The frequency of earnings restatements has been increasing over the last decade. Restating previous earnings erodes perceived trustworthiness and competence of management, giving firms strong incentives to take actions to enhance perceived credibility of future financial reports [Farber, D. 2005, The Accounting Review 80, 539-561.]. Using an experimental case, we examine the ability of post-restatement actions taken by a firm to positively influence nonprofessional investors' perceptions of management's financial reporting credibility. Our examination considers credibility judgments following two types of restatements (...) -those resulting from fraud in which the character, ethics, and values of an organization may be called into question [cf. Copeland, Jr., J. E.: 2005, Accounting Horizons 19, 35-43.], and those resulting from non-fraud. Based on the information in the experimental case, non-professional investors take the role of potential equity investors and make a judgment about management's financial reporting credibility after reviewing a set of postrestatement actions taken by a firm. The possible actions include changes in four corporate governance mechanisms and a buyback of company stock. Our results provide an important contribution to the literature by demonstrating that among non-professional investors, perceptions of management's financial reporting credibility are affected both by the postrestatement action taken and the nature of the restatement. These results offer insight into the formation of a key credibility judgment made by non-professional investors following a trust-destroying event, an earnings restatement. (shrink)

Various international authorities have insisted on the importance of ethical learning in higher education for would-be professionals, including students of Business Administration. As the process of creating the European Higher Education Area gathers pace, first steps have been taken to explicitly incorporate ethics in the common European Qualifications Framework. However, the authors of this study show how in the course of the EQF development process, the consideration given to ethical qualifications has been curtailed and subjected to serious limitations. In this (...) article, the authors review the historical development and the main elements of the EQF. Then, they analyze the gradual elimination of ethics within the EQF. Finally, they highlight the implications of this gradual elimination and propose avenues for further research. (shrink)

This study investigates antecedents of corporate social responsibility in multinational corporations' subsidiaries. Using stakeholder theory and institutional theory that identify internal and external pressures for legitimacy in MNCs' subsidiaries, we integrate international business and CSR literatures to create a model depicting CSR practices in MNCs' subsidiaries. We propose that MNCs' subsidiaries will be likely to adapt to local practices to legitimize themselves if they operate in host countries with different institutional environments and demanding stakeholders. We also predict that MNCs' subsidiaries (...) will be likely to adapt to local practices to avoid spillover effects if their parent companies suffer major legitimacy problems at home or abroad. However, we speculate that MNCs' subsidiaries will be less likely to adapt to local practices if they are strongly annexed to their parent companies and the benefit to gain internal legitimacy outweighs external legitimacy. This article contributes to the discourse on CSR across borders by exploring the antecedents of CSR practices in MNCs' subsidiaries at social and organizational levels, and integrating institutional and stakeholder views. We provide a number of propositions for future studies and explore implications for practitioners. (shrink)

This paper presents a comparative analysis of three American and three European corporate failures. The first part of the analysis is based on a theoretical framework including six areas of ethical climate; tone at the top; bubble economy and market pressure; fraudulent financial reporting; accountability, control, auditing, and governance; and management compensation. The second and third parts consider the analysis of these cases from fraud perspective and in terms of firm-specific characteristics and environmental context. The research analyses shed light on (...) the fact that, despite major differences between Europe and U.S. in terms of political institutions, laws and regulations as well as managerial practices, there are significant similarities between six groups. The analysis also demonstrates that, the ethical dilemma has been coupled with ineffective boards, inefficient corporate governance and control mechanisms, distorted incentive schemes, accounting irregularities, failure of auditors, dominant CEOs, dysfunctional management behavior and the lack of a sound ethical tone at the top. Significant similarities were also observed in the analysis from the fraud triangle perspective. However, there are several major differences between the six corporate failure cases particularly with regard to ownership structure, coverage in media, and legal, regulatory and governance frameworks. This research study may have several academic and practical contributions, particularly because of multidisciplinary, international features, and comparative analyses used in the paper. (shrink)

