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ETHICS

Highlights of ethics research

Studies examine corporate compliance programs, manager behavior, auditor decision-making, and managerial responsibility for internal control.

By Cynthia E. Bolt-Lee, CPA, Yi- Jing Wu, CPA, Ph.D. and Aleksandra B. Zimmerman, CPA/ABV
June 2014

Due diligenceCorporate 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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