Expert121

In the ethics paper you sent me. Where did you get the word understudies from. You forgot to do the citations on it. You just put the quotation marks, but didn't tell me where you got it.

Danish Evidence of Auditors' Level of Moral Reasoning and Predisposition to Provide Fair Judgements ABSTRACT. The community has legislatively conferred on external auditors a special but lucrative responsibility to provide fair and independent opinions about management's preparation of company fmancial statements. In return, auditors are obliged by professional standards to act vi^ith integrity, independently and in the public interest. This study examined 174 auditors* predisposition to provide just and fair judgements, using Kohlberg's theory of developmental moral reasoning, one of the most widely accepted theories in justice psychology. Respondents came from five international audit firms in Copenhagen. Results indicated that auditors with pre-conventional or low level of just reasoning or comprised 64 respondents, the largest group in the sample. The pre-conventional level suggests that people will act in their own self-interest and do the right only to avoid punishment. Pre-conventional auditors have the abihty to "do deals", advantageous for business. When faced with an ethical crisis, however, auditors as this level will tend to focus on their own needs at the expense of others. The post-conventional or mid level of just reasoning comprised 59 auditors, second largest group in the sample. This level indicates that these auditors have the predisposition to act fairly on principal, particularly when faced with an ethical crisis. The conventional level or mid-just reasoning consisted of 51 auditors. People with a conventional level of just reasoning believe in law and order, the maintenance of the status quo, however they tend not to be critical of laws, nor authority even if those laws and authority are unjust or evil. KY WORDS: auditors' fair and independent opinion, just reasoning, Kohlberg's theory of moral development Bent Warming-Rasmussen Carolyn A. Windsor Introduction Society has conferred on the auditing profession' a special legislative franchise to provide independent financial audits of large organisations on the condition that the profession complies with the codes of ethical conduct (Mautz, 1984, 1988). The auditor's opinion is based on professional judgement that gives credibility and integrity to the financial statements used by the community, (e.g. shareholders, investors, future investors, unions, retirees, future retirees, financial institutions, government bodies etc.). Hence, the economic wellbeing of the community relies upon independently audited financial statements (ASOBAC, 1973; SEC, 2000). If the auditing profession loses public confidence, there is the possibility of more government regulation rather than focussing on why auditors did not act in accordance with ethical standards (WarmingRasmussen, 1996). Moreover, the auditing profession may lose its special franchise An important attribute of professional judgement is the auditor's ability to make fair and just judgements. According to Mautz and Sharaf (1961) and Hansen (1990) auditor judgement is similar to that of a judge where auditors'judgements have to be fair, objective, impartial and independent. Kohlberg's (1969) cognitive moral developmental theory (CMD) or just reasoning is one way to examine auditors' psychological predisposition to provide fair judgements. Prior CMD studies have found that auditors' moral reasoning affect auditors' propensity to provide independent and fair judgements when faced with a hypothetical ethical dilemma (Ponemon Journal of Business Ethics 47: 7 7 - 8 7 , 2003. 2003 Kluwer Academic Publishers. Printed in the Netherlands. 78 Bent Warming-Rasmussen and Carolyn A. Windsor and Gabhart, 1990; Windsor and Ashkanasy, 1995; Gul and Tsui, 1996). Hence, auditors' level of moral reasoning can influence their professional obligations and social responsibility performance. Furthermore, auditors with a high level of moral reasoning were found to provide independent judgements rather than those auditors with lower levels of moral reasoning (Ponemon and Gabhart, 1990; Windsor and Ashkanasy, 1995; Gul and Tsui, 1996). The internationalisation of commerce and the auditing profession has meant that auditors from many countries use or refer to the International Federation of Accountants (IFAC) Code of Ethics for Professional Accountants (November 2001). Hence, auditors in several countries are guided by universal ideals mandated in IFAC Code of Ethics such as independence, honesty, integrity, impartiahty, fairness and ethical conduct. Because ethical decision-making and conduct are central to the credibility of auditing profession, several studies have examined auditors' cognitive moral reasoning. For example, Ponemon and Gabhart (1994) Hst several CMD studies of accountants and auditors usitig Rest's (1979a) Defming Issues Test (DIT) mainly in the United States and Canada (See also Louwers et al.. 1997). Few CMD studies of European accountants or auditors have been performed. Arnold, Barnardi and Neidermeyer (1999) however, conducted one study that examined auditors' independence judgments, individualism and litigation from Big 6 audit firms across Denmark, Ireland, Italy, Spain, Sweden The Netherlands and the United Kingdom. They used a modified audit-specific DIT based on Rest's (1979a) instrument (Thorne, 1999) rather than Rest's stories of universal dilemmas (Rest et al., 1999). As a result, Arnold et al.'s analysis did not include Rest's (1979a) P score, a measure principled reasoning. This present study examines Danish auditors' level of principled reasoning using Rest's (1979a, b) DIT as a means for comparison with other CMD studies. The purpose of this study, therefore, is to examine cogtiitive moral development of auditors from the largest international audit firms in Denmark." The IFAC code of Ethics^ for Professional Accountants (2001), the Danish "Law for State Authorized Public Accountants" (Lov om statsautoriserede revisorer 12) and the Danish "Executive Order on auditors reports" (Erklieringsbekendtgorelsen 1 ) requires the auditor to provide a fair and independent opinion about the financial statements prepared by management of all Danish corporations for the pubhc interest (Hasselager et al., 1998, p. 532). Moreover, auditors should act as a confidential agent of the community (ofFentlighedens tilllidsrepresentant) LSR 6a in Hasselager et al. (1977, pp. 510-518). This study examines three levels of Danish auditors' 'fairness judgement' or CMD by splitting the sample into three groups'^ rather the dichotomous high and low as in many prior studies in accounting research described by Thornton (2000). Moreover, the results of this study should benefit practitioners' understanding about the imphcations of a personal factor such as just reasoning development in providing fair opinions. The auditors in this study came from international audit firms in Copenhagen to add to this body of research. International audit firms were chosen because they perform about eight\\' percent of audits in large and medium sized companies in Denmark.^ This study, therefore, aims to measure not only Danish auditors' predisposition to provide fair and just judgements but also to indicate auditors' level of moral reasoning as suggested by Rest (1979a, b). Kohlberg's moral reasoning and auditors* fair judgements One of the most widely used theories injustice psychology is Kohlberg's (1969) theory of developmental moral reasoning (see Rest, 1994). Kohlberg (1969, 1986) advanced both a psychological theory of cognitive moral development and philosophical theory of normative ethics (Rest, 1979a; Rest et al., 1999). Kohlberg's normative theory adheres to deontological theories of Kant and Rawls (1971) that emphasise justice or fairness judgements.'' According to Rawls (1971), considerations of justice and fairness are paramount, when the allocation of resources is rationally regarded as advantageous or disadvantageous in society. Danish Evidence of Auditors' Level of Moral Reasoning Based on Rawls' (1971) theory of social j ustice. Rest ( 1979a) argues that Kohlberg's theory is concerned with how the benefits and burdens of social cooperation are to be distributed under the rules of a social system that assigns people's rights and responsibilities. Rest (1979a, p. 18) further states that. Every person is born into an association and people band together for mutual advantage. . . . Social cooperation makes possible a better life. Therefore, participants in a social group have a mutuality of interests for maintaining that group. There is also a potential source of conflict of interests since each person cannot be assumed to be indifferent to the distribution of the benefits of social cooperation. Hence there are natural tendencies to want to collaborate and cooperate but also tendencies to preserve and protect individual interests. Kohlberg's theory (1969) of moral reasoning is an appropriate framework to examine professional auditors' predisposition to provide fair and independent decisions because it deals with macro rnorality or moral systems, rather than with micro morality or face-to-face, personal issues (Rest et al., 1999). Society has given the professional auditor a legislated right to audit large organisations. In return, the professional auditor must provide a fair and independent opinion about the veracity of organisational financial statements to the pubhc. The auditor, therefore, must balance the interests of the clientfirm's management, the shareholders, creditors, lenders and the public interest when providing an opinion about the financial statements Johnstone et al. (2001). The auditor's ability to provide a fair and independent opinion is therefore critical for good corporate governance and the public interest. For Rawls (1971), considerations of fairness are paramount, when the allocation of resources is rationally regarded as advantageous or disadvantageous. Hence, society directly or indirectly relies upon the professional auditor's judgement to ensure that the interests of powerful groups, including management, do not harm the public interest (see Goldman and Barlev, 1974). Moreover, the management of large private and public organisations is a powerful institution that 79 influences the distribution of economic, environmental and social resources throughout society and for future generations. An auditor's social responsibility therefore, goes beyond monitoring of management's behaviour (selfinterested or otherwise) for the sake of good corporate governance and the public interest. Kohlberg's (1969) stage theory of moral reasoning is one way to examine auditors' predisposition to provide fair judgements. Kohlberg's stages of moral reasoning and social co-operation Kohlberg (1969) makes the claim