Turning around and changing an organization's culture does not happen by chance. The purpose of this paper is to offer insights into what is needed for an organization to successfully transform itself from a culture and experience that does not support individual ethical behavior. The recent bond trading scandal at Salomon Brothers will be used to demonstrate that a successful ethical turnaround does not just happen spontaneously. In particular, we argue that new leadership, altering policies, structure, behavior, and beliefs are (...) paramount to successfully change to an organizational culture that supports ethical behavior. Schein's five primary mechanisms available to leaders for embedding and reinforcing culture will be used to systematically analyze efforts to change Salomon Brothers' culture. (shrink)

The paper begins with an example of the accounting treatment afforded an Indefeasible Rights Use (IRU) Swap by Global Crossing. The case presents a typical example of ways in which accounting firms contributed to the ethical scandals of the early 21st century. While the behavior of Arthur Andersen, the accounting company in the case, might have met the letter of the law, we argue that it violated the spirit of the law, which can be discovered by looking at (1) the (...) legitimate goals of a company which give it its ethical direction and (2) the responsibilities of the accounting professionals who serve the company and the general public. Those professional responsibilities are determined by looking at the legitimate function those professionals fulfill in the economy. A further claim is that Andersen and other accounting firms are motivated to abandon the responsibilities derived from pursuing their proper goals by falling into the trap of accumulating wealth for its own sake. We argue that the ultimate responsibility of internal auditors is to develop statements that give as reasonably true and fair a picture of the financial situation to any user having a claim to that knowledge. Further we argue that the major responsibilities of the external auditor are: first, to be responsible to the using public for evaluating financial statements and declaring that they represent a fair picture of the financial situation of a company, and second, to be a watchdog of financial markets and call into question irregular practices that would distort those pictures. Such due professional care requires the auditor to exercise professional skepticism: an attitude that includes a questioning mind and a critical assessment of audit evidence. The paper concludes by giving particular examples of how Arthur Andersen LLP failed to meet those responsibilities. (shrink)

The paper begins with an example of the accounting treatment afforded an Indefeasible Rights Use Swap by Global Crossing. The case presents a typical example of ways in which accounting firms contributed to the ethical scandals of the early 21st century. While the behavior of Arthur Andersen, the accounting company in the case, might have met the letter of the law, we argue that it violated "the spirit of the law," which can be discovered by looking at the legitimate goals (...) of a company which give it its ethical direction and the responsibilities of the accounting professionals who serve the company and the general public. Those professional responsibilities are determined by looking at the legitimate function those professionals fulfill in the economy. A further claim is that Andersen and other accounting firms are motivated to abandon the responsibilities derived from pursuing their proper goals by falling into the trap of accumulating wealth for its own sake. We argue that the ultimate responsibility of internal auditors is to develop statements that give as reasonably true and fair a picture of the financial situation to any user having a claim to that knowledge. Further we argue that the major responsibilities of the external auditor are: first, to be responsible to the using public for evaluating financial statements and declaring that they represent a fair picture of the financial situation of a company, and second, to be a watchdog of financial markets and call into question irregular practices that would distort those pictures. Such due professional care requires the auditor to exercise "professional skepticism": an attitude that includes a questioning mind and a critical assessment of audit evidence. The paper concludes by giving particular examples of how Arthur Andersen LLP failed to meet those responsibilities. (shrink)

Ethics researchers advise managers of organizations to link rewards and punishments to ethical and unethical behavior, respectively. We build on prior research maintaining that organizations operate at Kohlbergs stages of moral reasoning, and explain how the over-reliance on rewards and punishments encourages employees to operate at Kohlbergs lowest stages of moral reasoning. We advocate designing organizations as ethical communities and relying on different assumptions about employees in order to foster ethical reasoning at higher levels. Characteristics associated with ethical communities are (...) identified and AES Corporation and Semco S/A serve as examples of corporations exhibiting the design characteristics and assumptions of ethical organizations. (shrink)

This paper examines the critical role that organizational leaders play in establishing a values based climate. We discuss seven mechanisms by which leaders convey the importance of ethical values to members, and establish the expectations regarding ethical conduct that become engrained in the organizations climate. We also suggest that leaders at different organizational levels rely on different mechanisms to transmit values and expectations. These mechanisms then influence members practices and expectations, further increase the salience of ethical values and result in (...) the shared perceptions that form the organizations climate. The paper is organized in three parts. Part onebegins with a brief discussion of climates regarding ethics and the critical role of values. Part two provides discussion on the mechanisms by which leaders and members transmit values and create climates related to ethics. Part three provides a discussion of these concepts with implications for theory, research, and practice. (shrink)

Fraudulent financial reporting, financial statements with errors so material as to require restatement, and biased reporting marred by defects such as managed earnings have plagued financial reporting in many countries in recent years. All of those failures are ethics failures that represent breaches of fiduciary duties by individuals who accepted responsibilities but did not fulfill them. The financial reporting system practiced in America is viewed by the parties involved in it as generally satisfactory. However, according to another view, the interests (...) of those primarily and secondarily responsible for those reports conflict with the interests of the intended beneficiaries, or users, of the corporate financial statements. A more realistic view of the actual operation of that reporting system shows that it is fundamentally flawed. Primary responsibility for failures rests with top management and financial management of the reporting corporation who are so strongly motivated to render favorable reports on their stewardship that they neglect their fiduciary responsibilities to investors. Secondary responsibility falls on independent auditors who are so heavily influenced by enterprise management that they, too, fail in carrying out their responsibilities to users of the audited financial statements. Ethics compromises are also found in the performances of academic accountants and members of accounting standards-setting bodies. The conflict between managements interest in reporting its performance in a favorable light and investors interest in decision-useful financial information will always exist and require regulation. However, changes in those regulations and in the basic governance arrangements involving shareholders, management, and auditors could reduce the opportunities and temptations for failures in carrying out fiduciary responsibilities. Most importantly, the close relationships between auditors and management must be loosened in favor of closer relationships between auditors and investors. (shrink)

