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Highlights of ethics research

Highlights of ethics research

Corporate ethics and auditor ethical decision-making have garnered
considerable attention in academic research following the corporate
scandals of the early 2000s, the passage of the Sarbanes-Oxley Act
(SOX) of 2002, and the financial crisis of 2008–2009. This article
summarizes the findings and observations from recently published
research in prominent accounting, auditing, and business academic journals.

CORPORATE ETHICS AND COMPLIANCE PROGRAMS

What is the state of corporate ethics today? What is the future of
corporate ethics programs? James Weber and David Wasieleski attempted
to answer these questions in their article, “Corporate Ethics and
Compliance Programs: A Report, Analysis and Critique,” published in
the Journal of Business Ethics in February 2013.

Weber and Wasieleski presented the results of a 2010 survey from
members of the Ethics and Compliance Officer Association (ECOA), a
professional association for ethics and compliance managers, on the
current state of corporate ethics programs. The authors compared the
results of their 2010 survey to six prior corporate ethics studies to
determine if, and how, corporate ethics programs have evolved over the
past two-and-a-half decades. Unlike prior studies about the state of
business ethics programs in the United States, which generally
surveyed employees and corporate management, the authors surveyed
individuals who are charged with creating, implementing, and
monitoring ethics and compliance programs in businesses across the
United States. The businesses ranged from 5,000 to 50,000 employees
and from $5 billion to $50 billion in annual sales.

The authors found that, while in the 1980s and 1990s companies were
primarily motivated to have an ethics and compliance program to show
that they were socially responsible and to guide employees’ behavior,
today’s companies are more motivated by “doing the right thing” and by
legal compliance. The authors found that the strongest incentive for
having a corporate ethics program has become pressure from laws such
as the Foreign Corrupt Practices Act, the Federal Sentencing
Guidelines (FSG), and SOX. This incentive outweighs other factors,
such as company leaders’ values, employee encouragement, competitors,
economic incentives, and pressures from the community and nonprofit groups.

Moreover, according to the survey, ethics training at employee
orientations or through electronic training sessions is now common at
98% of large U.S. corporations. The number of U.S. businesses that
have anonymous hotlines for reporting ethical questions and issues has
increased from about half, according to a 1999 survey that captured
this information, to 95% in 2010. The jump came primarily after the
implementation of SOX and the FSG.

Corporate board members, as well as compliance officers of large U.S.
businesses, have recently become a critical part of the process of
establishing and maintaining ethics and compliance programs and, as a
result, have taken on the primary responsibility in this area. This is
demonstrated by the fact that about 60% of the organizations surveyed
in the current study indicated that the board is involved in drafting
the ethics code. The study also indicated that the ethics code applies
not just to employees but also to senior management and the board of directors.

In addition, two innovations in ethics programs have been recently
implemented: the use of ethics-based performance appraisals and
ethics-based risk assessments. Specifically, close to three-quarters
of respondents indicated that their organizations use ethical criteria
in performance evaluations, promotion criteria, and calculation of
employee bonuses or salaries and/or nonmonetary compensation. The
latter involves periodically performing risk assessments to reduce
criminal conduct, detect fraud, meet legal requirements, and
strengthen internal control systems.

Weber and Wasieleski noted that transparency, sustainability, social
reporting, global corporate citizenship, and environmental performance
reporting are the emerging trends when it comes to ethics and
compliance programs at large U.S. businesses. They also concluded that
business ethics will continue to be a reaction to the forces of the
external environment, such as government regulations. The authors
provided a resource checklist for ethics and compliance officers to
use when evaluating the current state of their ethics and compliance programs.

CAN A CODE OF ETHICS IMPROVE MANAGER BEHAVIOR AND INVESTOR CONFIDENCE?

Codes of ethics have become commonplace in U.S. corporations, but do
they curb manager opportunism and increase investor confidence in the
corporation? Bruce Davidson and Douglas Stevens attempted to answer
that question via a laboratory experiment.

