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The Impact of Ethical Leadership, the Internal Audit Function, and Moral Intensity on a Financial Reporting Decision

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  • Barbara Arel
  • Cathy Beaudoin
  • Anna Cianci

Abstract

Two elements of corporate governance—the strength of ethical executive leadership and the internal audit function (IAF hereafter)—provide guidance to accounting managers making decisions involving uncertainty. We examine the joint effect of these two factors, manipulated at two levels (strong, weak), in an experiment in which accounting professionals decide whether to book a questionable journal entry (i.e., a journal entry for which a reasonable business case can be made but there is no supporting documentation). We find that ethical leadership and the IAF interact to determine the likelihood that accountants book the entry. Specifically, accountants are less likely to book a questionable journal entry when there is a weak ethical leader and a strong IAF compared to all other conditions. In addition, we find that accountants question the appropriateness and ethicalness of the request to book an undocumented journal entry more in the weak ethical leader and strong IAF condition than in the other conditions. These results suggest that the IAF has a different impact on financial reporting decisions depending on the ethicalness of executive leadership and that a strong IAF may cause accountants to question the appropriateness and ethicalness of an undocumented journal entry when combined with weak ethical leadership. We also find that the interactive effect of ethical leadership and the IAF on an accountant’s decision is fully mediated by his/her perception of the moral intensity of the issue. Thus, accountants, who perceive greater moral intensity associated with booking the entry, are less willing to do so. Copyright Springer Science+Business Media B.V. 2012

Suggested Citation

  • Barbara Arel & Cathy Beaudoin & Anna Cianci, 2012. "The Impact of Ethical Leadership, the Internal Audit Function, and Moral Intensity on a Financial Reporting Decision," Journal of Business Ethics, Springer, vol. 109(3), pages 351-366, September.
    • Handle: RePEc:kap:jbuset:v:109:y:2012:i:3:p:351-366
    DOI: 10.1007/s10551-011-1133-1
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    References listed on IDEAS

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    3. Dan Dacian Cuzdriorean, 2013. "Students Attitudes Regarding The Ethics Of Earnings Management Activities: An Empirical Investigation," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(15), pages 1-6.
    4. Cathy Beaudoin & Anna Cianci & George Tsakumis, 2015. "The Impact of CFOs’ Incentives and Earnings Management Ethics on their Financial Reporting Decisions: The Mediating Role of Moral Disengagement," Journal of Business Ethics, Springer, vol. 128(3), pages 505-518, May.
    5. Kim T. Baumgartner & Carolin A. Ernst & Thomas M. Fischer, 2022. "How Corporate Reputation Disclosures Affect Stakeholders’ Behavioral Intentions: Mediating Mechanisms of Perceived Organizational Performance and Corporate Reputation," Journal of Business Ethics, Springer, vol. 175(2), pages 361-389, January.
    6. Anna M. Rose & Jacob M. Rose & Ikseon Suh & Jay Thibodeau & Kristina Linke & Carolyn Strand Norman, 2021. "Why Financial Executives Do Bad Things: The Effects of the Slippery Slope and Tone at the Top on Misreporting Behavior," Journal of Business Ethics, Springer, vol. 174(2), pages 291-309, November.
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