigan State Texas A&M

Full Credit

Totals % of Full Credit

9 9 9 9 8 8 8 8 8 7 7 7 7 6 6 6 5 5 5 5 5 5 5 5

– 3 3 1 4 3 7 5 2 3 2 3 1 – 5 3 – 1 4 1 2 2 2 3

2 2 1 – 1 – – – – – – – 3 – – 1 – – – – 1 – – –

5 3 3 7 – 2 1 2 5 3 2 2 2 6 1 2 1 2 – 4 1 3 2 2

2 – – – 2 1 – – – 1 1 1 – – – – 2 2 1 – 1 – – –

– 1 2 1 1 2 – 1 1 – 2 1 1 – – – 1 – – – – – 1 –

503 100.0

156 31.0

34 6.8

208 41.4

50 9.9

54 10.7

5.58 4.36 4.32 3.50 5.00 5.00 4.16 3.32 2.86 4.66 3.83 3.66 3.32 4.00 2.58 2.41 3.33 3.00 3.00 3.00 2.83 2.83 2.33 2.16 267.3 53.1

6 7 9 2 3 5 2 4 2 6 5 6 7 3 3 5 4 3 3 3 4 1 2 5 294 n/a

The Place of Ethics Scholarship in the U.S. Accounting Academy

Nebraska Florida State Arizona State Massachusetts Southern California University of Washington UCLA Virginia Commonwealth Boston University North Carolina Oklahoma Alabama Georgia Temple Texas Austin Arizona Colorado Pittsburgh Union College Washington State Case Western Reserve Indiana Tennessee Oklahoma State

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Table 3.

Productivity by Doctoral Institution: Full-Credit and Coauthored Ethics Articles Adjusted for the Number of Authors from Each Institution for Year Groups 1969–1998.

Doctoral Institution

Number of Ethics Authors

Full credit

Coauthor adjusted

13 16 5 9 4 8 8 8 5 17 12 13 17 6 6 8 4 24 22 14

6.49 13.33 2.83 3.50 3.00 4.16 2.86 5.00 2.33 7.39 6.49 8.25 9.98 4.00 2.58 3.32 1.66 12.48 11.16 8.50

2 3 1 2 1 2 2 3 2 7 5 6 8 3 3 4 2 13 12 8

Articles/Author Full credit

Coauthor adjusted

6.50 5.33 5.00 4.50 4.00 4.00 4.00 2.67 2.50 2.43 2.40 2.17 2.13 2.00 2.00 2.00 2.00 1.85 1.83 1.75

3.25 4.44 2.83 1.75 3.00 2.08 1.43 1.67 1.17 1.06 1.30 1.38 1.25 1.33 0.86 0.83 0.83 0.96 0.93 1.06

RICHARD A. BERNARDI ET AL.

University of Utah New York University Indiana Massachusetts Michigan UCLA Boston University Southern California Tennessee South Carolina George Washington Maryland Houston Temple Texas Austin Virginia Commonwealth Memphis Wisconsin Arkansas Illinois

Total Articles

Totals (averages)

14 24 10 5 5 5 10 21 8 16 9 15 13 13 10 7 16 9 5 5 10 11 6 7 7 10 495

7.35 12.41 6.00 3.00 3.00 3.00 5.16 8.97 5.00 8.11 5.58 7.23 6.82 6.65 6.16 3.83 8.15 4.36 3.33 2.83 4.31 5.66 2.41 4.66 3.66 5.16 264.3

8 14 6 3 3 3 6 13 5 10 6 10 9 9 7 5 12 7 4 4 8 9 5 6 6 9

1.75 1.71 1.67 1.67 1.67 1.67 1.67 1.62 1.60 1.60 1.50 1.50 1.44 1.44 1.43 1.40 1.33 1.29 1.25 1.25 1.25 1.22 1.20 1.17 1.17 1.11

0.92 0.89 1.00 1.00 1.00 1.00 0.86 0.69 1.00 0.81 0.93 0.72 0.76 0.74 0.88 0.77 0.68 0.62 0.83 0.71 0.54 0.63 0.48 0.78 0.61 0.57

281

(2.12)

(1.15)

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Virginia Tech Missouri Texas Tech Pittsburgh Union College Washington State Florida Louisiana State University University of Washington Georgia State Nebraska Kent State Louisiana Tech Mississippi Penn State Oklahoma Kentucky Florida State Colorado Case Western Reserve Texas A&M North Texas Arizona North Carolina Alabama Michigan State

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Table 4. Productivity by Doctoral Institution: Full-Credit and Coauthored Ethics Articles Adjusted for the Number of Graduates from Each Institution for Doctoral Year Groups 1969–1998. Doctoral Institution

Full credit

Coauthor adjusted

13 5 2 8 8 5 13 5 12 9 15 17 14 21 3 17 16

4.69 3.00 0.66 3.32 2.86 3.00 8.25 2.83 6.50 3.49 7.23 7.39 11.33 8.97 2.25 9.98 8.11

Number of Ethics Authors

2 3 2 4 2 3 6 4 4 2 10 7 2 13 2 8 10

Total Number Graduates

24 10 4 22 22 15 42 16 44 33 57 75 64 99 15 85 79

Articles/Graduate Full credit

Coauthor adjusted

0.54 0.50 0.50 0.36 0.36 0.33 0.31 0.31 0.27 0.27 0.26 0.23 0.22 0.21 0.20 0.20 0.20

0.20 0.30 0.17 0.15 0.13 0.20 0.20 0.18 0.15 0.11 0.13 0.10 0.18 0.09 0.15 0.12 0.10

RICHARD A. BERNARDI ET AL.

University of Utah Union College Georgia Tech Virginia Commonwealth Boston University Washington State Maryland Case Western Reserve George Washington Massachusetts Kent State South Carolina New York University Louisiana State University University of Connecticut Houston Georgia State

Total Articles

Totals (averages)

24 14 8 3 6 10 13 24 22 7 9 16 3 7 5 10 8 10 11 9 4 3 422

12.48 7.35 4.16 1.16 4.00 6.00 6.65 12.41 11.16 3.83 4.36 8.15 1.25 4.66 3.00 5.16 5.00 6.16 5.66 4.32 1.66 1.33 220.6

12 8 2 3 3 6 9 14 12 5 7 12 2 6 3 6 3 7 9 9 2 2

121 74 45 17 35 68 84 157 144 49 63 114 23 62 45 95 79 105 107 90 39 31

0.20 0.19 0.18 0.18 0.17 0.15 0.15 0.15 0.15 0.14 0.14 0.14 0.13 0.11 0.11 0.11 0.10 0.10 0.10 0.10 0.10 0.10

0.10 0.10 0.09 0.07 0.11 0.09 0.08 0.08 0.08 0.08 0.07 0.07 0.05 0.08 0.07 0.05 0.06 0.06 0.05 0.05 0.04 0.04

235

2416

(0.21)

(0.11)

The Place of Ethics Scholarship in the U.S. Accounting Academy

Wisconsin Virginia Tech UCLA Southern Illinois Temple Texas Tech Mississippi Missouri Arkansas Oklahoma Florida State Kentucky Texas-Arlington North Carolina Pittsburgh Florida Southern California Penn State North Texas Arizona State Memphis Kansas

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Table 5.

Productivity by Doctoral Institution: Full-Credit and Coauthored Ethics Articles Adjusted for the Number of Graduates from Each Institution for Doctoral Year Groups 1989–1998.

Doctoral Institution

Full credit

Coauthor adjusted

11 13 10 11 5 4 5 6 7 7 6 6 6 7 2 8

5.66 10.50 6.50 7.00 3.00 1.83 3.00 2.50 2.83 4.00 2.33 3.50 2.91 3.83 0.83 3.33

Total Number Graduates

11 17 18 20 10 9 15 20 23 26 24 25 25 31 9 36

Number of Ethics Authors

1 2 4 3 3 3 3 2 5 4 3 5 2 6 1 5

Articles/Graduate Full credit

Coauthor adjusted

1.00 0.76 0.56 0.55 0.50 0.44 0.33 0.30 0.30 0.27 0.25 0.24 0.24 0.23 0.22 0.22

0.51 0.62 0.36 0.35 0.30 0.20 0.20 0.13 0.12 0.15 0.10 0.14 0.12 0.12 0.09 0.09

RICHARD A. BERNARDI ET AL.

University of Utah New York University Missouri Maryland Union College Case Western Reserve Washington State Virginia Commonwealth Louisiana State University Texas Tech Arkansas Houston Georgia State Florida State Massachusetts Wisconsin

Total Articles

3 3 9 6 5 6 6 5 5 3 2 3 2 2 5 2 4 2 1 3

Totals (averages)

191

2.25 1.33 3.83 2.00 3.50 2.30 3.33 2.66 3.00 1.50 1.00 1.08 0.66 1.00 2.00 1.50 2.00 1.00 0.50 1.16 101.2

14 14 47 34 31 37 39 33 37 21 16 24 16 17 42 18 38 19 10 31

2 2 6 4 3 3 5 3 4 2 2 2 2 2 3 1 3 2 1 3

857

107

0.21 0.21 0.19 0.18 0.16 0.16 0.15 0.15 0.14 0.14 0.13 0.13 0.13 0.12 0.12 0.11 0.11 0.11 0.10 0.10

0.16 0.10 0.08 0.06 0.11 0.06 0.09 0.08 0.08 0.07 0.06 0.05 0.04 0.06 0.05 0.08 0.05 0.05 0.05 0.04

(0.26)

(0.14)

The Place of Ethics Scholarship in the U.S. Accounting Academy

Connecticut Kansas Kentucky South Carolina Louisiana Tech Virginia Tech North Texas Florida Nebraska Texas-Arlington St. Louis Kent State Southern Illinois Oklahoma Mississippi Temple Michigan State Minnesota Cincinnati Arizona State

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Adjusting for Coauthorship The data reported in Table 2 were adjusted for coauthorship for each individual. Credit in Table 3 for coauthorship was determined by the number of authors for each article. For example, if there were two (three) coauthors for an article, then each person received one-half (one-third) credit for the article; therefore, a coauthored article does not count as much as an individually authored article. Table 3 provides data on the 46 Ph.D. programs with graduates between 1969 and 1998 with more than one full-credit article per ethics author. The data in Table 3 show the rankings determined by the average number of articles per author from each program; highlighting stratifies the sample into approximately equal thirds. The rankings in this table were by the average number of full-credit articles per author after considering the coauthor adjusted publications in the case of a tie. During the 1969–1998 timeframe, 17 programs (top third), only one of which is elite, have graduated scholars that produced two or more ethics articles. Given publication requirements for tenure at most schools, there appears to be an extremely small number of scholars dedicated to ethics scholarship as a principal part of their scholarly agenda. Five elite doctoral programs (bold face) remain in the Table 3 distribution. Even though Michigan is in the top third, this is because Michigan has only one graduate doing ethics research. While the University of Utah and New York University graduates rank one and two for authoring the highest number of ethics articles per author, each has one graduate (i.e., Kristi Yuthas and Moses Pava) with over 10 full-credit articles. Standardizing Productivity Table 4 recognizes the fact that larger doctoral programs have a size advantage in Tables 2 and 3. Consequently, Table 4 serves to ‘‘level the playing field’’ by standardizing the ethics productivity from the previous tables for full-credit and coauthored articles. We adjust the data for all 91 doctoral programs by the total number of graduates from each institution for the year groups 1969–1998 (Hasselback, 2002). To be included in Table 4, programs had to have a publication rate of 0.10 ethics articles per doctoral graduate – 40 programs met this benchmark. The data in Table 4 show that, after standardizing for the number of graduates from each doctoral program, the rankings change; highlighting stratifies the sample into approximately equal thirds by full-credit article per graduate.

