THE APPLICABILITY OF THE JONES MODEL TO ACCOUNTING ETHICS RESEARCH

THE APPLICABILITY OF THE JONES MODEL TO ACCOUNTING ETHICS RESEARCH Jeffrey Cohen ** Boston College Nonna Martinov-Bennie Lecturer University of New South Wales June 2005 Address for Correspondence: Jeffrey Cohen Department of Accounting Carroll School of Management Boston College Chestnut H1 Boston, MA Phone: (617) 552-3165 Fax: (617) 552 2097 Email: cohen@bc.edu We would like to acknowledge the helpful comments of Roger Simnett, Laurie Pant and Elizabeth Dreike Almer. To be reviewed for articles in JBE relating to: ACCOUNTING AND FINANCE

THE APPLICABILITY OF THE JONES MODEL TO ACCOUNTING ETHICS RESEARCH Abstract: This paper discusses the relevancy of the Jones (1991) model for conducting accounting ethics research. Using a sample of 40 experienced Australian auditing managers and partners of all of the Big Four multinational accounting firms, we find that Jones (1991) model can help guide accounting ethics research by isolating out the contingent factors that affect ethical decision making. Implications for accounting ethics research and accounting practice are then discussed. Key Words: Jones (1991) model, accounting ethics, audit judgment, moral intensity factors.

THE APPLICABILITY OF THE JONES MODEL TO ACCOUNTING ETHICS RESEARCH According to Watley and May (2004) the current business environment, marked by deregulation., privatization, increasing diversity and technological change, is complex with individuals given more latitude in decision making and fewer guidelines to use for direction. Recent corporate accounting scandals (One-Tel, Harris Scarfe and HIH in Australia, Parmalat in Italy, AHold in the Netherlands, Enron, WorldCom, Global Crossing, Qwest, Dynergy, CMS Energy, Tyco, Adelphia, Peregrine, Sunbeam, Baptist Foundation of Arizona, Waste Management and Xerox) demonstrate the need to investigate ways to understand and then enhance the ethical decision making of individuals, such as accounting and auditing professionals, in organizations. The objective of this study is to investigate whether Jones (1991) model of ethical decision making is relevant for the accounting ethics domain. The role of ethics and the necessity for accounting decision makers to possess ethical expertise in order to be able to exercise appropriate professional judgments (Keim and Grant, 2003) is now widely recognized by the public, regulators and the profession. The exercise of professional judgment has been recognized as an essential part of preparing and auditing financial reports. For example, a fundamental assumption underlying the auditing function and thus the exercise of professional judgment is that auditors must act ethically, especially in relation to independence (Jones and Ponemon, 1993; Thorne, 1998). This has been called the unique quality of the audit that distinguishes it from other professions and professional activities Mautz and Sharaf (1961). Many different sources have provided conceptual foundations for research into ethical behavior. Several theoretical frameworks have been developed since the late 1980s in the business ethics literature to study the effects of different categories of variables on ethical behavior (e.g. Ferrell and Gresham, 1985; Hunt and Vitell, 1986; Trevino, 1986; Jones, 1991; Lampe and Finn, 1992; Thorne, 1998; Trevino and Weaver, 2003). The basis of these theoretical frameworks of ethical decision making has been borrowed mainly from psychology (e.g. Kohlberg, 1969; Fishbein and Ajzen, 1975; 1

Rest, 1986 and 1994) and extended into business (mainly marketing) and accounting paradigms. Ford and Richardson (1994) comment that the study of ethics does not need additional models of ethical behavior but rather further testing of plausible existing models such as Jones (1991) model. Jones (1991) model integrates prior models (Ferrell and Gresham, 1985; Rest, 1986; Trevino, 1986; Hunt and Vitell, 1986; Dubinsky and Loken, 1989) and introduces concepts not present in the prior models. The purpose of Jones (1991) model was to offer a framework that supplements but does not replace other models. Jones (1991) argues that ethical (moral) issues vary in terms of their ethical (moral) intensity and that an issue -contingent model of ethical decision making and behavior can add significantly to the understanding of ethical (moral) processes. The Jones (1991) model, unlike the other models which focus on the traits of moral decision makers, focuses on the ethical issue and posits that six characteristics of the ethical issue (magnitude of consequences, social consensus, probability of effect, temporal immediacy, proximity and concentration of effect) will be positively related to ethical decision making and behavior. The six characteristics of ethical issues are collectively referred to as moral (or ethical) intensity and are likely to vary from issue to issue. The research of Jones (1991) moral intensity (MI) construct is still relatively limited and the results as to the importance of different individual MI factors at different stages of ethical decision making are mixed. This study examines the validity of Jones (1991) MI construct within the audit context generally as well as in relation to specific audit vignettes. The study s aim is to address the current gap in ethics research by focusing on the impact of the task or issue rather than the characteristics of the individual. The ethical research to date, including the limited number of studies examining auditor independence, has focused on the characteristics of the individual (e.g. moral development, cognitive styles), environmental (e.g. social, cultural) and situational (e.g. organizational culture, corporate policies) variables rather than the characteristics of the issue itself. This study provides evidence in relation to the experimental validity of the MI construct generally and within the audit context specifically. Thus, an aim of the study is to provide an insight into the relative importance of each of the MI factors to the different stages of auditors ethical decision making processes and to the overall MI evaluation. Furthermore, the study investigates 2

