Research " THE AWARENESS OF UNDERGRADUATE AND GRADUATE ACCOUNTING STUDENTS TO ETHICAL ISSUES IN INTERNAL AUDITING " pdf

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THE AWARENESS OF UNDERGRADUATE AND GRADUATE ACCOUNTING STUDENTS TO ETHICAL ISSUES IN INTERNAL AUDITING

By

Ana Margarita Cruz

A DISSERTATION

Submitted to

H Wayne Huizenga School of Business and Entrepreneurship

Nova Southeastern University

in partial fulfillment of the requirements

for the degree of

DOCTOR OF BUSINESS ADMINISTRATION

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Cruz, Ana Margarita

ProQuest Information and Learning Company 300 North Zeeb Road

P.O Box 1346

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A Dissertation Entitled

By

Ana Margarita Cruz

We hereby certify that this Dissertation submitted by Ana Margarita Cruz conforms to acceptable

standards, and as such is fully adequate in scope and quality It is therefore approved as the

fulfillment of the Dissertation requirements for the degree of Doctor of Business Administration ⁄⁄ AS Frank Cavic sf 1D Date Chairperso ⁄ i ! „ Sib Ne + Le ⁄⁄⁄ˆ FIA Z3 Pedro F Pellet, PhD Date.” 7 Committee YF Approved: ) 787077 L doves finda DBA , Daté YD EB 2 is ee Member Joséph ‘Balloun, " Phổ Date’ / oe ral t(/ Zcx3 uf

J Pry lần Tones, DỊ Date ‘

Ags6biate Dean, H Jayne Huizenga School of

Business and Entrepreneurship

Nova Southeastern University

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others is set forth, quotation marks so indicate, and that appropriate credit is given where I have

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ABSTRACT

By

Ana Margarita Cruz

The influence of the work of well known researchers on the topic of moral judgment and

moral development has been felt thorough the years In the 20" century, the work of Piaget and

Kohlberg has contributed to the awakening of empirical research in this area James R Rest, who

studied Kohlberg’s stages of moral development, designed an instrument, the Defining Issues Test

(DIT), for testing moral maturity which has been used in over 1,000 studies

This particular research describes the studies that have been conducted recently by various

individuals Yet the main essence of this research is to illustrate the ethical reaction of

undergraduate and graduate accounting students from two higher educational institutions to

internal auditing dilemmas The DIT-2 was used for analyzing the moral maturity of the sample

subjects; and internal auditing situations were presented for determining their ethical behavior or reaction

The results of this study give a better understanding to employers and educators in the

area of an individual’s moral development This study thus provides a basis to assist them in

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thank them for taking the time to review my dissertation and offer such valuable suggestions and

comments in a very prompt and organized manner It was a pleasure to work with a professional team of your caliber

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THỊ

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Research Questions and Hypotheses ke CC švi0ic 2š An

DIT-2: Validity and Reliability - ceeeseccceeteteees Internal Auditing Vigneff§ LH HH re Demographic Questionnaife HH HH 12111 re Research Sample QLL HH HH1 n2 1111112011111 x xa I0 80u 8n ad Internal Auditing Vigneff€s n1 tre Demographic Questionnaire - - -Q nn n2 2H22 tr ra 0ˆ 80)i : 0n “ :1lạạ Sample PariICIDATIS QQ T HH TH Hs HH ng ng ng TH key 0.00, 8n Internal Auditing Vigneff€§ QQcc nnnnnnnn ra Đemographic {Questionnafe cành hờn bê.) 18-8 4 Analysis of the Level of Moral Development and the Ethical

Awareness in Internal AudHing ch Hye

Hypothesis An" 4

Analysis of the Demographic Data and the Ethical Awareness in

Hucýi,18.À)04:0 0) NA dd

Hypothesis 2-Gend€r án 011101 111 1x ray Hypothesis 3-A8© LH TH HH giờ

Hypothesis 4-Education nh 1e

Analysis of the Enrollment in an Auditing Course and the Ethical

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Internal Auditing Standards .00.00000.00occccceccceccccccecececetnseensesenseens 108 SUMMALY 20 cece cece ccccescececeeeescsceeccsecessecersseceseecesecennsessnsesenstreees 108

V, DISCUSSION AND CONCLUSIONS OF FINDINGS 109

Introduction cà " — 109

Relationship of this Study to Prior Research ¬ eens ecesceeseeaen sees 109 Ethical Awareness and Moral Developmert 110 Ethical Awareness and Demographic Variables 112

Implications ofthe Fmdings 114

Limitations of this Research gu `

Recommendations for Future Research ¬— cede ence ects ce eset eee eben eta eueeee 116

