Thesis Proposal - School of Business and Social Sciences

Thesis Proposal

The Role of Incremental Discussions in Auditors’ Ethical Decision-Making Abilities

Author: Sudarshan Kumar Pillalamarri Accounting Research Group, Department of Business Studies, Aarhus School of Business, University of Aarhus Email: [email protected]

Supervisor: Professor Claus Holm Accounting Research Group, Department of Business Studies, Aarhus School of Business, University of Aarhus Email: [email protected]

Table of contents

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Part I Chapter 1 Introduction

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Topic

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Significance of the study

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Research objectives

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Research questions

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Structure

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Chapter 2 Key Concepts

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Part II Article 1

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Ethical Decision-Making Ability of Auditors: A Meta-Analysis of the effect of Group Decision-Making and Audit team attributes

Article 2

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A Model for Audit Firm’s Internal Discussions of Audit Issues with emphasis on Ethical Decision-Making.

Article 3

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The Role of Incremental Discussions in Auditors’ Ethical DecisionMaking Abilities’.

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Chapter 1: Introduction When we talk about ethics in the auditing profession, it would be impossible not to mention Enron. This fiasco has significantly changed the perception of auditing and also the way it is being conducted. Nevertheless, it has not been the only reason for this change in perception. Corporate failures have been occurring for a long time now but Enron was the only instance which closed the chapter on one of the illustrious auditing companies. It was this nexus between the company management and auditors that forced business community and the accounting regulators to introspect and change the way things were working. This of course gave the perfect opportunity for researchers to look into the ethical aspect of the auditing profession.

As a consequence of the Enron fiasco: the Sarbanes-Oxley Act was enacted to regulate the public company boards, management and public accounting firms. While the effectiveness and efficiency of this act is widely debated, it has been acknowledged that, this act would help in restoring the public confidence in the capital markets by strengthening the corporate accounting controls. The implications of this act have been far reaching, with different countries either enacting their own version of SOX or by simply following it. For example, the Financial Instruments and Exchange law in Japan (with its internal control component called J-SOX), the Financial Security Law of France (Loi de securite financiere), the Bill 198 in Canada and the Corporate Law Economic Reform Program Act (CLERP) in Australia. Most of these acts aimed to regulate businesses and protect investors by providing accuracy and reliability on corporate disclosures.

The SOX and other similar acts from different countries call for stringent internal controls and responsibility on part of both the management and the auditor to attest to the effectiveness of the internal controls, it is assumed that such an arrangement would deter any further scandals and improve the audit quality. While the internal controls of public companies are being taken care of, the focus shifts to the internal controls within the audit firms auditing these public companies. An audit firm, just like any other organization, is made up of different hierarchical levels and an audit team consists of members from

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different hierarchies. As in any effective internal control system, the division of labour is distinct. The internal controls that the auditor’s use while auditing could range from: audit plans and budgets to working papers, other reports, reviews and ISO standards. However the thread that binds all these aspects of Internal Control within an audit firm is: Communication: which, both inter and intra is done through, representations, clarifications, justifications, negotiations, discussions, review and supervision. The ethical / moral overtones placed on the auditor’s responsibility make these communications all the more important.

After Enron and WorldCom’s fraudulent accounting practices were publicized, the issue of ethics in the accounting profession has come under significant review. The fallout from those events forced to question the ethical practices of auditors, and with it came many studies on the ethical decision-making ability of the auditors. Previous studies on auditing ethics have addressed the ethical reasoning abilities of accounting students (Eynon et al., 1996, Thorne, 2001; LaSalle, 1997; Brown, 2006) and some studies focused on the ethical reasoning abilities of the auditors in profession (Bent Warming, 2003; Shaub, 1993; Libby, 2006). While some other studies focused on creating a model of ethical decision making for auditors (Trevino, 1986; Jones 1991; Lampe and Finn, 1992). Other studies have tried to combine the audit process with the auditor’s cognitive abilities. For example: familiarity with the reviewers (supervisor’s) views (Wilks 2002), reviewer cognition and expectation about the preparer (Rich 2004, Gibbins and Trotman 2002). While some other studies have looked at the connection between discussions and ethical decision-making abilities of the auditors (Thorne 2001, Dukerich et al 1990). The fall of the big 5 firm - Arthur Anderson had raised concerns over the credibility of the auditing profession. As ethical decisionmaking ability and conduct are central to the credibility of the auditing profession; these studies are justified.

Of all the above mentioned areas of research in auditing ethics: my area of interest is the relationship between discussions within and in between different hierarchical levels and the influence of these discussions on auditor’s ethical decision-making abilities. The motivation for my thesis has come from the papers on Prescriptive and Deliberative Reasoning (Thorne

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2001) and the effects of the types of reasoning and leadership on group-decision making (Dukerich et al 1990). Discussions play an important role in the audit process and also in setting and taking forward the ethical culture of the audit firms, besides they also act as instruments of data transfer and subsequently of Internal controls within the audit firms. Ethics are generally regarded as a set of professional and moral rules to be followed whether explicitly or implicitly stated. It has been said that, we inhabit a nomos – a normative universe. We constantly create and maintain a world of right and wrong, of lawful and unlawful. No set of legal institutions or prescriptions exists apart from the narratives that locate and give it meaning. Once understood in the context of narratives that give it the meaning, law becomes not merely a system of rules to be observed, but a world in which we live. In other words it means, the mere existence of rules and laws is of no use, unless everyone follows them. This goes on to say that the internal control systems put in place by the organization, are only as good as the people themselves.

Auditor’s in their profession face different kinds of threats, opportunities and pressures. With their status of a watch-dog, their every move is laced with ethical overtones of varying levels. Since different hierarchies in an audit firm have different roles, not all hierarchies face the same kind of ethical dilemmas. The basic question governing my thesis is: do discussing different kinds of dilemmas; between and within, different hierarchical levels have an incremental effect on the ethical decision-making ability of the auditors?

Aristotle, in his treatise on Ethics, suggests that contemplation is a key factor in ethics. Contemplation according to him is not discursive reasoning. A contemplator already possess the knowledge, contemplation is bringing this knowledge from the recesses of the mind and arranging it in an orderly manner and using it to inspect the truth. I intend to use this method in my thesis, auditing research has a vast amount of knowledge-literature, and it is my endeavour to use this literature: to build theory and normative models of ethical decisionmaking by auditors and compare these with the current practical aspects of the profession. The aim is to pin-point the aspects within these models where things could go wrong or are going wrong for the auditors in terms of ethical decision-making. With my thesis, I am trying to tie in various studies in ethics to the current ethical decision-making models used in

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the profession while emphasizing on the practical aspects of the profession viz. discussions between auditors, role of hierarchical levels in setting up ethical behaviour and on a higher level, the different kinds of dilemmas faced by auditors at different hierarchical levels.

Topic I intend to carry out three different studies: two preliminary and one final study. The preliminary studies will serve as the foundation for the final study, the details of which are as follows: 1.

Ethical Decision-Making Ability of Auditors: A Meta-Analysis of the Effect of Group Decision-Making and Audit Team Attributes. The objective of this article would be to evaluate and summarize the vast body of literature on auditor’s ethical decisionmaking ability. And then use meta-analysis to see the combined effect of the commonly used variables and bring out the gap in the auditing ethics literature.

2.