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While the University of Utah maintained its top position, Union College moved into second place followed by Georgia Tech and Virginia Commonwealth. Seven of the top 13 schools (top third) are relatively small programs: the University of Utah, Union College, Georgia Tech, Virginia Commonwealth, Boston University, Washington State, and Case Western Reserve. For the elite schools listed in Table 3, Michigan, Illinois, the University of Washington and Michigan State all failed to make the cutoff. The only elite school still included in the Table 4 ranking is Wisconsin, and it just made it into the top 50 percent of these 40 schools. Seven of the top third schools in Table 3 made the top third in Table 4. Both Tennessee and Texas Austin, which were top third schools in Table 3 also failed to make the cutoff for Table 4. Doctoral Year Groups 1989–1998 The data in Tables 2–4 report ethics publications for a 30-year period of Ph.D. graduates and provide a historical perspective of accounting ethics research. Of greater concern is the level of publications of those recent graduates who will be the continuing faculty at our institutions. Table 5 provides data on the most prolific institutions for the 10 doctoral year groups from 1989 through 1998. In Table 5, which follows the same format as Table 4, we adjust the data for all 91 doctoral programs by the total number of graduates from each institution for the year groups 1989–1998 (Hasselback, 2002). To be included in Table 5, programs had to have a publication rate of 0.10 full-credit article per doctoral graduate – 36 programs met this benchmark (39.6 percent). The highlighting in Table 5 stratifies the sample into approximately equal thirds by full-credit article per graduate. While some changes in ranking occurred among the top schools, Georgia Tech, Boston University, and George Washington do not appear in the Table 5 ranking. Missouri and Arkansas entered the top third from their positions at the bottom of the second third in Table 4. Only three elite schools are included in this list and their low numbers indicate that these graduates are not primarily committed to ethics scholarship. While Wisconsin maintained its position from Table 4, Michigan State and Minnesota returned to the rankings in the bottom third listing.

DISCUSSION This research analyzed the ethics publications in ethics journals of the 4,933 accounting doctorate holders from 91 U.S. doctoral granting institutions.

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As evidenced by the percent of ethics authors from their doctoral graduates, no one particular U.S. doctoral granting institution or group of institutions appear to dominate publications in ethics journals by accounting faculty. This suggests that for the time period reviewed in this research, which is considerable, no particular institution stands out as a mentoring presence for ethics research by accountants. The dispersion of the percentage of accounting doctoral graduates publishing ethics research suggests that those publishing in ethics journals do so as a personal choice rather than being influenced by their doctoral programs and mentors within these programs. Notable by their absence are the graduates of elite schools who dominate the gatekeeping function for the U.S. academy. No incentive appears to be provided by the current structure of the academy to engage in serious ethics scholarship. Given the current emphasis on ethics in the accounting profession, the dearth of ethics publications by accounting faculty is a concern especially, in light of the fact that only 2.7 percent of accounting faculty declare ethics as a research interest. Furthermore, our interpretation of the data is that no one particular doctoral program or group of programs in accounting dominates the ethics research agenda by current accounting faculty. Thus, the accounting academy has not provided for any systematic development of ethics scholarship. Unlike economics based research, which is systematically developed and encouraged, ethics scholarship is idiosyncratic to individual scholars. Thus, there is no collective focus on either the profession’s ethical problems or any systematic, rationally managed effort to understand them. Possible explanations include a lack of resources, lack of expertise, an overlooked component in an institution’s research agenda, a lack of interest, etc. These are potential areas for future research that are not empirically addressed in this research study. We find such a posture incredulous. One obvious weakness of this research study is that non-ethics journals in the so-called top 40 listing may, in fact, publish ethics research by accountants. While Accounting, Auditing and Accountability Journal, Accounting and the Public Interest, Accounting Forum, Accounting, Organizations and Society, Advances in Public Interest Accounting, Behavioral Research in Accounting, Critical Perspectives on Accounting, and the Journal of Accounting and Public Policy all publish some ethics articles; however, none of these journals indicates that ethics is an area of interest in their Cabell’s (2000a) listings (Bernardi, 2004, p. 145). Our review indicates that publications in these journals would have a minimal impact on our results. Some might argue that ‘‘accountant independence’’ is an important aspect of ‘‘ethics research,’’ while others argue

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that they are distinct and separate ‘‘research areas.’’ The resolution and analyses of the arguments are not within the scope of this article. However, it is important to address the frequency of these ‘‘accountant independence’’ articles as they are not included within our analyses and some may consider this to be a significant omission. To test this premise, we reviewed the articles appearing in The Accounting Review and Auditing: A Journal of Practice & Theory for the 10-year period 1993–2002. Although these are only two journals, they are the primary general and sectional journals for the American Accounting Association (AAA) and indicative of the importance of this research area to the accounting academy. Of the 283 articles appearing in The Accounting Review, nine (3.2 percent) were on ‘‘accountant independence.’’ Of the 186 articles appearing in Auditing: A Journal of Practice & Theory 14 (7.5 percent) were on accountants’ independence. However, of these 14 articles, five were from the 1999 Auditing Symposium that was devoted to the theme of independence. A complete study investigating the ethics research appearing in these journals would make an interesting extension of this study. We question whether the academic community in accounting can responsibly continue to be so distanced from an issue that is of such extreme importance to the accounting profession and society at large. Society at large has been the victim of significant frauds and financial misrepresentations (i.e. Enron and others). Many individual societal members have seen their savings and investments vaporized by these actions and many have helplessly watched as their retirement funds disappeared. Although such statements may seem rhetorical, they hardly convey the real and intense anger and frustration of those who have been and are being victimized. Consequently, members of the accounting profession have found themselves under siege due to a perception that they are associated with significant frauds and financial misrepresentations. To the extent that accountants are perceived by societal members to be willing agents of deception, real and significant threats to capital markets arise. If there is a lack of confidence in financial reports, one resultant consequence is the mispricing of securities that necessarily accompanies market inefficiencies. At an extreme, capital flights become large enough to lead to market failure. The one common thread that appears to be voiced by lawmakers, managers, accountants, and individuals is a call, perhaps a scream, for ethical behavior. Given the value and importance placed on ethics by users of financial statements and members of the accounting profession, the lack of research on ethics, in what are considered euphemistically to be ‘‘top tier’’ academic journals, suggests that ethics is of minor

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importance to many in the accounting academy, in general, and to so-called ‘‘elite’’ institutions, in particular. The academic elite’s single-minded emphasis on a neo-classical economic discourse to describe and explain all accounting phenomena has deprived the discipline of any serious means to discuss moral distinctions. With only the ethical egoist language of neo-classical economics there is no ethically right or wrong behavior; there is only behavior that is utility maximizing, i.e., means-ends rational or irrational. For a learned profession to fully comprehend and improve its practice, it must be capable of articulating judgments about ethically right and wrong professional conduct to an even greater extent than efficient or inefficient conduct. Accountants, to claim to be members of a learned profession, cannot just limit themselves to being able only to judge Andersen’s demise as economically stupid; they also need the capacity to judge it as morally reprehensible.

NOTES 1. While all three authors contributed equally to this research, the lead and second authors are involved in several research projects and alternate lead author responsibilities. 2. One might question why other schools (e.g., New York University) are not designated as an elite school in this research. To be designated as an elite school for the purposes of this research, the accounting Ph.D. graduates must perform a gatekeeping function at a premier U.S. accounting journal. On the current editorial boards of The Accounting Review, Journal of Accounting Research, and Journal of Accounting and Economics there are no Ph.D. graduates from NYU. 3. Starting with volume nine, Research on Accounting Ethics became Research on Professional Responsibility and Ethics in Accounting to reflect the scope and aims of the journal. 4. This represents the basic assumption of the current study that publications in these 15 journals concern ethics. 5. One could argue that a single ‘‘high productivity’’ ethics researcher could dramatically affect their school’s ranking. We examined this possibility and found that there were seven colleagues whose publication records in ethics were over three standard deviations (more than six publications) from the average level of publications for all ethics authors in the study. The ‘‘high productivity’’ colleagues (their Ph.D. programs – number of ethics publications) included: Moses Pava (New York University – 13), Kristi Yuthas (University of Utah – 11), Jesse Dillard (University of South Carolina – 9), Jeffrey Cohen (University of Massachusetts – 7), Stephen Loeb (University of Wisconsin – 7), Steven Mintz (George Washington University – 7), and Laurie Pant (Boston University – 7). Furthermore, the problem is compounded by schools such as Michigan, whose ranking is driven by one ethics researcher (i.e., James Lampe – 4).

