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Public Accounting Development

Chapter I: Introduction

As a result of such public accounting scandals involving the world’s largest public accounting firm, Arthur Anderson, and its unethical mishandling of such corporate accounts as Enron, WorldCom, Merck and Xerox, the public has a low level of confidence in the ethical makeup of Certified Public Accountants. (Coleman, Kreuze, and Langsam: 2004).

At the foundation of this ethical disintegration of the profession are cases of poor moral judgments and simply bad decision making. Thus, based off of this finding, a question as to the ethical standards of the profession today have been raised, essentially asking what is, or should be, the ethical code governing Certified Public Accountants?

In order to regain and eventually maintain the public’s trust in the profession, Certified Public Accountants must present themselves as an honest and ethical profession. In order to accomplish this, all professionals in the field must adhere to a high level of moral behavior in the form of a Certified Public Accountant Code of Ethics.

Problem Statement

This paper and the involved research will focus on the moral development and ethical decision-making methods of a select sample of Certified Public Accountants in Taiwan. The paper will statistically analyze the data with selected demographic variables that are collected through the appropriate testing instruments specifically designed to measure moral development and ethical decision making. These specialized tools include the use of the Defining Issues Test for measuring the CPA’s stages of moral reasoning and the three questions of the Multidemensional Ethics Scale for measuring their ethical decision-making process.

It is a general belief that an individual with lower moral development levels will be more likely to exhibit unethical behavior. It is also commonly held that demographic and institutional factors contribute to an individual’s moral development and ethical decision making skills.

This study investigates the truth of these statements by both studying the relationship between moral development and ethical decision-making actions and by choosing age, gender, level of position, educational level and ethical education as independent variables. The net result is that this paper presents the professional practitioner with useful information and insight on developing and operating an ethical work environment.

Since 2000, numerous, high-profile accounting scandals have occurred involving prettifying financial statements, inflating operating income figures falsely increasing overall yields, inaccurate recording of payments never made, just to name a few. In Taiwan the trend was no different. In 2004, Procomp Informatic and Infodisc were found to be in financial failure as a result of accounting errors, defalcation and illegal cash flow.

Further, Kelon Electrical Holdings Company was found to have reported inflated revenue numbers by over $112 Million. In 2007, the nation incurred the most serious financial criminal cases in the history, the financial scandal of the Rebar Group. Two of the group’s listed companies, the China Rebar Company and Chia Hsien Food and Synthetic Fiber Company, had filed the applications of the insolvency protection on Dec. 29, 2006.

However, the announcement of this major information was deferred until Jan. 4, 2007. According to the news released by the Taipei district court, this scandal involved in a record-high embezzlement of TWD 73.1 billions from the Rebar Group and other financial institutions, which had seriously affect the banking system and the capital market as well. Over 100 thousands of the shareholders and creditors were accordingly influenced. This event led the society to afresh emphasis the importance of the moral issues.

What can be understood from these unfortunate events is that ethical violations in accounting occur around the world. Thus, the problem of lost investor and public confidence in the financial statement, the hallmark of the accounting profession, has become a global epidemic. The cause of this ethical epidemic is a loss of moral reasoning. (Chamberlain: 2002; Joel: 2005).

Public confidence in the profession is essential, both to the profession’s growth and success, but also to the success and growth of the businesses that the profession serves. The accounting process is an essential component of measuring an organization’s economic growth. By law, CPAs are the only profession able to provide this measurement service. Thus, CPAs are relied upon by the public to possess and exhibit both high levels of competency and objectivity, but also, and most importantly, high levels of ethical standards. This critical role played by CPAs in the business world is undermined when questions of integrity and ethics are publicly questioned as having a reputation for high ethical standards is the essence of the profession. (AICPA Professional Standards: 2002).

Theoretical Framework

In Taiwan, the accounting profession is ethically governed by an independent accounting standards board. This board, the Accounting Research and Development Foundation (ARDF) is responsible for the development, publication and implementation of the Statements of Financial Accounting Standards (SFAS). The purpose of the ARDF is to “develop accounting standards and help enterprises establish valid accounting systems in Taiwan.” (ADRF: 2004).

The field of study on moral development, which is the foundation of ethical practices, has been an important sub-field of psychology since the mid 1970s. (Rest, 1979). Within this psychological field, many studies have been conducted on the moral development of accountants.

All of these studies are generally based on the six-stage sequence of moral and cognitive development proposed by Kohlberg. The purpose of this theory is to understand the reasoning behind an adult’s method of decision making based on what he or she personally believes is morally right or wrong. (Baxter & Rarick: 1987; Shenkir: 1990).