A Model for Audit Firm’s Internal Discussions of Audit Issues with Emphasis on Ethical Decision-Making. This paper would be theoretical and would build upon the previous article. Firstly, a normative model for the auditor’s internal discussions of ethical dilemmas would be developed. This model would describe how discussions with in an audit team must ideally take place. The commonly used variables from the previous paper would then be ranked based on the influence they exert upon the ethical decision-making ability of auditors and they would then be introduced into the normative model and the result of their interactions would form the basis for the final pragmatic model. This paper, in conjunction with the first article, will serve as the foundations for the hypothesis put forth in the final article.

3.

The Role of Incremental Discussions in Auditors’ Ethical Decision-Making Abilities’. The objective of this article is to study the effect of discussions on auditors’ ethical decision-making abilities and also the context being discussed and the parties involved in the discussions. I intend to conduct an experiment with the participants draw from different hierarchical levels of the big 4 accounting firms.

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Significance The motivation for this study is to show the causality between discussions, dilemmas and ethical decision making ability. As has been seen with the relatively recent scandals and frauds, the top hierarchical level of auditors bear an unquestionable decision making power while the lower level auditors are the ones who are at the crux of the auditing process but cannot take decisions on their own. In such cases the discussions play an important role, the top hierarchical level directs these lower level auditors and hence it becomes important to observe the effect of these directions (discussions). More over, in due course of time, the lower level auditors progress hierarchically and their ethical decision making ability could very well be influenced by the discussions they had with their peers and superiors. Perhaps this could explain the behavioural patterns of auditors who were related to the recent scandals.

The studies of Dukerich et al. 1990 and Thorne 2001 suggest that, principled reasoning leads to a higher level of ethical reasoning among individuals. However, the problem with principled reasoning is that, the individuals must actually be able to recognize appropriate principles and apply them to get the optimal result (Dun et al. 2003). Thorne (2001) suggests that principled reasoners can make sophisticated and nuanced ethical and moral decisions as they cognitively possess more moral forms of reasoning, but whether they will actually follow their decisions depend on their own convictions, interpersonal and situational context. Empirical research indicates that there exists a moderate relationship between an individuals’ level of moral development and his or her moral actions (Blasi 1980; Thoma et al. 1991). These statements very clearly explain the moral reasons for the latest accounting scandals and also throw light on the gap in Ethics education and training for accountants. Considering the junior auditors and the type of dilemmas they face, it would be interesting to study if sustained discussions on procedural dilemmas would enhance their ethical reasoning and motivate / prepare them to deal with ethical dilemmas in an appropriate manner.

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Research Objectives The objectives of my study are (1) to study the effect of discussions both, within and between, different hierarchical levels; over the auditors’ ethical decision-making abilities and, (2) to explain that auditors at different hierarchical levels face dilemmas of varying ethical importance and that the discussion of these dilemmas has an effect on the overall ethical decision-making abilities of the auditors.

Research Questions 1.

What are the variables that effect ethical decision-making within audit teams? Can these variables be explained and ranked on the basis of the overall influence they have on ethical decision-making ability within audit teams?

2.

Are normative models of auditors’ internal discussions of ethical dilemmas different from the pragmatic models?

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Can discussions have an influence on the ethical reasoning abilities of auditors?

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Is there a difference between the dilemmas faced by auditors at different hierarchical levels and if so, would their subsequent discussions lead to a change in the ethical decision-making of Auditors?

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Does facing different kind of dilemmas lead to different perception of ethics?

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Considering that members of a particular hierarchy reason either at pre-conventional, conventional or post-conventional levels: do discussions within the same hierarchical level increase or decrease ethical reasoning?

The first research question would be explicitly dealt with in article 1 and it would form the basis for working on the other research questions. With my second article, I intend to answer the second and third research questions and argue theoretically the validity of the fourth research question. Having the answers to these four questions would help in setting up the final article, which uses empirical methods to find answers to the remaining research questions while also justifying the other questions in a controlled experimental set-up.

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Structure With my thesis, I intend to close the loop on research in auditing ethics, by reviewing varied topics with specific and precise research questions. Although, I have a fair idea of the structure of my thesis, some of its content and research questions are still loosely defined. The current content of the thesis proposal contains some of my ideas but it could change as work on my project. The thesis is divided into three different parts Part I, II and III. Part I consists of three chapters and has all the background information about the thesis while Part II contains the three articles I’ve planned as a part of my study and, the final part consists of the conclusion of the results. The chapter one contains the introduction, topic, significance, research objectives, research questions, structure of the thesis and time frame for my study. The second chapter relates to the theoretical background and the key concepts. In Part II, I introduce and articulate my ideas in the form of papers. While I have started working on one of the articles, because of their tied in nature, some of the literature review is expected to be the same for all the articles. Of the three planned papers, the first paper would be a metaanalysis of the literature; the second paper would be completely theoretical and would form the foundations for the following empirical paper. The idea is to use existing theory to establish the concepts and introduce new ones which will be tested in the final paper.

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Chapter 2: Key Concepts This section attempts to briefly state the two key concepts that will be used in the making of the three articles, these key concepts are not an exhaustive list of important studies and does not rule out the possibility of other suitable concepts being included during the due course of the thesis preparation. The key concepts will be dealt with explicitly in the thesis and would contain detailed explanations about some of the important concepts and various studies with in this specific research area. The two key concepts that will be used in the thesis are:

Cognitive Moral Development The thesis has its foundations in the Cognitive Moral Development theory and tries to add another dimension to the already existing wide variety of studies within this particular research area. The use of cognitive moral reasoning in Accounting can be attributed to the works of Piaget (1932) and later on the works of Lawrence Kohlberg (1973, 1976) and it was developed further by Rest (1986) who put forth the four component model and the DIT to measure an individuals level of moral development. The majority of studies of auditors’ ethical reasoning process have been grounded in Kohlberg’s (1979) theory of cognitive development. Kohlberg postulates that cognitive structures and interpretative processes precipitate an individual’s ethical choices. Kohlberg's justice-based stage model of moral development, the Cognitive Moral Theory (CMT), identifies three levels of moral judgments. Each level contains two stages. The pre-conventional level focuses on self, the conventional level focuses on group, and the post-conventional level focuses on inner self. He also suggests that individuals’ progress through the stages as their reasoning abilities grow more sophisticated. My thesis will be based on the assumption that Kohlberg’s theory hold’s good in a real-time discussion of ethical dilemmas by the auditors’ and in effect test’s the positive and negative influences on Kohlberg’s findings.

The three articles will be written in a progressive manner with the preceding article forming the backbone for the other articles to come; more about how I intend to achieve this is discussed in the individual articles. The final article will be an experiment and would entail the use of DIT as its primary assessment tool. While the DIT has been an important addition to the cognitive moral developmental research area, there are other aspects of it that warrant

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a closer look. For example, factors like ethical intensity, sensitivity, orientation, motivation, integrity, professional and organizational commitment, personal values, ethical culture, age, work experience and education have significant influence on the overall ethical development of auditors.