Accounting professionals play an important role in the generation and auditing of financial statements and, given their understanding of business processes, may be relied upon in the development of organizations’ ethical infrastructures (i.e., the formal aspects of an organization’s ethical environment that are explicitly under the control of the organization). Thus, understanding and improving the work environments of accounting professionals is crucial to improving organizational ethical culture and reducing fraud. In this study, we extend prior research that documents the prevalence (...) of ethical infrastructure programs by assessing how accounting professionals, a key employee group, perceive their organizations’ ethical infrastructures. In addition, we examine whether perceptions of the effectiveness of the ethical infrastructure and professional autonomy influence accountants’ ethical judgments. Based on the responses of 378 CPAs in the United States, we find the perceived state of the ethical infrastructure across accounting work environments—both public accounting firms and other organization types—is relatively strong. However, of the five ethical infrastructure components we examine (i.e., ethics code, ethics training, ethics-based punishments and incentives, ethics reporting system, and ethics review system), only 35% of respondents indicate that their organizations have more than three of these components. Importantly, we find that perceived ethical infrastructure effectiveness and professional autonomy influence both perceptions of the ethical culture and the ethical judgments of accounting professionals. We also contribute to practice by highlighting opportunities for improvement in ethics training formats, ethics-based incentives, and ethics review systems. (shrink)

For several decades, most discussion on financial fraud has centered on the fraud triangle, which has evolved over time through various extensions and re-interpretations. While this has served the profession well, the articulation of the human side of the act is indirect and diffused. To address this limitation, this research develops a model to explain the role of human desires, intentions, and actions in indulgence of, or resistance to, the act of financial fraud. Evidence from religion, philosophy, sociology, neurology, behavioral (...) economics, and social psychology is integrated to develop and support an alternative fraud model, called the disposition-based fraud model. To articulate the model, its two primary components, disposition and temptation, are further developed and extended. Although the DFM is generally applicable to any act of fraud, this paper focuses on executive fraud. The similarities and differences between the DFM and extant fraud models are discussed. Importantly, in light of the DFM, a re-interpretation of the fraud triangle is made to improve our understanding of the human element in it. Additionally, potential implications of the model for corporate governance are discussed, suggestions for further research are offered, and the DFM’s strengths and limitations are noted. (shrink)

The current economic and preceding financial crises seem to provide evidence in favour of the self-destruction thesis of capitalism. Responses to the crisis have been polarised. Some suggest that regulatory changes are all that is needed. Others suggest the need to change the economic system by developing a new global economic ethic. The first is too limited, the second too utopian. This article suggests that a MacIntyrean virtue ethics approach provides both a more convincing diagnosis of the problem and leads (...) to a more workable prescription. First, we need to understand the internal contradictions of the tradition that has developed of how to ‘do’ business. Then we need the virtues to be exercised inside practices and institutions. But virtue itself needs to be institutionalised; we need an appropriate governance of virtue in organizations. Even though governance is usually taken to ‘crowd out’ virtue, this article proposes an approach to governance that ‘crowds in’ virtue. (shrink)

Publicly available information indicates that the collapse of the high-profile corporations during the recent past were due to the unethical actions of a number of major players, including high level managers in those corporations. These examples of the ethical misdeeds of corporate actors have influenced accounting professional bodies and academic institutions around the globe to revisit the issue of ethical training of business and accounting students—the corporate managers of tomorrow. However, little is known about the ethical perceptions of business and (...) accounting students, and business academics are finding it challenging to develop and promote ethics-based accounting and business curricula. This study addresses the research gap. It explores the ethical perceptions of accounting and business students in two Australian universities using three paradigms, that is, whether there are differences between regional and metropolitan, male and female, older and younger accounting students with respect to their ethical perceptions. Empirical evidence provided in this study suggests that while there are no differences in ethical perceptions of the regional and metropolitan accounting and business students, female and older students are found to be more ethical compared to male and younger students. (shrink)