ConcluSIO'S Qua T7

Appendix

A Cover Letter to accompany Research Instrumers 119 B Dclmng Issues Test (DĨT-2) ĐT TQ HH Hee ra 121 C Internal Auditing Vigneffes L QQ.QQ nh nen 129

D Information an 133

E Research FImdings TQ n nn n2 H22 n2 111k rệt 135

Level of Moral Development and the Ethical Awareness in Internal

Hypothesis 1 136

Demographic Data and the Ethical Awareness i in n Internal ‘Auditing 140

Hypothesis 2-Gender Ma 140

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4.1 Demographics by Groups, with Information on Auditing Course

4.2 Mean of Vignettes, P Scores and N2 Scores by Groups

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List of Figures

4.1 Graph of the Means of the P Score and Internal Auditing Vignette 1 86

4.7 Graph of the Means of the Gender and Internal Auditing Vignette 1 90

4.13 Graph of the Means of the Age Group and Internal Auditing Vignette 1 95

4.19 Graph of the Means of the Education Level and Internal Auditing M5: -› 99

4.20 Graph ofthe Means of the Education Level and Internal Auditing

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4.22 Graph of the Means of the Education Level and Internal Auditing Vignette ——— 4.23 Graph of the Means of the Education Level and Internal Auditing MS "=&aaá.A ` 4.24 Graph of the Means of the Education Level and Internal Auditing Vignette ——

4.25 Graph ofthe Auditing Course Frequency by Groups 4.26 Graph of the Means of the Enrollment in an Auditing Course and Internal

Auditng Vignetfe Ì ch hHHhhhhrrdrhree 4.27 Graph of the Means of the Enrollment in an Auditing Course and Internal

ii A1; ——

4.28 Graph of the Means of the Enrollment in an Auditing Course and Internal Auditing Vignette 3.0.0.0 0.00 c e 4.29 Graph of the Means of the Enrollment in an Auditing Course and Internal

Auditing Vignette 4.0.0.0 0.0.0.0 o ccc eect e ete cere enterteereeneeeneey

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CHAPTER I INTRODUCTION

This study examines the relationship between the accounting students’ level of moral

development and their perception as to the proper ethical choice in an internal auditing dilemma

The ability of potential future internal auditors, i.e., current college students, to be aware of and react appropriately to ethical dilemmas is an issue that concerns the auditing area of the

accounting profession

It is for this reason that this research is intended to measure the ethical awareness of undergraduate and graduate students when they are presented with internal auditing situations, in which a decision must be made as to the right ethical choice Furthermore, the degree of moral development of these students will be contrasted to their ethical awareness observations

The need for having a workforce that would respond to the public interest has been

accentuated most recently by the collapse of Enron Corporation when it filed for Chapter 11 bankruptcy on December 2, 2001 (Sridharan, Dickes, & Caines, 2002) This public corporate case, which is one of the largest accounting scandals identified in the United States (U.S.),

demonstrates the importance for an organization to have internal auditors who can adequately implement an internal control system and monitor its risk management policy, thus minimizing future unethical problems of this magnitude As Sridharan et al stated, “it has become

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management, external and internal auditors, and the Board of Directors In this study, the

component being examined is the internal auditors The ethical characteristics of future student recruits into this position could help employers to determine how ethically prepared these students are to face the intricacies found in the business world This research will also provide insight to

employers in developing further training for internal auditors

The accounting and auditing courses offered at higher level institutions present the

students with not only the rules and regulations of the profession, but with analysis of business cases The students have to exercise their critical thinking skills in analyzing the circumstances

found within these stories in the pursuit of making an accurate ethical decision Furthermore,

codes of conduct appropriate for the profession, emphasizing the proper behavior in a business

environment, are illustrated as an added element of their educational training To determine if the essence of this material is being assimilated by the accounting students, it is essential to examine their ethical tendency when required to make a decision These findings will indicate the degree of preparedness that these students would have to face real business challenges

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DuFrene, 1997, Sridharan et al., 2002) In order to force an end to these crimes, various

mandates have been developed, such as the ones proposed by the U.S Sentencing Commission and the Treadway Commission

In earlier times, one of the strongest movement to terminate unethical behaviors and

eliminate white collar crimes was the document written by the U.S Sentencing Commission, the Federal Sentencing Guidelines (FSG), which became effective in 1991 and has been updated in

2002 (United States Sentencing Commission, n.d.) The objectives of these guidelines are to

prevent unethical behaviors and to punish those individuals who commit them by assessing fines and sentences that can be classified from misdemeanor to major offenses The offenses also are

reduced if the companies have implemented compliance programs that would lead to meeting the FSG requirements (Ferrell, LeClair, & Ferrell, 1998) Yet it also has been viewed that a business ethics program established by a company requires more than basic compliance; rather it should describe and direct moral conduct of employees by concentrating on business conduct and values

as its main focal points (Dubinsky, 2002)