Group-Decision Making and Discussions Auditing is a team phenomenon, although different tasks are carried out by different individuals, decision-making in an audit environment is dominated by group-decisions (Bamber et. al 1995; Ashton et. al 1985). Further, it has been stated that, hierarchical review is the mode of group decision-making during the fieldwork stage of auditing where as the planning and reporting stages involve peer group decision-making (Solomon et. al 1987). It has also been suggested that groups make superior decisions (Ashton et. al 1985). However as reported by Dukerich et. al 1990, group decisions are often influenced by the leaders or the people who speak the most and by people who have a more principled reasoning. Haan (1975) studied the effect of social interaction on moral reasoning, the effect of type of reasoning and leadership on group decisions (Dukerich et al 1990) and more recently influence of impressions on interactions and discussion timing and familiarity as part of quality control mechanisms (Suzuki et al 2007; Favere-Marchesi 2006) there has not been much research on the effects of peer discussion on the auditors’ professional judgments. Of the more interesting papers, compared the moral reasoning abilities of groups and individuals on the DIT (Nichols & Day 1985), suggested that auditors’ moral reasoning is integral to professional judgment (Gaa 1993) and postulated that there are different kinds of discussions viz. prescriptive and descriptive (Thorne 2001). The research questions of my thesis stem from the studies by Dukerich (1990) and Thorne (2001). The motivation of these research questions lies in finding out how do audit teams resolve ethical dilemmas and if discussions are the means to this end, then how does agreement or disagreement among auditors effect their overall reasoning abilities.

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Article 1: Ethical Decision-Making Ability of Auditors: A Meta-Analysis of the effect of Group Decision-Making and Audit team attributes The code of ethics helps the auditors to attain high standards of professionalism, performance and also to meet the public interest requirement. Research has also shown that auditors easily recognize ethical issues covered by the code. The code appears to reduce the ethical ambiguity and assist the auditor’s in recognizing ethical issues explicitly stated in the code (Douglas, Davidson, and Schwatz, 2001; Dreike and Moeckel, 1995; Claypool, Fetyko, and Pearson, 1990). However Douglas et al (2001) suggest that the code also limits the auditors’ perceptions of what is and what is not ethical, as ethical issues not explicitly covered by the code are less likely to be identified. This is where the principle based codes must take over and assist the auditor in ethical decision making. Auditors’ technical knowledge is essential to their expertise, more so in grey situations, where the rules are not clear, auditors’ ethical reasoning determines the overall quality of the auditors’ professional judgment (Gibbins and Mason, 1988). Auditors’ ethical reasoning consists of the fundamental principles of the auditing profession, viz: integrity, objectivity, professional competence, skepticism and due care (Thorne, 1998; Jones and Ponemon, 1993). The conclusion to be drawn out of this is: auditors’ must give their opinion un-altered by selfinterest and only after recognizing the potential impact of the judgment on the welfare of the stakeholders (Ponemon and Gabhart, 1994).

Objective and Research Question Although research in this domain has been extensive, there have been gaps in the extant literature. The aim of this paper is to review the empirical literature in order to identify and assess the variables that influence the ethical decision-making ability of the auditors with particular emphasis on group decision-making and certain contextual factors like peer influence and discussion of dilemmas with in an audit team. Although there have been few literature reviews on the ethical decision-making process, meta-analytical procedures have

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been scantly used. Although literature reviews are useful in summarizing, critiquing the vast body of literature and in spelling out the need for further research, meta-analysis helps to gather all the quantitative data and derive statistically valid conclusions in a specific area of inquiry. Meta-analysis also helps in dealing with the sampling errors and the measurement errors that may be present in similar studies with conflicting results.

Prior Literature The literature in ethics is divided into two realms – normative ethics and descriptive ethics. Normative ethics is said to be grounded in moral philosophy and guides individuals as to how they should behave. Critics of the normative models raise objections on the basis that normative models often assumes absolute truth about appropriate decision making and this led to the development of the positive models or the descriptive (empirical) models, which describe what actually happens in the organization and also predicts an individual’s actual behaviour. Because of the draw-backs of the normative model, researchers have favoured the descriptive models both for research and review. The starting point for model could be pinned to the Rest’s (1986) four component model for ethical decision-making. The four components are: identifying moral nature of the issue, making a moral judgment, establishing moral intent and engaging in moral action. All the literature reviews so far have taken these four components as their yard-stick, however, the researchers have divided the dependent and independent variables (constructs influencing the four component model) into three categories viz: 1. Individual Factors, consisting of variables: Age, Awareness, Gender, Political Orientation, Cognitive Moral Development, Locus of Control, Nationality, Job Satisfaction, Religion, Conflict of Interest, Bias, Character, Organizational Commitment, Personal Values, Commitment, Machiavellianism etc. 2. Contextual / Organizational Factors, consisting of variables: Code of Ethics, Ethical Culture / Climate, Industry Type, Rewards & Sanctions, Training, Peer Influence, Job Context (Time & Budget Pressures), Organizational Values, SOX etc. 3. Issue-Contingent Factors, consisting of variables: Magnitude of Consequences, Proximity to Harm, Temporal Immediacy, Concentration of Effect etc.

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The studies using the above mentioned variables have reported varying results for the same variables. For example, studies using gender have turned up mixed results: Some find females having higher DIT scores (Fleischman and Valentine, 2003; Weeks et al, 1999; Hill, Stevens and Clarke, 1998; Eynon et al, 1997; Shaub, 1993), while some find few or no significant results (Abdolmohammadi et al, 2003; Shafer et al, 2001; Thorne and Magnan, 2000; Schminke, 1997; Wimalasiri et al, 1996, Ponemon and Gabhart, 1990; Armstrong, 1984). This gives rise to the general questions: how was ethical behaviour measured? Where was the study conducted? And what was the methodology?

The same questions could be raised for other variables like education, work experience, employment and job satisfaction: Contrary to Kohlberg’s Cognitive moral development theory, some studies suggest that students have a higher DIT score than professionals or that managers and partners have lower DIT scores than staff and senior accountants (Wimalasiri, 1996; Ponemon, 1995), some found similar results but suggested that work experience and DIT scores were negatively related (Thorne and Magnan, 2003; Shaub, 1994; Ponemon and Gabhart, 1993) and that CPA’s scores are lower than that of similarly educated professionals (Ponemon and Gabhart, 1993; Lampe and Finn, 1992; Armstrong, 1987) while some studies have found no significant results, no relationship or a positive relationship between DIT scores and education, work experience (Bernardi and Arnold, 1997; Shaub, 1994; Ponemon and Gabhart, 1993). Narrative reviewing techniques cannot explain the wide range of results for the same dependent variable; hence it becomes imperative to conduct a meta-analysis. After looking at the results from the cognitive developmental research, it is important to question the objective of such a research: Is it important to observe and conclude who makes better ethical decisions or to show why does one make better ethical decisions?

Methodology In this paper, I intend to use the dependent variables of previous studies and reason as to what actually affects the ethical decision-making of groups / audit teams. The variables would be drawn from all the three factors that influence Rest’s (1986) four component model viz. Individual factors, Organizational factors and Issue-Contingent factors. However, emphasis would be given to the factors that affect team dynamics viz. Discussions, context

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of dilemmas, leadership Styles, personal values, organizational values, age, work experience, resolution of conflicts, education, job satisfaction, peer influence etc.

To start of this paper, a literature search would be done for all the studies examining the group ethical decision-making process, behavioural aspects of a team and the effect of discussions and context of the discussions. An electronic search would be conducted from the databases like: Business Source Premier and ABI/Inform, some of the narrative literature reviews (O’Fallon and Butterfield, 2005; Jones, Massey and Thorne, 2003; Loe et al, 2000; and Ford and Richardson, 1994) would be used as well. The meta-analysis would be conducted with the Hunter and Schmidt (1990) procedures. Each observed correlation would be weighted by that study’s sample size to provide a weighted mean estimate of the population correlation, and then the standard deviation of this estimate across multiple studies is computed.