The UK Alternative Investment Market (AIM) was launched in 1995 and has been a great success with over 1200 companies now listed. In this article, we examine the development of AIM as it reaches its 15th year and discuss the potential pitfalls of the light touch regulation that is one of the attractions of AIM and identify potential corporate governance and ethical issues that may arise as a result of light touch regulation. We examine the central role of the nominated (...) advisor (NOMAD) and draw on the findings of in depth interviews with 25 AIM participants including AIM company directors, institutional investors, nominated advisors and brokers. We highlight the influence of the NOMAD on these participants and potential governance and ethical implications. We also discuss some of the concerns that AIM participants have about the market. We examine some of the recent scandals on AIM to determine why these scandals occurred — were they, for example, attributable to corporate governance weaknesses? Finally, we offer some concluding comments to discuss the future of AIM. The findings of the article have important implications for investors and policymakers alike. (shrink)

This study examines the association between corporate social responsibility and management forecast accuracy. Using data from 1995 to 2009, we find that firms provide more accurate earnings forecasts in the face of CSR activities. We also find that the positive association between CSR and management forecast accuracy is only present for the post-regulation period of 2001–2009, after the introduction of disclosure regulations intended to mitigate managers’ opportunistic behavior. These findings are consistent with the notion that managers strive to improve the (...) quality of financial disclosure following superior CSR performance in the recent period. (shrink)

We discuss how the approach taken by regulators to address financial reporting issues has a significant influence on tone at the top. While tone must ultimately be established internally, regulators are more likely to have a positive impact on the quality of financial reporting by addressing organizational tone. A strong tone at the top should ensure that the financial reports are characterized by greater transparency and complete disclosures, and a regulator’s response will depend upon their perspective as to what motivates (...) management. A compliance-based approach, rooted in agency theory’s assumption that managers act in their own best interests, seeks to mandate desirable behavior through elevated monitoring and reduced managerial discretion. Alternatively, an empowerment-based approach rooted in stewardship theory views managers as trustworthy guardians and grants them greater discretion without burdensome external monitoring. In practice, regulations fall on a continuum between these two approaches. To illustrate the continuum between compliance and empowerment, we present three cases in financial and tax reporting and examine the outcomes of these recent regulatory responses. We then provide conclusions regarding the effectiveness of each regulation by considering how tone was influenced within organizations. (shrink)

Notwithstanding empirical evidence that combining ethics and compliance into one function or programme is likely to erode an ethical culture in organisations, the praxis to coalesce ethics and compliance conceptually and structurally remains attractive and continues in many organisations. Drawing on systems psychodynamic theory, this study enquires into unconscious complexities and drivers that may contribute to adverse consequences when combining ethics and compliance. Whereas previous research demonstrates that compliance dominates ethics because of self‐regulation issues, this research provides deeper insight into (...) why this happens. On explicating the unconscious dynamics that underlie the apparent lure of combination, it becomes clear that this praxis remains attractive because of its function to repress anxieties, maintain phantasies, and provide psychological comfort. In recognising the role of unconscious dynamics in the decision to combine ethics and compliance and the consequences thereof, cognition of this combination and its outcomes is moved beyond a conscious rational process. This elucidates the commanding opposing unconscious forces potentially at play in this decision. Insights could lessen adverse outcomes by prompting organisations to think of the combination of ethics and compliance as unconsciously motivated systemic processes that require sincere consideration before pursuing them. (shrink)

