Determinants of auditors’ perception of ethics within big
audit firms.
A case study from Romania and the Netherlands.
Name: Cristian Tomac Student number: 11115181
Thesis supervisor: Elma van de Mortel Date: June 25, 2018
Word count: 30.544
MSc Accountancy and Control, Accountancy track
Statement of Originality
This document is written by student Cristian Tomac who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Content
Content ... 3 Abstract ... 6 Chapter 1. Introduction ... 7 1.1 Background ... 7 1.2 Research motivation ... 8 1.3 Research question ... 9Chapter 2. Sector description ... 11
2.1 Assurance services ... 11
2.2 Financial Audit ... 11
2.3 “Big Four” firms ... 13
2.3.1 History of audit industry ... 13
2.3.2 Big Four firms – General information ... 13
2.3.3 Big Four firms – Description ... 14
2.4 Development of audit in Romania ... 18
2.5 Big Four firms in Romania ... 21
2.6 Audit market in the Netherlands ... 21
2.7 Big Four firms in the Netherlands ... 24
2.8 Conclusion ... 24
Chapter 3. Theory development ... 26
3.1 Ethics ... 26
3.2 Business ethics ... 27
3.2.1 Theorizing business ethics ... 27
3.2.2 Ethical perception ... 28
3.3.3 Previous literature on business ethics ... 29
3.3.3.1 Individual factors ... 31
Gender ... 31
Nationality and culture ... 32
Ethical experience ... 32
Affect and arousal ... 35
3.2.3.2 Organizational factors ... 36
Formal ethical infrastructure ... 37
Informal Ethical Infrastructure ... 38
Chapter 4: Research methodology ... 43
4.1. Description of the research method ... 43
4.2. Criteria for qualitative research ... 44
4.3. Research design ... 44
Chapter 5: Results ... 49
5.1 Introduction ... 49
5.2 Organizational factors ... 49
5.2.1 Formal communication systems ... 49
5.2.1.1 International Code of Ethics for Professional Accountants ... 49
5.2.1.2 Codes of Conduct ... 53
5.2.1.3 Trainings on ethics ... 54
5.2.1.4 Internal communications ... 55
5.3.1.5 Ethical breaches reporting channels ... 56
5.2.2 Formal surveillance and sanctioning systems ... 57
5.2.2.1 Control procedures ... 57
5.2.2.2 Performance appraisal ... 61
5.2.3 Informal communication systems ... 63
5.2.3.1 Informal Conversations ... 63
5.2.3.2 Superiors ... 67
5.2.3.3 Peers ... 68
5.2.4 Informal surveillance and sanctioning systems ... 69
5.2.4.1 Group relations ... 69 5.2.4.2 Group surveillance ... 69 5.2.4.3 Group pressure ... 71 5.2.4.4 Group sanctioning ... 73 5.2.5 Conclusion ... 73 5.3 Individual factors ... 75
5.3.1 Affect and arousal ... 76
5.3.2 Education and professional experience ... 79
5.3.3 Nationality and culture ... 80
5.3.4 Religion ... 82
5.3.5 Conclusion ... 82
5.4 Ethical perception ... 83
5.4.2 Ethical dilemmas ... 86
5.4.3 Ethics in audit ... 87
5.4.4 Conclusion ... 88
Chapter 6: Discussion and conclusions ... 89
6.1 Discussion and conclusion ... 89
6.2 Limitations and recommendations ... 92
7. References: ... 95
Appendix 1 ... 99
List of figures Figure 1 - Hierarchical structure within a Big Four firm ... 18
Figure 2 - No. of employees of each Big Four firm in the Netherlands ... 24
Figure 3 - Conceptual model ... 42
Figure 4 - Revised Conceptual Model ... 94
List of tables Table 1- European audit market share rank ... 14
Table 2 - Evolution of professional services firms in Romania ... 21
Table 3 - Big Four firms' market share in Romania ... 21
Table 4 - Evolution of audit firms in the Netherlands ... 23
Table 5 - Top audit firms by market share in the Netherlands ... 23
Table 6 - Review of ethical decision making models ... 30
Table 7 - Individual factors – association expectations ... 36
Table 8 - Organizational factors - expected associations ... 40
Table 9 - Overview of respondents within Romanian Big Four firm ... 45
Table 10 - Overview of the respondents within Dutch Big Four firm ... 46
Table 11 - Informal communications systems - Overview of the results ... 51
Table 12 - Formal surveillance and sanctioning systems - Overview of the results ... 58
Table 13 - Informal communication systems - Overview of the results ... 64
Table 14 - Informal surveillance and sanctioning systems - Overview of the results ... 70
Table 15 - Organizational factors - Summary of the results ... 75
Table 16 - Individual factors - Overview of results ... 77
Table 17- Individual factors - Summary of the results ... 83
Abstract
Purpose – The purpose of this study is to provide an understanding of auditors’ perception of ethics within big audit firms in Romania and the Netherlands.