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Article 2: A Model for Audit Firm’s Internal Discussions of Audit Issues with emphasis on Ethical Decision-Making One of the first models on ethical decision-making was proposed by Rest (1979); this model of ethical action is grounded in cognitive-developmental perspective and is applied to describe the key components of the ethical decision-making process in a management context. The model consists of four components: the first component identifies the ethical dilemma. The basis behind this first component is the awareness that this situation would affect the welfare of others. The second component is about Ethical Judgment and deals with evaluating outcomes that might occur for any given situation. The third component talks about intention to act ethically and deals with comparing the right choice with other available action choices. The final component talks about carrying out the ethical action. There have been other models that have been developed from Rest’s model (e.g., Lampe and Finn, 1992; Jones, 1991; Trevino, 1986) however all these models along with Rest’s models have failed to show that one component leads to the other. While researchers are still striving to show the causal relationship between all these four components, it is relatively easy to predict the attributes influencing these components and perhaps theoretically explaining these causal relationships via some common attributes.

Objective The purpose of this paper is to come up with a normative model for internal discussions of ethical dilemmas, compare it with the extant literature and other models to pin-point the influences on this model and finally to come up with a more practical model. The aim of drawing up the practical model would be to show the black-box of internal discussions and argue that any change at this micro level would upset the ethical equilibrium of the audit teams.

Prior Literature Ethical Decision-Making There are two aspects of ethical decision-making that have an effect on both the organizational and individual levels and warrant a closer look viz. moral reasoning and

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moral behaviour. The influences on these two aspects have been explained by Trevino’s (1990) paper about “Bad apples in bad barrels”. Members of an organization referred as bad apples are attributed to be unsavoury individuals, lacking in some personal qualities, like moral character. It further suggests that measures like locus of control, economic value orientation, political value orientation, Machiavellianism and cognitive moral development to be significantly related to ethical decision-making behaviour. The bad barrels argument suggests that, something in the organization poisons otherwise good apples. Some of the attributes that make such an impact on the organization are: unethical behaviour in competition, management’s result orientation, lack of reinforcement of ethical behaviour and peer behaviour. This also brings into the picture the role of rewards for ethical behaviour and sanctions against unethical behaviour. This equates ethical behaviour to conformity and adherence of the organizational rules and policies.

Social Learning Theory and Ethical Culture The issues plaguing internal discussions of ethical dilemmas can be further enhanced by looking at the social learning theory. This theory suggests that vicarious learning influences behaviour through its influence on observer’s outcome expectancies (Bandura, 1986; Mans and Simms, 1981). The observation of others being reinforced for specific behaviours, both ethical and unethical, arouses observers’ expectancies that they will be similarly treated. Add to this the issues with familiarity between the members of an audit team. Having bad apples and bad barrels in an audit team will adversely affect their ethical decision-making ability. Studies on ethical climate or culture of an organization have revealed similar conclusions. Ponemon (1992) finds a negative association between audit experience and auditors’ DIT scores as a result of the selection-socialization process of accounting firms. His two-year longitudinal survey of staff accountants, seniors and managers reveals that staff-level auditors with higher DIT scores were more likely to be promoted as senior auditors. However, senior-level auditors with lower DIT scores were more likely to be promoted to a manager. The results suggest that audit firms weed out those individuals who do not conform to the firm’s ethical culture on the basis that managers favour for promotion of those seniors with comparable DIT scores. This kind of ethical culture in audit firms along with the other

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attributes discussed above could reduce auditor’s ability to formulate better ethical judgments.

Game Theory The normative model of internal discussions within audit teams can also be looked at from a game theory perspective. Since the object of enquiry is an audit team, it becomes necessary to understand what exactly a team is, what is its purpose and how to create a successful team? Holmstrom (1982) and Rasmusen (1987) suggest that a team is a set of self-interested employees on the vector of whose efforts output depends. This team only retains the interdependence aspect and responds wholly individualistically to incentives while not retaining any group identification. Another definition on a team suggests that a team is a set of agents serving a common objective (Bacharach, 2006). Only that this team needs rules to be designed to inform each agent what action to be taken for each possible observation they make. In game theory, Sugden and Gold (2007, 1993) have put forward the theory of teams in a more positive way yet has an overlap with the other two definitions. They argue that team reasoning is fundamental in the functioning of an organization and that group identification is the basic proximate mechanism for successful human group activity.

They further suggest that team reasoning does not end with working out the best combination. It is important to note which bit of this combination pertains to a particular individual. A team consists of a set of agents who have alternative action options and a common ranking, by the agents, of the profiles made up by these alternatives. These situations are called coordination contexts where the set of agents, set of feasible profiles of options and the shared ranking combine to form a simple coordination context. The shared rankings do not necessarily reflect the own goals of the agents but they draw their motivation from it. For example, in an audit scenario, the auditors are encouraged to pursue the objective of auditing not by internalizing these objectives but by the fear of sanctions or possible rewards. The audit team are employees of a certain audit firm, the financial and the professional incentives drive them to pursue the firm’s goal and pursuing it is only instrumental to their own ultimate goals. There are different causal processes which

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determine the choice of agents in a simple coordination context and these processes are called choice mechanisms.

For a team to be called a team, the decisions of its members, reached through any mechanism, must ensure that their common goal is achieved. In such a team, the director (audit senior / partner) identifies the agent (audit staff) and tells the agent to do their component (assigns audit tasks) which the agent executes. There is a three-stage process viz. computing, identifying and instructing. If everyone in the team is governed by this simple process, the goal expressed initially is achieved. But team reasoning (and audit) is a do-ityourself direction, and auditing a much more complex phenomenon. In other words, the agent computes their task (auditors identify ethical dilemmas), next the agent locates the component under their control (evaluates best possible actions) and reasons that they should perform their component (intends to act and acts ethically) because it is the component directly under their control. The team thinking literature in game theory also suggests that there are two separate aspects of what a team reasoner does: one is to reason at the group level and the other is to reason as an individual. The first step of team reasoning calls for a simulation of peers and suggests that the first step should be to ask oneself, “what would the director have me do?”

Game theory could be used to explain how the normative model for internal discussions within an audit team would look like and while all the attributes influencing group decisionmaking could explain the deviations from the normative model and lead to a more commonly observed model of discussions. A normative model for discussions among peers would start with the identification of an ethical dilemma by a staff accountant, who in conformity with the team reasoning literature, obtains the evidence and evaluates the same. This then leads to the formulation of an individual and personal initial opinion. After informal discussions with peers on the group level there could be two out-comes. The first could be a dis-agreement, this would lead the auditors to re-evaluate their evidence and reformulate their initial opinion. The second outcome could be an agreement, this could lead to the formulation of an interim opinion, which could be similar to that of the initial opinion and this finally leads to formal discussions with the audit seniors / managers.

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According to the studies on discussions and the mode of reasoning, it is suggested that a more prescriptive form of reasoning among peers increases the ethical decision-making ability of the auditors (Thorne, 2001). So it can be said that the interim opinion that the audit staff forms, after discussions with their peers, would be strong in reasoning and content. The philosophy behind these informal discussions is to think meta-ethically and at a group level. The formal discussions that follow are supposed to be equally important as quite often the audit-staff are not expected to have the decision-making ability in their hands i.e even though they have moral intentions; their want to act on these moral intentions depends on the general satisfaction of the audit-seniors / managers with their mode and level of reasoning. If the senior is adequately satisfied then the audit-staff formulates a final opinion with the instructions from the audit seniors to act upon these final opinions. In case of a disagreement, the audit-staff then goes back to re-evaluating their evidence and re-formulating their initial opinion and so on.