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REFERENCES Bernardi, R. A. (2004). Suggestions for providing legitimacy to ethics research in accounting education. Issues in Accounting Education, 19(1), 145–146. Blissett, M. (1972). Politics in science. Boston, MA: Little, Brown and Company. Cabell, D. W. E. (2000a). Cabell’s directory of publishing opportunities in accounting (8th ed.). Beaumont, TX: Cabell Publishing. Cabell, D. W. E. (2000b). Cabell’s directory of publishing opportunities in management 2001–2002 (8th ed.). Beaumont, TX: Cabell Publishing. Fuchs, S., & Turner, J. H. (1986). What makes a science ‘mature?’ Patterns of organizational control in scientific production. Sociological Theory, 4(2), 143–150. Gross, G. R. (1970). The organization set: A study of sociology departments. The American Sociologist, 5(1), 25–29. Hargens, L. L. (1988). Scholarly consensus and journal rejection rates. American Sociological Review, 53(1), 139–151. Hasselback, J. R. (2002). Accounting faculty directory 2002–2003. Upper Saddle River, NJ: Prentice-Hall. Hasselback, J. R., & Reinstein, A. (1995). Assessing accounting doctoral programs by their graduates’ research productivity. Advances in Accounting, 13, 61–86. Hasselback, J. R., Reinstein, A., & Schwan, E. S. (2003). Prolific authors in accounting literature. Advances in Accounting, 20, 95–135. International Association for Management Education (AACSB). (2001). Standards for business accreditation. St. Louis, MO: AACSB. Jacobs, F. A., Hartgraves, A. L., & Beard, L. H. (1986). Publication productivity of doctoral alumni: A time-adjusted model. The Accounting Review, 61(1), 179–187. Knorr-Cetina, K. D. (1981). The manufacture of knowledge. Oxford, UK: Pergamon Press, Ltd. Lee, T. (1995). Shaping the U.S. academic accounting research profession: The American accounting association and the social construction of an elite. Critical Perspectives on Accounting, 6(3), 241–261. Lee, T. A. (1997). The editorial gatekeepers of the accounting academy. Accounting, Auditing and Accountability Journal, 10(1), 11–30. Lee, T. A., & Williams, P. F. (1999). Accounting from the inside: Legitimizing the accounting academic elite. Critical Perspectives on Accounting, 10(6), 867–895. Longino, H. (1990). Science as social knowledge. Princeton, NJ: Princeton University Press. Lowe, A., & Locke, J. (2005). Perceptions of journal quality and research paradigm: Results of a web-based survey of British accounting academics. Accounting, Organizations and Society, 30(1), 81–98. Lukka, K., & Kasanen, E. (1996). Is accounting a global or a local discipline? Evidence from major research journals. Accounting, Organizations and Society, 21(7/8), 755–773. May, L. (1992). Sharing responsibility. Chicago, IL: University of Chicago Press. Morris, J. L., Cudd, R. M., & Crain, J. L. (1990). The potential bias in accounting journal ratings: Evidence concerning journal-specific bias. The Accounting Educators’ Journal, 3(1), 46–55. Nikolai, L. A., & Bazley, J. D. (1975). The organizational set prestige ranking and its impact upon accounting department faculties. The Accounting Review, 50(4), 881–888. Ostrowsky, B. A. (1986). First-time accounting faculty: The job search, acceptance and support processes. Issues in Accounting Education, 1(1), 48–55.

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Reiter, S., & Williams, P. F. (2002). The structure and progressivity of accounting research: The crisis in the academy revisited. Accounting, Organizations and Society, 27(6), 575–607. Rodgers, J., & Williams, P. F. (1996). Patterns of research productivity and knowledge creation at the accounting review: 1967–1993. Accounting Historians Journal, 23(1), 51–88. Sabrin, M. (2002). A ranking of the most productive business ethics scholars: A five-year study. The Journal of Business Ethics, 36(4), 355–379. Shearer, T. (2002). Ethics and accountability: From the for-itself to the for-the-other. Accounting, Organizations and Society, 27(6), 541–573. Whitley, R. D. (1984). The intellectual and social organization of the sciences. Oxford, UK: Clarendon Press. Williams, P. F. (2000). A social view of accounting ethics. Research on Accounting Ethics, 6, 259–272. Williams, P. F. (2003). Modern accounting scholarship: The imperative of positive economic science. Accounting Forum, 27(3), 251–269. Williams, P. F. (2004). You reap what you sow: The ethical discourse of professional accounting. Critical Perspectives on Accounting, 15(6/7), 995–1001. Williams, P. F., & Rodgers, J. (1995). The accounting review and the production of accounting knowledge. Critical Perspectives on Accounting, 6(3), 263–287. Williams, P. F., Jenkins, G. & Ingraham, L. (2004). Academic reputations, behavioral accounting research and the next generation of elites. Working Paper, North Carolina State University. Windal, F. W. (1981). Publishing for a varied public: An empirical study. The Accounting Review, 56(3), 653–658.

INSTRUCTIONAL CASES

AN INSTRUCTIONAL CASE IN USING RECEIVABLES AS COLLATERAL FOR A LOAN: HARRISON CHEMICAL CORPORATION Steven M. Mintz and Mahmoud M. Nourayi ABSTRACT This instructional case analyzes the ethics of using receivables as collateral for a loan and the ethical responsibilities of internal accountants in disclosing improper classification of loans in a bank agreement. The case focuses on the pressure exerted by the major shareholder and president of the company on the accountant to go along with what the latter believes to be improper accounting techniques. The case was used by the authors in two different accounting classes – Intermediate Accounting I and Cost Accounting – and in both instances the students benefitted from a discussion of ethical issues surrounding the responsibilities of internal accountants and the role of the external auditors. Also, the case was extended in classroom discussions to include securitizations of receivables and other issues that were questionable activities in accounting scandals such as at Enron.

Research on Professional Responsibility and Ethics in Accounting Research on Professional Responsibility and Ethics in Accounting, Volume 10, 195–209 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1574-0765/doi:10.1016/S1574-0765(05)10008-9

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BACKGROUND Internal accountants have the primary responsibility to prepare the financial statements under the supervision of top management. Publicly owned companies are required by the Securities and Exchange Commission (SEC) to have their annual financial statements audited by independent CPAs. The Public Company Accounting Oversight Board (PCAOB) that was formed in the aftermath of the recent accounting scandals now establishes auditing standards and ethics rules for CPAs that audit the financial statements of public companies. PCAOB reports to the SEC. Independent auditing standard-setting no longer exists in the public arena as that task has been taken away from the American Institute of CPAs as a result of passage of the Sarbanes-Oxley Act of 2002. Throughout the process of preparing and auditing the financial statements, accountants and auditors have ethical obligations to investors and creditors that rely on the accuracy and reliability of the statements for their decision-making. These parties are known as the ‘‘stakeholders.’’ Moreover, the stakeholders often lack the technical knowledge required to understand accounting principles and auditing standards so they rely on the ethics of professional accountants and their exercise of due care in the performance of professional services. This case emphasizes the responsibilities of an internal accountant when the president of a company takes actions that jeopardize the accountants’ ability to meet ethical obligations to the stakeholders. In particular, the facts of the case raise issues related to techniques used to borrow funds and to finance the sale of receivables, and the proper accounting for these transactions under generally accepted accounting principles (GAAP).

INTRODUCTION Mike Johnson was a graduate student at the State University when he received a job offer from Harrison Chemical Corporation (HCC) for an accounting manager position. Mike chose an evening graduate program so that he could work full time. The position appeared to be a good match for Mike and paid well so he accepted it. HCC is a closely held corporation specializing in the production of industrial plastic compounds. Since its inception three years ago, HCC’s sales have tripled from $1 million to $3 million. The company projects a similar

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growth rate during the next three years so that its sales are estimated to be about $9 million. HCC hopes to go public at that time and plans to have its financial statements audited during the current year and each of the following two years. Jerry Harrison is the major shareholder and president of HCC. Jerry has limited knowledge of accounting and he needs someone like Mike to handle day-to-day details. Jerry is a hands-on owner and directly supervises the financial activities of the company including details related to valuing the receivables. Mike Johnson works under Jerry but does not feel completely comfortable with Jerry’s micro-management style. Still, he was anxious to accept the position because it provides an opportunity to work for a growing company. Mike does recognize that Jerry’s close contact with customers through his previous consulting experience provides him with information regarding industry cash flow patterns and customers’ credit-worthiness that facilitates the determination of the net realizable value of receivables.

BORROWING FUNDS Prior to hiring Mike, Jerry had approached First City Bank and applied for a loan to remedy what he anticipated would be a cash-tight period for the industry. Victoria Barkley, the bank’s vice president of commercial financing, had suggested that HCC pledge Trade Receivables as collateral for a loan program. Barkley also mentioned the possibility of bundling receivables as part of a securitization arrangement. Either way, Barkley expected HCC’s accounting department to provide all the necessary documentation and periodic reports to support granting of the loan. HCC requested a $1 million loan to insure continued research on a new plastic compound. This research project is the cornerstone of the company’s product line strategy and is critical to the long-term growth and eventual success in an Initial Public Offering of company stock. Mike’s responsibilities as the accounting manager include to review information and compile trade receivables reports and documents to support the loans. Jerry and Mike discussed financing options and concurred that pledging receivables seemed the simpler approach and a good way to establish a banking relationship with the First City Bank. The application and documentation for this type of financing appeared to have a shorter lead time and provide an almost immediate source of cash. Mike started the preparation of loan documents shortly after his discussion with Jerry.

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During the next few days, Mike, with the help of the accounts receivable clerk, completed the necessary documentation for the ‘Request for Funds’ package. The package included copies of invoices representing trade receivables pledged as collateral for funds to be advanced by the bank and deposited in HCC’s checking account. Among other terms of the loan agreement, the Bank agreed to advance 40% of the gross amount of unsecured receivables and 90% of those invoices that were collateralized by customers’ assets. Mike often relied on Jerry’s classification of secured and unsecured receivables and review of the signed affidavit of authenticity. First City personnel were very helpful in processing the loan application and it was approved.

MIKE’S CONCERNS Over the next six months Jerry remained actively involved with accounting issues and appeared to be unwilling to relinquish his control of customer accounts. Mike was concerned about Jerry’s continued participation especially in the billing function that was performed by his executive assistant, Rose Lee. Mike could not find any documentation to support the rise in the number of credit memos issued by Rose in the weeks following a surge in the number of receivables pledged as collateral for the First City loan. He decided to approach Jerry on this issue. Mike believed he needed to have more direct control over the billing and collection functions if he was to sign off on loan reports to the bank. He asked Jerry to provide him with customer files, particularly those of customers with a secured liability to the company. Mike told Jerry in no uncertain terms that he wanted to personally verify all transactions affecting First City’s loan transactions. He reminded Jerry that the auditors would be in shortly to conduct preliminary audit planning and, without such oversight of the receivables, Mike felt obliged to point out what he deemed to be a lack of segregation of duties. Jerry was displeased with Mike’s aggressive attitude but realized Mike had been instrumental in helping to secure the loan. As the meeting ended, Jerry said to Mike: ‘‘Let’s talk again next week to see what has to be done.’’ The following Tuesday Jerry called Mike into his office. Jerry offered Mike a cup of coffee. As Mike sat down, Jerry told him ‘‘You have been working very hard for this company during the past eight months and have accomplished a lot. I have neglected to recognize your excellent work and do not want to delay that recognition. I would like to give you a 10 percent

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salary increase effective immediately.’’ Jerry continued, ‘‘I have been thinking about your concerns and feel we can best address them by changing our financing arrangement instead of wasting your time with details of billings and receivables.’’

SECURITIZATION OF RECEIVABLES Jerry told Mike the company needed the cash to survive and indicated that the securitization option was still available through the First City Bank. Jerry explained that the bank would use the receivables from HCC in a securitization transaction by pooling those receivables into an investment that could be marketed to the public. In this way, the company receives immediate cash and the bank realizes a return on its investment with the risk transferred to the outside investors. Jerry emphasized that Mike would not have to sign the securitization documents because HCC’s receivables are only a small portion of the investment pool and the bank and its agents would handle that detail. Mike had gone into Jerry’s office already suspicious about the sufficiency of the collateral for the ‘‘secured’’ receivables, the support for credit memos, and the possible inadequacy of the allowance for doubtful accounts. He felt more uncomfortable after hearing about the securitization arrangement and shifting of the burden to innocent outside investors. Although he lacked concrete evidence that something wrong had occurred, Mike thought that it might be wise to raise the issue with the auditors.