Previous accounting ethics research berates auditors for ethical lapses that contribute to the failure of Andersen (e.g., Duska, R.: 2005, Journal of Business Ethics 57, 17–29; Staubus, G.: 2005, Journal of Business Ethics 57, 5–15; however, some of the blame must also fall on regulatory and professional bodies that exist to mitigate auditors’ ethical lapses. In this paper, we consider the ethical and economic context that existed and facilitated Andersen’s failure. Our analysis is grounded in Akerlof’s (1970, Quarterly Journal of (...) Economics August, 488–500) Theory of the Market for Lemons and we characterize the market for audit reports as a market for lemons. Consistent with Akerlof’s model, we consider the appropriateness of the countervailing mechanisms that existed at the time of Andersen’s demise that appeared to have effectively failed in counteracting Andersen’s ethical shortcomings. Finally, we assess the appropriateness of the remedies proposed by the Sarbanes–Oxley Act of 2002 (SOA) to ensure that similar ethical lapses will not occur in the future. Our analysis indicates that the SOA regulatory reforms should counteract some of the necessary conditions of the Lemons Model, and thereby mitigate the likelihood of audit failures. However, we contend that the effectiveness of the SOA critically depends upon the focus and attention of the␣Public Companies Accounting Oversight Board (PCAOB) towards assessing the ethical climates of public accounting firms. Assessments by the PCAOB of public accounting firm’s ethical climate are needed to sufficiently ensure that public accounting firms effectively promote and maintain audit quality in situations where unconscious bias or economic incentives may erode the public accounting firm’s independence. (shrink)

As demand grows from various stakeholders for responsible management education in business schools, it is essential to understand how corporate social responsibility and RME are perceived by various subgroups of business students. Following the principles of theories on moral orientation and moral development, we examined the role of gender and age in determining four indicators of business students’ moral approach in the context of business schools committed to RME and CSR. Based on nearly 1300 responses to a survey, conducted with (...) the United Nations-supported principles for responsible management education, we show that overall, female students placed a higher value on ethical responsibilities than male students. Female students were also more welcoming than male students regarding curriculum changes that were focused on CSR-related studies. In addition, older age groups ranked transcendent values and positive CSR attitudes higher than younger age groups. We also found that the subgroups of the age variable could better discriminate the differences in choices made by the respondents between the four indicators of students’ moral approach. The implications of our findings to RME, business schools, and other stakeholders are discussed. (shrink)

Following the landmark corporate scandals of the early 21st century, there appeared to be a tremendous increase in the U.S. business media's emphasis on issues of ethics in corporate leadership. The purpose of this research was to examine whether that apparent increase was reflected in an actual change in that media's portrayals of successful leaders. We content analyzed the text of a total of 180 articles in Business Week, Fortune, and Forbes magazine, 90 from the five years preceding the landmark (...) scandals and 90 from the five years following the scandals. We found no evidence that the landmark scandals had any impact on the media's incorporation of ethics in their portrayals of leaders. We attribute this substantially to the persistence of a world-view in the U.S. business press that emphasizes leader traits and actions that have a direct impact on corporate profits. Additionally, we found some interesting consistencies and differences in media portrayals across the two time periods, likely related to the rise and fall of dot-com businesses. We discuss the implications of these findings for researchers and corporate leaders. (shrink)

Various international authorities have insisted on the importance of ethical learning in higher education for would-be professionals, including students of Business Administration. As the process of creating the European Higher Education Area gathers pace, first steps have been taken to explicitly incorporate ethics in the common European Qualifications Framework (EQF). However, the authors of this study show how in the course of the EQF development process, the consideration given to ethical qualifications has been curtailed and subjected to serious limitations. In (...) this article, the authors review the historical development and the main elements of the EQF. Then, they analyze the gradual elimination of ethics within the EQF. Finally, they highlight the implications of this gradual elimination and propose avenues for further research. (shrink)

This article provides an analysis of the ethical behavior of managers making goodwill impairment decisions following the adoption of the International Financial Reporting Standard 3 on Business Combinations. Replacing the systematic amortization of goodwill with the impairment-only approach has been a highly controversial step. Although the aim of IFRS 3 was to provide users with more value-relevant information regarding the underlying economics of the business, it has been criticized for the potential earnings management inherent in impairment testing. This study is (...) based on a sample of Spanish-listed companies between 2005 and 2011, a period that embraces the economic crisis. After controlling for the underlying economic factors of the firms, the results suggest that managers are exercising discretion in the reporting of goodwill impairment losses, and big bath and smoothing strategies are influencing the decisions, whether or not to impair goodwill and about the magnitude of the impairment. Firm size is an attribute that appears significant in the analysis, suggesting that the cost and complexity of running the impairment test affect managers’ decisions. Additional analyses suggest that the macroeconomic environment influences opportunistic and unethical behaviors. (shrink)