whether the perceived importance of the MI factors is affected by different audit related situations/ethical issues. If the impact of the MI factors identified by Jones (1991) is empirically supported in the audit context, then the applicability of other ethical models needs to be carefully evaluated, as controlling for issue characteristics would become an integral part of a meaningful test of these models. Further, a better understanding of the impact of the individual MI factors on auditors ethical decision making processes could also prove beneficial for regulators by assisting in the clarification of professional issues exhibiting MI factors which may be of concern (e.g. MI factors increasing independence risk), highlighting the need for intervention in terms of professional and/or ethical pronouncements. MOTIVATION The purpose of the current research, as advocated by Ford and Richardson (1994) and Reiter (2001), is not an attempt to build a model but to extend our knowledge of auditor ethical judgment by utilizing and testing the conceptual framework proposed by Jones (1991). Jones (1991) integrated model shows that the various models have certain components in common. The foundation of the model is Rest s (1986) four component model. These components form the horizontal chain in Jones simplified model. Rest s (1986) four components specify four distinct sequential steps/processes an individual must take in order to incorporate the ethical dimension in a decision. The four components are: (1) Recognition of Moral Issue (moral sensitivity) or interpretation of the particular situation and the awareness of what actions are possible and the affect on the parties concerned. (2) Moral Judgment about which course of action is more morally justifiable (i.e. what ought to be done). (3) Establishing Moral Intent (moral motivation), or prioritization of moral values higher than other values (i.e. agreeing to perform chosen course of action). (4) Engaging in Moral Behavior (moral character) refers to perseverance to follow through on one s intentions (i.e. implementing the chosen course of action). The second component (i.e. make moral judgment) within Rest s (and Jones ) model incorporates the process by which individuals define what ethical/moral means 3

to them. The moral judgment component is based on Kohlberg s (1976) model of cognitive moral development. The other four models utilized in the Jones model recognize that the personal factors in Rest s model may not be the only influences in the decision process. Trevino (1986) proposed a person situation interactionist model in which contextual variables interact with Rest s and Kohlberg s individual variables. Under Trevino s model cognitive evaluation of an ethical dilemma is influenced by the individual s stage of cognitive moral development, but situational factors such as immediate job context, organizational culture, and characteristics of the work have a direct effect on cognitive evaluation, and a moderating effect on the relationship between cognitive evaluation and behavior. Individual characteristics such as ego strength and locus of control also moderate the effect of cognitive evaluation on behavior. The other models influencing the Jones model (Ferrell and Gresham, 1985; Hunt and Vitell, 1986; Dubinsky and Loken, 1989) have also described the ethical processes used by individuals to evaluate specific ethical situations. For example, Ferrell and Gresham (1985) model also includes a feedback mechanism in which evaluation of past ethical/unethical behavior has an effect on future behavior, mediated by significant others, opportunity (e.g. professional codes, corporate policy), individual factors (e.g. attitudes, intentions) and the individual decision making process. In the Hunt and Vitell model (1986), the individual s perception of the problem leads to perception of behavioral alternatives which leads to perception of consequences and the evaluation of the probability and desirability of the consequences. Finally, the Dubinsky and Loken (1989) model of ethical decision making is founded upon the theory of reasoned ac tion (Ajzen and Fishbein, 1980), which is based on the belief that when faced with a behavioral decision, individuals usually make a systematic, rational use of available information. The most immediate determinant of behavior is the individual s behavioral intentions, which are a result of the individual s attitude toward the behavior and the individual s subjective norm, which is the term used to indicate the social pressure put on the individual to perform or not perform the behavior in question. Jones (1991) argues that although the above models are collectively reasonably comprehensive, the model clearly shows that none of the previous models of ethical decision making explicitly includes characteristics of the moral issue itself as either an independent variable or a moderating variable. He argues that ethical decision making is 4