A study by Weaver, Trevino, and Cochran (1999) of Fortune 500 industrials and 500

service corporations, with a 26% response rate, indicated that even though it was found that these

major companies had some type of ethics policies, not all of them implemented them in the same

manner Substantiating Dubinsky’s (2002) views, they also found that is not sufficient to

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Securities and Exchange Commission (SEC), the Committee of Sponsoring Organizations

(COSO) published the Internal Control Integrated Framework to provide a definition for internal control This definition by COSO considers internal control as “a process, effected by an entity’s

board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and

regulations” (as cited in Fiorelli & Rooney, 1997, p 57)

Furthermore, COSO described five interrelated elements forming an integrated system of

controls and these are: “(1) the control environment, (2) risk assessment, (3) control activities,

(4) information and communication, and (5) monitoring” (as cited in Fiorelli & Rooney, 1997, p

57) This integrated system developed by COSO can help companies to meet the requirements of

FSG in reducing or avoiding violations and misconduct if it is properly implemented and

adequately controlled (Fiorelli & Rooney, 1997)

The internal auditors are in an important position within the organizations to ascertain that

an acceptable internal control system is in place and working effectively toward the attainment of

guidelines and objectives (Fiorelli & Rooney, 1997) Also, the issuance of management reports

on internal control on the part of the internal auditors can assist in improving controls and

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(Hermanson, 2000)

Internal auditors and accountants, in general, are seen as ethical individuals who must exercise good judgment and follow a code of ethics when performing their duties These professionals represent a profession that owes loyalty and respect to the stakeholders of businesses in assessing the financial statuses of their organizations Thus, it is important to determine the moral inclination of these college students in their early years when they react to different ethical and unethical circumstances, and to seek remedy, if necessary

Background of the Problem

In today’s financial environment, it is not uncommon to hear about the number of cases proceeding to litigation because of improprieties committed by business professionals A typical

example is the accounting profession, and as Jake Netterville, the American Institute of Certified Public Accountants (AICPA) Chairman, said:

I fully realize the profession is facing some problems, such as the recession and the

liability crisis, but there are some very positive things as well Unfortunately, negative matters sometimes get more press than positive ones I would like to see the profession’ s positive side become more visible while I serve as chairman the liability crisis is far and away the most important problem facing the profession at

this time Nothing else is even close But, even here, there are some positives

Most important, we have mounted a concerted attack on the problem from several

different angles (Barrett, 1992, p 86)

The negative matters refer to the number of lawsuits arising out of improprieties by

accountants This problem not only affects the accounting profession but all professionals in a

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several fraud incidents have become visible According to Izraeli and Schwartz (1998), the U.S

Sentencing Commission reported that in 1995 there were 111 entities sentenced, in which 83 of them were being subject to the fine provisions And in 1996, one of the most notorious criminal case occurred when the Manhattan federal court ordered Daiwa Bank, a foreign entity, to pay a fine of 340 million (Izraeli & Schwarts, 1998)

Another important element of information is found in two surveys conducted by one of the largest CPA firms, KPMG, and the Ethics Resource Center The findings from these studies revealed that organizations that devote time and effort to implement a good ethics program,

emphasizing the importance of ethical behavior, actually are encouraging their employees to behave ethically (Read, 2000)

The KPMG survey on ethics in the workplace stated that more than 75 percent of the employees surveyed had seen cases of unethical behavior against the law or company standards They also did not feel management was fully committed to keep an ethical environment within the company Furthermore, management is perceived as being unable to handle cases of unethical

behavior (KPMG, n.d.)

In a like manner, the Ethics Resource Center, in its National Business Ethics survey of 2000, asked 1,500 employees about formal ethics programs and practices within the companies

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saw other people’s behaviors that violated the rules established; more than two in five workers

failed to report their observations of misconduct; and two in five employees were not satisfied

with the company’s action after a misconduct was reported The responses also showed that formal ethics programs are looked upon by employees as a valuable mechanism that has positive

ethics outcomes (Ethics Resource Center, n.d.)