After the approval of a code of ethics, the creation of a permanent board‐level ethics committee is the next step in the institutionalization of business ethics. This study explores how the board's structure and demographic characteristics explain the decision to form an ethics committee. The analysis is based on the constituents of the Standard and Poor's Europe 350 index. Consistent with our hypotheses, we find that ethics committees are more likely to be found in firms with a lower presence of (...) executive directors and of directors holding MBA degrees. However, we also observe that boards chaired by executive directors seem to favor the creation of an ethics committee. Additionally, as we had anticipated, firms with stronger agency conflicts seem to be more willing to create committees. The analysis conducted with segmented samples reveals that the model has greater explanatory power when applied to firms from common‐law and French civil‐law countries than when applied to firms from the German–Scandinavian civil‐law area. Finally, our results indicate that a firm's country of origin is a more influential factor in explaining the decision to create an ethics committee than the industry to which it belongs or even the magnitude of its agency conflicts. (shrink)

Responsibility and accountability of CEOs has been a major ethical concern over the past 10 years. Major ethical dilemmas at Enron, Worldcom, AIG, as well as other well-known organizations have been at least partially blamed on CEO malfeasance. Interviews with Ken Lay, CEO of Enron, after his 2006 fraud convictions provides an opportunity to document his perceived role in the demise of Enron. Possibly no other CEO has had as much impact on the scrutiny and legalization of business ethics as (...) Ken Lay. This analysis is timely because of many information sources now available and the recent Supreme Court decisions on Enron conviction appeals. Using Ken Lay as the focal point, a review of literature provides the background for research questions to explore the role of the CEO in developing an ethical corporate culture. (shrink)

This study builds upon the top management literature to predict and test antecedents to firms’ engagement in corruption. Building on a survey of 341 executives in India, we find that if executives have social ties with government officials, their firms are more likely to engage in corruption. Further, these executives are likely to rationalize engaging in corruption as a necessity for being competitive. The results collectively illustrate the role that executives’ social ties and perceptions have in shaping illegal actions of (...) their respective firms. (shrink)

Although numerous benefits are associated with interfirm ties, these external relationships can also have negative consequences. Theoretically based in the relational component of social capital, we identify one potentially serious consequence of interfirm ties, propensity of firms engaging in illegal behavior. Results of our study of S&P 500 firms suggest that companies benefit from a lower likelihood of illegal behavior when they have numerous weak ties to other firms. Conversely, when they become overly embedded in a network of strong ties, (...) they are more likely to engage in illegal behavior. We also found evidence that reciprocity and status similarity influence firms’ propensity to engage in illegal behavior. (shrink)

Prior studies have provided explanations for the presence, use and dissemination of codes of corporate ethics or codes of corporate conduct of business corporations. Most such explanations are functional in nature, and are descriptive as they are derived from the codes and their associated documents. We search for more underlying explanations using two complementary theories: first, social contract theories explaining the exogenous and endogenous reasons of organizational behavior, and then institutional theory explaining why organizations take similar measures in response to (...) institutional pressures. Based on our explanations, we contend that the codes and their use and dissemination are arising from underlying social and institutional pressures for firms to continuously validate their existence in the face of increasing changes and recurrent uncertainties. (shrink)

