Whistle blowing programs have been central to numerous government, legislative, and regulatory reform efforts in recent years. To protect investors, corporate boards have instituted numerous measures to promote whistle blowing. Despite significant whistle blowing incentives, few individuals blow the whistle when presented with the opportunity. Instead, individuals often remain fallaciously silent and, in essence, become passive fraudsters themselves. Using the fraud triangle and models of moral behavior, we model and analyze fallacious silence and identify factors that may motivate an individual (...) to rationalize fallacious silence. We use a survey of graduate accounting students to test hypothesized factors that contribute to fallacious silence rationalizations in an academic setting. We find evidence that the ability to rationalize fallacious silence is related to community influences and personal traits such as awareness and moral competence. (shrink)

Over the past decade, a number of accounting and financial reporting frauds have led to lost stock wealth, destroyed public trust, and a worldwide recession that called for necessary reform. Regulatory responses and systemic reforms quickly followed, and we show that, while necessary, these reforms are insufficient. The purpose of this paper is to forward virtuous professionalism as a necessary path toward restoring financial reporting systems. We take the position of external observer and analyze the accounting profession over time to (...) assess what has transpired within our financial reporting systems. Our analysis reveals that the combined influence of commercialism and regulatory response has led to a systemic decline in accounting’s professional ideals and, as a result, an erosion of public trust. We then propose virtuous professionalism as a necessary process for restoring financial reporting systems based on sociological, professional, and philosophical theories. We argue that virtuous professionalism is necessary for restoring the public servant identity of the accounting professional. We conclude that efforts to restore financial reporting systems should begin with reforms that restore professional identity shaped by virtues. (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)