that basic problem solving strategies used by people the world over can be reduced to just six stages in a developmental sequence. All people begin using Stage 1 reasoning that progresses to Stage 2, then Stage 3 and so on. The decisional processes involved with the higher stages (Stage 5 and Stage 6) take a more complex, society wide perspective. At these higher stages, a person realises that societies can be governed by diverse systems of law. The principles determine, regulate and criticise the laws and role systems of a co-operative society. Whereas, at Stage 4, the morally right is whatever the law says. Stage 6 represents visions of an ideal society that balance burdens and benefits of co-operative living and optimise each person's stake and welfare in the social order. The secret is not just to have ideals but to have ideals that can win the support of other people as good ways for organising society (Rest, 1994). Kohlberg (1969, 1976) identified three broad levels of moral development through which an individual progresses: The pre-conventional level comprises Stages 1 and 2. Here a person responds to notions of right or wrong, particularly when personal consequences are itwolved, (i.e. punishment, reward, or an exchange of favours), or when authority figures impose physical power upon the individual. Reasoning at the conventional level consists of Stages 3 and 4, where doing "right" at this level conforms to society's expectations, family or peer groups. In postconventional reasoning (Stages 5 and 6), "right" 80 Bent Warming-Rasmussen and Carolyn A. is influenced by universal values or principles; the individual defines moral values apart from the authority of groups, and relies upon self-chosen altruistic principles but non-arbitrary to guide reasoning. Table I provides Rest's (1994) description of the six stages and three levels of Kohlberg's theory (1969). Kohlberg (1969) found that the six stages of moral development are invariant. A person gradually moves from Stage 2 through to Stage 3 on the way to Stage 4, rather than leaping from Stage 2 to Stage 4. Development may terminate at any stage, but Kohlberg found that the majority of adults reached the conventional level at Stage 4 and, but on rare occasions progressed to Stage 6. The rate of moral development varies, as Kohlberg indicated that some young people achieved higher stages than older adults did. Furthermore, Kohlberg's (1969) - stage theory posited that an individual's moral development is not only invariant but also innately predisposed.'' . Over the years, criticisms have emerged regarding Kohlberg's theory. Kohlberg and his associates have responded to their major criticisms (see Kohlberg et al., 1983; Kohlberg, 1986; Modgil and Modgil, 1986), addressing such issues as stage sequeticitig, subjectivity in the scoring method, gender and cultural biases. Snarey's (1985) review of Kohlberg's claim of cross- Windsor cultural universality, revealed support for much of Kohlberg's theory. Gilligan (1982) voiced criticisms about gender bias. She argued that because Kohlberg focused on justice as the central denning feature of the moral domain, he failed to recognise an important area of morality, namely caring and responsibility. Various researchers, however, such as Lifton (1985), Nunner-Winkler (1984) and Walker (1984) provide general empirical support for the application of Kohlberg's theory to both sexes. Rest et al. (1999) acknowledge that there are limits to Kohlberg's approach and that CMD is one component of the psychological process of morality. They argue that there are four components that lead to moral behaviour: moral judgement, moral motivation, moral sensitivity and tnoral character. Furthermore they state that, "Some critics have said that Kohlberg's theory (dealing with moral judgement) is too cerebral, that it misses the 'heart of tnorality'". But the special function of the construct of moral judgement is to provide conceptual guidance for action choice in situations in which moral claims confiict (see p. 10). In fact, auditors are often faced with situations where conflicting moral claims among the various interests associated with the fair presentation of financial statements (see Goldman and Barlev, 1974). TABLE I Six stages in the concept of moral reasoning and cooperation Pre-conventional Level : J'^i ' Stage 1: The morality of obedience; do what you are told. Stage 2: The morality of instrumental egoism and simple exchange; let's make a deal. Conventional Level Stage 3: The morality of interpersonal concordance; be considerate, nice, and kind; you'll make friends. Stage 4: The morality of law and duty to the social order; everyone in society is obligated to and protected by the law. Post-conventional Level Stage 5: The morality of consensus-building procedures; you are obligated by the arrangements that are agreed to by due process procedures. Stage 6: The morality of nonarbitrary social cooperation. Morality is defined how rational and impartial people would ideally organise cooperation. Cited Rest (1994, p. 5). Danish Evidence of Auditors' Level of Moral Reasoning Methodology While much praise and criticism for Kohlberg's theory has focused on the validity of the theory, it is important to examine the instrumentation used to measure moral stage development (Evans, 1986). Kohlberg developed the Moral Judgement Interview (MJI) where data are collected though semi-structured interviews asking subjects to explain