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An Investigation of the Moral Intensity Construct on Auditors’ Decision Making and Independence

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An Investigation of the Moral Intensity Construct on Auditors’ Decision Making and Independence AN INVESTIGATION OF THE MORAL INTENSITY CONSTRUCT ON AUDITORS’ DECISION MAKING AND INDEPENDENCE A thesis submitted in fulfillment of the requirements for the Degree of Doctor of Philosophy by Nonna Martinov August 2004 CERTIFICATION I hereby declare that this submission is my own work and to the best of my knowledge it contains no material previously published or written by another person, nor material which to a substantial extent has been accepted for the award of any other degree or diploma at UNSW or any other educational institution, except where due acknowledgment is made in the thesis. Any contribution made to the research by others, with whom I have worked at UNSW or elsewhere, is explicitly acknowledged in the thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project’s design and conception or in style, presentation and linguistic expression is acknowledged. ……………………………………………… Nonna Martinov i ABSTRACT The current environment of alleged accounting breakdowns, such as those at Enron, WorldCom and others, has heightened the importance of ethics and quality professional judgment within the accounting profession and has brought the issue of audit quality and auditor independence to the fore. The purpose of this thesis is twofold. Firstly, the thesis aims to provide an understanding of auditors’ ethical decision making processes by addressing the relatively unexplored area of the audit judgment process with respect to ethical issues. Secondly, the thesis examines auditors’ ethical decision making within the specific context of auditor independence in the post Enron environment. The first study investigates the applicability of Jones’ (1991) issue-contingent model and its moral intensity factors (i.e. the characteristics of the ethical issue) to auditors’ ethical decision making. The results provide strong support for the Jones’ (1991) model and its relevance to the audit domain. The 37 auditing practitioners surveyed (partners and managers) considered all of the six moral intensity factors to be relevant and important but proximity appeared to be most significant within a specific auditor independence context, followed by social consensus and magnitude of consequences. The impact of these three moral intensity factors was further investigated in the second experimental study with 102 audit partners and managers. The second study, a 2 x 2 x 2 full factorial between-subjects design, manipulates proximity (alumnus v. non-alumnus client CFO and audit v. non-audit prior employment background of the client CFO) and social consensus (ambiguity level of the audit issue). In addition perceived magnitude of consequences (remuneration scheme, risk of losing the client) was measured. These independent variables represent key elements of Johnstone et al’s (2001) independence risk framework of indirect incentives of interpersonal relationships (proximity), direct incentives of financial dependence (magnitude of consequences) and the judgment-based decision (social consensus). Some key results are: no support was found for the alumni effect; professional (i.e. audit) affiliation appears to be a significant separate construct from the alumni effect; perceived and actual level of ambiguity of the accounting issue often differ and it is the perceived ambiguity which is of significance; the effect of the remuneration scheme was not significant but the risk of losing the client was. These results provide further support for the validity of Jones’ (1991) moral intensity factors within the audit context but only partial support for Johnstone et al’s (2001) independence risk framework. Overall these results indicate that in the post Enron environment auditors seem to be sensitive to independence risk and their independence judgments and behavior intent do not appear to be impaired. ii ACKNOWLEDGEMENTS It goes without saying that this thesis would not have been possible without the support and generosity of a number of people. Firstly, I would like to thank my supervisor Professor Jeffrey Cohen for his patience, optimism, wisdom and knowledge. I would also like to thank my co-supervisor Professor Roger Simnett for his support. To my colleagues at UNSW, my gratitude for your assistance and encouragement. I would especially like to thank Peter Roebuck for his friendship and unfailing faith in my ability to navigate my way successfully through my PhD journey. Special thanks go to Judith Quinn, Kevin Tee and Amirali Minbashian for their never failing support and encouragement. This thesis has benefited from the comments of many fellow academics to whom I am extremely grateful. In particular, I wish to thank Ken Trotman, Mike Gibbins and Peter Luckett. Members of the profession were extremely generous and supportive of my research. I would like to thank the 139 audit partners, directors and managers who gave their time and energy to participate. Without their assistance this research would not have been possible. I would also like to thank for the financial assistance provided by the AFAANZ in the form of a PhD scholarship sponsored jointly by the Australian Society of CPAs and the Institute of Chartered Accountants in Australia. Last, but not least, my family. Thanks to my husband Raymond and son Callum for their patience, love and understanding. Thanks especially to my parents, Sylvia and Jan, for being there to share my highs and lows with love and support. iii DEDICATION To my son Callum who continues to be the source of my everyday inspiration and has transformed my life into an ever-changing and joyous adventure. iv TABLE OF CONTENTS CERTIFICATION ............................................................................................. i ABSTRACT ....................................................................................................... ii ACKNOWLEDGEMENTS ............................................................................. iii DEDICATION ................................................................................................... iv TABLE OF CONTENTS .................................................................................. v LIST OF FIGURES ......................................................................................... xiii LIST OF TABLES ........................................................................................... xiv CHAPTER 1 : INTRODUCTION, MOTIVATION AND AIMS OF THE RESEARCH .. 1 1.1 INTRODUCTION ......................................................................................... 1 1.2 MOTIVATION.............................................................................................. 2 1.2.1 NEED FOR ETHICAL JUDGMENT RESEARCH IN RELATION TO AUDITING ....... 2 1.2.2 NEED TO CONSIDER THE IMPACT OF THE CHARACTERISTICS OF THE ISSUE ON ETHICAL DECISION MAKING PROCESS ......................................... 3 1.2.3 CALLS FOR RESEARCH TO ADDRESS FACTORS THAT AFFECT AUDITOR INDEPENDENCE........................................................................................... 5 1.3 AIMS OF THE THESIS ............................................................................... 7 1.4 STRUCTURE OF THE THESIS ................................................................ 13 CHAPTER 2 : LITERATURE REVIEW .............................................................. 15 2.1 INTRODUCTION ....................................................................................... 15 2.2 LITERATURE RELATING TO MODELS OF ETHICAL DECISION MAKING ................................................................................. 16 2.2.1 INTRODUCTION ......................................................................................... 16 2.2.2 THE JONES’ (1991) SYNTHESIS OF ETHICAL DECISION MAKING MODELS ................................................................................................... 18 v 2.2.3 JONES’ (1991) ISSUE-CONTINGENT MODEL OF ETHICAL DECISION MAKING ................................................................................................... 25 2.2.3.1 Moral Intensity .................................................................................. 25 2.2.3.2 Issue–Contingent Model Framework. ................................................ 27 2.2.3.3 Other Models Adapting Jones’ (1991) Model .................................... 31 2.2.4 EMPIRICAL STUDIES OF JONES’ (1991) MORAL INTENSITY CONSTRUCT ..... 37 2.2.5 AUDITING RESEARCH AND JONES’ (1991) MORAL INTENSITY CONSTRUCT ............................................................................................. 48 2.3 LITERATURE RELATING TO AUDITOR INDEPENDENCE ............. 52 2.3.1 INTRODUCTION ......................................................................................... 52 2.3.2 AUDITOR INDEPENDENCE RESEARCH ........................................................ 54 2.3.3 AUDITOR-CLIENT EMPLOYMENT RELATIONSHIP AS A THREAT TO AUDITOR INDEPENDENCE.......................................................................... 57 2.3.3.1 Introduction ...................................................................................... 57 2.3.3.2 Regulators’ Response to Independence Threat of Employment Relationships ..................................................................................... 59 2.3.3.3 Research Relating to Audit Firm Affiliation (i.e. Alumni Effect) ......... 62 2.3.3.4 Research Relating to Auditor Professional Affiliations (i.e. Audit Background Effect)
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