Discuss how moral intensity, organizational culture, and ethical leadership influence behavior in accounting.

Question

What will be an ideal response?

Answer 1

We could equate moral intensity with materiality issues in accounting where differences of opinion over proper accounting become more significant/intense as the amount involved increases and/or qualitative characteristics increase moral intensity—such as when an item in question masks a change in earnings or other trends.

Taylor and Curtis studied whistleblowing among public accounting seniors and found that moral intensity is one of three significant factors affecting the intention to report wrongdoing, where intention to report is measured as the likelihood of reporting and perseverance in reporting. The other two factors were professional identity and locus commitment (organization versus colleague). The authors found that while high levels of professional identity increase the likelihood that an auditor will initially report an observed violation, the auditor's commitment to the organization drives perseverance in reporting. Auditors were more likely to report and to persevere when moral intensity is high.

Personal ethical skills are primarily managed by the organizational structure of audit firms, and rules and processes have been developed with the sole aim of limiting the audit risk and guaranteeing audit quality. Ethical competencies are managed indirectly and promoted by the idea of responsible leadership and incentives to promote exemplary behaviors. Personal and professional ethics have roles to play in cultivating responsible leadership by management of audit firms. The promotion of responsible leadership is seen within audit firms as a way to improve audit quality.

Responsible leadership in audit firms is essential to create an ethical environment within the firm. It is a critical component of setting the proper tone and encouraging members of the organization to ask probing questions when management's representations are unclear or unsubstantiated. Responsible leadership is an integral part of ethical leadership, although the latter also entails the ability to reason through ethical dilemmas and resolve conflicts in a morally appropriate way.

The ethical environment within an accounting firm is created through espoused values and management practices. The culture of the firm results from leadership style and may be the most important deterrent to unethical behavior. Authentic (partner) leaders gain the confidence of audit staff and managers and create a foundation for ethical decision making.

Research by Ponemon found that leaders of accounting firms set the tone of their organizations, promoting those whose personal attributes more closely reflected the leaders' perceptions and moral reasoning development. He hypothesized there is a correlation between the organizational culture created by leaders of the accounting firms and the subordinates' personal characteristics and decision-making styles.

Prior research has indicated that audit seniors' perceptions of their firm leaders and firm culture impact auditor behavior. Personal characteristics have an impact on individual behaviors. Shaub et al. found mixed evidence of "the ability of an accounting firm to either change an auditor's ethical orientation to match its own, or to provide an environment that closely matches an auditor's norms."

The dissidence that is created when individual values do not fit into the expectations of the firm might lead the individual to alter behavior to conform to firm norms, the firing of the individual from the firm, or her voluntary departure. Ponemon confirmed the existence of a selection-socialization mechanism operating to control ethical reasoning in public accounting firms. The selection-socialization bias causes a firm to hire and promote individuals who fit into the prevailing firm culture and causes individuals unable to fit into that culture to leave.

Morris studied the influence of authentic leadership and ethical firm culture on auditor behavior. Morris gathered data from 120 practicing senior auditors representing the Big Four firms, other international firms, large regional firms, and local firms. Participants were asked to indicate the frequency of selected dysfunctional behavior among audit seniors. Morris hypothesized that perceptions of authentic leadership are negatively related to the frequency of dysfunctional audit behaviors. The behaviors identified include under-reporting of time worked on an engagement, premature sign-off on audit procedures, and other dysfunctional behaviors.

The results indicate that a typical audit senior at these firms more frequently under-reports time than prematurely signing off on audit work. The results also indicate there was a significant negative correlation between all measures of authentic leadership and dysfunctional audit behaviors with few exceptions. With respect to ethical culture, there was a negative relationship between the audit seniors' perceptions of their firms as ethical, and instances of dysfunctional audit behavior. The findings support the mediation of perceptions of authenticity in leaders on the auditors' perception of ethical firm culture and on auditors' instances of dysfunctional behavior. The results seem to indicate that the four constructs of authentic leadership, whether taken individually or in combination, have influence over the employee's perception of the ethical content of a firm's organizational culture.

The takeaway from the Morris study is that authentic leaders can help to promote an ethical culture and reduce the instances of dysfunctional auditor behavior. Authentic leaders seek to eliminate ethical dissonance. Ethical (authentic) leaders commit to a high person-organization fit where organizational ethics are high and the culture promotes high individual ethics (High-High). Any other combination may jeopardize ethical decision making and sacrifice the public trust in the audit profession—at least in that instance.