Accounting ethics

New research finds that the ethical environments perceived by accountants employed in industry lag well behind the environments perceived inside the leading public accounting firms.

That finding is “counterintuitive,” wrote the authors of a new paper on accounting ethics published in the Spring issue of Behavioral Research in Accounting, given that “Big 4 firms are now commonly assumed to have profit maximization as their primary motivation.”

Prior research, the authors acknowledged, has suggested that organizations in industry are more likely to espouse the values of commercialism than public accounting firms. On the other hand, they wrote, “public accounting firm socialization, wherein members are molded by the firm, is quite different from most industry settings [in its] techniques to acculturate individuals into the profession.”

The paper also cited research by the Association of Certified Fraud Examiners that accounting department employees commit the highest frequency of fraud. Coupled together, the two research efforts suggest that “organizations in industry may need to place more emphasis on developing and strengthening their ethical environments,” the paper stated.

As for the superior ethical milieu evidently achieved by the Big 4, the paper suggested three possible reasons: (1) with more reputational capital to lose than other public accounting firms, the Big 4 have more incentive to promote strong ethical environments; (2) they spend more than the smaller firms on ethical training; and (3) their greater litigation risk and deep pockets provide extra motivation to maintain high ethical standards.

The 904 accountants who participated in the survey included 676 employed by public accounting firms, 127 employed in industry, 62 with jobs in government, and 39 employed by nonprofit organizations.

Participants responded on a scale of 1 (strongly disagree) to 7 (strongly agree) to statements about their employers’ ethical norms (e.g., “firm has strong ethical values”); their practices (e.g., “organization has an effective ethics training program”); and outcomes (e.g., “unethical behavior is severely punished”). There were 12 such statements, so the score for any particular employer could range from 12 to 84.

The accountants’ mean rating of the ethical environment in public accounting was 73.32, compared with 67.0 in industry. Even higher was the 76.11 rating for the Big 4, its margin over other public accounting firms also statistically significant.

Notable, too, was that the mean rating of the ethical environment in government was only 63.81, significantly trailing both public accounting and industry.

In the researchers’ analysis of factors affecting ethical environments, the biggest differences proved to be in ethics training. On a scale of 2 to 14 (as there were two statements related to ethics training), public accounting outscored industry, 11.71 to 9.86, and within public accounting the Big 4 outscored other firms, 12.86 to 11.41. Both gaps were statistically significant.

The authors observed that those “may reflect the increased emphasis, particularly by Big 4 firms, on ethics training and ethical behavior that has occurred since the scandals of the early 2000s, which resulted in the demise of Arthur Andersen.”

But, says co-author Robin Radtke of Clemson University, citing prior research, “there appears to have been little if any long-term effect of the failure of Enron and WorldCom, not to mention the passage of Sarbanes-Oxley, on the ethics environment in industry. And that is surely unfortunate.”

The other co-authors were Derek Dalton of Clemson, Donna Bobek of the University of South Caroliina, Brian Daugherty of University of Wisconsin – Milwaukee, and Amy Hageman of Kansas State University.

In conclusion, the professors advised that CPAs in public accounting who are considering a transfer to industry should be aware that the ethical environments within industry are perceived as significantly weaker than those in public accounting.

“It is relatively common for CPAs to leave public accounting for industry due to work-life balance concerns,” they wrote. “However, these CPAs should also consider the possibility that a position in industry may be associated with a weaker ethical environment, [which] may place more stress on accounting professionals [who] face ethical dilemmas without the organizational support needed for effective resolution.”

The paper, entitled “An Investigation of Ethical Environments of CPAs: Public Accounting Versus Industry,” is in the spring issue of Behavioral Research in Accounting, a journal published twice yearly by the American Accounting Association.

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