Now considering the debate over who has better ethical ability i.e the audit-staff or the audit seniors, it will be interesting to observe the kind of role discussions play in the ethical decision-making ability of an audit team. Considering that the audit-staff has the better ability, a disagreement with superiors could result in a reduction of ethical decision-making ability. While an agreement would reinforce the whole process and strengthen the staff’s ethical decision-making ability. Through this paper we try to predict these behavioural patterns while using the normative model and then add to it the influences (positive and negative) over the group dynamics and observe whether this could explain that basic problems plaguing the audit profession are not just it’s processes but also in the individuals running these processes. Hence it becomes important for the individuals involved with these processes to understand their role.

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Figure 1: Normative Model for Audit Firm’s Internal Discussions of Ethical Dilemmas

Audit Staff

Identifying Ethical Dilemmas

Evidence Collection & Evaluation

Formulation of an Initial Opinion Informal Discussions

Agreement

Formulation of an Interim Opinion

Peers Disagreement

Formal Discussions

Re-evaluate Evidence

Audit Senior / Manager Disagreement

Agreement

Formulation of the Final Opinion

Ethical Actions

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Article 3: The Role of Incremental Discussions in Auditors’ Moral Reasoning

Abstract: Auditing like some other professions cannot be performed by a single individual. Generally the audit process is carried out by a team of auditors, either of different hierarchical levels or of the same hierarchical level. The interactions between and within different hierarchies brings into picture, the complex levels of communications inherent in any audit process. Communication takes the form of instruction, supervision, review, reporting and discussions. It has been shown that discussions play an important role in the formulation of the auditors moral reasoning (Thorne 2001; Bamber et al 1995; Solomon 1987)) and also that the type of reasoning and leadership attributes have a bearing on the outcome of group discussions (Dukerich et al. 1990). This study aims to show that auditors at different hierarchical levels face different kinds of dilemmas and the subsequent discussions of these dilemmas both within and in between hierarchies, influences the ethical reasoning abilities of auditors. From this study we aim to bring out the causal relationship between dilemmas, discussions and ethical reasoning abilities of auditors. The results could explain the highly centralized nature of decision-making with in audit firms and effects of such a set-up on the ethical reasoning abilities of audit teams.

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Introduction Like many other professions, auditing too is a team based profession. What sets auditing apart from other professions is the dynamism in its communications and also its situational setting. Consider an audit team conducting an audit of the financial statements of a client, the complexity of communication faced by such an audit team is worth taking note of. Not only do the auditors have to communicate with the client but also there would be internal communication within the team and in particular cases, with other audit firm members (Solomon 1987). The complexity of this situation is further appreciated by the expectations placed on the role of an auditor, in a stakeholder setting. The accountants are subject to external professional and judicial review of their decisions which make these communications all the more important (Gaa 1992). Communication plays an important role in recognizing, understanding, clarifying and resolving ethical / moral dilemmas. Communication, both inter and intra, is done through, management representations, clarifications, negotiations, discussions, review and supervision. The objectives of this paper are three-fold, first we bring to light the different types of ethical dilemmas faced by auditors and understand its impact on the overall ethical decision making ability of auditors. Secondly, we study the make-up of ethical perception at different hierarchical levels with in an audit firm and establish the influence of ethical dilemmas on ethical perceptions. And the final objective, places emphasis on the role of discussions between the audit team members and superiors in the audit firm while controlling for ethical dilemmas and perceptions.

There seems to be a general consensus that ethics training should start in the universities and after the scandals at the start of this century, this consensus has been overwhelming. As a part of this consensus, researchers have focused quite a lot on different techniques (Ferrell, 2005; Nelson et al, 2003) of ethical training and also on the ethical reasoning abilities of accounting students with emphasis on the factors influencing these reasoning abilities (Chan et al 2006, Eynon, 1997). However, there have not been studies explaining whether teaching ethics in a class-room setting would actually translate to training in ethics in a real audit setting. We can only postulate that accounting students with higher ethical reasoning ability would act ethically in an audit setting. Thorne (2001) suggests that principled reasoners would make more sophisticated and nuanced ethical and moral decisions but whether they

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do so will depend on their own convictions, as well as on their interpersonal and situational context. This shows that there is a vast gap in between theory and practicality. Students might make better decisions in a class-room, however practical that particular case maybe. However the pressures, opportunities and threats in a real-time audit setting might be enough to mitigate the prior ethical training in the class-rooms.

The audit firm consists of different hierarchical levels viz. junior (staff) accountants, senior accountants, managers and partners, when a team of accountant’s is selected for an audit, this hierarchy is maintained. The junior and/or senior accountants are the foot soldier’s and do the maximum work on an audit. Among the different hierarchical levels they are exposed to the client the most; however they face the least amount of risk. In other words, the risk they face is not direct; perhaps their risk might be more internal than external. The meaning and importance of this statement can be judged from the explanations offered by Kohlberg in his cognitive moral development theory (1976). According to Kohlberg, people can be classified into 3 stages of moral reasoning, pre-conventional, conventional and postconventional levels, the explanations of which have been offered later in the paper. Researchers have categorized staff accountants to be in the first schema of conventional level, where their actions are governed by their perceptions of breaking rules and punishment avoidance. In other words, their perceptions might be influenced by the rules laid down by their superiors rather than the covenants of the code of ethics of their accounting regulatory bodies.

The role of these junior accountants in ethical decision making is perhaps non-existent. They are given certain criteria’s for the audit and are expected to report back anomalies of these criteria’s, after initial discussion with clients throws up un-satisfactory answers. Dilemmas arise when there is disagreement between the client and the auditor and as the audit staff is subject to constant review by their superiors (Gaa, 1992). The decision making role is taken out of the hands of the junior accountants after they report such dilemmas to their superiors. So it maybe said that, junior level staff may face ethical dilemmas whose consequences are more internal in nature, even if they do face dilemmas with far reaching external consequences: the decision making role may not be with them, the kind of dilemmas faced

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by them may not even be ethical: perhaps we could call them procedural dilemmas. The best example for a procedural dilemma would be under-reporting of time in an audit budget. This kind of a scenario is most likely to have an effect on the perception of ethics by the junior level staff. It would be interesting to study whether this perception changes as we move up the hierarchical levels of an audit firm, and also whether this perception changes with the different kinds of dilemmas that auditors face.

The final but more important part of this paper deals with the intention/motivation to act ethically. As suggested earlier, the junior auditors have to report ethical dilemmas to their superiors: this brings forward the role of communication in ethical decision making. More specifically, it would be interesting to observe the role of discussions in ethical decision making. Gibbins and Mason (1988) suggest that auditors mostly interact with three to five other individuals before making a professional judgment. On the basis of this it could be inferred that auditors’ from one hierarchical level interact both within (inter) their hierarchical level and with other hierarchical levels (intra). Two important studies have captured the basic premise of discussions and reasoning level among groups (Dukerich et al 1990) and the context of discussions and mode of reasoning between auditors (Thorne 2001). These two papers form the basic foundation of my ideas and will be discussed at length later in the paper. In brief, Dukerich et al (1990) suggest that more principled reasoning leaders impacted the group and individual performance benefitted from group experience. However, this study fails to show the innate differences between discussions among different hierarchical levels, for ex. what happens when a more principled junior auditor discusses an ethical / procedural dilemma with a superior with varied reasoning abilities?