In general, Kohlberg’s six stages can be summarized into three categories: pre-conventional, conventional and post-conventional. According to Kohlberg, moral reasoning follows a clear pattern of development that is step-by-step and whose stages are invariant. (Kohlberge: 1981, p. 136). Kohlberg’s findings are even more important to the study at hand in that, according to his study, these stages of moral development are universal and thus applicable to all cultures.

In fact his studies even involved various cultures in Taiwan. (Kohlberg: 1981). To summarize, Kohlberg’s theory identifies a person’s current stage of moral judgment, reliably measures stage change, demonstrates that a higher stage is a better stage, and supports ethical/moral improvement through the advancement of cognitive stages. (Kholberg: 1981).

The tool Kholberg utilized in testing his theory of moral development was the Moral Judgment Interview (MJI). The MJI is a tool in which the subject is presented with an assortment of moral dilemmas in which all require choices. The subject’s responses to these presented dilemmas are thereafter interpreted and coded for scoring purposes. The psychologist Rest furthered this theory of moral development by inventing the Defining Issues test (DIT).

The DIT is used to measure moral development by having the subject evaluate various considerations and then make specific statements about the given dilemma using a multiple-choice question formant. (Rest: 1986). Both testing formats have been reviewed and validated as being scientific methods for evaluating individual moral development, although the DIT is often cited as being easier to use and score.

The second component of the study at hand is to evaluate the ethical decision making process and logistics as it applies to CPAs. Decision making is the key managerial activity that requires both conceptual skills and reflective maturity. Essentially, it is the complex process of identifying a situation in which a decision must be made, analyzing the problem requiring the decision, considering and evaluating all available alternatives, making a decision, taking a specified course of action and, finally, evaluating the results.

Using Kohlberg’s method as a foundation, Trevino developed a model of ethical decision making that has as its hypothesis the theory that when an individual moves through the various stages of moral development, they are subsequently able to make the difficult decisions in ways that transcend the needs of the self.

Thus, this establishes the correlation between moral development and ethical decision making: the more morally developed an individual is, the more capable he or she will be of making ethical decisions. As Trevino states, “individuals make decisions that are based on their internally held values and the ethical issues they believe are the most important.” (Trevino: 1986).

A similar correlation was reached by Rest with the development of his Four Component Model of Ethical Decision Making. According to this model, the four components include: 1) Moral reorganization, where one recognizes that an ethical issue exists; 2) Moral judgment, where one is able to judge what is right; 3) Moral intention, where one must be motivated to prioritize moral values; and 4) Moral Behavior, where one has the courage to act ethically. (Rest: 1986).

Accordingly, in order for an individual to make an ethical decision, they must first be able to recognize that a situation requiring an ethics decision exists. (Rest & Narvaez: 1994). The key to being able to recognize such situations is moral sensitivity, part of the development of moral character described by Kohlberg. (Collins: 2000). Moral sensitivity enables the individual to recognize the presence of an ethical issue. (Hunt & Vitell: 1992). Another essential component is moral intention, or the ability to prioritize the level of importance of moral values in comparison to other values one may possess. (Rest & Narvaez: 1994).

Although most ethics related research pose systematic errors that are introduced into the overall measurement by some factor which has persistent directional effects on the characteristic being measures, or the process of measurement, the study at hand limits this inherent problem by utilizing the five vignettes from Cohen. (Brownell: 1995). According to the Cohen vignettes, a third-person is used and thus each vignette poses the ethical situation for a third person and posits a decision or action taken by that person.

In order to control the social desirability response bias, the Cohen approach uses such questions as “The probability that I would undertake the same action is…” and “The probability that my peers would undertake the same action is…”. It is the difference in the responses given to these two questions, as captured on a seven point Likert scale, that is the measure of the social desirability response bias. (Tyson: 1992; Cohen et al.: 1995, 1996, 2001).

Many studies have been done on the role and correlation between moral development and ethical decision making as it applies to various professionals. A majority of these research studies have found that such things as gender, education, age and taking ethics courses in school have some affect on one’s moral reasoning developments (Armstrong: 1993; Elm, Kennedy & Lawton: 2001; Jones & Hiltebeitel: 1995; Ponemon & Glazer: 1990; Shaub: 1994). However, many studies have also found exactly the opposite, in that no significant relationship exists. (Ma & Chan: 1987; Rogers & Smith: 2001; Thorne, Massey & Magnan: 2003).