QUESTIONS 1. Distinguish between the accounting rules for collateralized receivables and securitized receivables. Be sure to cite specific accounting standards. How would HCC benefit by securitizing the receivables? How might a change to securitization affect the concerns expressed by Mike in the last paragraph of the case? 2. Identify the stakeholders and their interests that Mike should consider in choosing a course of action. 3. Consider the ethics of the situation. Is Mike right to be concerned about the collateral for the secured receivables, volume of credit memos issued, and possible use of receivables in a securitized transaction? Why or why not? Be sure to include in your analysis consideration of the stakeholders’ interests.

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4. Assume that Mike is a Certified Management Accountant (CMA) and member of the Institute of Management Accountants (IMA) and he is a Certified Public Accountant (CPA) and a member of the American Institute of CPAs (AICPA). Compare Mike’s ethical obligations under both sets of standards in selecting a course of action? Be sure to include in your analysis Mike’s obligations to the external auditors. 5. According to Statement on Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit, ‘‘three conditions generally are present when fraud occurs.’’1 Describe those conditions and how they relate to fraud in the financial statements. Using the SAS 99 fraud construct and ethical reasoning, recommend a course of action for Mike Johnson.

TEACHING NOTES Classroom Use of the Case The case was tested in two classes – Intermediate Accounting I and Cost Accounting. Each class was offered at one of two different universities. Based on the responses of 20 students to the case questions, there does not appear to be a significant difference in students’ understanding of either the accounting or ethical issues. The fact that all Cost Accounting students had completed Intermediate I is an important one since that is the course where securitization is discussed. The case may also be appropriate for an auditing class since there is a significant discussion of the role and responsibilities of internal accountants and the external auditors. Also, the codes of conduct of professional associations such as the IMA and AICPA typically are discussed in this course. Graduate students at the introductory accounting level also may benefit from a discussion of the role of company personnel in preparing the financial statements and the external auditors in examining that information. The issue of using receivables to finance transactions is important to finance students and other non-accounting majors that might pursue a concentration in management or entrepreneurship. In addition to assigning the case questions for written analysis and class discussion, students might be asked to role-play a situation where Mike discusses his concerns about the securitization transaction and overall financing of the receivables with Jerry. The external auditors also can be

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brought into the discussion perhaps in a meeting between themselves and Mike before he approaches Jerry. One full class session (75 minutes) was devoted to discussing the case with students with part of the time used to review the rules under SFAS 140. While some instructors may feel this is too much time to devote to the topic, the students benefited greatly from the discussion of ethical issues and several commented after taking the Auditing class that discussions about ethics and standards of conduct in Intermediate I were very beneficial to them in Auditing. Since ethical issues in accounting are sometimes covered only in the Auditing class, the approach of discussing ethics earlier on in the curriculum can help to strengthen students’ overall understanding of how the technical accounting issues have ethical dimensions, in part due to the role of the external audit in creating efficient capital markets.

Additional Issues to Cover Instructors can extend the boundaries of the case by linking securitizations to the technique used by Enron to finance some of its long-term gas contracts (receivables). Enron bought gas from producers under long-term contracts and sold them to consumers at expected higher future prices. To receive the cash from customers up front, Enron securitized some of the contracts and transferred the risk of collecting from the gas customers to outside parties. Enron even set up special-purpose entities to facilitate the financing process. Another issue that can be discussed with students is the difference between ‘‘ethics’’ and ‘‘morals.’’ Ethics deals with objective standards of behavior and can be analyzed using philosophical reasoning methods, such as utilitarianism or the rights theory that is discussed in the notes. Ethics also is linked to the provisions in professional codes of conduct of many groups such as doctors, lawyers and CPAs. Morals, on the other hand, often relate to the values a person holds dear and may be based on one’s family upbringing, cultural beliefs, or religious experiences. Often, moral issues deal with personal beliefs such as one’s position on abortion and capital punishment. These factors may influence ethical decision-making for a particular person. For example, someone who thinks abortion is wrong might engage in a protest that violates the rights of abortion-clinic workers to carry out their responsibilities. Importantly, it is the objective standards and philosophical reasoning methods that should be used in classroom discussions.

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Answers to the Questions 1. Receivables that are designated as collateral for a loan can be attached by the lender if the borrower fails to repay the loan when due. The borrower should footnote the collateral arrangement in its financial statements. Under securitization, a company groups its receivables in batches and sells them at a discount to other entities and investors. Assuming the transaction is on a non-recourse basis, the economic risk of collection is transferred to the buyer. The company that sells the receivables has no further liability, even if the customers do not pay. On the other hand, a sale with recourse obligates the borrower to pay the lender if customers fail to pay their receivable balances. Under SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,2 a transfer of financial assets in which the transferor surrenders control over those financial assets should be accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. The transferor has surrendered control over the assets if all of the following conditions are met: a. The transferred assets have been put out of the reach of the transferor; b. A transferee can pledge or exchange the assets (or beneficial interests) without the approval of the transferor; c. The transferor does not maintain effective control over the transferred assets through, for example, a repurchase or redemption agreement. If all these conditions have been met, the transferor records the proceeds received as cash, derecognizes the assets sold, and records a gain or loss on sale. The benefits of a securitization are the reporting of cash instead of receivables thereby improving its liquidity position. The risk of collection is borne by the transferee (investor), not the company, and there is no guarantee to make good on debt payments. If the receivables are not fully collected, it is the investors who will be hurt. The company also benefits by not having to record a loan payable for the funds transferred by the bank as a result of the securitization. This further improves HCC’s liquidity. Finally, the cash proceeds can be recorded as an operating cash inflow in the Statement of Cash Flows, not an investment inflow. The operating cash number is more widely followed by investors and financial analysts as an indication of a company’s financial strength. Based on the facts of the case, it appears that HCC could recognize the securitization as a sale of its receivables assuming it relinquishes all rights or

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obligations in the transferred assets that might otherwise bring into doubt whether there has been a true transfer of economic risk to the investors. Undoubtedly, this is preferable for the company since it is relieved of any ongoing liability as would exist if the receivables had been used as collateral for a loan. Moreover, the questions raised by Mike Johnson about the collectibility of the receivables become moot, notwithstanding Mike’s concerns about the integrity of Jerry Harrison. 2. The stakeholders include Mike Johnson, Jerry Harrison and HCC, Victoria Barkley and the First City Bank, the outside investors in a possible securitization transaction, and the external auditors. The following is a discussion of stakeholder interests and how they could affect Mike’s decision making. Mike Mike is the primary decision-maker in the case. If Mike brings his concerns to the external auditors, Jerry is likely to feel betrayed and consider Mike to be a disloyal employee. Mike risks being fired and possibly blackballed from future jobs. On the other hand, Mike’s integrity is being challenged since he is suspicious about Jerry’s motives and actions as well as the appropriateness of entering into the securitization transaction. He already has questioned the handling of the receivables that are collateral for the loan. Mike also should consider his obligation to be candid with the external auditors. This is an important ethical responsibility for CPAs that serve in internal accounting and auditing positions. Jerry Harrison and HCC Jerry believes the company needs cash to survive and securitization may be the best option. If Mike refuses to go along with the transaction, Jerry may feel compelled to fire Mike and that could affect the bank’s confidence in the company. The bank may view this as a ‘‘red flag’’ to hold up the transaction pending further support for the securitized receivables. The company’s credit rating might suffer and the continued existence of HCC could be in doubt. Moreover, the external auditors are likely to become suspicious since this is their initial engagement for HCC. Victoria Barkley and the First City Bank Barkley suggested pledging receivables as collateral for a loan with the Bank and also suggested a possible securitization transaction. She depends on HCC’s accounting department (and Mike) for accurate and reliable information to support the granting of the loan. Once Jerry approaches the bank

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and asks to change the terms of the borrowing from a collateralized loan to securitized receivables, Victoria may become suspicious of the reasons. Her credibility with the bank could be damaged since she had initially supported the loan and it might have been granted based on questionable receivables. Mike should feel obligated to provide accurate and reliable information to Victoria and Mike jeopardizes his reputation if he silently goes along with the securitization. Outside Investors in a Securitization Transaction Given the increase in credit memos granted after the surge in the number of receivables pledged as collateral for the loan, Mike should be concerned that the potential investors might become involved in a very risky transaction if the receivables are to be securitized. Since the risk of collection would be transferred to the outside investors, and they depend on the reliability of receivable valuations made by the accounting department of HCC, these investors place their trust in HCC and the bank to ensure that the receivables are fully collectible. External Auditors It is possible that the external auditors will discover the flaw in internal controls when they review the company’s procedures for valuing the collectibility of receivables. The auditors will question Mike at that time. Mike will gain credibility with the auditors if he comes forward now and brings his concerns out in the open. Perhaps the auditors can convince Jerry about the need for stronger controls including a better segregation of duties. HCC plans to go public in three years. Mike’s involvement with any false or misleading financial information should be of critical concern to him right now. Once the company goes public, everyone’s potential legal liability increases dramatically. 3. The question is whether Mike is ‘‘right’’ to consider the status of the receivables in light of the existing collateralization agreement and pending securitization transaction. According to the Rights Theory,3 an action is morally correct if it is motivated by a sense of obligation and not because it might advance one’s personal interests. Kant’s categorical imperative that is an integral part of Rights Theory emphasizes the universality of one’s actions. According to this perspective, the morality of an action is evaluated based on whether the decision maker should will that everyone act this way in a similar situation for similar reasons. Mike is right to be concerned about the lack of proper documentation for the receivables and increasing level of credit memos. Given Jerry’s insistence

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on being directly involved in classifying receivables as secured or unsecured, Mike does not have access to important documents to sign off on loan reports to the bank with a clear conscious. Moreover, he would be acting with due care in questioning Jerry’s motives for switching to securitization financing. Mike should know that his reputation is on the line if the bank discovers that the receivables are inadequate to support the amount loaned to HCC. He should not become part of any effort to mislead the bank or improperly classify receivables as collateral for the loan. If he goes along with Jerry’s proposal to securitize receivables, then a bad situation becomes worse since outside investors will then be involved in what may be partially or fully uncollectible receivables. HCC’s prospective public offering means the company will need to have three years of audited financial statements as a precondition to filing with the SEC. Mike should consider the potential implications of not properly valuing the receivables and transferring the risk to investors without proper disclosure of the collectibility of the receivables used in the securitization. The auditors are likely to question the procedures used to evaluate collectibility and Mike should be prepared to respond to their concerns. 4. Mike would be obligated to follow the IMA’s Standards of Ethical Conduct4 assuming he is a CMA. The standards include: competence, confidentiality, integrity, objectivity, and the resolution of an ethical conflict. According to IMA ethical standards, members ‘‘have an obligation to the public, their profession, the organizations they serve, and themselves, to maintain the highest standards of ethical conduct.’’ Mike should not disclose confidential information about the customers of HCC but he does have an obligation to ‘‘disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented.’’ Therefore, Mike should carefully evaluate whether the First City Bank had all the information it needed prior to approving the loan to HCC. Also, Mike should consider whether the collateralized receivables are collectible since he is signing off on loan reports to the bank. Moreover, if the receivables are securitized, then the outside investors have a right to expect that there would be full disclosure of the risks of ownership prior to making an investment decision. Mike may believe that he has an obligation of loyalty to Jerry Harrison, his superior, and to HCC. While a loyalty obligation does exist under the Standards, it would be unethical for Mike to place that obligation ahead of his duty to serve the public interest. The ethical obligation of loyalty should