issue-contingent and introduces characteristics of the moral issue itself (MI) as an additional variable. AUDITING RESEARCH AND JONES (1991) MORAL INTENSITY CONSTRUCT The research into the MI construct within an auditing context is in its infancy. The earlier auditing researchers have hypothesized that MI influences ethical decision processes, but did not directly test the theory (e.g. Lampe and Finn, 1992; Hooks and Tyson, 1995). The prior empirical studies testing the effects of the MI construct in an audit context using professional auditors (Ketchand et al, 1999; Shafer et al, 1999 and 2001; Douglas et al, 2001) were either not testing all components of the model or else were very situation-specific. The aim of the current research is to fill in some of the existing gaps in the prior research and to firstly investigate the validity and relevance of the Jones (1991) model within an audit context. Unlike the previous studies, this research explores directly the auditors perceived relevance and importance of each of the six MI factors at each of the four stages of ethical decision making. Secondly, the current research directly investigates the impact of different issues/scenarios contexts on auditors perception of relative importance of each of the six MI factors. Thus it is important to examine whether the relevance of all the six MI factors varies both within and between each stage, as well as the impact of different situational contexts on the individual MI factor s perceived importance. THE APPLICABILITY OF JONES (1991) MODEL TO THE AUDIT PROCESS Jones (1991) proposes that the MI of the issue itself has a significant effect on ethical decision making and behavior at all four stages of the process. The four stages adopted from Rest s (1986) model are: 1. Recognition of ethical issue or ethical sensitivity. This involves interpretation of the situation, identification of available alternative courses of action and the consequences on the parties involved. For example, Ketchand et al (1999) have identified subordination of judgment in auditing, that is, situations in which auditors face client pressure to acquiesce in the use of questionable or 5

aggressive accounting practices, as one of the most critical issues facing the auditing profession. This first component of the model, in relation to the client pressure to acquiesce to a questionable accounting treatment, such as an overstatement of the net realizable value of accounts receivable, would involve the recognition of the ethical dimension of the issue. This consists of two eleme nts, firstly the recognition by the auditor that the decision in relation to the client pressure will affect others (e.g. gain or loss of bonus to management, gain or loss to investors due to mispriced shares, negative publicity to the audit firm if sued, etc.) and secondly that the auditor has a choice (e.g. to acquiesce or not). 2. Making ethical judgment, which refers to making a judgment as to what is the ethically correct course of action, i.e. what ought to be done. This stage of the process involves prescriptive reasoning which is analogous to an accountant s formulation of his or her professional judgment of an ideal resolution to an ethical dilemma (Thorne, 2000, p. 141). Thus, once the auditor has recognized that an ethical dimension exists in relation to an overstatement of net receivables, then he or she must make an ethical judgment as to what should ideally be done, i.e. is it ethical or is it unethical to acquiesce to the client s pressure to accept the misstatement and issue an unqualified audit report. 3. Establishing ethical intent. This stage of the process involves weighing up of ethical values in relation to other values to establish behavioral intentions, i.e. decide what to do. Auditor s decision in the previous stage about what is ethically correct to do, is not the same as establishing ethical intentions in relation to the client s pressure to acquiesce to an overstatement of accounts receivable. Establishing ethical intent involves deliberative reasoning and is analogous to an accounta nt s intention to exercise professional judgment (Thorne, 2000, p. 141). At this stage the auditor would balance ethical factors (such as potential losses to shareholders, upholding of professional integrity, independence, and public interest) against other factors (e.g. retention of the client, loss of audit fee). This step is of special significance within an audit context as auditors normally make a decision with the knowledge that the decision will be reviewed and that an explanation of the decision may be called for (Johnson and Kaplan, 1991, p. 96). Beu and Buckley (2001, p. 63) suggest 6

that ethics and accountability fit well together as both are methods of social control and should be studied together. Furthermore, Emby and Gibbins (1988) and Messier and Quilliam (1992) acknowledge the complexity of accountability in audit environment as auditors may be accountable to multiple stakeholders (e.g. client, the profession, different levels of professional staff) holding conflicting views. The accountability relationship of the auditor to the different stakeholders (e.g. in terms of PX and the potential MC) is an important consideration in weighing up between ethical and other values to establish behavioral intent. 4. Engaging in ethical behavior which refers to the actual behavior. This last stage of the ethical decision making process involves an auditor acting on his/her ethical intentions, that is, exercising professional judgment and engaging in a course of action (e.g. accepting an overstatement of receivables or requesting the client to make an appropriate adjustment, and if not adjusted qualifying the audit opinion). The actual judgment may differ to both the decision as to what the correct and what the intended course of action was. Thorne (2000, p. 154) suggests that accountants respond to social factors when formulating their ideal professional judgment and respond to self- interest in the exercise of professional judgment. Jones (1991) identifies six variables/characteristics of the ethical issue (i.e. MI factors) that will impact on the ethical decision making process. These are: 1. Magnitude of consequences (MC), which refers to the sum of harms and benefits resulting from a given action. In the context of a financial report audit MC for a given misstatement may vary depending on the circumstances, but generally will be related to the materiality of the misstatement. An example of a material misstatement and high MC is the Securities and Exchange Commission s civil fraud charge against the former executives of Cendant Corporation who used earnings management to report more then US$500 million in phantom profits over a decade with a resulting US$19 billion loss to investors (New York Times, 28 February 2001). There are numerous other examples of material misstatement and manipulation of the financial information with the ultimate consequence being a corporate collapse (HIH 7

