Despite the enormous impact of Enron, WorldCom, and other scandals on industry accounting years ago, a new study published by the American Accounting Association indicates that CPAs consider the ethical environment within the hallways of industry to be weaker than the environment within the largest public accounting firms.
What’s more, the Big Four firms are perceived to have a stronger ethical environment than smaller public accounting firms.
The findings are included in the study, An Investigation of Ethical Environments of CPAs: Public Accounting versus Industry, which was featured in the spring issue of Behavioral Research in Accounting.
The study was authored by Donna Bobek Schmitt, CPA, associate accounting professor at the University of South Carolina; Derek Dalton, CPA (inactive), associate accounting professor at Clemson University; Brian Daugherty, CPA, associate accounting professor at the University of Wisconsin; Amy Hageman, associate accounting professor at Kansas State University and chair-elect of the American Accounting Association’s Public Interest Section; and Robin Radtke, assistant accounting professor at Clemson University.
“We are particularly interested in the ethical environment because a sharpened focus on the ethical (as opposed to economic) implications of decisions should help deter the lapses in judgment that have led to so many scandals,” the authors wrote.
They note that a better understanding of ethical environment perceptions is important for several reasons. Such perceptions can influence ethical behavior and also the perception of reality – regardless of its accuracy – which can affect work attitudes and organizational behavior. Identifying the strengths and weaknesses of ethical environments is key because they potentially can be improved.
So, what drives the difference in ethical perceptions between public accounting and industry? The professors believe their findings uphold prior research, which suggests that organizations in industry “are more likely to espouse the values of commercialism than public accounting firms.” Besides, the socialization that goes on within public accounting firms, where employees are “molded,” is far different than in industry, which “acculturates” people (assimilates them into a different culture that usually is the dominant one), the study states.
The researchers surveyed 904 accountants for the study: 676 employed by public accounting firms, 127 employed in industry, 62 with jobs in government, and 39 employed by not-for-profit 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”). The greater the agreement with the statements, the higher the level of perceived ethics. Because there were 12 statements, scores could range from 12 to 84.
The accountants’ mean rating of the ethical environment in public accounting was 73.32, compared with 67 in industry. Even higher was the 76.11 rating for the Big Four – its margin over other public accounting firms also was statistically significant.
In addition, the mean rating of the ethical environment in government was only 63.81, significantly below both public accounting and industry.
While the study’s results indicate that organizations could do some work on bolstering their ethical environments, there’s also a specific message here for audit and tax professionals, the study states. They should be aware that the ethical environments in which their clients work are perceived as weaker than public accounting.
“This has important implications for public accounting CPAs when assessing the relative risk of an engagement,” the study states.
But why are the Big Four firms perceived as more ethical? Even the professors find that counterintuitive, stating that the firms “are now commonly assumed to have profit maximization as their primary motivation.”
They cite three possible reasons:
- The Big Four have bigger reputations to lose than other public accounting firms so they have more incentive to promote ethical environments.
- They spend more on training.
- Their greater litigation risk motivates them to maintain high ethical standards.