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be considered as secondary to primary obligations such as honesty, integrity, and trustworthiness. Otherwise, an act might be rationalized out of loyalty to one’s superior even though it is not in the best interests of other stakeholders including the public. The AICPA Code of Professional Conduct5 requires that a CPA should place the public interest ahead of all other interests. The public interest includes the investors and creditors that provide financing to enable a company to operate. It is not in the public interest for the First City Bank and the outside investors to commit funds when there are significant concerns about the collateral and collectibility of the receivables. CPAs are expected to be objective, maintain their integrity, and exercise due care in the performance of professional services. Mike is obligated to question the handling of the receivables by Jerry. Indeed, the external auditors rely on Mike’s objectivity in performing services in determining the extent of audit procedures to be followed in conducting the external examination of HCC’s financial statements. An important issue for Mike to consider under either set of ethical rules is how to deal with the difference of opinion between himself and Jerry. The IMA’s standards contain steps to be taken to resolve an ethical conflict with a superior. In short, Mike should bring his concerns to the appropriate oversight group. Since HCC is not yet publicly owned, there would be no audit committee and, apparently, the company also lacks a board of directors or board of trustees. In the absence of such a group, Mike should bring his concerns to the owners of the company. HCC is a closely held company and Jerry is the primary stockholder. Therefore, it appears that Mike may not have an adequate outlet to express his legitimate concerns. The IMA’s standards state that: ‘‘If the ethical conflict still exists after exhausting all levels of internal review, there may be no other recourse on significant matters than to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization. After resignation, depending on the nature of the ethical conflict, it may also be appropriate to notify other parties.’’ Mike would be wise to consider his continued relationship with HCC. Jerry’s insistence on controlling aspects of the receivables review and analysis for the collateralization and now the pending securitization transaction does not bode well for establishing a strong system of internal controls. The failure of Jerry to appreciate the need to segregate duties and assign Mike the responsibility for these procedures appears to indicate a hands-on approach to management consistent with an override of internal controls, a danger sign pointed out in the COSO report.6

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According to the AICPA Code (Interpretation 102-4), internal accountants who are CPAs should be candid in their dealings with the external accountants.7 Moreover, the Code requires (Interpretation 203-4) that internal accountants who are CPAs should not state that the financial statements are prepared in conformity with GAAP if there is a material departure from GAAP in those statements.8 Mike should know that the external auditors would rely on his work. If he believes that the financial statements contain a material departure from GAAP in the valuation of receivables or disclosures about securitization, then he should bring these matters to the attention of the external auditors. 5. There are two kinds of fraud: fraudulent financial reporting and the misappropriation of assets. This case deals with the possible falsification of receivable values and disclosures that would lead to the issuance of fraudulent financial statements assuming it was a knowing act on the part of Jerry Harrison designed to deceive the bank and investors. SAS 99 identifies a ‘‘fraud triangle’’ that consists of three conditions generally present when fraud occurs including the pressure or incentive to commit fraud, the opportunity to engage in the act; and rationalization for one’s actions. The pressure that exists in the HCC case is the possible negative consequences to the company if it does not secure needed funding. Jerry stated that the company might not survive without the cash from a securitization transaction. Assuming this is an accurate statement, Jerry might feel the pressure to do whatever it takes to get the bank to accept the securitized receivables. It could be that Jerry’s motivation in controlling documentation of the collateralized receivables results from this pressure. The opportunity to commit fraud exists because of the lack of segregation of duties and the hands-on approach taken by Jerry that makes it more difficult for Mike to carry out his responsibilities. Jerry virtually shuts out Mike in the receivables review process. Jerry dominates the management of HCC and there appears to be no oversight body to provide the needed checks and balances to facilitate strong internal control. Jerry’s rationalization is linked to the pressure he feels about the importance of securing the needed financing for the continued existence of HCC. It could be that Jerry is exaggerating the danger of not receiving the funds from a securitization. He may be doing this to mask some of the problems that exist with the collectibility of the receivables, as indicated by the high volume of credit memos. Mike has a right to be suspicious about Jerry’s intentions in shifting to a securitization transaction. The fraud signs are there and Jerry has virtually

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ignored Mike’s concerns about his lack of control over receivable transactions and valuations. Jerry’s answer seems to be to change the funding mechanism with the bank from collateralizing receivables in support of a loan to selling them outright for cash in a securitization transaction. While the latter may be beneficial to HCC, Jerry’s proposed change in the financing technique does not address the underlying issues raised by Mike in his meeting with Jerry. Mike should make it clear to Jerry that he has been placed in a difficult position by not having access to key documents and by Jerry’s control over the classification of receivables as secured or unsecured. The bank relies on Mike’s signing off on loan documents. Therefore, Mike should insist on having the requisite authority in the future to match his responsibility. Mike should not agree to go along with Jerry’s securitization proposal. Mike should place his obligation to the bank and any potential investors ahead of what may be a perceived loyalty obligation to his employer. The rights of these external stakeholders are paramount and require that they should receive accurate and reliable financial information about the receivables used in the securitization prior to committing to such a transaction. Mike should satisfy himself about the accuracy of information related to the accounting and financial reporting of the receivables prior to agreeing to support Jerry’s decision. If he is unable to do so, then Mike should consider his continued involvement with HCC. This is especially important since the external auditors plan the audit based on an evaluation of the extent to which they can rely on Mike having fulfilled his ethical obligations.

NOTES 1. American Institute of CPAs, Statement on Auditing Standards 99, Consideration of Fraud in a Financial Statement Audit, AICPA: New York, 2002. 2. Financial Accounting Standards Board, Original Pronouncements, FASB: Stamford, CT, 2003. 3. Kant, Immanuel, Foundations of the Metaphysics of Morals, second edition (revised), Macmillan Publishing: New York, 1990. 4. Institute of Management Accountants, Standards of Ethical Conduct, (www.imanet.org). 5. American Institute of CPAs, Code of Professional Conduct, AICPA: New York, 2002. 6. Committee of Sponsoring Organizations of the Treadway Commission, Internal Control: Integrated Framework, AICPA: New York, 1992. 7. American Institute of CPAs, Professional Standards Volume II, AICPA: New York, 2003. 8. Ibid.

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ACKNOWLEDGMENTS The authors would like to thank two anonymous reviewers for their helpful comments in developing the case. Also, we wish to acknowledge the help of students at Loyola Marymount University and the California State University, San Bernardino for their participation in class discussions that were essential in developing the teaching notes.

AN INSTRUCTIONAL CASE IN THE ETHICS OF THE CPA/CLIENT RELATIONSHIP: THE ROADRUNNER AND HOWARD BEAN, CPA Lawrence Webb, Brendan O’Connell, Chris Carr and Mark Higgins ABSTRACT This instructional case examines the relationship between a CPA and his client. The case is suitable for use with upper-level accounting majors (juniors or seniors) as many of these students are likely to enter public practice and therefore are likely to be exposed to some of the ethical dilemmas addressed in this case. As such, the case could be included as a capstone to an advanced accounting course or used in an auditing course to emphasize accountants’ ethical responsibilities and the application of ethics in ‘real world’ situations. Alternatively, if the accounting curriculum includes a specific course on ethics then the case would be suitable for this purpose. This case can be assigned in two ways: (1) as an individual project or (2) as a group project (ideally three or four students).

Research on Professional Responsibility and Ethics in Accounting Research on Professional Responsibility and Ethics in Accounting, Volume 10, 211–229 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1574-0765/doi:10.1016/S1574-0765(05)10009-0

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The major objective of this case is to enhance students’ understanding of an accountant’s legal and ethical duties to the client. In this case, three legal areas are analyzed: contract law, tort law (fiduciary duty) and tort law (professional negligence/malpractice). This case is based on facts that were presented before an accounting body’s professional disciplinary committee, and examines a number of dealings between a CPA and a small business client. The issues examined include: the acquisition by a CPA of a client from a former employer, the withdrawal of fees for accounting services without express client approval, and the provision of inaccurate client financial statements. Another focus of this case is to enhance students’ understanding of an accountant’s legal (contract and tort law) and professional ethical (code of conduct) duties owed to the client.

INTRODUCTION Rockport is a Midwestern college town with a population of 30,000 located 100 miles from the state capital. The area is well known for its dairy products and like most rural areas it is a close-knit community. There are only five CPA firms in town, and two of those are seeking to merge with a large practice located in the state capital. Three of the CPA firms are well-established family firms with over 40 years of service to the local community. One of the town’s prominent citizens was Lewis Bean, a local doctor and former mayor of Rockport whose only son was Howard Bean. Howard left Rockport 10 years ago to attend the prestigious Smythe University on the East Coast. His father hoped Howard would enter the family medical practice so Howard enrolled in the pre-med program at Smythe. After his freshman year, it was clear to Howard that he was not suited for a career in medicine. Howard became heavily involved in the social activities of his fraternity and his grade point average suffered accordingly. His disappointed father accepted the inevitable. Howard took 12 months off from school and travelled through South America, finally ending his journey in Argentina where he planned to spend several weeks. While in Buenos Aires, Howard contacted an old family friend, Larry Goldberg. Larry had established an import business in Argentina a few years earlier and invited Howard to help him in the administration of the business – an offer that Howard gladly accepted. It was during this time that Howard found he enjoyed the financial side of business which was not Larry’s strength.

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Concerned that his son might extend his stay in Argentina indefinitely, Howard’s father offered to underwrite the full cost of Howard’s education if he returned to the U.S. Howard accepted the offer and completed his accounting major at Brighton University, located 90 miles from Rockport. Following graduation, Howard worked as an auditor with a large local CPA firm, Goldfinger & Associates, in the state capital. After winning the gold medal on the CPA exam, Howard was assigned to one of Goldfingers top three clients, The Roadrunner, a successful gas station and fast food outlet located 30 miles outside of Howard’s hometown. During his fourth year at Goldfinger, Howard’s father called him to inform him that a CPA practice in Rockport, operated by Thomas Plugger, was about to be sold. Thomas wished to retire and wanted to know if Howard was interested in purchasing his practice. With the financial assistance of his father, Howard decided to buy the practice. As part of the agreement, Thomas agreed to work as a consultant for six months and help Howard settle into the practice. Howard immediately changed the name of the firm to Bean Financial Services. The firm now consisted of Howard, two bookkeepers (one parttime), and a receptionist (his wife Candy). After acquiring Plugger’s practice, Howard obtained a number of new clients including Thelma Bickford who owned and operated The Roadrunner.