Insurance and One.Tel in Australia, and Enron and WorldCom in the US, just to name a few) and the demise of the auditing firm, Arthur Andersen. The auditing literature has recognized the significance of MC in relation to auditors judgment. For example, Kida (1980) concluded that a comparison between accuracy of prediction of going concern by mathematical models (e.g. Altman, 1968) and qualified opinions may be confounded by extraneous variables such as perceived consequences of qualifying. 2. Social consensus (SC). This MI factor is defined as the extent of agreement that an action is ethical or unethical. A high degree of consensus is most likely to be reached if a situation involves clear violation of known professional or legal standard, for example mandatory recognition of future losses under an accounting standard. Although many situations that arise in audit practice have a degree of ambiguity and are subject to auditors professional judgment (e.g. audit materiality evaluation), nevertheless consensus has traditionally had an important role in auditing. For example, consensus between auditors continues to be the most commonly used measure of decision quality in studies of auditor judgment. 3. Probability of effect (PE), which refers to the likelihood of consequences actually occurring. The type of factors that could impact on this in the context of a financial report audit are the level of reliance placed on the statements by the users, availability of alternate sources of information to users, and the likelihood that the reliance on the financial statements will result in monetary loss. An example of a high PE and high MC is the deliberate and fraudulent use of the internet, uncovered by the Securities and Exchange Commission (SEC), where 23 companies and individuals pumped up stock prices by more than US$300 million to raise US$2.5 million from investors (New York Times, 2 March 2001). 4. Temporal immediacy (TI). This is the length of time between the action and the onset of the consequences. An example of high TI is where the audited financial report is the basis of an imminent borrowing investment decision as compared to a low TI in which this decision is some months away. A particular instance of high TI and high MC is the case filed by the SEC against PinkMonkey.com where a fraudulent company news release tripled the 8

company s share price within an hour, eventually jumping more than 1,000 percent within two days (New York Times, 2 March 2001). 5. Proximity (PX), which refers to the affinity with the victim/beneficiary. An example of high PX would be a situation of a close relationship between the client and an auditor. This may result in the auditor s independence being compromised, as the auditor would be perceived to act in the client s best interest at the expense of the other users. 6. Concentration of effect (CE). This is a function of a number of people affected. In the context of a material misstatement of financial statements, the CE would be much greater for a publicly listed company with a large number of shareholders then a closely held private company. RESEARCH DESIGN As discussed above, this study aims to fill in an existing gap in the research to date and provide an insight as to the relative importance of each of the MI factors to the different stages of the ethical decision making process and to the overall MI evaluation within an audit context. To investigate the perceived relevance and relative importance of each of the six MI factors a sample survey of audit partners and managers was cond ucted. The three part questionnaire requiring approximately 30-40 minutes to complete (as recorded by the participants) was pilot tested by three academics, two audit partners and one technical consultant with specific expertise in professional ethics. Their comments were incorporated into the final instrument. One part of the questionnaire collected demographic information (e.g. age, years of audit experience, type of clients). This part was presented, on a random basis, to the participants either as the initial or the final part of the questionnaire. The second part asked the participants to rate the importance of each of the six MI factors (on a Likert scale of 11 ranging from very important to very unimportant ) for each of the four stages of the ethical judgment process. The order of the six MI factors was randomized for different subjects to minimize any potential order of presentation effect. After each stage, the participants were also asked to rank the factors in order of importance (most important, second most important, third most important, fourth most important, etc.). To ensure that each participant was 9