Although the foundation of financial accounting and auditing has traditionally been based upon a rule-based framework, the concept of a principle-based approach has been periodically advocated since being incorporated into the AICPA Code of Conduct in 1989. Recent high profile events indicate that the accountants and auditors involved have followed rule-based ethical perspectives and have failed to protect investors and stakeholders – resulting in a wave of scandals and charges of unethical conduct. In this paper we describe how the rule-based (...) traditions of auditing became a convenient vehicle that perpetuated the unethical conduct of firms such as Enron and Arthur Andersen. We present a model of ten ethical perspectives and briefly describe how these ten ethical perspectives impact rule-based and principle-based ethical conduct for accountants and auditors. We conclude by identifying six specific suggestions that the accounting and auditing profession should consider to restore public trust and to improve the ethical conduct of accountants and auditors. (shrink)

This paper is designed to do three things while discussing the challenge of ethical behavior in organization. First, it discusses some reasons why unethical behavior occurs in organization. Secondly, the paper highlights the importance of organizational culture in establishing an ethical climate within an organization. Finally, the paper presents some suggestions for creating and maintaining an ethically-oriented culture.

Questionnaire data obtained from 97 supervisory and nonsupervisory employees representing the Production, Production Services, Marketing, and Administration departments of an Israeli metal production plant were used to test the relationship between selected personal and organizational attributes and work related misbehavior. Following Vardi and Wiener''s (1996) framework, Organizational Misbehavior (OMB) was defined as intentional acts that violate formal core organizational rules. We found that there was a significant negative relationship between Organizational Climate and OMB, and between the Organizational Climate dimensions (Warmth (...) and Support, and Reward), and OMB. Also, the activities of misbehavior reported by both managers and employees were negatively related to the Rules, Instrumental and Caring dimensions of Ethical Climates as defined by Victor and Cullen (1988). (shrink)

This paper explores the financial reporting scandals of the past decade and the resulting U.S. legislative attempts to impose ethical behavior and control the incidence of new reporting problems via the Sarbanes-Oxley legislation. We begin with a brief historical perspective followed by assertions of ethical consequences of legislation with discussions of key recent corporate scandals, the motives for the frauds, and the consequences. Ethics related provisions of the Sarbanes-Oxley Act are discussed with the potential impact of the legislation on the (...) likelihood of similar future frauds and accompanying prognosis for future corporate ethical behavior. (shrink)

. Recent corporate scandals have focused the attention of a broad set of constituencies on reforming corporate governance. Boards of directors play a leading role in corporate governance and any significant reforms must encompass their role. To date, most reform proposals have targeted the legal, rather than the ethical obligations of directors. Legal reforms without proper attention to ethical obligations will likely prove ineffectual. The ethical role of directors is critical. Directors have overall responsibility for the ethics and compliance programs (...) of the corporation. The tone at the top that they set by example and action is central to the overall ethical environment of their firms. This role is reinforced by their legal responsibilities to provide oversight of the financial performance of the firm. Underlying this analysis is the critical assumption that ethical behavior, especially on the part of corporate leaders, leads to the best long-term interests of the corporation. We describe key components of a framework for a code of ethics for corporate boards and individual directors. The proposed code framework is based on six universal core ethical values: (1) honesty; (2) integrity; (3) loyalty; (4) responsibility; (5) fairness; and (6) citizenship. The paper concludes by suggesting critical issues that need to be dealt with in firm-based codes of ethics for directors. (shrink)

. The accounting profession’s image and reputation is built upon the members of the profession acting with the “highest sense of integrity” in “the public interest” (AICPA, 2003, www.aicpa.org/about). The Enron debacle initiated the latest crisis facing the profession regarding its image and reputation. The American Institute of Certified Public Accountants (AICPA) is the largest professional body representing the accounting profession and the one to which regulators have looked in establishing and upholding professional standards relating to the public practice of (...) accounting and auditing. One of the AICPA’s responsibilities is to “promote public awareness and confidence in the integrity, objectivity, competence and professionalism of CPAs ....” (AICPA, 2003, www.aicpa.org/about). We analyze the public statements issued by the AICPA (i.e., press releases, speeches of officers, testimony, published articles) during this ethical and identity crisis beginning with the AICPA’s first public statement on the Enron debâcle (AIPCA 2001) and concluding with the AICPA recognizing the need for a “new accounting culture” (Melancon 2002). In order to better understand the public discourse, we use image restoration theory (Benoit, 1995), because it provides a typology of strategies for dealing with the public face of crises. We identify the three most common strategies the AICPA employs during this period. Proposals for taking corrective action represent the most commonly employed strategy, but the analysis also indicates an attempt to evade responsibility by claiming defeasibility and to reduce the offensiveness of the situation by employing a bolstering strategy. A second analysis using DICTION, a software package useful in revealing latent dimensions in a text, indicates that early statements tend to use language related to accomplishing specific action while the later statements tend more toward general language that relates to peoples’ everyday lives. The findings raise questions as to substantive nature of the changes proposed by the AICPA, and thus, the extent to which the public interest is being served by them. (shrink)