Both the KPMG and the Ethics Resource Center surveys demonstrated commitment from

management will tend to promote ethical behavior within the company Therefore, in this study of

college and university accounting students, the need to determine from the earlier years in the students’ careers their ethical reaction to different circumstances is addressed, since these

individuals are going to be tomorrow’s leaders and auditing managers

Most recently, the ethical practices of businesses in the U.S have been impaired by the

downfall of Enron whose external auditors had a significant role in performing internal audit work which is in violation of the auditor’s rule of independence The new government measure to assure confidence to the public in the American capital market is the Sarbanes-Oxley Act of 2002 This act formed an oversight board to regulate the audit procedures and reporting of financial information, as well as limit other activities performed by companies providing audit services, for publicly-held corporations, established penalties for management when committing fraud, and

provided the Securities and Exchange Commission (SEC) with an increase budget to facilitate the

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of independence when the auditor also is employed to perform nonaudit services for the client

which was the case in Enron

Nevertheless, Locatelli (2002) believes that the main reason for prohibiting the external

auditor to perform internal audit services should be his/her lack of knowledge on the internal controls of a company Internal auditors seem to be the most prepared individuals to undertake this task because they concentrate on operational and administrative controls In addition, they do have a close relationship with the company personnel and understand the organization’s culture

She stated that “ a failure to understand the root cause of the problem will lead to an

ineffective solution” (Locatelli, 2002, p 12) Thus, it is implied that internal auditors, because of their knowledge about the company’s business and environment, should be the ones involved in

setting up and restructuring the internal control system of the organization

The Sarbanes-Oxley act of 2002 also proposes certain rules (e.g 404, 406 and 407) which

obligate public companies to make accessible information pertaining to reports on internal

controls, codes of ethics, and audit committee members In a report by KPMG’s Audit Committee Institute (2002), the above rules were explained as follows:

Pursuant to Section 407, a company would be required to disclose the number

and names of the “financial experts” serving on the company’s audit committee

and that they are independent of management, as determined by the company’s board of directors

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company has adopted a code of ethics for the company’s principal executive officer and senior financial officers, or if it has not, why it has not; and to disclose on a current basis amendments to, and waivers from, the code of ethics relating to any of those officers

Pursuant to Section 404, a company would be required to file, in its annual report,

an internal control report of management stating:

management’s responsibilities for establishing and maintaining adequate internal controls and procedures for financial reporting for the company,

management’s conclusions about the effectiveness of the company’s internal controls and procedures for financial reporting as of the end of

the company’s most recent fiscal year, and that the company’s registered public accountant has attested to, and reported on, management’s

evaluation of the company’s internal controls and procedures for financial

Reporting (€PMG’s Audit Committee Institute, 2002)

In view of these proposed rules, it seems appropriate to vision that internal auditors will

have a more active role in a company’s environment Thus, it is proper to pose the questions if possible future recruits into the internal auditing field will posses the sensitivity to perceive ethical from unethical situations and to have a degree of moral maturity that will make them more

susceptible to see these differences

The internal auditor’s responsibilities to ensure adequate internal controls by assessing the

company’s risk, report any weaknesses to the company’s audit committee, and interpret the risk

environment surrounding the company for the audit committee have been augmented by the

Sarbanes-Oxley act of 2002 In this context, risk assessment as defined by O’Regan (2002) is “a

systematic review of the risks facing an organization (i.e., the likelihood adverse conditions or

threats to an organization’s objectives and goals), and a definition and prioritization of ways to

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Purpose of the Study

It is evident that throughout periods of time researchers like Kohiberg and Rest have tried

to find a relationship between a person’s moral basis to his/her action in different situations,

(Kohlberg, 1969; Rest, 1979) Thus, the intention of this study is to further this concept and relate it to the students’ choice of action in a given internal auditing situation after they have taken classes in accounting and auditing The selection of these business students is made because the

material taught in the courses they have to take emphasizes the code of ethics for the accounting

and auditing professions, and present students with a thorough background on norms and behaviors that are acceptable in the business world

Regarding this issue, there have been some studies conducted to attempt to see the effect

of education on students’ reaction to ethical dilemmas which have concluded that the

development of moral reasoning tends to increase as the students progress in their career

(Ponemon and Glazer, 1990; Jeffrey, 1993) These findings are critical to understanding the reasons why the students have been selected after they had taken some of the accounting and

auditing classes By selecting these students, it is obvious that they would be prepared to analyze

internal auditing situations, since they would be more aware of the operations in a business environment and/or the functions of an internal auditing department

Base Theory

The importance of moral virtues dates back to the period of two great philosophers, Plato

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select what is good for them and for others Eterovich (1980) stated that “Plato looked at virtues

as the knowledge of good, and hence something that it could be taught” (p 26) However,

Aristotle went beyond this concept by specifying that moral virtues are not received from nature

as a gift, since these can be changed by habit Thus, it must be said that “ nature gives us the capacity to receive them, and this capacity is brought to maturity by habit” (Aristotle, trans 1926, p 71) Aristotle then continued his analysis by specifying the importance of inculcating principles

to children at the beginning of their lives so these can become habits (Eterovich, 1980)