familiar with the meaning of the four stages of the judgment process and each of the six MI factors a description of them taken directly from Jones (1991) together with a diagrammatic representation of the relevant parts of Jones (1991) model were included at the beginning of this section of the questionnaire. A manipulation check consisting of a series of multiple choice questions to ensure the participants understanding of the meanings of the six MI factors was also included in this part of the questionnaire. The order of the questions in the manipulation check was varied across subjects. The third part of the questionnaire consisted of three vignettes. This enabled testing of whether the perceived importance of the MI factors was affected by different situations/ethical issues. The three vignettes in the questionnaire were adopted from prior ethics research (Claypool et al, 1990; Cohen et al, 1996). The benefit of using vignettes from prior research is that they have been tested and evaluated by the prior studies for realism and plausibility to ensure that they captured ethical dilemmas pertinent to current audit practice as well as direct comparison of results. For the purposes of the current study, two Australian audit academics and two audit partners reviewed these vignettes for their appropriateness in the Australian context and to ensure that they represented a variety of ethical issues. In addition a sample of 12 qualified accountants and auditors (CAs) was presented with the three vignettes and asked to rate each one as to the realism in an Australian context on a five-point Likert scale anchored from not realistic to very realistic. The subjects were also asked to match the issue faced by the audit partner in each of the three vignettes to one of the issues in a provided list of ethical issues. The results strongly support the use of these vignettes as realistic and appropriate. In the third part of the final questionnaire the participants assessed the importance of each of the six factors as well as the overal MI level (on an 11-point Likert scale anchored from very unimportant to very important and very low to very high respectively) for each of the three vignettes. In order to control for social desirability bias (i.e. respondent acting in an unnatural manner in order to appear more altruistic and society oriented than they actually are), a concern in research ethics (Jones et al, 2003), the respondents were asked for their assessments of the relevance of the MI factors to the audit partner portrayed in each of the vignettes rather than to themselves. This is in line with the approach taken by prior ethics studies (e.g. Cohen et al, 1996). 10

In addition, after each vignette the participants were asked to identify and rank the six MI factors in order of importance. The order of the vignettes, as well as the order of the six MI factors, were randomized across the participants. PARTICIPANTS A sample survey of 40 audit partners and managers from the Big 4 firms was conducted. Audit partners and managers (experts) were considered necessary for the purpose of the study as it was essential for the participants to be intimately familiar with the complexity of all aspects of the audit judgment process in terms of both the technical and ethical dimension. For example, one of the key ethical issues, within an audit context, is auditor independence. Decisions involving potential or actual independence issues, due to their paramount importance, are generally dealt with by the manager and the engagement partner or in highly contentious and risky situations by a panel of partners or a designated national partner. As Gaa (1992) points out the practice of accounting and auditing is dynamic, many conflicts are not resolved by simply adhering to codes of conduct or professional standards. This is especially true of partners, who by virtue of their position, are typically exposed to the most difficult and pressing problems within the organization (Ponemon and Gabhart, 1993, p. 106). The questionnaires (randomized across the four firms) were mailed to a senior audit partner in each of the four firms (Sydney offices for three of the firms and Melbourne office for the fourth firm). The contacts were instructed to distribute the questionnaires to five audit managers and five audit partners in their respective offices. Forty questionnaires (ten questionnaires per firm) were sent out and thirty-seven were returned, indicating a 92.5% response rate. The final sample consisted of 20 managers and 17 partners. They had an average of 14.8 years of experience, ranging from 5 years to 40 years. RESULTS THE PERCEIVED IMPORTANCE OF THE MORAL INTENSITY FACTORS ACROSS THE FOUR STAGES OF THE ETHICAL D ECISION MAKING PROCESS Participants were asked to rate the importance of each of the six MI factors for each of the four stages of the ethical judgment process. The descriptive statistics in Table 1 11

show that no MI factor had a mean score of less than 5.3 suggesting that none of the factors were considered to be irrelevant. The data also suggests relative consistency of each of the factors across all four stages of ethical decision making. There appears to be a consensus on the importance of the first three constructs (i.e. MC, SC and PE), however, all six factors are important for each stage. (INSERT TABLE 1 ABOUT HERE) Each of the MI factors was also ranked for their relative importance and Table 2 records the most frequently occurring ranking for each MI factor. The ranking supports findings discussed above. The ranking across the four stages rema ined relatively stable. MC was most frequently ranked first and TI was most frequently ranked last. There appears to be a clear consensus on the first three constructs but all appear to be important. (INSERT TABLE 2 ABOUT HERE) A (6 x 4) repeated measures ANOVA was used to test for differences in the perceived importance ratings of the six MI factors across the four stages of the ethical decision making process and the res ults are summarized in Table 3. The main effect of the decision making process stage s was not significant and therefore there was no evidence that the importance rating for the average of the six MI factors differs between the stages. This can be seen from the summary of means in Table 1. The interaction was also not significant and there fore there was no evidence that the differences between the importance ratings of the individual MI factors differ between the four stages as seen in Table 1 with each factor remaining relatively stable. The results show that the main effect of the MI factors was significant (F 5,31 = 25.721, p =.001, Wilk s Lambda =.194) providing evidence that there were differences in the perceived importance of the MI factors when averaged across the four decision making stages. Pairwise comparison of means (Table 4) show that the importance rating for MC (M = 9.313) was significantly higher than for all of the other factors (p =.001 for all factors). The difference between SC (M = 8.000) and PE (M = 7.972) was not significant (p >.05), however both these factors were rated significantly more important 12