“Can a Code of Ethics Improve Manager Behavior and Investor
Confidence? An Experimental Study” was published in January 2013 in
The Accounting Review. The authors predicted that managers’
opportunistic behaviors should be curbed to the extent that the codes
of ethics activate social norms. Social norms are activated by making
behavioral rules set forth in the code of ethics more prominent (i.e.,
emphasizing manager behavior that considers the needs of shareholders
above managers’ self-interest). They are also activated by increasing
managers’ motivation to follow rules set forth in the code of ethics
by making them believe that these rules are valid and reasonable.

In the authors’ experiment, 124 graduate and undergraduate students
acted as managers and investors in a computer-based simulation of an
investment game, which captured information on the behavior of the
managers and investors, based on the decisions and behaviors of the
other party. The decision context and incentives faced by participants
mirrored those encountered by managers and investors, thus results
should generalize to real-world corporate settings.

The authors found that a code of ethics alone is not sufficient to
reduce opportunistic behavior by a manager or to increase investor
confidence. What is needed to accomplish both goals is to have
managers publicly sign a statement that they will personally adhere to
the code of ethics. The act of certifying increases managers’
awareness of social norms in the code of ethics as well as investors’
belief that managers and corporations will conform to these behavioral rules.

The findings could help corporations implement their codes of ethics
more effectively. In an appendix to the article, the authors provided
an example of an ethics code (made available by the Starbucks Corp.)
certified by senior management and finance leaders. Readers can tailor
this code of ethics with a certification requirement to their
organizations to help achieve the potential increase in investor
confidence suggested by results of this study.

INTERNAL AND EXTERNAL AUDITOR ETHICAL DECISION-MAKING

What causes auditors to make unethical decisions? Are these factors
different across different types of auditors? Donald Arnold Sr., Jack
Dorminey, A.A. Neidermeyer, and Presha Neidermeyer attempted to answer
these questions by surveying internal auditors working for publicly
traded U.S. businesses and external auditors at the Big Four public
accounting firms and smaller regional and local firms. “Internal and
External Auditor Ethical Decision-Making,” published in the
Managerial Auditing Journal (Vol. 28 (2013), Issue 4),
sheds light on the ethical decision-making processes of internal and
external auditors. The work is one of the first studies to compare
internal and external auditors and to look not only at Big Four
auditors but also external auditors from smaller, regional firms.

While internal and external auditors share a similar set of audit
principles and ethical standards, they differ significantly in terms
of the structure and size of the organizations for which they work,
their training, to whom they report, and the type of services they
provide. These differences could translate into different ways
auditors consider and respond to ethical concerns. The study examined
how two situational factors—social consensus and magnitude of
consequences—affect an auditor’s ethical decision-making.

By statistically analyzing the survey responses, the research
revealed that the magnitude of consequences to victims of the action
in question does not influence the ethical decision-making of internal
or external auditors differently. However, the authors found that the
effect of social consensus (the degree of agreement that an act is
right or wrong) on ethical decision-making differs among the various
groups of auditors.

Specifically, social consensus explains in large part how auditors of
Big Four firms intend to act when faced with an ethical dilemma.
However, for small firm and internal auditors, this effect is not as
strong. The authors suggested that the more diverse and political
environments in which the larger firms operate make auditors of Big
Four firms more cognizant of aligning their views with social norms.
Thus, social consensus may be more critical among this group of auditors.

The study’s findings showed that the auditors’ ethical
decision-making process is contingent on the situational context.
Differences among internal, large-firm external, and small-firm
external auditors on social consensus lead to differences in the
ethical decision-making processes for these three types of auditors.
Consequently, the authors urged the profession and policymakers to
consider how these differences should be addressed in individual firm
policies as well as in the ethical training that different groups of
auditors should receive.