THE ROADRUNNER (BACKGROUND) Thelma, who is in her mid-60s, had been operating The Roadrunner since her husband’s death two years earlier. Prior to her husband’s passing, there was a distinct division of labor in the business. Thelma controlled all the operational aspects of the business while her husband handled the financial side of the business. Upon her husband’s death, a friend of hers suggested that she use Goldfinger & Associates to help prepare the financial reports of the business. Howard was assigned responsibilities for managing this account. While Howard was negotiating the purchase of Thomas Plugger’s practice, he continued to manage The Roadrunner account. When Howard established Bean Financial Services, Thelma wanted to continue using Howard for financial and accounting advice as she had little formal business training and she had quickly grown to trust him. At that time, he was not actively seeking clients for the accounting practice, and suggested to Thelma that she formally write to him requesting that he take over her account upon the commencement of this new venture. During the last two weeks before Howard resigned from Goldfinger & Associates he worked almost exclusively on Thelma’s account in

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order to bring it up-to-date. He also came into the office after hours and made photocopies of a few supporting documents in Thelma’s file such as depreciation schedules and bank reconciliations. Howard’s rationalization for this photocopying was that, in the event she decided to hire his new firm instead of continuing with Goldfinger & Associates, these working papers would help him continue his high level of service to The Roadrunner. Upon taking over the account, Howard advised her on the financial aspects of a major refurbishment of the fast food section of The Roadrunner. Thelma was concerned about the $50,000 cost to upgrade the kitchen and restroom facilities. Howard offered to arrange $50,000 of funding for this renovation through a local firm called the Mustang Finance Corporation (‘‘Mustang’’) thus bypassing the local bank. Howard mentioned in passing to Thelma that he was an agent for Mustang but he did not discuss the commission that he received nor did he mention that his wife, Candy, was a Director and major shareholder of Mustang. Thelma signed a loan contract in the presence of Howard who accepted the contract on behalf of the company. The terms of the contract were that The Roadrunner would make payments to Mustang of $10,000 per quarter for two years (these payments include principal and interest). Howard, after making some cashflow forecasts, assured Thelma that the increased cash flows emanating from the refurbished fast food section would more than cover her loan payments. Thelma continued to rely heavily on Howard for his advice concerning all financial matters including the preparation of the financial statements. Even though there was no engagement letter signed that established the rights and obligations of each party, Howard arranged for all bank correspondence to be sent directly to his firm. Although smaller bill payments for The Roadrunner were paid directly by Thelma from the cash register, Thelma had all major creditor bills forwarded to Howard for payment. In addition, Thelma regularly withdrew cash from the business for her personal needs. While, Thelma generally informed Howard (as a form of internal control) of the payments to small creditors and the cash withdrawals for her personal needs, these transactions were not always recorded. Thelma arranged for Howard to have signing authority on The Roadrunner checking account for all bills submitted by her to him, and authorized Howard to withdraw the loan payments on her behalf. Howard also assisted Thelma with a recent tax audit by the Internal Revenue Service (IRS). During the audit process, Howard uncovered expenses that he had failed to deduct in completing the last return on behalf of The Roadrunner and the IRS disallowed some deductions. Howard and the IRS agent agreed on a revised taxable income for The Roadrunner. A few

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weeks later, Howard received the auditor’s change letter. Upon examining the agent’s calculation, he found that the IRS agent had miscalculated the new tax liability by $3,500 in favor of the business. In fact, The Roadrunner would now receive a refund instead of being required to pay additional tax. Thelma received her copy of the letter and left a message on Howard’s voice mail congratulating him on his excellent work. Concerned that Thelma might question his competency and change to another accounting firm, if he informs her of the error, Howard decides to say nothing to her or the IRS about the agent’s miscalculation. Two years after engaging Bean Financial Associates as her accountant, Thelma expressed her frustration to her son, Ronald, an attorney living in Baltimore that the long hours she was working at The Roadrunner did not seem to be increasing her financial wealth. Sales had increased significantly since the remodelling, yet her bank manager had recently called her to suggest that an increase in the business bank overdraft might be required. Thelma asked Ronald to investigate her concerns and she forwarded to him the past two years’ financial statements. Upon reviewing these statements, Ronald noted that a motor vehicle that Thelma had recently purchased for the business was not listed as an asset on the Balance Sheet. He also discovered that the loan to finance the vehicle (through Mustang) did not appear as a liability. Ronald called Howard to discuss the exclusion of these items. Howard assured Ronald that he would review the matter and report back to him by the end of the week. After four weeks and two more unreturned calls, Ronald asks an old college friend, Barry Flint, now a successful CPA in the state, to take over as accountant for Thelma. Howard was unhappy but three weeks later he reluctantly handed over the previous year’s financial statements for The Roadrunner to Barry. Howard retained the working papers, budgets, ledger accounts and bank statements of The Roadrunner. After a thorough audit of the accounts, Barry listed a number of concerns:
Howard had withdrawn fees for accounting services totalling $10,000 covering the previous six months of services and for the next six months to the end of the financial year (i.e., 12 months in total).
Howard had made three loan payments after the due dates on behalf of The Roadrunner resulting in $1,000 of late payment penalties.
The Trial Balance of The Roadrunner in both years balanced only after a ‘‘Suspense Account’’ was used to account for the imbalance.
There was no Interest Expense item in the Income Statement even though there were substantial interest payments made by Thelma to Mustang.

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Tax returns for one year were filed late with the IRS resulting in a fine and penalty to the business.
Payments totaling $1,539 for newspapers were shown in the Income Statement as $15,390.
Cash register receipts often did not reconcile with subsequent bank statements.
A second bank account for The Roadrunner used to separate the gasoline sales from the takeaway food side of the business was omitted from the Balance Sheet.

HOWARD’S DEFENSE At the urging of Ronald, Barry advised the AICPA and the State Board of Accountancy of his concerns about Howard’s professional services for The Roadrunner and a letter of complaint was filed with both professional accounting bodies. In the ensuing professional conduct hearing, Howard’s defense focused on the following points:
Much of the income and expenditure of The Roadrunner was in cash making it difficult for Howard to reconcile payments and receipts. In particular, personal expenditures were deducted from the cash receipts before being deposited at the bank. Therefore, Howard assumed that any imbalance between bank deposits and the cash register receipts reflected these withdrawals.
Thelma often neglected to keep all receipts for the cash payments to small vendors she made out of the cash register. This made it difficult for Howard to accurately reflect expenses in the Income Statement.
Mistakes relating to the omission of major assets and liabilities from the Balance Sheet were errors caused by the part-time bookkeeper of Bean Financial Services, who no longer was employed by the firm.
The financial statements of the previous year were rushed because Thelma failed to provide the necessary data to file the tax return on a timely basis.
Howard often found it difficult to reach Thelma to answer his queries.
Howard claims that the payments on the loan to The Roadrunner were incorrectly calculated by one of his bookkeepers. The correct quarterly payments should have been about $7,000, well below what was inadvertently charged.
The reason for slow payment of Thelma’s loan (which resulted in payment penalties and interest) on three separate occasions was due to insufficient

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funds being available in the bank account at those times. Howard said that there was no cash flow budget prepared for the business to predict cash requirements.
Howard claimed that he withdrew funds from Thelma’s account to pay for his accounting services only after repeated efforts to obtain Thelma’s permission had failed. Specifically, Howard sent a bill for his services to Thelma along with two follow-up letters, but she never responded to his request for payment. Several weeks after sending these letters, Howard decided to withdraw the monies owed from her checking account and ceased to send further reminder letters.

DISCUSSION QUESTIONS For each of the items listed below discuss the following: (a) Howard’s likely legal liability to Thelma (his client) under both contract law and tort law (specifically fiduciary duty and professional negligence/malpractice); and (b) any ethical violations under the AICPA’s Code of Professional Conduct (Code). (1) The loan by Howard’s company, Mustang Finance Corporation, to The Roadrunner. (2) Did Thelma’s level of reliance and trust in Howard reach the level of a fiduciary responsibility? (3) Howard’s lack of a written fee/services agreement with Thelma. (4) Howard’s acquisition of Thelma and her business as a client from his former employer, Goldfinger & Associates, together with files relating to that client. (5) Howard’s response to Ronald’s requests for information about Thelma’s account. (6) Howard’s withdrawal of fees for accounting services. (7) The errors Howard made in preparing The Roadrunner’s financial statements.

TEACHING NOTES Target Audience and Application of this Case This instructional case examines the relationship between a CPA and his client. The case is suitable for use with upper-level accounting majors (juniors or seniors) as many of these students are likely to enter public practice

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and therefore, are likely to be exposed to some of the ethical dilemmas addressed in this case. As such, the case could be included as a capstone to an advanced accounting course or used in an auditing course to emphasize accountants’ ethical responsibilities and the application of ethics in ‘real world’ situations. Alternatively, if the accounting curriculum includes a specific course on ethics then the case would be suitable for this purpose. This is a research case in that students will need to be made aware of the requirements of the AICPA Code and, contract and tort law.1 This case can be assigned two ways: (1) as an individual project or (2) as a group project (ideally three or four students). Regardless of the method chosen, we recommend that the instructor place the above items on reserve in the university library with the students answering the set questions using these materials and discussing their answers in a subsequent class.

Objective of Case The major objective of this case is to enhance students’ understanding of an accountant’s legal and ethical duties to the client. In this case, three legal areas are analyzed: contract law, tort law (fiduciary duty) and tort law (professional negligence/malpractice). For example, did Howard comply with the express terms of any written or oral contract (or any implied contract) with Thelma? What fiduciary duties, if any, did Howard owe Thelma, and did he breach any of those duties? Finally, did Howard exercise the standard of care expected of a ‘‘reasonably prudent CPA’’? Howard’s primary professional obligations arise under the Code. The Code requires CPAs to conduct their activities within underlying principles of professional conduct such as integrity, objectivity, independence and due care. Overview of a CPA’s Responsibilities Under Tort Law (Fiduciary Duty)2 The term fiduciary means ‘‘trust-like’’. The question of its existence is generally ‘‘a question of fact’’ and the burden is on the ‘‘party asserting the relationship to prove its existence’’.3 Some researchers argue that CPAs will not always owe a fiduciary duty to their client.4 However, if one can establish that Thelma has reasonably placed a high level of trust and confidence in Howard, and/or she is looking to him for his special skill or expertise, then a fiduciary relationship will probably exist under the law.5 Given Thelma’s heavy reliance on Howard for his financial advice, and her expectation of his expertise as a CPA, it is highly likely that a fiduciary duty is owed in this case.