than TI (M = 5.521). They were also rated more important than CE (M = 6.451) and PX (M = 6.444). (INSERT TABLE 3 ABOUT HERE) (INSERT TABLE 4 ABOUT HERE) Importance Rating for Each of the MI Factors The summary of the means in Table 5 indicates differences in the importance ratings of the six MI factors for each of the three vignettes. A one way repeated measures ANOVA was used to test for the differences in the perceived importance ratings of the six MI factors within each vignette. (INSERT TABLE 5 ABOUT HERE) For Vignette 1 the main effect of MI factors was significant (F 5, 32 = 13.002, p =.001) providing evidence of differences in the perceived importance of the factors. Pairwise comparison of means (Table 3.7) indicates that for Vignette 1, MC (M = 8.486), PE (M = 8.459) and PX (M = 8.459) had the highest ratings and were not significantly different from each other, but all three were significantly higher than TI (M = 5.811) and CE (M = 4.703). For Vignette 2 the main effect of MI factors was also significant (F 5, 32 = 8.921, p =.001). Pairwise comparison of means indicates that MC (M = 7.108) and PE (M = 6.946) had the highest means and were significantly higher than TI (M = 5.919), PX (M = 5.378) and CE (M = 3.946). The results of one way repeated measures ANOVA used to test for the differences in the perceived importance ratings of the six MI factors within Vignette 3 was also significant (F 5,32 = 12.191, p =.001). Further analysis using pairwise comparisons indicates that PX (M = 7.919) was significantly higher than all other factors, with MC (M = 6.108), SC (M = 6.811) and PE (M = 6.081) significantly higher than TI (M = 3.811) and CE (M = 4.162). The above results provide evidence of differences across vignettes in terms of relative importance of different MI variables. For example, while PX was very 13

important in Vignette 1 and especially Vignette 3, it was of relatively less importance in Vignette 2. MC was relatively more important in Vignettes 1 and 2 than in Vignette 3. (INSERT TABLE 6 ABOUT HERE) The Relative Importance Ranking for Each of the Moral Intensity Factors Each of the MI factors was also ranked for their relative importance for each scenario and Table 7 records the most frequently occurring ranking. MC (32.4%) and SC (32.4%) were most frequently ranked first in Vignette 1. MC (29.7%) and SC (27.0%) were ranked highest in importance in Vignette 2, while PX (45.9%) and SC (29.7%) were ranked most frequently as first in Vignette 3. (INSERT TABLE 7 ABOUT HERE) The Overall Moral Intensity Ratings The differences in the rating of the overall MI (1 = very low, 11 = very high) between the three vignettes were also found to be significant (F 2,30 = 33.987; p =.001). The mean overall MI score for Vignette 1 was rated significantly more serious (mean = 8.406, st. deviation = 1.663) than Vignettes 2 and 3. Vignettes 2 and 3 were not perceived to be significantly different to each other in terms of ethical seriousness (means = 5.500, 5.281; st. deviatio n = 2.514, 1.836). The relationship between the overall MI ratings and the importance of the six MI factors was investigated using Pearson Correlations for each of the scenarios (Tables 3.10, 3.11 and 3.12). No significant relationship was found between the overall MI and individual factors for Vignettes 1 and 3. Overall MI ratings were significantly correlated with PX in Vignette 2, suggesting that subjects who rated PX as more important also rated the situation as more ethically serious (r =.487, p <.001). 14

