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IN PRACTICE

Highlights of Finance and Accounting Ethics Research

 

By CYNTHIA E. BOLT-LEE, CPA and JANETTE MOODY, CPA, PH.D.
OCTOBER 2010
In Practice

Ethical behavior is difficult for any researcher to measure and analyze, especially in real-life situations. Results are often imprecise due to the challenges inherent in quantifying what is ethical and what is not. Much of the work done is theoretical, and involves either creating or applying ethics models. To draw conclusions from ethics research, due to the many variables involved, researchers must rely on judgment and assumptions as they study an individual’s actions, reactions and reasoning for the individual’s behavior. Nonetheless, the conclusions drawn and models proposed in ethics research provide valuable insights into ethical behavior, and it is an important area of academic research.

 

ETHICAL SHIFTS AFTER ENRON

Recent research suggests a shift in the ethical behavior of management, apparently linked to the highly visible convictions of Enron executives. The timing of two separate studies by the same author reveals interesting changes in the decision-making behavior of management before and after the convictions. This research suggests a movement toward a more “heightened state of ethical awareness” resulting from the greater likelihood of punitive consequences imposed for unethical corporate behavior given high-profile trials for alleged corporate malfeasance.

 

Author Shane Premeaux conducted both studies, each through a questionnaire sent to 1,000 marketing managers in the U.S. and each resulting in a response rate of more than 40%. The first, in 2003, was conducted after Enron’s bankruptcy but before its executives were prosecuted. Participants in the study responded to a series of vignettes containing ethical dilemmas. The responses were evaluated to determine their position on the ethical issues presented in situations involving areas such as conflict of interest and interpretation of gray areas within specific laws.

 

Results from the 2003 study suggested that business practitioners at the time relied on a combination of “act and rule utilitarian ethical philosophy.” This ethical theory says that, when an individual makes a decision, the best choice is one that provides the greatest good, regardless of laws or socially acceptable behavior. Therefore, decisions are acceptable if they lead to the greatest good, while ignoring justice and the direct spirit of the law.

 

After the convictions of Enron executives, Premeaux repeated his study. The 2006 study included several questions identical to those in the 2003 study. Results revealed a change in philosophies, with a current predominant reliance on the combined ethical theories of “rule utilitarian and rights rationale.” This suggests a greater respect for the law and a belief that actions are moral when they are fair, just and respect the rights of everyone. This shift in moral philosophy reveals more ethical decision making according to the law, which in turn indicates actions that, according to the author “in the long term may be in the best interest of business and society.”

 

The author suggests that managers are now adhering to laws more closely due to the social and political changes since Enron, not due to a shift in moral thinking. Prior to the conviction of Enron executives, business scandals without real consequences had little impact on behavior. Essentially, management decision making is currently more aligned with acceptable ethical behavior, resulting in greater respect for the law as a means of avoiding the sanctions that come with noncompliance.

 

The research, titled “The Link between Management Behavior and Ethical Philosophy in the Wake of the Enron Convictions,” appeared in the March 2009 issue of the Journal of Business Ethics.

 

ETHICS PROGRAMS AND THE PARADOX OF CONTROL

Corporate ethics programs have become widespread in part because organizations convicted of ethical violations are eligible to have their federal penalties reduced by up to 95% if they have a qualifying ethics program in place. This change occurred due to the Federal Sentencing Guidelines for Organizations (FSGO) of 1991.

 

Authors Jason Stansbury and Bruce Barry cite research showing mixed results when examining organizations with programs containing four elements: written standards, anonymous advice help lines, anonymous reporting and training. Could an organization’s ethics program hinder rather than enhance an employee’s ethical behavior? Could an ethics program actually weaken employee skills for handling ambiguous ethical situations? The authors of “Ethics Programs and the Paradox of Control” (Business Ethics Quarterly, April 2007), drawing upon research in the areas of psychology and organization theory, provide a compelling case for how an improperly constructed, albeit well-meaning, ethics program can disable rather than enable employees to act appropriately when confronted with situations involving questionable ethical behavior.

 

The authors suggest that the mixed outcome of ethics programs reflects the different mechanisms underlying the programs themselves. At their core, ethics programs are control systems designed to align employee behavior with management’s values. Employers can achieve this in one of two ways: either through agreement on shared values between management and employees or by coercive mechanisms in which management alone dictates what employee behaviors should be. However, coercive control programs are less likely to develop an employee’s skills necessary to address ambiguous situations. An “atrophy of moral competence” results when workers are not required to use their individual judgments, but are directed to turn the situation over to “experts” such as the human resources department, legal counsel, etc.

 

The authors recommend a combined program that includes accountability for specific violations plus coaching and goal setting. Overall, Stansbury and Barry recommend that organizations:

  1. Regularly review and revise their ethics programs using anonymous feedback to help employees develop “moral imagination”;
  2. Utilize a philosophy of prioritized principles (for example, provide guidance on which has precedence: animal rights or customer safety); and
  3. Use anonymous help lines and training to provide advice.