In subsequent periods, including modern times, philosophers, writers, and researchers have concentrated on explaining the behavior of people by relating their actions to moral

upbringing These beliefs are manifested in a modern instrument, the Defining Issues Test (DIT), developed by James Rest with the objective of measuring people‘s moral judgment and providing

an index of moral maturity (Rest, 1979, p 289-96, 1986, p 185-95) The basis of this exam

evolved from the studies developed by Lawrence Kohlberg on moral judgment (Kohlberg, 1969) The DIT has been utilized in over 1,000 studies by researchers; and, therefore, validating it for

this purpose Also, it has been used in over 40 foreign countries, however, variations in some of the answers received seem to relate to cultural differences

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this work seeks to extend Kohlberg’s (1969) cognitive model on the theory of Moral

Development to a previously unexplored environment—undergraduate and graduate accounting

students facing ethical dilemmas in internal auditing

The short version of the DIT-2 will be given to the groups of students who have already

taken business and accounting courses or have in addition taken auditing courses These groups also will be given six internal auditing scenarios, representing ethical and unethical internal auditing situations used by Larkin (2000) in his study of internal auditors working at a large financial institution

Research Question

This research focuses on the level of moral development of undergraduate and graduate

accounting students in two higher educational institutions, as compared to their perceptions of the proper ethical choice in internal auditing situations, in order to answer the following questions: Is

there a correlation in a student’s level of moral development and his/her ethical choice in resolving an internal auditing dilemma? Is there a difference in a student’s gender and his/her ethical choice

in resolving an internal auditing dilemma? Is there a difference in a student’s age and his/her

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potentially encountered if they become internal auditors Scope and Limitation of the Study

The scope of the study is to determine the ethical awareness of accounting students in an internal auditing environment The study is limited to freshman and senior undergraduate students, and graduate students enrolled in two public, city colleges of South Florida Some of

the subjects completing the surveys are students who have never worked in the business or

auditing fields Others might have experience in business, but not specifically in internal auditing Even though the answers might imply that education has an impact on individuals’ ethical behavior, it does not indicate that these students are going to make the proper ethical decision in the business world, or in a real internal auditing environment For those students already

working, their reactions to ethical situations in their work environment might be affected by the existing corporate culture, pressure by top management, or the fear of losing their jobs

The described limitations could make the sample not representative of a broader

population of students Furthermore, the use of students in any research or study attempting to predict behavior in an actual environment is subject to be influenced by additional factors, not occurring in a preconditioned setting, i.e., a classroom

Definition of Terms

Auditing

It is the field of accounting that includes: (1) the design of the records and procedures

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interpretation of reports, and (4) the review to determine the adequacy of the accounting system and the reliability of the reports (Brink, 1958)

Cognition

It is defined as a means of putting things together or relating events, and this relating

activity is an active connecting process, not a passive connecting of events through external

association and repetition (Kohlberg, 1969)

Ethical

The term is defined as of relating to, or dealing with, ethics; being in accordance with the accepted principles of right and wrong that govern the conduct of a profession (The American Heritage Dictionary, 2000, p 611)

Ethics

The term is defined as the study of the general nature of morals and of the specific moral choices to be made by a person; the rules or standards governing the conduct of a

person or the members of a profession (The American Heritage Dictionary, 2000, p 61 1) It also has been defined as the standards of conduct that indicate how one ought to behave based on specific values and moral duties and virtues arising from principles about right and wrong (Mintz,

1995)

Internal Auditing

It is a special segment of the broad field of accountancy, utilizing the basic techniques and

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Moral

The term is defined as of or concerned with the judgment of the goodness or badness of

human action and character; conforming to standards of what is right or just in behavior (The

American Heritage Dictionary, 2000, p 1142) Moral Behavior

It is the response that a person makes to ethical pressures If these responses are

consistent with societal standards of “good,” they are regarded as moral; if they contradict those expectations, they are considered immoral (Garsee & Schuster, 1992, p 330) It also has been

defined as the result of the relative strength of the superego in conflict with other personality agencies, a conflict complicated by strategies of inhibition, transformation, deception, and disguise (Blasi, 1980, p 2)

Moral Development

The term makes reference to perceptual stages through which individuals pass as their

ability to reason about moral issues matures (Derry, 1989)

Moral Judgment

It is defined as the concern of how the benefits and burdens of social cooperation are to be distributed (the rules of a social system that assign people’s rights and responsibilities) (Rest,

1979, p 20) It also is judging which action is morally right/wrong (Rest & Narvaez, 1994) Moral Reasoning

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problem (Elm & Nichols, 1993) Reasoning

It is defined as the use of the faculty of reason; thinking logically; so as to determine or

conclude by logical thinking; reasoning out a solution to the problem (The American Heritage

Dictionary, 2000, p 1457)