ADDITIONAL ANALYSES Relationship Between Moral Intensity Factors (i.e. Characteristics of the Issue) and Characteristics of the Person The analyses above addressed the perceived importance of the MI factors. Further analysis was performed to investigate whether characteristics of the person are associated with perceiving a particular factor as important. Demographic factors which are uniquely associated with the individual decision maker, have received considerable research attention in the empirical literature (Ford and Richardson, 1994). For example, gender (e.g. Chonko and Hunt, 1985; Jones and Gautschi, 1988; Ruegger and King, 1992; Franke et al, 1997; McCabe and Trevino, 1997) has been shown to have an effect on ethical decision making. However, empirical investigations examining demographic factors (such as gender, age, type and years of education, and individual s organizational rank) and ethical/unethical behavior have provided mixed results (Lund, 2000). A number of studies (e.g. Ponemon 1990, 1992; Shaub, 1994; Sweeney, 1995) found that moral reasoning measured by DIT decreased for CPAs with a higher rank in their firm, while other studies (e.g. Moreno and Bhattacharjee, 2003) using actual judgments such as potential obsolescence risk found higher ranked auditors to be more ethical (i.e. less susceptible to client pressure). Similarly, the results for the impact of gender have also been mixed with some studies (e.g. Shaub, 1994; Sweeney, 1995) finding that female CPAs have higher DIT scores than males while other studies (e.g. Ponemon, 1992; Ponemon and Gabhart, 1993) found no significant gender differences. The relationship in the current study between overall experience, audit experience, rank, gender and the perceived importance of the MI factors averaged across stages was tested using Pearson Correlations. The results (Table 3.13) indicate that the extent to which MC and PE were perceived to be important was related to the participants rank and overall experience. Partners had higher importance ratings than managers for MC (r = -.383, p <.05) and for PE (r = -.392, p <.05). Furthermore, the more experienced the participants the more likely they were to rate MC (r =.347, p <.05) and PE (r =.386, p <.05) as important. The results suggest that the perception of MC and PE as important increased with auditors experience and rank. Thus it appears that more experienced auditors (i.e. partners) are more likely to take these two MI factors into account when making ethical decisions than less experienced auditors. 15

Audit Firms Code of Professional Conduct and Training Participants responses to additional questions, included with the demographics and eliciting information as to the firms use of codes of conduct, mode of training, etc., were analyzed. All the participants indicated that their firm (i.e. all of the Big 4 ) has its own code of professional conduct and that the codes cover all of the ethical principles contained in CPC Section B. 62.2% of participants indicated that their firm considers the code of professional conduct to be very important, with only 5.4% indicating that it was not important. 88.2% of the partners but only 50.0% of the managers indicated that they had undertaken specific firm training on ethical considerations/issues. The most often covered topics were client relationships/conflict of interest (95.8%) and auditor independence (100%). The mode of training for ethical issues appears to take the form of memo updates (70.8%), policy manuals (79.2%) and firms code of conduc t (79.2%) provided to all staff (73.9%). All subjects indicated that their firm provided both formal and informal channels to help resolve difficult client related ethical issues. Audit team meetings (86.5%) and designated national partner (86.5%) were the most commonly available formal channels. Approaching the technical support section (86.5%), discussion with peers within the audit section (94.6%), and discussion with partner responsible for the client (86.5%) were the most commonly available informal channels. 40.5% of the participants considered informal channels to be more important, 18.9% considered both types to be equally important with only 21.6% indicating that formal channels were more important than the informal channels. DISCUSSION The results of the study suggest that all of the six MI factors (magnitude of consequences (MC), social consensus (SC), probability of effect (PE), temporal immediacy (TI), proximity (PX), and concentration of effect (CE)) were considered important at each of the four stages of the ethical decision making. Further, the importance rating and ranking of the six MI factors across the four stages was stable with MC considered the most important factor, followed by SC and PE. TI was the least important MI factor. Further, differences were found for the importance ratings (and ranking) of the six MI factors for each of the three vignettes and between the three 16

vignettes. Finally, the additional a nalyses found that MC and PE importance ratings were affected by auditors rank and experience. Research on MI is still in its infancy. The current study is the first study to gather data in a systematic way to explore the relevance of the Jones (1991) MI construct across all four stages in a specific professional context using highly skilled practitioners. The data supports the relevance of the MI construct within the auditing context. The practitioners considered all of the six MI factors to be important and the ratings for each of the factors remained stable across all four stages. In the absence of specific situational factors, the data suggests a clear consensus that the most important MI factor within the auditing context is MC. This is not surprising as the current audit methodology is driven by risk and materiality, i.e. a concern that the entity s business and environmental circumstances (risk factors) may result in a material misstatement in the financial statements with potential negative consequences for the users (i.e. inappropriate decisions, financial loss) and the auditor (loss of client, litigation). The other two most important factors identified by the auditing practitioners were SC and PE. This is also not surprising as PE, in an auditing context is very closely linked to the MC, i.e. the likelihood (or risk) of consequences (i.e. material misstatement) actually occurring. SC is also closely linked to risk and consequences in an audit context as a failure to detect or report non-compliance with existing professional or legal standards and the consequential misstatement in the financial statements could result in negative consequences for the client, users and the auditor. The least important MI factor in the auditing context appears to be TI, i.e. the length of time between the action (issuing an audit opinion) and the onset of the consequences. This seems plausible as the auditor s opinion covers only a relatively limited time period. The results of the current study support prior research which found that MC, SC and PE (e.g. Singer, 1996, 1999; Singer and Singer, 1997; Singer et al, 1998; Frey, 2000; Barnett, 2001) to be important determinants of the first three stages of the ethical decision making process (the only three stages studied to date) and TI not to be significant (e.g. Singer et al, 1998; Barnett, 2001). The data in the current study also suggests that the perception of MC and PE increased with auditors expertise in terms of overall experience and rank. A large 17

