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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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Author Info

  • Barbara Arel

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  • Cathy Beaudoin

    ()

  • Anna Cianci

    ()

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    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

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    File URL: http://hdl.handle.net/10.1007/s10551-011-1133-1
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    Bibliographic Info

    Article provided by Springer in its journal Journal of Business Ethics.

    Volume (Year): 109 (2012)
    Issue (Month): 3 (September)
    Pages: 351-366

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    Handle: RePEc:kap:jbuset:v:109:y:2012:i:3:p:351-366

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    Web page: http://www.springerlink.com/link.asp?id=100281

    Related research

    Keywords: Ethics in accounting; Moral intensity; Ethical leadership; Moral action; Internal audit function; Financial reporting;

    References

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    1. Steven Kaplan & Joseph Schultz, 2007. "Intentions to Report Questionable Acts: An Examination of the Influence of Anonymous Reporting Channel, Internal Audit Quality, and Setting," Journal of Business Ethics, Springer, vol. 71(2), pages 109-124, March.
    2. Ryan Davidson & Jenny Goodwin-Stewart & Pamela Kent, 2005. "Internal governance structures and earnings management," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 45(2), pages 241-267.
    3. John R. Graham & Campbell R. Harvey & Shiva Rajgopal, 2004. "The Economic Implications of Corporate Financial Reporting," NBER Working Papers 10550, National Bureau of Economic Research, Inc.
    4. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
    5. Merchant, Kenneth A. & Rockness, Joanne, 1994. "The ethics of managing earnings: An empirical investigation," Journal of Accounting and Public Policy, Elsevier, vol. 13(1), pages 79-94.
    6. Jeanette Ng & Gregory White & Alina Lee & Andreas Moneta, 2009. "Design and Validation of a Novel New Instrument for Measuring the Effect of Moral Intensity on Accountants’ Propensity to Manage Earnings," Journal of Business Ethics, Springer, vol. 84(3), pages 367-387, February.
    7. Breda Sweeney & Don Arnold & Bernard Pierce, 2010. "The Impact of Perceived Ethical Culture of the Firm and Demographic Variables on Auditors’ Ethical Evaluation and Intention to Act Decisions," Journal of Business Ethics, Springer, vol. 93(4), pages 531-551, June.
    8. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
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    Cited by:
    1. 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 6.

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