Despite regulatory reforms aimed at inhibiting aggressive financial reporting, earnings management persists and continues to concern practitioners, regulators, and standard setters. To provide insight into this practice and how to mitigate it, we conduct an experiment to examine the impact of two independent variables on CFOs’ discretionary expense accruals. One independent variable, incentive conflict, is manipulated at two levels —i.e., the presence or absence of a personal financial incentive that conflicts with a corporate financial incentive. The other independent variable is (...) CFOs’ earnings management ethics, measured as their assessment of the ethicalness of key earnings management motivations. We find that incentive conflict and EM-Ethics interact to determine CFOs’ discretionary accruals such that in the presence of incentive conflict, CFOs with low EM-Ethics tend to give into the personal incentive by booking higher expense accruals; and in the absence of an incentive conflict, CFOs with low EM-Ethics tend to give into the corporate incentive by booking lower expense accruals. We also find support for a mediated-moderation model in which CFOs’ level of EM-Ethics influences their moral disengagement tendencies which, in turn, differentially affect their discretionary accruals, depending on the presence or absence of incentive conflict. Theoretical and practical implications of these findings are discussed. (shrink)

This study explores how financial executives retrospectively account for their crossing the line into financial statement fraud while acting within or reacting to a financialized corporate environment. We conduct our investigation through face-to-face interviews with 13 former C-suite financial executives who were involved in and indicted for major cases of accounting fraud. Five different themes of accounts emerged from the narratives, characterizing executives’ fraud immersion as a meaning-making process by which the particulars of the proximal social context and individual motivations (...) collectively molded executives’ vocabularies of fraud immersion. Our executives’ narratives portray their fraud entanglement as typically occurring in small, incremental steps. Their accounts expand our understanding of the influence of socialization on executive-level financial fraud beyond the individualized focus of the fraud triangle model. (shrink)

The relevance of leader ethicality has moti- vated ethical leadership theory. In this paper, we emphasize the importance of moral identity for the concept of ethical leadership. We relate ethical leadership incorporating an internalized moral identity to productive deviant workplace behavior. Using qualitative empirical data we illustrate the relevance of critical situations, i.e., situations in which hypernorms and organizational norms diverge, for the distinction of ethical leaders with or without internalized moral identities. Our paper takes a multidisciplinary approach integrating insight (...) from management as well as humanities and social sciences toward a comprehensive sense of ethical leadership. (shrink)

This exploratory study investigates the manifold conceptions of the internal auditing of risk culture prevalent among four influential actors of the financial sector—regulators, normalizers, consultants, and implementers. By inductive analysis of 20 interviews and 295 documents, we illustrate a two-step interpretive scheme utilized by the four actors in their IA approaches of risk culture: defining broad goals and designing visibility schemes. The visibility schemes were tied to the demarcation, measurement, as well as the IA data collection techniques of risk culture. (...) Our results indicate two dichotomous interpretations among the four actors concerning the IA of risk culture. The first interpretation, prevalent among regulators and implementers, promotes the control of risk culture primarily through verification. The second interpretation, adopted by consultants and normalizers, promotes the control of risk culture by IA along with the empowerment of employees through training programs. Our results not only contribute to understanding IA expansions, specifically to non-tangible domains such as risk culture but also enrich the literature exploring the mechanisms different stakeholders utilize to shape weakly professionalized IA practices. (shrink)

Our exploratory study considers whether the internal audit function is an efficient “third line of defense” for risk management and control as proposed by The Institute of Internal Auditors. To that end, we interview chief audit executives and experienced internal auditors to examine whether CAEs manage the impressions of audit committee members in the annual accountability process. We also provide an illustration of impression management techniques through a documentary case that explores a unique and exclusive dataset consisting of the main (...) guidance, framework, and accountability documents of one of these organizations. Our analysis highlights how several macro- and microimpression management techniques were used to burnish the image of internal auditors and, more importantly, the management team. Rather than monitoring managers, the CAEs team up with them. Our findings cast doubts on the conceptualization of internal audit as the independent third line of defense envisioned to be a keystone of the governance mosaic. This study supports other research that questions the effectiveness of internal auditing as a governance mechanism. It also contributes to the impression management literature by exposing impression management practices that occur through a private reporting channel—the internal audit function’s annual accountability to the audit committee. Last but not least, significant ethical concerns are raised in regard to internal audit, and research is urged in that area. (shrink)