Thorne (2001) on the other hand studies the context of discussions with peers. She suggests that there are two types of discussions, prescriptive: where accountants discuss what should ideally be done in case of a dilemma and deliberative: where accountants discuss how actually the dilemma would be solved. The results indicate that, auditors have higher moral reasoning scores after prescriptive discussions and lower moral reasoning after deliberative discussions. Just like Dukerich’s study, she too fails to show the effect of discussions within different hierarchical levels. Another gap in her study that we intend to address in this paper

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is, what happens when auditors with different ethical perceptions, discuss different kinds of dilemmas with either the same hierarchical level or different hierarchical levels?

With this paper, we intend to show that discussions can be incremental or decremental in terms of ethical decision-making ability. Let us consider, a junior level auditor discussing an ethical dilemma with a superior. Let us assume, on the basis of Thorne’s study, that the junior auditor already has formulated what is supposed to be done through introspection and discussions with peers (prescriptive discussions) and with reference to Dukerich’s study, he is a principled reasoner. When the discussion with the superior takes place and the solution is different than what the junior had hoped for, would this scenario diminish the ethical decision-making ability of the junior auditor? The implications of this study are three-fold, first we try to add other dimensions (perceptions, dilemmas and hierarchical levels) to the research in auditing ethics. Secondly, we emphasize on a pervasive ethical training program for different hierarchical levels instead of a one type fits all program. Finally, we aim to throw light on the road-blocks for development of ethical standards within audit firms.

Prior Research Group-Decision Making The discussions that take place during various meetings and reviews among the audit team and or among the partners have a significant influence on the final outcome of many debatable ethical dilemmas. Group decision-making plays a key role in most of the critical decisions that the auditors make (Rich, Solomon and Trotman, 1997). Auditing is a team phenomenon, although different tasks are carried out by different individuals, decisionmaking in an audit environment is dominated by group-decisions (Bamber et. al 1995; Ashton et. al 1985). It has been further stated that, hierarchical review is the mode of group decision-making during the fieldwork stage of auditing where as the planning and reporting stages involve peer group decision-making (Solomon et. al 1987). It has also been suggested that groups make superior decisions (Ashton et. al 1985). As reported by Dukerich et. al 1990, group decisions are often influenced by the leaders or the people who speak the most

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and by people who have a more principled reasoning. Considering this, the roles different hierarchical members play in such a decision-making process becomes debatable.

Prior research on group decision-making and discussions has focused exclusively on the technical component of auditors’ judgment and has not investigated the effect of discussing ethical dilemmas on auditors’ professional judgment (Thorne, Massey and Jones, 2004). The other notable point of research in group-decision making is that despite the use of multipleperson decision-making methods in audit practice (Ashton et al. 1985) much emphasis has been placed on individual auditor judgments and the review process (Libby and Trotman, 1983; Messier and Tubbs, 1994) and there has been little research on the interactions within peer groups. In a related study about peer group interaction, Schlaefli, Rest and Thoma (1985) studied the relationship between the amount of time spent on moral education and its effects on the moral judgments. They found that if the moral education program lasted for more than a few weeks and it involved interactive exchanges with peers, the natural development of moral judgment speeds up. This suggests that moral education need not be theoretical discourses but could be a more practical method like, interaction among peers on a sustained basis, to have a lasting effect on moral development. However the effect of interactions with superiors and subordinates on the overall moral development of individuals remains to be seen.

Cognitive Moral Development Cognitive developmental theory assumes that an individual’s conception of ethics and morality which is indicated by their level of moral development would affect the way they resolve moral dilemmas (Thorne and Hartwick, 2001). Cognitive developmental research seeks to determine how people think about moral dilemmas; instead of looking into the decisions of they make (Nichols and Day, 1982). This type of research seeks to understand the processes people use to resolve the moral dilemmas. Moral Reasoning refers to the cognitive skills and concepts an individual utilizes in solving moral problems. The moral judgment development of individuals often changes over a period time and proceeds in a sequential manner (Kohlberg, 1973), which implies that junior audit staff would on the lower levels of moral judgment development than the senior audit members. Contrary to

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this, there is empirical evidence which suggests that moral reasoning abilities are higher in staff and supervisory levels and decreases in the manager and partner ranks (Ponemon, 1990). In view of these rather contradicting studies, it would be interesting to observe what happens when auditors with different ethical reasoning abilities and from different hierarchical levels discuss audit issues with ethical overtones. The motivation for this paper comes from two other studies within the cognitive moral developmental research area viz:

Dukerich, Nichols, Elm and Vollrath (1990) This study is one of the important and few studies to have examined the effects of discussion on auditors’ moral reasoning. Dukerich et al. examined the effect of group discussions on the resolution of moral dilemmas contained in the Defining Issues Test. The showed the impact of social context on the methods of reasoning employed by the members of a group. Their results showed that group decisions are often influenced by the leaders or the people who speak the most and by people who have a more principled reasoning, even though all the members of a particular group had more or less similar levels of moral reasoning. The results also showed that the participants who followed group discussions resolved moral dilemmas at a significantly higher level of moral development than they had used before. In other words, an improvement and a regression was observed in different participants. The participants with the lowest pre p-scores appeared to have benefited the most from the group experience. While the more principled reasoners showed deterioration in their performance as opposed to less principled reasoners. This gives strength to the postulate that: when audit staff, with lower levels of ethical reasoning ability, discusses ethical dilemmas with audit seniors of higher ethical reasoning ability, the audit staff’s overall ethical reasoning ability increases and the opposite happens for the audit seniors.

Thorne and Hartwick (2001) Thorne and Hartwick (2001) suggest that there are two different kinds of discussions viz. prescriptive and deliberative. Prescriptive discussions are the discussions in which group members discuss about how an accountant ideally should resolve a moral dilemma and deliberative discussions are the ones in which group members discuss how an accountant would actually resolve moral dilemmas.

Their results show that the auditors’ moral

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reasoning increases after prescriptive discussions with peers and decreases after deliberative discussions with peers. It is inferred from these results that prescriptive discussions are the way to go in auditors’ moral reasoning. The most interesting question that arises at this point is: Does increased moral reasoning lead to an increased motivation to act morally on a sustained basis? Also, it appears that there are two different kinds of action sets available to auditor’s viz. what should be done and what would be done.

Thinking practically and on the basis of previous research on group decision making, it would be interesting to observe the kind of dilemmas faced by lower level audit team members. Generally, audit team members face more of the procedural kind of dilemmas e.g. Under-reporting time etc, although these are dilemmas that may not bear a significant influence on the outcome of the audit. The tougher or higher level dilemmas, read Moral dilemmas, are faced by the higher level audit staff. In such a scenario, what would be the role of discussions? Do discussions on the procedural dilemmas help the junior audit team members in preparing for the tougher dilemmas they would face as they grow up the professional auditing ladder? Also, does a difference of opinion during discussions, prescriptive or deliberative, influence the ethical reasoning abilities of auditors?