Studies have also been done on CPAs specifically, finding that as a whole CPAs do not have a higher level of moral reasoning compared with individuals who have similar educational and economic backgrounds. (Bay & Greenberg: 2001; Jeffrey: 1993; Ponemon: 1993; Ponemon & Glazer: 1990). Ponemon, in his longitudinal study of auditing managers and partners, specifically found that individuals who showed as having a higher level of ethical reasoning per their DIT scores were also more responsive to ethical dilemmas.

Further, those with higher DIT scores are also more likely to frame their ethical judgments independent and separate from clients and other colleagues within the same firm. Trevino and Youngblood, for example, found that MBA students at the postconventional stage of Kohlberg’s moral development are more likely view questionable issues as being unethical as opposed to students at the conventional or preconventional stages of development.

Further, their studies revealed that progression from stage to stage of moral development correlates with an individual’s ability to make ethical judgments less and less dependent on outside influences. Therefore it can be concluded that individuals who are more morally developed are less likely to engage in unethical behavior. (Leming: 1978; Ponemon: 1992; Trevino and Youngblood: 1990).

Purpose of Study

This study attempts to extend the research on moral development. First, this study examines the relationship between moral reasoning, measured by the Defining Issues Test, and ethical awareness of CPAs in Taiwan. Second, this study exams the relationship of CPAs’ level of moral reasoning and ethical intention in business situations. Third, this study examines the relationship between the moral reasoning, moral awareness, and moral intention with relevant demographic and institutional variables.

This current study thus hypothesizes that moral reasoning as a predictor of ethical awareness and ethical intention in business situations. This study also continues prior research that tests the relationship between certain demographic variables and moral reasoning as well as moral awareness and moral intention.

If the moral reasoning ability is lower for accountants and there is a relationship between moral reasoning, moral awareness and moral intent, it is valuable to find the determinants of this relationship in order to improve accountants’ moral reasoning ability. Therefore, the selected demographic variables may reveal these determinants.

Definition of Terms

Ethics: As defined by Nichols, et al.(2001) “That branch of philosophy dealing with the values relating to human conduct, with respect to the rightness and wrongness of certain actions and to the goodness and boldness of the motives and ends of such actions” (p. 665)

Moral: Nichols, et al., (2001) defined that “Of, pertaining to, or concerned with the principles or rules of right conduct or the distinction between right and wrong” (p. 1249)

Ethics and Moral are interchangeable terms in this current study.

Moral Awareness: An individual’s ability to identify actions as ethical using the question “The question described is ethical or unethical?” to measure.

Moral Intention: An individual’s intent to behave in an ethical manner. In this current study, uses the third-person approach that is measured by responses to the question “The probability that my peers would undertake the same action is high or low”, in order to control the social desirability response bias.

Moral reasoning: Brand (1999) defined as “thinking through alternatives and making judgments about particular cases” (p. 372).

Moral development: Rest (1983) defined it as “basic cognitive structures that underlie and organize moral reasoning…and that represent successive transformations in the way thinking is organized” (p. 574).

Summary

Based on the previously established research, this study examines moral reasoning as a predictor of moral awareness. This study also proposes that CPAs with lower stages of moral development as derived from the DIT scores will agree more with questionable actions as compared to CPAs with higher stages of moral development.

In conducting this research study, the relevant demographic and institutional variables identified include age, gender, level of position, general education level and ethical education level. The reasons for these variables are due to previously found correlations. For example, Rest has indicated that DIT scores increase over time, or with age.

Further, as a result of the information gathered from the aforementioned literature review, this study proposes that there are differences in the moral development of CPAs in Taiwan of different age groups. More so, this study proposes that there are differences in the ethical decision-making of CPAs in Taiwan of different age groups.

It is also proposed that there are differences in the moral development of male and female CPAs in Taiwan with male CPAs being more agreeable with questionable actions. This hypothesis is based on past studies that have shown that males are more likely to engage in unethical behavior because, as a gender, they focus more heavily on competitive success and will thus break the rules when it means achieving more success.

The research conducted by Rest has further found that “the average DIT scores increases about ten points with each increase in level of education.” (Rest: 1979, p. 110). Thus, this study proposes that there are differences in the moral development of CPAs in Taiwan relating to their educational level. Further, this study proposes that there are differences in the ethical decision-making of CPAs in Taiwan relating to their educational level.

Finally, because there has been an established relationship between ethical education and moral development, many accounting programs have implemented ethics-related curricula into their programs. This study will further investigate the effect ethics education has on the moral development and ethical decision making of CPAs as there has been little prior research conducted in this area.

This study proposes that the levels of moral development of CPAs who have taken ethics courses are different than those who have not take ethics courses. Likewise, this study proposes that the levels of ethical decision making CPAs who have taken ethics courses are different than those who have not taken ethics courses.

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