The discussion about the relationship between tone at the top and financial reporting practices has been primarily focused on the oversight role played by the board of directors and other structural elements of corporate governance. Another relevant determinant of tone at the top is the corporate narrative language, since it is a fundamental way in which the chief executive officer enacts leadership. In this study, we empirically explore the association between financial reporting aggressiveness and five thematic indicators capturing different traits (...) of ethical leadership from 535 annual letters to shareholders. We find that aggressive financial reporting is positively associated with CEO letters using a language which is resolute, complex, and not engaging. Our empirical findings highlight the importance of examining discretionary corporate narratives for the auditing process and the role of tone at the top in influencing accounting practices. (shrink)

Researchers have suggested that ethical judgments about “right” and “wrong” are the result of deep and thoughtful principles and should therefore be consistent and not influenced by factors, such as language :e94842, 2014b, p. 1). As long as an ethical scenario is understood, individuals’ resolution should not depend on whether the ethical scenario is presented in their native language or in a foreign language. Given the forces of globalization and international convergence, an increasing number of accountants and accounting students are (...) becoming proficient in more than one language, and they are required to interpret and apply complex ethical pronouncements issued by various global standard setters both in their native language and in English. There have been calls in the literature to examine whether subjects make systematically different ethical judgments in a foreign language than in their native language. We contribute to the literature by drawing on culture, linguistics, and psychology research to provide empirical evidence that Chinese subjects are more aggressive in interpreting the concept of control when providing their consolidation reporting recommendations in English than in Simplified Chinese. We applied a 2 × 2 within-subject and between-subject randomized experimental design using a sample of Chinese final year undergraduate accounting students at a leading Chinese university, where accounting courses are taught in both Simplified Chinese and English. Students in our study are proxy for entry-level accounting practitioners. Our findings have implications for the globalized business world and cross-cultural research by challenging the commonly held assumption that an individual’s ethical judgment is consistent in different languages. We suggest that systematically different ethical judgments in native and foreign languages needs to be recognized. (shrink)

The purpose of this study was to investigate whether intent, an attribute of earnings management, affected the evaluation of the level of ethical acceptability of other EM attributes reported by senior Canadian undergraduate accounting students. Extending work in the U.S. begun by Merchant and Rockness and Bruns and Merchant, 22–25, 1990), our results indicate that there were statistically significant differences in the assessments of ethical acceptability attributable to intent. There were also significant differences attributable to gender.

We examine the impact of activated versus non-activated ethical norms on the aggressiveness of accounting decisions, in the presence of self-interest favoring aggressiveness. Using a case in which the accounting rules are ambiguous, we ask professional accountants to make an accounting decision as though they were in their own organization; we measure the ethical norms of their organization at the end of the experiment. Based on the focus theory of normative conduct, we argue that the general ethical norms of the (...) participants’ organizations are activated when the decision structure is such that the participant receives a recommendation from a subordinate, whereas those norms are not activated when the participant is making the decision alone. We find that higher ethical norms decrease aggressiveness when the decision maker receives a recommendation, whereas higher ethical norms have no impact on aggressiveness when the decision maker makes the decision alone. Our results demonstrate that general ethical norms, known to impact decisions having clear ethical content, can also curb accounting aggressiveness when these norms are activated. Furthermore, firm practices such as decision structure can activate norms. These findings are of interest to practitioners and regulators who seek to temper aggressive accounting. (shrink)

This article documents the response of cooperative institutions that were required to adhere to new capital adequacy regulations traditionally geared for profit-maximising organisations. Using data from the Australian credit union industry, we demonstrate that the cooperative philosophy and internal corporate governance structure of cooperatives will lead management to increase capital adequacy ratios through the application of accounting window dressing techniques. This is opposite to the intended purpose of template regulation aimed at efficiently increasing operating margins and lowering risk. Our results (...) raise several debatable issues regarding the ethics of accounting management and the imposition of one-shoe-fits-all external regulation. (shrink)

This paper investigates the moderating role of industry regulation on the effectiveness of audit committees in restricting earnings management. Using comprehensive panel data of S&P 1500 firms between 2003 and 2007, we find that the proportion of CEO directors on an audit committee is positively associated with earnings management in unregulated industries, while this association is significantly weaker in regulated industries. Further, the proportion of financial experts on an audit committee is negatively associated with earnings management. Our results also indicate (...) that the average board tenure of audit committee members is negatively related to earnings management in regulated industries, but positively affects earnings management in unregulated industries. Finally, audit committee members’ average directorship increases earnings management in regulated industries, but reduces earnings management in unregulated industries. Overall, our results suggest that the effectiveness of audit committees in reducing earnings management and improving financial reporting quality is influenced by industry regulation. (shrink)

It has long been recognized that accountants practicing in business settings have a dual role: as employees, they are bound to the organization, and as professionals, they are bound by the profession’s code of ethical conduct : 119–128, 1986). These two roles highlight the need to recognize and consider both the ethical and economic implications of their decisions. Practicing industry accountants are commonly involved in a broad range of their firm’s business practices and decision making, and are increasingly exposed to (...) the commercial aspects of their companies. Also, during their education, they were trained on their professional responsibilities. However, in general, this education was not recent and may not have been reinforced. By contrast, accounting students have been recently and repeatedly exposed to and have knowledge about their professional responsibilities as an accountant, but limited, if any, exposure to the commercial aspects of business. Consequently, our first hypothesis predicts that the ethical sensitivity of practicing industry accountants will be lower than that of accounting students. We find limited support for this hypothesis. Second, we also examine company reward structure and predict that ethical sensitivity will be lower for those in a company with a reward structure narrowly focused only on financial goals as compared to those in a company with a broad reward structure. Third, we predict that the difference in ethical sensitivity levels between those in a company with a narrow reward structure as compared to those in a company with a broad financial reward structure will be higher for practicing industry accountants compared to accounting students. Results from our study generally support these last two predictions. Ethical sensitivity is lower for those in a company with a reward structure narrowly focused only on financial goals as compared to those in a company with a broad reward structure, suggesting that companies may be able to increase ethical awareness in their organizations by including non-financial goals in their reward structures. (shrink)

Management accounting and control seeks to provide information that substantiates decision-making at all firm levels and thus may also foster ethical decision-making. Against this background, this article presents a systematic literature review of research on management accounting and control and business ethics that has been published in the Journal of Business Ethics. Through this review, we intend to bring to the forefront a research topic that has been widely neglected in broader literature reviews on accounting ethics research and that has (...) been covered by a small number of articles published by traditional leading accounting journals only. Our systematic literature review is guided by a theoretical framework that integrates the decision-facilitating and decision-influencing roles of management accounting and control information and the stages of the ethical decision-making process. Through this theoretical lens, we analyze 64 management accounting and control articles published in the Journal of Business Ethics over more than three decades. Synthesizing and structuring this research, we discuss prior accomplishments and elaborate on avenues for future research. (shrink)

Using a sample of 11,357 firm-year observations from the Chinese stock market for the period of 2001–2011, we investigate whether and how religion can mitigate earnings management. Specifically, based on geographic-proximity-based religion variables, we provide strong and robust evidence to show that religion is significantly negatively associated with the extent of earnings management, suggesting that religion can serve as a set of social norms to mitigate corporate unethical behavior such as earnings management. Our findings also reveal that the negative association (...) between religion and earnings management is less pronounced for firms with closer distance to the regulatory centers than for their counterparts, implying the substitutive effects between religion and the distance to regulators on mitigating earnings management. The above results are robust to different measures of earnings management, various religion variables, and a variety of sensitivity tests. (shrink)