Key Concepts Use of Cognitive developmental approach in Auditing The use of cognitive moral reasoning in Accounting can be attributed to the works of Piaget (1932) and later on the works of Lawrence Kohlberg (1973, 1984) and it was developed further by Rest (1986) who put forth the four component model and the DIT to measure an individuals level of moral development. Cognition is termed as, “what is known by an individual in a subjective sense” (Chen & Olson 1989), and it contains both the ethical and moral aspects within it. And as we know, Morality is an individual’s definition of what is good or right and Ethics is a systematic attempt to make sense of an individual’s social and moral experience, in such a way, as to determine the rules that govern human conduct, the values worth pursuing and the character traits deserving development in life (DeGeorge). Aristotle in his treatise on Nichomachean Ethics suggests that any work on Moral Philosophy consists of two judgments viz. Substantive moral judgments and judgments

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about such substantive moral judgments. While referring to substantive moral judgments as Ethics, which are about the effect that certain men or types of actions are good or bad, right or wrong etc. He calls the Judgment on substantive moral judgments as meta-ethics, to the effect that they are or are not factual or objective or prescriptive etc and that the concepts they use are to be elucidated in such and such way and the logic that binds these concepts in such and such manner. The relevance of this statement comes in light of the kinds of discussion suggested by Thorne (2001) and the emphasis on moral development placed in Kohlberg’s work.

The cognitive developmental approach has been established on the foundations of moral philosophy and behavioural psychology. Kohlberg (1979) identifies the developmental stages of an individual’s moral reasoning. He also suggests that individuals’ progress through the stages as their reasoning abilities grow more sophisticated. Kohlberg's justicebased stage model of moral development, the Cognitive Moral Theory (CMT), identifies three levels of moral judgments. Each level contains two stages. The pre-conventional level focuses on self, the conventional level focuses on group, and the post-conventional level focuses on inner self. He developed a personal interview procedure to measure the stages of cognitive moral development. Based on Kohlberg's Cognitive Moral Development Theory, Rest (1979) used the Defining Issues Test (DIT) to measure ethical reasoning ability. The difference between Kohlberg's research and DIT research is in the method of data collection. Kohlberg used qualitative method to do the research; Rest used a quantitative method to analyze moral reasoning and to ascertain a person's level of moral maturity on the Kohlberg scale.

Essentially, Kohlberg suggests that individuals who possess lower levels of ethical reasoning ability follow rules in order to avoid harming themselves and in contrast, individuals capable of higher moral reasoning act in accordance with self-chosen ethical principles based on justice and human dignity. The implication of this study would add one more dimension to Kohlberg’s original model. The dimension comes straight out of the Enron fiasco i.e., “irrespective of the level of ethical reasoning ability, auditors choose to act either in a

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positive way or a negative way”, the reasons for this could be survival, recognition or retention.

Defining Issues Test As previously stated, the Defining Issues Test was developed by Rest (1976), it use a case study technique to assess the moral reasoning levels of the subjects. The DIT presents the subjects with certain Ethical Dilemmas (3 case or 6 case), each choice is assigned to a different stage of moral development, the subjects are then asked to choose the ethical arguments they consider as important. It is assumed that the subjects would choose the arguments corresponding to their personal level of moral development. The DIT then measures these arguments on the basis of the percentage of the preferred arguments that are at the highest (principled) level of reasoning and this measure is called the P-score. In other words, the higher the P-score the higher is the level of moral reasoning in an individual. The six different stages are described as below:

Stage 1: Represents actions in conformity with obedience for the fear of punishment or want of a reward.

Stage 2: Represents considerations that focus on the direct advantages to the actor and on the fairness of simple exchanges of favor for favor.

Stage 3: Represents considerations that focus on the good or evil intentions of the parties, on the party's concern for maintaining friendships and good relationships, and maintaining approval.

Stage 4: Represents considerations that focus on maintaining the existing legal system, maintaining existing roles and formal organizational structure.

Stage 5A: Represents considerations that focus on organizing a society by appealing to consensus producing procedures (such as abiding by the will of the people), insisting on due process (giving everyone his day in court), and safeguarding minimal basic rights.

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Stage 5B: Represents considerations that focus on organizing social arrangements and relationships in terms of intuitively appealing ideals (but which may lack a rationale for gaining general support).

Stage 6: Represents considerations that focus on organizing society in terms of ideals that appeal to a rationale for eliminating arbitrary factors and that are designed to optimize mutual human welfare.

This score is based on the relative importance that a subject gives to items representing stages 5 and 6, principled moral thinking (Rest & Narvaez, 1994). In a typical 3 case DIT, the score ranges from 0 to 95 and is derived from the simple sum of scores from stages 5A, 5B, and 6, which is then converted to a percentage. A higher score indicates higher moral judgment development. Rest explains that the P-score "represents the degree to which a "

person's thinking is like that of moral philosophers (Rest, 1983). It has been found that, group discussions led to a general upward revision of the subjects’ levels of moral reasoning while resolving the moral dilemmas of the DIT (Dukerich et al. 1990), the use of DIT to gauge the level of moral reasoning for individuals of different hierarchical levels would be the most appropriate method.

Connecting Moral Reasoning, Motivation & Actions As seen in the results of Dukerich et al. 1990 and Thorne 2001, principled reasoning leads to a higher level of moral reasoning among individuals. However, the problem with principled reasoning is that, the individuals must actually be able to recognize appropriate principles and apply them to get the optimal result (Dun et al. 2003). Thorne 2001, suggests that principled reasoners can make sophisticated and nuanced ethical and moral decisions as they cognitively possess more moral forms of reasoning, but whether they will actually follow their decisions depend on their own convictions, interpersonal and situational context. Empirical research indicates that there exists a moderate relationship between an individuals’ level of moral development and his or her moral actions (Blasi 1980; Thoma et al. 1991). These statements very clearly explain the moral reasons for the latest accounting scandals

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and also throw light on the gap in Ethics education and training for accountants. Considering the junior auditors and the type of dilemmas they face, it would be interesting to study if sustained discussions on procedural dilemmas would enhance their moral reasoning and motivate / prepare them to deal with moral dilemmas in an appropriate manner.

Hypothesis Development Incremental and Decremental Discussions: Across Hierarchies As seen in the studies by Thorne (2001) and Dukkerich (1990), discussions have an important role to play in ethical decision making. While it has been stated that engaging in prescriptive discussions more than deliberative discussions would increase an auditor’s moral reasoning abilitiy, it remains to be seen if discussions have an incremental or a decremental effect of moral reasoning abilities. Gibbins and Mason (1988) suggest that majority of auditors interact with three to five other individuals while making professional judgments. Not all auditors would have the same perception, notion and answer to any ethical dilemma, their discussions may not always end in agreement. Once an auditor, discusses (prescriptive or deliberative) his dilemma with these three to five other auditors, he may have a fair understanding of the required action and also of his own stance regarding the dilemma. This helps the auditor to check whether his responses are in line with either his own set of ethics, ethical standards of the profession and / or both.