Significance of the Study

The importance of this research arises out of a need to understand the intricacies of human

behavior of those charged with the fiduciary responsibility of being internal “watch dogs” and how to give society a workforce that is going to protect the integrity of corporate financial reporting

and provide for the future well being of investors The population analyzed is composed of

accounting students because of the importance the accounting and auditing professions have in our world today

Specifically, this study concentrates on the internal auditing field which has been subject to

very limited empirical research (Larkin, 2000) The results of this research in determining how

prepared these students will be to face ethical dilemmas are intended to provide employers with information on future recruits’ ethical awareness in an internal auditing environment, as well as

identifying areas of continuing education

Organization Plan

The presentation of this document complies with Nova Southeastern University’s

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Chapter I states the problem, background of the problem, purpose of the study, base theory, research question, scope and limitation of the study, definition of terms, significance of the study and organization plan

Chapter IT reviews the literature It discusses the work of well known researchers in the

field of moral development and the application of this theory in understanding the behavior of individuals in resolving ethical dilemmas The chronological illustration of the narrative is on general ethics applications, leading to specific ethics research in business and auditing

environments

Chapter III defines the instruments used, the characteristics of the sample selected to conduct this study and the procedures implemented to collect the data It describes the null and alternate hypotheses, the specific statistical tests performed, and the reliability and validity of the instruments

Chapter IV presents the findings obtained from the research The results are analyzed and interpreted in relation to the hypotheses formulated

Chapter V summarizes the conclusions of this study An explanation of the results is provided to indicate the similarities and differences found in this study when compared to previous research Lastly, recommendations for future research in the areas of moral

development and auditing are presented

Summary

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development and their perception as to the proper ethical choice in an internal auditing dilemma The research contributes to the existing literature that is investigating the area of internal auditing

that in particular addresses the issue of future accounting recruits into the profession, and how

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CHAPTER II

LITERATURE REVIEW

Introduction

The review of the literature in this chapter analyzes five of the most significant philosophical moral theories which attempt to explain the meaning of individuals’ actions

Specific examples of how they relate to the business world are presented as well as a description

of some of the main philosophers behind them

In addition, an explanation about the empirical research done in the 20" century is provided by illustrating several studies conducted on cognitive moral development and ethical

behavior or reaction Piaget’s, Kohlberg’s and Rest’s works are detailed, leading to the

discussion of the research instrument, the DIT, to be used in this study to measure the degree of moral maturity of the subjects being examined

Furthermore, internal auditing is defined within its domain The code of ethics and ethical responsibilities of internal auditors also are analyzed to further the understanding of this particular profession and to demonstrate the importance of providing our society with ethical internal

auditor recruits

Ethics Theories

As Ferrell, Gresham, and Fraedrich (1989) stated, “moral philosophies provide standards

to judge the act, the actor’s intentions, and the consequences of the act” (p 56) There are five

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Their significance is discussed in the next paragraphs and sections, with illustrations of some of the most notorious philosophers behind each of them and their applications to actual business

practices

Utilitarianism and egoism can be classified as sub-theories of the teleology theory which is established on the basis of analyzing the ultimate results or goals (Barnett, Bass & Brown, 1996;

Fraedrich & Ferrell, 1992) In particular, utilitarianism “refers to the tendency to assess ethical situations in terms of their consequences to people It does not specify kinds of consequences; it

does not identify which persons are relevant It circumscribes a cluster of philosophical positions, all of which are more closely related to each other than they are to ethical formalism, which they are contrasted” (Brady & Wheeler, 1996, p 928)

It can be said that this type of thought encourages an individual to maximize the well- being of others without subjecting society to pay a high cost for this act In business, specifically

in the accounting and auditing areas, this would address the cost benefit analysis that accountants

or auditors undertake in order to find and contract additional services for the organizations at adequate fees (Cohen, Pant & Sharp, 1998)

Instead, egoism focuses on the results that are beneficial only to the individual As Ferrell

et al (1989) said:

The egoist is an opportunist who will use manipulation to promote self-interest

Machiavellianism is a value-oriented form of egoism Because Machiavellian

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Studies have shown that in the fields of accounting and finance, the agency theory tends to

be interpreted as a form of egoism Specifically, when it refers to managers who want to

demonstrate that they can operate the organization efficiently and effectively (Cohen et al., 1998)

In reality, they are looking for their self interest as an end result

On the other hand, deontology is embedded in the belief that individuals’ behaviors are guided by the implied rules of society, i.e., the obligations that people have with one another (Cohen et al., 1998; Ferrell et al., 1989) This conviction is based fundamentally on the idea that

proper behavior comes about from these implied obligations Kant, the philosopher who is

famous for his writing on the categorical imperative, is associated with this theory (Fraedrich & Ferrell, 1992)