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The fiduciary duty owed by one party to another can have many different ‘‘hallmarks’’ or facets.6 For example, and as with implied contractual duties, Howard had or owed Thelma the fiduciary duty of loyalty, to obey instructions, to act with reasonable care and skill in the performance of his tasks, to notify her and keep her informed and to account for all money and property entrusted to him by her. Overview of a CPA’s Responsibilities Under Tort Law (Professional Negligence/Malpractice) Professionals such as CPAs, attorneys and doctors undergo years of intense study and continuing education. In return for this level of competency, such professionals are well compensated (at least in the eyes of most people). CPAs, like doctors and lawyers, are held to a high standard of care. They are expected to act as a ‘‘reasonably prudent CPA’’ would act, a more rigorous standard than the ‘‘reasonably prudent person’’ criterion applicable in normal negligence cases.7 For Thelma to recover against Howard using a professional negligence/ malpractice claim, she would have to prove and convince a jury that: (1) Howard owed her a duty to act in conformity with a certain standard of conduct (i.e., that of a reasonably prudent CPA); (2) he breached that duty by failing to conform to that standard; (3) a reasonably close causal connection exists between her injury and his breach; and (4) she did, in fact, suffer loss or injury.8 At trial, expert testimony will be required to establish the level or duty of care, if any, that Howard owed Thelma. Suffice it to say that Howard will have an extremely difficult task establishing that he satisfied the applicable duty of care expected of a ‘‘reasonably prudent CPA’’ given the circumstances of this case (this issue will be analyzed in detail in the Suggested Solutions section). As with our breach of fiduciary duty analysis, Thelma should have little difficulty establishing that Howard failed to act as a ‘‘reasonably prudent CPA.’’ It should be noted that in a professional negligence case, Howard might argue that the defense of contributory negligence (called comparative negligence in some jurisdictions) should apply to reduce Thelma’s claim (i.e., her damage was caused, not by Howard, but by her own undocumented cash withdrawals and her tardiness in providing him with the information he needed to complete his tasks successfully). Notwithstanding this defense, Thelma is not savvy in financial matters and she clearly placed trust and confidence in Howard. Further, he held himself out to be the ‘‘expert CPA’’ and he had numerous opportunities to remedy the situation, or even

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withdraw from the relationship if he felt that Thelma was not providing him with sufficient detail to satisfactorily meet his responsibilities. It is unlikely that the disciplinary board of the AICPA Professional Ethics Division would accept any such argument by Howard to shift the blame. Overview of a CPA’s Responsibilities Under the AICPA’s Code of Professional Conduct The Code requires Howard to maintain the public trust and meet his obligations with integrity, objectivity, independence and due care. Integrity requires that Howard be honest and candid within the constraints of client confidentiality and that the public trust should not be subordinated to personal gain and advantage. Specifically Section 54-03, which discusses integrity states that ‘‘[in the] absence of specific rules, standards, or guidance, or in the face of conflicting opinions, a member should test decisions and deeds by asking: ‘Am I doing what a person of integrity would do? Have I retained my integrity?’’’ Therefore, while Howard’s behavior in obtaining Roadrunner as a client for Bean Financial Associates does not directly violate the principle of integrity, it clearly violates the spirit of the principle. The principle of objectivity imposes the obligation to be impartial, intellectually honest and free of conflicts of interest. Howard’s role as an agent for Mustang Finance Corporation appears to present a conflict of interest, which would jeopardize his objectivity. The standard of due care requires Howard to plan and supervise adequately any professional activity for which he or she is responsible. Therefore, Howard has an obligation to Thelma to properly supervise all of his employees (i.e., bookkeeper) who work on The Roadrunner engagement. Finally, the Code also requires that Howard be diligent in discharging responsibilities to clients and requires him to render services promptly and to be thorough in discharging his duties. Howard’s filing late tax returns would appear to be contrary to this standard of due care.

SUGGESTED SOLUTIONS TO DISCUSSION QUESTIONS The Loan by Howard’s Company, Mustang Finance Corporation, to The Roadrunner Howard breached his fiduciary duty of loyalty under tort law through the loan to The Roadrunner. While he mentioned to Thelma that he was an

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agent for Mustang, he failed to advise her that he would also receive a commission, and/or that his wife was a director and major stockholder of the corporation. It could also be argued that this conduct breached his fiduciary duty to notify (he never fully advised Thelma about the extent of his or his wife’s involvement in the corporation) and his duty to account (any profits resulting from an agent’s breach of the duty of loyalty – here, his commission – belong to the principal). Because Thelma has placed a high level of trust and confidence in Howard, and/or she is looking to him for his special skill or expertise, then a fiduciary relationship probably exists. Howard also breached his fiduciary and tort (professional negligence/ malpractice) duty to act with reasonable care and skill in a variety of ways relating to the loan. First, he failed to notice that the $10,000 quarterly payments from The Roadrunner to Mustang were much larger than what they should have been. This overcharge is also of concern given Howard’s (and his wife’s) links to Mustang. Second, without preparing a detailed cash budget, Howard assured Thelma that the cash flows from the remodeled fast food section of The Roadrunner would be more than sufficient to cover her loan payments. A reasonably prudent accountant would conduct a thorough investigation of the cash flow impact of a major investment before providing such a recommendation. Third, Howard caused $1,000 of penalties for late payment by making three loan payments on behalf of The Roadrunner after their due date. A CPA, acting with reasonable care and skill, would not have allowed this to occur. Howard’s failure to transfer these loan payments on a timely basis from Thelma’s account would also be a breach of his duty to obey because Thelma presumably advised or expected him to make the loan payments on time. His neglect in not advising Thelma of these late penalties would also be a breach of the duty to notify. As a mitigating factor, Howard might argue that these late penalties were due to insufficient funds being available in the bank account at the time payments were due. However, Howard appears to have done little to avoid this problem or to prevent its reoccurrence after the initial late payment. Turning to the AICPA’s Code of Professional Conduct, Howard breached Section 102 (Integrity and Objectivity) in relation to Mustang’s loan to The Roadrunner. Section 102 states that a member shall maintain objectivity and integrity, [and] shall be free of conflicts of interest. The interpretations under Rule 102 provide examples of situations in which a CPA’s objectivity could be impaired. Specifically, a CPA’s objectivity might be impaired if the CPA recommends or refers a client to a service provider in which the CPA or another CPA in the firm holds a material financial

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interest. As noted above, Howard appears to have a conflict of interest in providing both accounting advice and loan services to The Roadrunner. His business relationships with Mustang would potentially impair his objectivity. Moreover, whatever Howard’s wife does in relation to Mustang is attributed to him under these rules. While, the Code of Professional Conduct does not specifically prevent Howard from having such dealings if he believes that the professional service can be performed with objectivity, Section 03-102-2 states that this type of potential conflict of interest must be disclosed to his client and her consent obtained. There is no evidence of this disclosure to, or consent from, Thelma. Further, Howard appears to have breached Section 503, Commission and Referral Fees, by not disclosing this commission.

Did Thelma’s Level of Reliance and Trust in Howard Reach the Level of a Fiduciary Responsibility? Yes. Thelma’s apparent lack of business experience, age and widowed status put her in a vulnerable position. It seems reasonable to conclude that she placed a high level of trust and confidence in the financial skills and expertise of Howard. Evidence of this high level of trust and reliance is that: Howard arranged finance for The Roadrunner renovation; he had all bank correspondence and creditor invoices forwarded directly to him rather than Thelma; and, he possessed signing authority on all her checks. This evidence appears to establish, under law, a fiduciary duty on the part of Howard in his relationship with Thelma. The Code does not address the concept of fiduciary duty as such. However, it does require the CPA to act, at all times, in the best interests of his client.

Howard’s Written Fee/Services Agreement with Thelma From a legal and professional standpoint, it is generally in the best interests of both the CPA and his/her client to have a written fee/services agreement in place in the form of an engagement letter that informs both parties of their rights and responsibilities. The CPA benefits from such an agreement by utilizing the engagement letter to limit his/her liability, avoid any potential misunderstandings with the client, and minimize the risk of the client accusing him/her of performing services outside the scope of the business arrangement or overcharging the client.

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There was no formal written agreement between Howard and Thelma. Instead, there was only a very loose and ill-defined set of conversations between them indicated that Howard would take over responsibility for all of the financial affairs of her business, and that he would act as her financial advisor. This arrangement translates into an oral agreement/contract under contract law. To the extent that these conversations addressed or touched on Question Numbers 1–7 listed above and analyzed in this section, a strong argument can be made by Thelma that Howard breached the express terms of their oral agreement by many of his actions such as providing her with inaccurate financial information. In addition to the oral agreement, certain implied contractual duties exist under the law. Howard owed to Thelma an implied contractual duty of loyalty (e.g., to avoid conflicts of interest with her), to obey her instructions, to act with reasonable care and skill in the performance of his tasks, to notify her and keep her informed and to account for all money and property entrusted to him by her.9 Howard breached many of these implied contractual duties. As a result, contract law will require him to reimburse her for any economic damages she incurred.

Howard’s Acquisition of Thelma and her Business as a Client from his former Employer, Goldfinger & Associates, Together with Files Relating to that Client The employer–employee relationship is based on confidence and trust, which gives rise to certain duties under law. For example, the employer has a duty to maintain a good working environment and to compensate the employee for his/her efforts. In return, the employee has a duty to use his/her best efforts on behalf of the employer, and not to act in any way that is adverse to the employer’s interests.10 Howard should have handled the issue of soliciting the clients of their current employer with greater care, especially since he intended to leave the employer and establish a competing business. For example, it is likely that Howard’s outright or even subtle solicitation of Thelma while still employed with Goldfinger & Associates breached the employment agreement he signed when he began his employment with the firm. Moreover, the common law duty of loyalty to an employer, which exists independent of any employment contract, would also prohibit Howard from doing anything that would harm the firm while he is still employed (e.g., coaxing Thelma to place her business with him after he leaves the firm).