Looking at this scenario from a Utilitarian point of view, it can be argued that individuals make the choices which maximize their happiness, satisfaction or pleasure. It should be noted that, taking a Utilitarian stance is quite different from exhibiting ethical egoism, in that the individual is merely behaving in accordance with certain self-drawn principles of morals and is not driven by self-interest. However, in the light of the relatively recent scandals and frauds, the role ethical egoism plays in the ethical behaviour by auditors would be worth observing, especially among the higher hierarchical levels. This stance of utilitarianism is further enhanced by research in social psychology and particularly by the theory of motivated reasoning. According to Kunda (1990), motivation affects the moral reasoning through reliance on a biased set of cognitive processes, i.e. strategies for accessing,

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constructing and evaluating beliefs. There is also considerable evidence that people are more likely to arrive at the conclusions that they want to arrive at, thereby drawing self-serving conclusions not because they wanted to but because these conclusions seemed more plausible. The effect of social interaction on the moral reasoning abilities of individuals has been consistently reflected in social psychology research. Some researchers have found that social interaction results in increased preference for more moral actions (Alker and Kogan, 1968) while others found a contrasting result and suggested that social interaction results in increased preference for immoral actions. (Myers, Schreiber and Viel, 1974).

From Thorne’s study, we infer that prescriptive discussions generally take place between peers and deliberative discussions take place across the hierarchical lines. Considering the emphasis on prescriptive discussions, it would be interesting to see what happens when an audit junior, who’s indulged in prescriptive discussion and has already had discussions with peers exchanges views with seniors (who indulge in deliberative discussions), thus we hypothesise that:

Hypothesis 1: (a) If the prior judgments of junior level auditors are good and the discussion with superiors results in an agreement, there will be increment in the moral motivation (reasoning) of the auditors. (b) If the prior judgment of junior level auditors is bad and the discussion with superiors results in an agreement then there will be a decrement in the moral motivation of the auditors.

Incremental and Decremental Discussions: Within Hierarchies In social psychology research there have been extensive studies on groups of undifferentiated individuals who cooperate in order to reach a consensus on decisions where there is little feedback on their accuracy. Lepine et al. (1997) suggest that hierarchically structured teams lack vertical and horizontal substitutability. Low vertical substitutability indicates that, teams have a hierarchy in which status levels are distinct in terms of power position i.e. leaders have the final say, and facilitative expertise i.e. leaders have a

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knowledge about the staff responsibilities. While low horizontal substitutability means that members have differences in expertise that are not easily interchangeable. Auditors work more or less on a similar premise, in that the higher level audit staff generally has the final say in audit related issues and the lower level staff mostly do not have the decision making ability in their hands. It is clear that vertical substitutability exists across hierarchies and horizontal substitutability both within hierarchies and across hierarchies. It is also improbable to expect a feed back in low vertical substitution situations, which makes the discussions and feedback within hierarchies that much more important. In order to bring out the inherent value of discussions it would interesting to compare and contrast the discussions between and within the hierarchical levels. As prior research suggests that, engaging in prescriptive reasoning increases the moral reasoning ability and that prescriptive discussions generally take place within the same hierarchical levels, it could be fairly assumed that discussions within the hierarchical levels play any important role in the development of the moral reasoning ability of auditors, hence we hypothesis that:

Hypothesis 2: (a) If the prior judgment of auditors is good and the discussions within the members of the same hierarchical level results in an agreement then there will be an increment in the moral motivation. (b) If the prior judgment of auditors is bad and the discussions within the members of the same hierarchical level results in a disagreement then there will be a decrement in the moral motivation.

Different Kinds of Dilemmas The ethical issues faced by individuals in a corporate setting generally arise from conflicts between the personal and corporate values. It has also been said and is widely accepted that, an individual within an organization is the moral agent, but the organization exerts significant influence within its boundaries (Sims, 1992). Over the years, there have been significant changes to the codes of ethics and other regulations with in the auditing profession, some changes have been forced due to various scandals and frauds while others were part of a progressive ideology. However, it is to be noted that we cannot and will not

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have a code of ethics which will be perfect and never give rise to dilemmas. The debate between a rule based and a principle based code has also been widely covered. The best way to address this is to have a hybrid code which is a mix of rules and principles and the AICPA Code of Professional Conduct, addresses just that. Despite of the pro-activeness or the knee jerk response, the code of ethics will keep evolving and changing according to the dilemmas thrown at it.

A narrower definition of ethical dilemma is “situations in which neither of two available alternatives seems ethically acceptable”. These dilemmas can arise on a personal level, firm level or the level of the industry. People take these dilemmas at their face value and try to resolve it at their level (DeGeorge). In an audit, dilemmas arise when there is dis-agreement between the client and the auditor. The auditors, the staff accountants, must have the ability to identify that they are facing an ethical dilemma and then have to report it to their superiors, there by taking the decision making role out of their hands. Perhaps it could be said that, junior level staff does not face ethical dilemmas, even if they do: the decision making role may not be with them, the kind of dilemmas faced by them may not even be ethical: perhaps we could call them procedural dilemmas. The best example for a procedural dilemma would be under-reporting of time in an audit budget. This kind of a scenario is most likely to have an effect on the perception of ethics by the junior level staff, the auditors in such scenarios may act individually or discuss it with their team members, hence we hypothesize that:

Hypothesis 3: (a) Discussion of procedural dilemmas within the same hierarchical levels will not lead to an increase in ethical decision making ability. (b) Discussions of moral dilemmas in between different hierarchical levels will lead to an increase in the ethical decision making ability.

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Methodology This study adopts an experimental approach to test the hypothesis which will be used to explain the effects of discussions on the moral reasoning process of auditors. Since this study involves auditors at different hierarchical levels, the subjects would also be from different hierarchical levels and would be mainly drawn from the big 4 auditing firms. The average work experience of this pool of subjects should ideally be 4 to 5 years. The auditors would initially be tested using three dilemmas from the DIT in order to determine their initial level of moral reasoning; the p-score would be collected and should range from 0-90. The higher the p-score the greater importance is given to principled moral considerations. This experiment adopts a different approach than what Dukerich and Thorne have: the auditors would then be paired according to their p-score and their work experience into teams of two. There would be 4 categories of teams viz. a high group (both high p-scores), low group (both low scores), moderate group (moderate p-scores) and a high-low group. Further these groups could be categorized into high-moderate and low-moderate groups but the results from these groups may not be significant. All these teams would have one auditor with 3 years or lower work experience and the other with more than 3 years of work experience. This is done to simulate the superior-subordinate relationship.

These teams would then be asked to discuss four audit specific dilemmas, two of the procedural type and two of the ethical types. In order to simulate real time audit scenario, the teams would be disengaged and then the subjects would be assigned other partners, either of the same hierarchical level or different hierarchical levels, to discuss these issues, this cycle will be repeated around 3 to 5 times, this would also be in line with the suggestion by Gibbins and Mason about auditors discussing with 3 to 5 of their peers. A no discussion group would also be introduced as a control group. After the discussions are complete, the individuals would be asked to complete a parallel form of the DIT individually. This instrument will contain three dilemmas, different than has been used for the pre-test and the team task. This post-test measure will be included in order to determine if discussions among different hierarchical levels and discussing different dilemmas has any effect on individual moral reasoning levels.

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Discussions: Incremental / Decremental

Ethical Perceptions

Moral Actions

Hierarchical Level : Different Dilemmas

Incremental and Decremental Discussions Prior Judgment

Good

Bad

Agreement

Incremental

Decremental

Disagreement

Decremental

Incremental

Results of Discussions

No Discussion

Discussion of Dilemmas with in Hierarchical Levels Hierarchical Levels\

Procedural Dilemma

Moral Dilemma

Lower

Higher

Lower

High

Lower

-/=

+

=/+

+

Higher

=

+

-

+

Dilemmas

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