their concerns about the presented dilemmas. The MJI is a directed conversation between interviewer and respondent concerning the resolution of moral dilemmas. The subjects' responses are then classified, coded and evaluated, and then tested for reliability by obtaining interrater agreement (see Golby and Kohlberg, 1987). Rest (1986) argues that Kohlberg relied on face validity, longitudinal change and internal consistency as the main grounds for claiming validity for this assessment procedure. Rest's (1979b) Defining Issues Test (DIT) is a widely used instrument to assess moral development (see also McCrea, 1985; Rest, 1993, 1994; Rest et al., 1999). DIT is an objective test of moral development in questionnaire form whose output of 'P' score is continuous rather than MJI's coded responses. Rest's 'P' score indicates what percent of a subject's thinking is at a principled level of Kohlberg's levels 5 and 6 (Armstrong, 1987). The DIT has been extensively vahdated in accounting and audit environments (see Ponemon and Gabhart, 1994; Thornton, 2000). Rest (1979b, 1993) cites Cronbach alpha reliabihty for the 3-story DIT typically around the mid- to high 0.70s. In the present research, a reason for using the shorter 3-story version was the time constraints experienced by professional auditors. More importantly, this study intends to follow other behavioural accounting researchers and use Rest's DIT rather than Kohlberg's MJI approach. Procedure An audit partner from each of the participating international audit firms in Copenhagen was approached for permission to distribute the questionnaires. Once permission was granted the audit partners were then briefed on how to 81 distribute and collect the questionnaire booklets so as to minimise internal validity problems such as history and maturation. The co-opted partners were instructed not to participate in the experiment, nor to advise auditor respondents about the substance of the questionnaires. The questionnaire booklets and DIT instructions were distributed to experienced auditors using secretarial services provided by the participating firms, under supervision of the co-opted audit partners. Participating auditors were guaranteed full anonymity and confidentiality. Neither the researchers nor the senior partners knew who participated in the study. Following the analyses, feedback interviews were conducted with the co-opted senior audit partners to discuss the preliminary results to ensure their participation in the study. Defining Issues Test (DIT). This comprised the 3-story version of Rest's (1979b) scale, which is based on Kohlberg's (1969) cognitive theory of moral reasoning development. The scale presents three brief stories that portray moral dilemmas in everyday life. Respondents answer questions concerning the importance of considering various aspects of each of the three stories using 5-point response scales, with 1 representing least importance, and 5 greatest importance. Calculation of P-scores is based on a formula set out by Rest (1979b, 1993). Respondents. Subjects from populations a large city location participated in this study. Care was taken in the distribution of questionnaires to ensure that there was no dominance by a particular firm. 500 questionnaires were couriered to the participating audit partners in Copenhagen. 195 were returned but 21 were eliminated from the study because they were either incomplete or inconsistent, leaving 174 useable questionnaires, a 35% response rate. The sample comprised of 19.5% partner/owners, 16.7% employed CPAs, 48.9% supervisory staff, and 14.9% of non-management staff. The majority of the respondents came from mid to upper levels of audit firm management as they have the most influence regarding audit judgements. See Table II for a description of the respondents. 82 Bent Warming-Rasmussen and Carolyn A. Windsor TABLE II Respondents from Danish international audit firms Sample n= 174 Mean age Female Male Mean yrs exper. Partner/ owner Employed CPAs Supervisory Level Non-ni'ment employees 35.4 yrs (9.37) 52 122 12.4 (9.54) 34 19.5% 29 16.7% 85 48.9% 26 14.9% Results As set out in Table I, Kohlberg (1969) categorised Stages 1 and 2 of moral reasoning development as the pre-conventional level. Stages 3 and 4 of moral reasoning development as tbe conventional level, and Stages 5 and 6 as the post-conventional level. Rest's (1979b) DIT measures level of moral reasoning development using scores to represent Kohlberg's Stages 5 and 6. This is called tbe mean P-score; it ranges from 0 to 70, and indicates the level of moral reasoning development. The higher the P-score, the more highly developed is the respondent's moral reasoning.*^ Rest (1979b) recommended that the P-scores could be used to categorise the auditors into high, mid and low groups, corresponding, respectively, to Kohlberg's (1969) pre-conventional, conventional, and post-conventional levels of moral reasoning development.'' Based on a large normative sample. Rest determined that P-scores of 27 and 42 were the appropriate cutoff scores to define tbe three groups. The sample was divided into three groups, with high, medium, and low moral reasoning P-scores using the cut-off scores. A discriminant analysis was performed, with DIT P score the dependent variable and the three levels of moral reasoning, low, mid and high as the independent variables. Wilks' Lamda test indicated a significant difference between groups (F = 421.1, d.f = 2, 171, p