PERCEPTION GAPS BETWEEN ACCOUNTING AND MANAGEMENT PROFESSORS

Management’s responsibility for establishing and maintaining internal
controls is well-known in the accounting field. Although more than a
decade has passed since the passage of SOX, numerous studies reveal
that management continues to incorrectly assume that internal auditors
hold this responsibility. This perception gap creates a challenge for
corporate management, who may not understand the internal control
environment or its responsibility for financial reporting controls.

Recent research shows that this perception gap exists in academia as
well, uncovering a need to ensure that the nonaccounting business
major receives adequate training in this important aspect of corporate
governance. Researchers Karen Miller, Thomas Proctor, and Benjamin
Fulton surveyed 212 management and accounting professors from U.S.
universities. The survey included research questions to examine the
perception gap between accounting and management professors related to
management’s responsibility for internal controls, the instruction of
SOX regulations, and curriculum-related issues such as who might be
best qualified to teach nonaccounting majors.

The authors found that 39% of management professors presumed that the
internal auditors were responsible for establishing internal controls
and 44% thought that internal auditors were responsible for
maintenance of controls. Of accounting professors surveyed, 90% and
88%, respectively, were accurate in determining these
responsibilities. This perception gap affects the curriculum of
management classes at both the graduate and undergraduate level,
potentially perpetuating the same misperception that occurs in the
corporate environment.

While the professors acknowledged the importance of a student’s
understanding of internal controls, the greatest concern lies in the
business graduate without an accounting degree. The survey revealed
that most professors believed internal controls should be introduced
in an undergraduate accounting class to ensure exposure to both
accounting and nonaccounting majors. However, the content-heavy
introductory accounting classes often have little time for in-depth coverage.

Results also showed that management professors, in addition to
misunderstanding management’s responsibilities, thought that
management courses would be more appropriate to cover internal
controls, while at the same time recognizing that accounting
professors are more qualified to teach the topic. Interestingly,
accounting professors believed that these topics should remain in
accounting classes and that nonaccounting majors should consider
enrolling in these courses as an elective. Both accounting and
management professors felt that topics related to internal control
should be taught at the graduate level and in the workplace as well as
at the undergraduate level.

Given the perception gap of management professors, and the lack of
additional coursework in accounting, the nonaccounting major could
potentially perpetuate the misperception that occurs in the corporate environment.

To address this void, business curriculum must lead the way in
ensuring the next generation of business managers understands not only
the importance but also the responsibility for establishing,
maintaining, and evaluating internal controls over financial
reporting. The authors identified a need for curriculum revisions to
ensure appropriate coverage of the basic principles of internal
control, including stronger coordination between management and
accounting faculty as well as continued training in the workplace.

“Teaching Managerial Responsibilities for Internal Controls:
Perception Gaps Between Accounting and Management Professors” appeared
in the March 2013 issue of the Journal of Accounting
Education
.


Cynthia E. Bolt-Lee (

boltc@citadel.edu
) is an associate professor at The Citadel School of Business
Administration in Charleston, S.C. Yi-Jing Wu (

yi-jing.wu@case.edu
) is an assistant professor at Case Western Reserve University in
Cleveland. Aleksandra B. Zimmerman (

axb172@case.edu
) is a doctoral student in accounting at Case Western Reserve University.

To comment on this article or to suggest an idea for another
article, contact Jack Hagel, editorial director, at

jhagel@aicpa.org
or 919-402-2111.

The Pathways Commission was created by the American Accounting
Association and the AICPA to study the future structure of higher
education for the accounting profession and develop recommendations to
engage and retain the strongest possible community of students,
academics, practitioners, and other knowledgeable leaders in the
practice and study of accounting. Recommendation No. 1 of the Pathways
Commission report was to “build a learned profession for the future by
purposeful integration of accounting research, education, and practice
for students, accounting practitioners, and educators.” The
dissemination of practice- related research to practitioners supports
this recommendation. This article supports the Pathways Commission’s
efforts. It summarizes the findings and observations from recently
published research in prominent accounting, auditing, and business
academic journals.

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