In accounting and auditing, it is relevant to discuss the obligations that public accountants

have for other people (Cohen et al., 1998) Accountants are obligated to perform their duties with integrity and objectivity to respond to those stakeholders to whom they owe a fiduciary responsibility Furthermore, the auditors, i.e., internal auditors, have a duty towards their employer, i.e., the company’s management, as well as the company’s shareholders for acting in their best interest

The theory of justice suggests that principles of formal justice guide the actions of

individuals People do the right thing because of established rules and laws Aristotle’s writings

advocated this trend of thought (Cohen, et al., 1998) as well as Kohiberg’s theory of moral

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(1998) suggested that “ the firm’s commitment to diversity could be framed in terms of

justice” (p 254)

The theory of relativism, when compared to the ones previously described, has a more

realistic or practical way of reasoning the actions of individuals From its point of view, ethical

values are not universal As Barnett et al (1996) stated, “ highly relativistic individuals reject the application of any universal rules or standards that attempt to define an act as moral or immoral

_ individuals believe that ethical acts will sometimes produce negative outcomes for some and benefits for others” (p 1163)

Followers of the theory of relativism tend to believe that ethical values are confined to culturally defined territories; the acceptance of certain rules by one culture does not necessarily make it acceptable by another culture This relativism is a very important concept for business

firms that are expanding their operations overseas into countries that have completely different cultures As Cohen et al (1998) stated, “ this is very important in multinational public accounting firms that must manage different notions of independence that may be prevalent in different cultures” (p 254) In this context, companies should first analyze and research the foreign

country’s conditions to determine their operational grounds

Aristotle and Plato

Aristotle’s writings describe ethics as a science that studies the individual’s behavior, moral traits, and happiness For him, happiness needed to be examined under three main

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as being inadequate, but necessary in the development of human happiness if it is accompanied by

virtue and contemplation (Eterovich, 1980)

The life of virtue was portrayed as the life of a just and courageous individual, following the theory of justice In the accounting profession, being just and courageous is a positive trait

that individuals must have to fulfill their responsibilities Mintz (1995) stated, “an Aristotelian

approach to virtue in accounting recognizes the importance of certain traits of character that

enable the accountant to make professional and ethical judgments (exercise practical intelligence) that are consistent with the expectations of public trust” (p 252) The third factor, the life of

contemplation, was considered to be the maximum manifestation of someone’s well being; freed

from worries and concerns of life (Eterovich, 1980)

Aristotle believed in the end results of human actions Thus, his ethics are mainly

governed by the theory of teleology In teleology, as Eterovich (1980) said:

Each being is so constructed in its nature (physics) that it acts only according to

a particular pattern and in a certain direction But this direction presupposes a

definite nature or essence from which a determinate action starts Moreover, there is no random action; on the contrary, every action points to the end or target towards which it aims Therefore, determined nature produces determined action; this action in turn produces or reaches a determined end Thus nature,

action and end are correlative terms Everything has its function to fulfill , and this fulfillment of its function is its proper end (p 3)

Thus, Aristotle thought of morality as being embedded in the nature of an individual’s

acts, goals, and consequences of his/her acts (Eterovich, 1980)

Plato’s ideas differ from Aristotle’s somewhat in terms of defining the Form of Good

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Eterovich (1980) said, “Aristotle differs from Plato by putting forms in individual things, whereas Plato sees them as self subsistent entities, separate from the individual things of which they are perfect embodiments” (p 11)

Thus, Aristotle did not agree that Plato’s doctrine of the Form of Good was the definition for the highest good of an individual Instead, he believed that if an individual practices moral virtues, he/she can find happiness, especially if it is complemented by intellectual wisdom

(Eterovich, 1980)

Kant

The philosophy of Immanuel Kant (1724-1804) is associated with the theory of deontology which emphasizes the intentions of the individual’s behavior Its focal analysis

differentiates from teleology by concentrating on the individual person, instead of society as a

whole and the end results of an action

Kant believed that moral behaviors are caused by a sense of duty, and that people’s moral actions do not take into consideration their consequences when performed His principle of categorical imperative or moral law described in two of his most renown work, Groundwork of the Metaphysics of Morals (1785) and The Critique of Practical Reason (1788), elaborates on

this concept in depth by determining that if a person acts to his/her maximum of his/her reason, then these actions must be universal law (Kitcher, 2001) Borowski (1998) described him as

being “ aman who placed emphasis on reason firmly believed that reason alone could

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Bowie (1998) related Kant’s moral theory discussion on work to business by applying it to the obligation that organizations have in providing employees with meaningful work From Kant’s writings, Bowie proposed six characteristics of meaningful work:

1 2

Meaningful work is work that is freely entered into

Meaningful work allows the worker to exercise her autonomy and independence Meaningful work enables the worker to develop her rational capacities