REBUILDING STAKEHOLDER TRUST IN BUSINESS

One of the goals of an effective ethics program is to inspire trust in the organization. Authors Mark Bandsuch, Larry Pate and Jeff Thies note that organizations can enhance trust through the inclusion of certain key elements in corporate governance policies, specifically:

 

  • Principle-centered leadership
  • Transparency
  • Stakeholder voice
  • Ethical culture

 

While principle-centered leadership sets the tone for an organization’s ethical culture and promotes stakeholder voices, trust comes from being able to “see” these features via corporate transparency. Businesses provide information to stakeholders either actively (without being prompted) or passively (having it available only upon request). A reinforcing cycle of principle-centered leadership providing transparency increases the accountability of leadership, thereby reinforcing ethical governance and responsiveness to stakeholder voices. Citing various research studies, the authors conclude that trust, based on ethical leadership and transparency, leads to increased employee loyalty and job satisfaction, which in turn fosters adaptability and productivity, resulting ultimately in overall corporate success.

 

Given the importance of transparency to stakeholder trust, how can an organization assess how well it is doing in this area? The authors created a transparency measurement tool (TMT) to provide a framework to assist management in organizing and examining key dimensions of organizational transparency. The TMT assigns a score to each dimension of transparency: accuracy, comprehensiveness, relevancy, timeliness, accessibility, clarity and responsiveness. Each dimension is evaluated for major corporate categories: risk management, OSHA, stakeholder voice, financial data, management structure, ownership and BOD structure, industry standards, environmental impact, company values, and human rights. Each item is scored on a scale from 1 (unacceptable) to 5 (outstanding). Each category’s total score is then either summarized or averaged to provide an overall organizational score.

 

The TMT can be used as an internal management tool that looks beyond the organization’s reported regulatory information to include other information relevant to stakeholders. The March 2008 article “Rebuilding Stakeholder Trust in Business,” published in Business and Society Review, includes the TMT matrix. By completing the matrix, an overall transparency score can be calculated and the results used for comparisons over time and as a method of benchmarking with other organizations. Whether performed by internal personnel or by independent auditors, the assessment process itself can provide a valuable examination of the organization’s practices. However, in the final analysis it is the organization’s prerogative as to whether it will take action to improve its transparency to stakeholders. Thus, as is true of all tools available to management, the TMT’s value lies in shedding light on those practices that are commendable as well as those that are not.

 

IT’S LOVELY AT THE TOP: PERCEPTIONS OF ORGANIZATIONAL ETHICS

Is it possible that top executives, charged with setting an organization’s ethical tone, see its ethical culture in a vastly different light than do lower-level employees? And if so, why would this be the case? Linda Trevino, Gary Weaver and Michael Brown (“It’s Lovely at the Top,” Business Ethics Quarterly, 2008) use identity theory to support and explain the disconnect between top management’s positive perception of the corporation’s ethical environment and the less positive perceptions of lower-level employees.

 

Identity theory suggests that employees tend to see their organization in an overall positive light because doing so reaffirms their own positive self-identity as part of that organization. However, this “accentuating the positive” is more pronounced in senior management. This is because ascent to the top is a result of cultivating close relationships with other likeminded top members, thereby further solidifying the individual’s corporate identity. This is also reflected in a stronger organizational commitment. In addition, top management is required to represent the organization to outsiders, in other words, to be the “face” of the organization, further intensifying the individual’s identification with the corporation and the desire to see it in a positive light.

 

This identity bond is less strong as one moves down the hierarchy where employees are more psychologically distant from, and cynical of, their employers. While still being “good” employees in terms of performance, they nevertheless can have a less positive perception of corporate ethics initiatives than do senior managers. Lower-level employees may perceive corporate ethics programs as control instruments rather than as truly representing and cultivating an ethical environment.

 

The authors verified the above theories with a large survey of employees in three major corporations. Their findings showed that senior managers, compared to production and clerical workers (employees), were less likely to see ethics programs as existing to protect top management from blame, were more likely to view the ethics programs in a positive light, were more likely to believe that employees would report unethical behaviors, and were more likely to believe that employees would seek advice from management about their ethical concerns. This gap between top management’s perceptions of the firm’s ethical culture and the perception among lower-level employees can have serious consequences if it leads to a neglect of ethical leadership and management through the false perception that all employees are as positive about the organization’s ethical environment as are top managers.

 

The authors suggest that a more active involvement by top management in understanding the ethical environments of all levels of the organization is necessary to prevent unwanted consequences. Senior management should be familiar with how their employees view ethics at the organization. Top management should not rely on worker surveys but rather should create opportunities for regularly scheduled direct interactions between the two groups in open communications. It is suggested that top management participate in joint, interactive ethics training courses with lower-level workers. It is also suggested that senior executives receive regular and detailed briefings on items collected through their whistleblower reporting centers to stay abreast of workplace concerns about unethical activities.

 

Cynthia E. Bolt-Lee (boltc@citadel.edu) is an associate professor and Janette Moody (janette.moody@citadel.edu) is a professor at The Citadel School of Business Administration, Charleston, S.C.

 

To comment on this article or to suggest an idea for another article, contact Matthew G. Lamoreaux, senior editor, at mlamoreaux@aicpa.org or 919-402-4435.

 


 

Editor’s note: This article is part of a series that samples accounting research and distills key findings for busy practitioners and preparers. These summaries explain the implications of a wide range of research and give CPAs the opportunity to apply the results in day-to-day activities. Readers interested in more detail should review the full text of each article to explore the hypothesis, research process, statistical analysis, supporting theories and conclusions.

 


 

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