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Once the employee leaves the firm, he/she may still be restricted by a covenant not to compete. A covenant not to compete is an agreement between an employer and an employee designed to protect the employer from potentially harmful competition from a former employee. Prohibited competition usually includes dealing with or soliciting business from the former employer’s clients. While the case does not mention whether such a covenant exists, it is becoming increasingly common for such clauses to be written into the employment agreements of professionals such as lawyers and accountants. To be binding and legally enforceable, the covenant not to compete must meet certain requirements. Among other things, it must be designed to protect a legitimate interest of the employer; and it must be reasonably limited in scope, geography and duration (courts have generally found six months to one year or less to be a reasonable time limitation, while a court would never enforce a covenant for a period of more than five years, except perhaps in connection with the sale of a business).11 The most prudent action for Howard to take in relation to his leaving Goldfinger & Associates is to make sure that this parting is accomplished on good terms. To achieve this, he should be honest and candid with his employer about the reasons for leaving. If he lies and represents that he is going to set up a non-competing business, and then starts a competing firm, his former employer is likely to feel deceived, possibly resulting in protracted litigation (with Thelma caught in the middle). A major problem for Howard is that he worked almost exclusively on Thelma’s account just prior to him leaving the firm (as well as his after hours photocopying of documents from Thelma’s file). These actions conflict with any claim by Howard that he was acting in good faith, he was looking out for Thelma’s best interests, and that the decision to move her business was hers alone. It has been the experience of at least one of the authors of this case that a smooth transition and litigation can often be avoided when: an honest and upfront strategy is implemented; the client is fully informed of the ramifications of moving his/her business from the firm; and it is made clear by the client that he/ she sincerely wishes to keep his/her business with the departing employee. There is no specific rule within the Code referring to solicitation of former clients. However, CPAs who actively seek out clients of former employers might be viewed as acting outside of the spirit of the Code including principles such as to act in the public interest and as professionals, and with integrity. Moreover, Ruling 191 of the code prohibits a CPA from removing client files from an accounting firm without permission or a contractual right to that action. Howard, in taking copies of key files such as depreciation schedules appears to be in breach of this rule.

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Howard’s Response to Ronald’s Requests for Information about Thelma’s Account Howard breached his fiduciary duty to obey by failing to respond to the telephone calls of Thelma’s son, Ronald. This is also a breach of his fiduciary and tort (professional negligence/malpractice) duty to act with reasonable care and skill (a reasonably prudent CPA would not have ignored these repeated requests from Thelma’s son for information), as well as the duty to account (e.g., part of the duty to account includes disclosing to the principal [Thelma], or the principal’s agent [Ronald], requested information in a timely manner once a reasonable demand has been made for the information). Howard’s handing over of only incomplete financial information/records to Ronald would also be potentially a breach of these three duties. Howard also appears to have breached Section 501, Acts Discreditable, in withholding certain client records after Barry Flint made a request for them. A CPA cannot withhold a client’s bank statements and books of original entry (ledgers). Moreover, this section stipulates that working papers containing information, which is not reflected in the client’s books and records, but would result in incomplete financial information if not forwarded to the new accountant, be made available. These papers include items such as adjusting, closing and consolidating entries and information normally contained in books of original entry and ledgers. It is clear that Howard, in handing over only the firm’s financial statements, fell short of these requirements.

Howard’s Withdrawal of Fees for Accounting Services Howard breached the fiduciary duty to obey by withdrawing $10,000 for his accounting fees. Thelma only gave him permission to withdraw funds from The Roadrunner checking account to pay bills. The argument that Howard withdrew these funds only after repeated attempts failed to obtain Thelma’s formal permission does not justify his action. It would also be unlikely that Howard could successfully argue that he had the implied authority/permission to withdraw such funds and/or that her failure to respond gave him such authority/permission to access that account for the purpose of the fee payment. This conduct was also possibly a breach of Howard’s fiduciary and tort law duty to act with reasonable care and skill (would a reasonably prudent accountant withdraw funds from a client’s account without permission?)

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probably breached this standard and the duty to notify (Howard failed to advise Thelma that he was going to deduct the funds). While the Code does not address these particular circumstances, this action appears to violate Section 501 Acts Discreditable. Section 501 specifies that a member shall not commit an act discreditable to the profession. Clearly, withdrawing client funds without permission is an unacceptable standard of behavior and contrary to professionalism. Howard’s excuse that he endeavored to obtain Thelma’s permission for payment of fees is not acceptable.

The Errors Howard made in Preparing The Roadrunner’s Financial Statements Howard failed in his fiduciary and tort law duty to act with reasonable care and skill in not including the motor vehicle that Thelma purchased as a business delivery vehicle in the Assets section of the Balance Sheet. He also failed to include the loan as a liability. Howard’s contention that this mistake was caused by the error of his part-time bookkeeper is not acceptable. Although, an agent may authorize or approve a sub-agent to perform a portion of the assigned task, the primary agent remains responsible for the breach of any fiduciary duty owed to the principal.12 Further, under the principles of vicarious liability, respondent superior and direct liability, Howard, as the principal of his firm, remains responsible for the negligent acts of his subordinates.13 Using the ‘‘Suspense Account’’ to account for the imbalance in the Trial Balance is also a clear breach of Howard’s duty to act with reasonable care and skill. Unexplained differences are always investigated by prudent accountants. Another breach of Howard’s fiduciary and tort law duty to act with reasonable care and skill is incorrectly showing newspaper payments of $1,539 in the Income Statement instead of the correct amount of $15,390. Clearly, this is a careless and significant error that Howard should have discovered when he reviewed the final accounts. Moreover, Howard violated this duty when he failed to record Interest Expense in the Income Statement even though there was substantial implied interest in the payments made by Thelma to The Mustang that would significantly overstate accounting profit for The Roadrunner. This would also be a contravention of the duty to account because he has omitted a key expense item.

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The late filing of The Roadrunner’s tax return with the IRS, resulting in a fine and penalty to the business, is clearly a further example of Howard’s failure to act with reasonable care and skill. His failure to advise Thelma of this penalty would also be a breach of his duties to notify and obey (Thelma presumably expected Howard to file these returns with the IRS on a timely basis). Cash register receipts not reconciling with subsequent bank statements is an additional concern. Howard argued that much of the income and expenditure of The Roadrunner was in cash thereby making it difficult to reconcile payments and receipts. Moreover, Thelma often neglected to advise him of all cash payments. Notwithstanding these assertions, it appears that Howard did little, if anything, to investigate these irregularities. Nor does it appear that Howard advised Thelma to keep records of all personal withdrawals. This oversight also would be a breach of his duty to account (he failed to keep accurate records and accounts of all transactions or take the necessary steps that would allow him to do so) and his duty to notify (he failed to advise Thelma of these discrepancies and what she needed to do to ensure accurate records). A further sign of Howard’s failure to exercise due care and skill is his omission of the second bank account for The Roadrunner (used to separate the gasoline sales from the takeaway food side of the business from the Income Statement). This would also be a breach of Howard’s duty to account (he failed to keep accurate records). Any claim by Howard that errors in the preparation of the financial statements were due to Thelma’s slowness in providing necessary information (and/or his difficulty in contacting Thelma to obtain answers to his questions) is unlikely to be a convincing defense. While his client’s tardiness and inaccessibility were understandably frustrating to Howard, it is not a valid justification for substandard services and/or the breach of a fiduciary duty owed by a professional to a client. There is little to suggest that he emphasized to Thelma the importance of maintaining records that ensure accurate financial statements. Moreover, if he felt that Thelma could not provide him with sufficient data to ensure reliable financial statements, he should have considered whether it is prudent to continue with the engagement. Howard should not have produced financial statements that he knew were inaccurate and potentially misleading to users. The errors in The Roadrunner financial statements and associated documents such as the firm’s Trial Balance are also a breach of the Code, Section 501 (4) Acts Discreditable- Negligence in the preparation of financial statements or records. This section stipulates that a CPA shall be considered

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to have committed an act discreditable to the accounting profession when, by virtue of his negligence, he makes or permits or directs another to make, or fails to correct, materially false and misleading entries in the financial statements or records of an entity.

CONCLUSION This case provides students with a variety of situations that they might encounter as a practicing accountant. Students are asked to consider the various legal and ethical issues stemming from Howard’s actions. The case demonstrates that accountants have to be fully aware of their obligations to the client, and that these duties extend beyond simple legal matters. Finally, the case provides an opportunity to distinguish for students the difference between legal requirements and ethical standards of behavior.

NOTES 1. Two suggested references for the students are Managers and the Legal Environment: Strategies for the 21st Century by C.E. Bagley, published by West Publishing Company (1991) and Business Law: The Legal, Ethical, and International Environment by Henry Cheeseman published by Prentice-Hall (3rd Edition, 1998). In the Bagley text Chapters 7, 8 and 17 discuss the various aspects of contract law and tort law that are relevant to this case study, while in the Cheeseman text Chapters 5, 9, 29 and 30 discuss the various aspects of contract law and tort law that are relevant to this case study. 2. An overview of a CPA’s responsibilities arising under contract law are detailed in our suggested answer to Question No. 3. 3. Causey, D.Y. and Causey, S.A. 1999. Duties and Liabilities of Public Accountants. 6th ed. Starkville, MS: Accountant’s Press. p. 26. 4. Armstrong, M. B. and Carr, J. 2002. Expansion of the concept of fiduciary duty in accounting. Research on Accounting Ethics, Vol. 8. 5. For example, a fiduciary relationship exists whenever ‘‘a client justifiably puts trust and confidence in an accountant to act in the client’s interest’’. (See Davitt & Gross, 1995, p. 34). See also Cafritz v. Corporation Audit Co., 60 F. Supp. 627 (1945) (where the defendants were held to have owed a fiduciary duty to the plaintiff because the plaintiff had entrusted substantial control over a portion of his business to the defendants); and Dominguez v. Brackey Enterprises, Inc., 756 S.W. 2d 788 (1988) (where the court found a fiduciary relationship between the CPA and his clients, stating, ‘‘Where a party is accustomed to being guided by the judgment or advice of another in y accounting matters relating to income taxation, and there exists a long association in a business relationship, as well as a personal friendship, the first party is justified in placing confidence in the belief that the other party will

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act in his best interest. Under these circumstances, a fiduciary relationship y exist[s]’’. 6. Managers and the Legal Environment: Strategies for the 21st Century by C.E. Bagley. West Publishing Company (1991) p. 428. 7. Business Law: The Legal, Ethical, and International Environment by H. Cheeseman. Prentice-Hall (3rd Edition, 1998) pp. 85–86. 8. See, Supra, note 6 at p. 167. 9. Mallor, J., Barnes, A. J., Bowers, T., Phillips, M., and Langvardt, A. 2001 (11th Edition). Business Law and the Regulatory Environment. McGraw-Hill/Irwin. pp. 750–755. The student might also find Chapters 7, 9, 34 and 35 that discuss the various aspects of contract law and tort law relevant to this case study. 10. See, Supra, note 7 at pp. 522–526. 11. Carr, C., Furniss, J., Harrington, M. and Morton, J. 2003. The Legal Environment of Business. Abbott Publishing, pp. 207–209. 12. See, Supra, note 9 at p. 750. 13. See, Supra, note 9 at pp. 772–774.

ACKNOWLEDGMENTS The authors would like to thank Mary Beth Armstrong, Marshall Geiger, Henry Schwarzbach, Steven Mintz, Bill Seaman and two anonymous reviewers for their helpful comments on earlier versions of this case. This case is primarily based on facts that were at issue in a professional conduct investigation conducted by an accounting professional body. The business ethics issues and essential facts have been retained. All names, locations, dates and identifying details have been disguised. Thus, if any names used in this case are those of actual firms or individuals, it is purely coincidental.