number of studies have found that experts have superior memory for relevant information, they tend to be faster and more efficient than non-experts, they search for information differently from non-experts and employ different reasoning and inference patterns (Gaa, 1995). In an audit practice context, the ability to make ethical choices efficiently is valuable. The data suggests that the use of MI factors is a learned skill, which implies that the degree of expertise of auditors in terms of their ethical cognition may be improved through formal recognition of and training using the MI concept. The results in relation to the three vignettes also support the prior findings of the current study as to the differences in the perceived importance rating and ranking of the MI factors as well as a strong relationship between the MI factors considered to be most important. The consensus as to the three most important MI factors in the auditing context is also further supported by the se results. MC was rated and ranked as most important in Vignettes 1 and 2 and second most important in Vignette 3. SC was rated as third and second most important factor in Vignettes 2 and 3 respectively but ranked as the most or second most important factor in all vignettes. PE was ranked as equal most important MI factor in Vignette 1, second in Vignette 2 and ranked as the third most important factor across all three vignettes. CE and TI continue to be perceived overall as the least important MI factors. Kelley and Elm (2003) applied Jones (1991) model to issues in a professional context, faced by social services administrators, which involve close relationship of caseworkers to clients. Their results indicate that ethical issues that are centred on the client relationship are high in MI. They believe that the nature of the relationship influences the intensity of ethical issue and they expect similar findings in other clientbased interactions. The relationship between auditor and client (personnel) has similar characteristics of psychological and physical PX to the one examined by Kelley and Elm (2003). Although there are clear rules to protect auditor independence, it is problematic for auditors not to develop relationships with their clients as they are in constant contact, sometimes over prolonged periods of time, with the client who provides much of the information, pays the audit fees and can have significant impact on the auditor s status and career attainment. The results of the current study support the importance of the auditor-client relationship (Vignettes 1 and 3) especially in relation to independence (Vignette 3) which is considered to be the key construct in an auditor- 18

client relationship. The data in the current study confirms that the ethics related topics most often covered during the audit training by the Big 4 firms are client relationships, conflicts of interest and auditor independence. This also lends support to the importance of the auditor-client relationship and the related PX construct and the need for firms training programs to incorporate information on the MI of issues, including PX, to enhance auditors ethical decision making. The current study also found significant differences in the overall MI rating between the three vignettes but no significance between the overall MI rating and individual factor ratings, other than for PX in Vignette 2. This suggests that once an auditor is aware of an ethical issue (as was the case in the current study) then it is the issue itself rather than its level of overall MI which determines the relative importance of each MI factor on ethical judgment and behavioral intentions. Overall these results provide strong support for the Jones (1991) model and its relevance to the audit domain. The research of Jones (1991) model within an audit context has been very limited. Given the results of the current study and their sup port for the relevance of the MI construct in an audit context, this research could be obviously extended to further examine and validate the role of MI in the audit context. The role of the MI factors could be also investigated in relation to other more realistic significant ethical dilemmas facing practitioners, such as conflict of interest between different stakeholders (e.g. different audit clients of the firm), situations of client pressure (e.g. to accept aggressive accounting treatment), willingness of the audit committee members to support the auditors in disputes with management (e.g. over accounting treatment, audit adjustments, etc.) and independence issues (e.g. firm affiliation, client tenure, external competition and tendering, internal competition in terms of promotion, job security and retention of clients, remuneration structure, etc.). Future studies should also extend the research of the MI construct to Non- Big 4 auditors and to ranks below partner and manager. Finally, there appear to be no published empirical studies to date examining the effect of MI factors on behavior. This is not surprising due to the difficulty in measuring and observing auditors behavior. Nevertheless, to develop a comprehensive understanding of auditors ethical action, research in this area is obviously needed. For example, as Jones et al (2003) suggest, research investigating the impact of MI factors on auditors likelihood of whistle -blowing is needed given the explicit requirements in the Sarbanes-Oxley Act of 2002. 19

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