Meaningful work provides a wage sufficient for physical welfare

Meaningful work supports the moral development of employees

Meaningful work is not paternalistic in the sense of interfering with the worker’s

conception of how she wishes to obtain happiness (Bowie, 1998, p 1083)

According to Kant, a person’s work is necessary to give autonomy and independence

to the individual Thus, if a company provides the means to allow the employees to earn their living, which in turn contributes to these persons’ wealth, then this firm has provided self-respect for its employees This is a way of contributing to the happiness of others

Another example is found in the U.S during a period (1980’s and 1990’s) when foreign companies were gaining momentum over the domestic ones, because the foreign companies were

offering products with a higher quality at a lower price To respond to this trend, the U.S

government initiated the establishment of an award for quality (the Baldridge Award) so

manufacturing firms could compete among each other (Bowie, 1998) The intent behind this was

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an appropriate level

Along Kant’s thoughts of mutual respect among individuals, the notion that managers and

employees of a business should conduct themselves as rational human beings is embedded Borowski (1998) described the behavior of the Chief Executive Office (CEO) of Malden Mills manufacturing company, Aaron Feuerstein, as different from other managers’ actions He actually kept all of his employees on the company’s payroll, while his plant was being reconstructed, after a fire destruction Most employees were called back to work after the three months of

reconstruction, and those who were not, received other types of assistance

In his analysis of Feuerstein’s situation, Borowski (1998) contends that “as a manager, he

treated his employees as the human beings they actually are It was not a warring relationship but one based on a desire to respect the other” (p 1631) This illustration of a manager's response in

a business crisis follows Kant’s idea of sense of duty within the inner soul

Schopenhauer

Arthur Schopenhauer (1788-1860) revealed in his essays, On the Freedom of the Will and On the Basis of Morality that, as stated by Janaway (2001):

_ acts of will are caused by a combination of one’s permanent unchanging character and motives, which are representations of states of affairs in the

world that impinge upon one’s character in this sense there is no free will

Yet the feeling that we are responsible for our actions remains (p 340)

Schopenhauer also asserted that an individual’s act of morality is controlled by his/her

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components: egoism, compassion, and malice (Janaway, 2001)

Even though he recognized certain positive factors in Kant’s writings, Schopenhauer’s

theory of morality opposes Kant’s theory in various aspects Schopenhauer did not accept the concept of Kant’s categorical imperative to do what is right and did not believe in the relationship

of morality and rationality Rather, Schopenhauer envisioned a person could be moral and irrational at the same time (Janaway, 2001) He thought of Kant as being too idealistic

Rawls

John Rawls’ beliefs are based on a system of justice and equalities of opportunities In

contrast, he thought the Greek moral philosophers, such as Aristotle and Plato, had to search for the highest good in order to present those societies with some type of idealistic answers to

questions that civic religion could not explain, i.e., the pursuit of happiness (Rawls, 1993) Rawis is convinced that the present period’s political and philosophical views are

influenced by three main historical events: the reformation of the sixteenth century which led to

religious pluralism; the creation of the state with its centralized management; and the progress towards science, such as the development of mathematics and physics (Rawls, 1993) All these movements led to the creation of political liberalism As Rawls (1993) stated:

political liberalism assumes the fact of reasonable pluralism as a pluralism of comprehensive doctrines, including both religious and nonreligious doctrines

This pluralism is not seen as disaster but rather as the natural outcome of the activities of human reason under enduring free institutions (p xxiv)

Thus, even though society is divided by political and philosophical beliefs, stability for its

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(Rawls, 1993)

Rawls’ (2001) ideology emerges from two principles of justice:

a Each person has the same indefeasible claim to a fully adequate scheme

of equal basic liberties, which scheme is compatible with the same scheme

of liberties for all; and

b Social and economic inequalities are to satisfy two conditions: first,

they are to be attached to offices and positions open to all under conditions

of fair equality of opportunity, and second, they are to be to the greatest benefit of the least-advantaged members of society (the difference principle)

(p 42-43)

Rawls’ point of view differentiates from Kant’s concept of moral order in that acts arise from human nature and the relationships of individuals as opposed to the formal establishment of rules of justice by a democratic political system But at the same time, their beliefs focus on

mutual respect among individuals

Locke

Alain Locke’s dissertation, the Problem of Classification in the Theory of Value, or an Outline of a Genetic System of Values, explains the various problems with the Theory of Value In his document, Locke attempts to show that values, i.e the ethical and aesthetic, are

exchangeable Thus, the perception of these values depends on the individual that is exposed to

them Basically, Locke’s beliefs tended to show that values within a group of individuals derive

from attitudes and feelings (Mason, 1982)

Locke referred to his theory of value as value relativism This extreme position was an

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