This paper employs theory of normal organizational wrongdoing and investigates the joint effects of management tone and the slippery slope on financial reporting misbehavior. In Study 1, we investigate assumptions about the effects of sliding down the slippery slope and tone at the top on financial executives’ decisions to misreport earnings. Results of Study 1 indicate that executives are willing to engage in misreporting behavior when there is a positive tone set by the Chief Financial Officer, regardless of the presence (...) or absence of a slippery slope. A negative tone set by the CFO does not facilitate the transition from minor indiscretions to financial misreporting. In Study 2, we find that auditors evaluating executives’ decisions under the same conditions as those in Study 1 do not react to the slippery slope condition, but auditors assess higher risks of fraud when the CFO sets a negative tone. Overall, our results indicate that many assumptions about the slippery slope and tone at the top should be questioned. We provide evidence that pro-organizational behaviors and incrementalism yield new insights into the causes of ethical failures, financial misreporting behavior, and failures of corporate governance mechanisms. (shrink)

This study of internal auditors and auditees, who engage in both financial and operational internal audits in Israel, extends theory and research on internal audits in organizational units. It develops and tests a model that examines the role of top management and internal auditors in facilitating learning from internal audits and driving perceived performance improvement. We argue that support from the top management for the internal audit as well as the auditor’s capacity facilitate learning from audits and help audited units (...) to improve ethicality, efficiency, and effectiveness in organizations. The results of time-lagged survey data provide general support for the hypothesized indirect relationships between auditor capacity, auditor–auditee relational exchanges, learning from audits, and three different perceived performance measures: ethical behavior, efficiency, and effectiveness. We discuss the implications for research on internal audits, proactive learning, ethics, and performance improvement of organizational units in the public sector. (shrink)

Over the past decade, ethical leadership has increasingly become one of the most popular topics in the areas of leadership and business ethics. As a result, there now exists a substantial body of empirical research addressing ethical leadership issues, but the findings reported by this body of research are highly fragmented. The topic has advanced to the stage where a review and synthesis of existing literature can provide great value and help move the scholarly conversation forward. The primary purposes of (...) this article are to review empirical findings from the ethical leadership literature utilizing a framework consisting of the antecedents, mediators, moderators and outcomes of ethical leadership, and suggest a set of interesting research opportunities, thereby facilitating future investigation. We base our synthesis on a review of 62 empirical studies on ethical leadership that were published between 2005 and mid-2015. (shrink)

Synthesizing theories of ethical leadership, psychological climate, pro-environmental behavior, and gender, first, we proposed and tested a model linking supervisors’ ethical leadership and organizational environmental citizenship behavior via green psychological climate. Then we tested the moderating effect of gender on the indirect (via green psychological environment) relationship between supervisors’ ethical leadership and organizational environmental citizenship behavior. Time-lagged (three waves, two months apart) survey data were collected from 447 employees in various manufacturing and service sector firms operating in China. Data were (...) analyzed using structural equation modeling, bootstrapping, and multi-group technique to test the hypothesized relationships. The results showed a positive relationship between employee ratings of supervisors’ ethical leadership and organizational environmental citizenship behavior. Moreover, green psychological climate mediates the relationship between supervisors’ ethical leadership and organizational environmental citizenship behavior. Importantly, the multi-group analysis revealed that gender moderates the indirect relationship (via green psychological climate) between supervisors’ ethical leadership and organizational environmental citizenship behavior. The study carries useful practical implications for policymakers and managers concerned about environmental sustainability. (shrink)

Corporate reputation is decisive for stakeholders’ supporting or repelling behavior and, therefore, one of firms’ most valuable intangible resources. Drawing on signaling theory, this paper focuses on the usefulness of voluntarily provided corporate reputation disclosures (CRDs) and examines their impact on stakeholders’ attitudinal and behavioral outcomes. Our experimental vignette studies reveal that CRDs reduce stakeholders’ information asymmetries, which positively affects perceived organizational performance and corporate reputation as well as stakeholders’ purchase, investment, and employment intentions. The relationships between CRDs and stakeholders’ (...) behavioral intentions are sequentially mediated by changes in the perceived organizational performance and corporate reputation. This implies that stakeholders use the signals transmitted by CRDs to adjust their perceptions of a firm’s organizational performance and corporate reputation, which ultimately induces their behavioral outcomes. Overall, our empirical results show the usefulness of CRDs for firms in effectively developing stakeholder relationships and, thereby, contributing to assure their going concern. For stakeholders, CRDs improve efficiency in evaluating a firm’s future development. (shrink)