In this study we examine (1) how a manager’s risk behavior is influenced by developing success (or failure) as an impending settling up deadline to report performance approaches, (2) how willingness to provide transparent accountability is negatively affected by perceived risk and eroding trust, and (3) how others interpret and respond to reduced transparency. As perceptions of high levels of risks suggest a lack of environmental control of a firm’s destiny in contemporary settings, we adopt a historical approach to examine (...) these issues. In this respect we draw on primary sources found in library archives in Spain and Argentina. Our focal case refers to the contract signed and executed between the South Sea Company and Captain José de Salinas (1731–1735) to walk 408 Negroes from Buenos Aires to Potosí and sell them en route or at destination. Drawing on this evidence, we examine how bring about unethical conduct featured by increasingly risky business practices, and how eroding trust conditions lead to only summary record-keeping and delayed reporting. In turn, diminished accountability further undermined trust. Our findings have implications for further research in this area as well as for contemporary cases of accounting failures. (shrink)

The compliance-based approach and the integrity approach have been the mainstream responses to corporate scandals. This paper proposes that, despite each approach comprising necessary elements, neither offers a comprehensive solution. Compliance and integrity, far from being mutually exclusive, reinforce each other. Working together, in a correct relationship, they build a harmonized system that yields positive synergies and which also advocates prudence. It enables the generation of a culture of compliance that tends to minimize the technical and ethical errors in decision (...) making. In order to explore an applied harmonized approach, we analyze the audit committee, a specific and broadly accepted regulatory instrument. Formed by non-executive members, regulation requires these members to be dedicated, qualified, and independent as a guarantee of efficiency. We show how the compound of those elements produces positive effects in a context of solid governance. We conclude that it is the strong relationship between efficiency and prudence, in the creation of a culture of compliance, which enables the minimization of errors. (shrink)

In this article, we empirically assess the impact of corporate ethical identity (CEI) on a firm's financial performance. Drawing on formulations of normative and instrumental stakeholder theory, we argue that firms with a strong ethical identity achieve a greater degree of stakeholder satisfaction (SS), which, in turn, positively influences a firm's financial performance. We analyze two dimensions of the CEI of firms: corporate revealed ethics and corporate applied ethics. Our results indicate that revealed ethics has informational worth and enhances shareholder (...) value, whereas applied ethics has a positive impact through the improvement of SS. However, revealed ethics by itself (i.e. decoupled from ethical initiatives) is not sufficient to boost economic performance. (shrink)

The tension between external forces for better ethics in organizations, represented by legislation such as the Sarbanes–Oxley Act (SOX), and the call for internal forces represented by increased educational coverage, has never been as apparent. This study examines business school faculty attitudes about recent corporate ethics lapses, including opinions about root causes, potential solutions, and ethics coverage in their courses. In assessing root causes, faculty point to a failure of systems such as legal/professional and management (external) and declining personal values (...) (internal). We also found that faculty recommend external forces as a remedy more often than increased ethics educational coverage; we contextualize this finding with recent ethics education literature. We conclude by proposing that neither legislation nor ethics education alone are complete when addressing widespread unethical corporate acts and offer a multi-faceted approach to ethics educational opportunities. (shrink)

A heterogeneous survey sample of for-profit, non-profit and government employees revealed that organizational factors but not personal characteristics were significant antecedents of misconduct and job satisfaction. Formal organizational compliance practices and ethical climate were independent predictors of misconduct, and compliance practices also moderated the relationship between ethical climate and misconduct, as well as between pressure to compromise ethical standards and misconduct. Misconduct was not predicted by level of moral reasoning, age, sex, ethnicity, job status, or size and type of organization. (...) Demographic variables predicted job satisfaction and organizational variables added significant incremental variance. Results suggest the importance of promoting a moral organization through the words and actions of senior managers and supervisors, independent of formal mechanisms such as codes of conduct. (shrink)

In this paper, we investigate a large-scale financial statement fraud to better understand the process by which individuals are recruited to participate in financial statement fraud schemes. The case reveals that perpetrators often use power to recruit others to participate in fraudulent acts. To illustrate how power is used, we propose a model, based upon the classical French and Raven taxonomy of power, that explains how one individual influences another individual to participate in financial statement fraud. We also provide propositions (...) for future research. (shrink)