Design/methodology/approach – The aim of the paper is addressed through a comparative case study which examines how auditors’ perception of ethics is formed. Data collection was performed by using semi-structured interviews with 6 auditors from one Big Four in Romania and 6 auditors from one Big Four in the Netherlands. The conceptual model which helps investigating the perception of audit is based on a synthesis of factors influencing ethical perception.
Findings – The study identifies that auditors’ perception of ethics is influenced by two main types of factors: individual and organizational factors. Furthermore, the study identifies that organizational factors pose a stronger influence on ethical perception and that this influence is generally positive. Moreover, the research identified that the influence magnitude of influence of individual factors varies across two studied contexts.
Research limitations – The main limitation of the study is referring to bias of the self-reported data in the sense that ethics is a rather sensitive concept, especially within audit, therefore, the fairness of collected data can be questioned. Furthermore, as this study analyses a specific context, it can be argued that the findings are not transferable to other cases.
Originality / value - The study compares the determinants of perception of ethics within two apparently different national and cultural spaces.
Chapter 1. Introduction
1.1 Background
The last two decades have seen a growing trend towards study of professional ethics, especially in the corporate sector. This increased interest was mainly caused by the tremendous number of financial scandals which were discovered in the early 00s and which shattered the public’s trust in corporate world. (Ball, 2009) provides a list of example of companies involved in financial scandals: “AOL, Bristol-Myers Squibb, Cendant, Computer Associates (CA), Conseco, Dynegy, Enron, Federal Home Loan Mortgage Corporation (“Freddie Mac”), HealthSouth, Peregrine Systems, Qwest, Rite Aid, Sunbeam, Tyco, Waste Management, WorldCom, Xerox, etc. In Europe, ComRoad AG (Germany), Lernout & Hauspie Speech Products (Belgium), Parmalat (Italy) and Royal Ahold (Netherlands)” (p. 278).
These scandals have led to several negative outcomes for corporate world such as, “decline in the worldwide reputation of a wide variety of U.S. institutions, including U.S. generally accepted accounting principles (GAAP), the most substantial increase in the regulation of U.S. public financial reporting in 75 years, under the Sarbanes-Oxley Act of 2002; creation of a Public Company Accounting Oversight Board (PCAOB) with almost unfettered powers to adopt and enforce rules governing the audit industry and to discipline audit firms and employees; the demise of a once-proud accounting firm; and a forest of largely unhelpful literature” (Ball, 2009, p. 278).
A several number of occurring scandals were involving, among others, auditors and audit firms. The nature itself of the audit work exposes this field to a continually evolving and expanding public expectation. The assurance nature of the audit work leads to the fact that, auditors are often seen by the public as sort of “watchdogs” of the business world making them held accountable for every stumble of their clients.
After the abundance of financial scandals at the beginning of millennia and subsequent criticism aimed directly at the audit profession, big audit firms understood that they have to deal with this trust issue. The audit industry focused on managing the societal expectation gap, for example, using the words of a prominent British judge of the nineteenth century – that auditor is a “watchdog”, not a “bloodhound”.
Furthermore, audit industry advanced the idea that problems related to financial scandals can be resolved by improved ethics. Occurrence of financial scandals “encouraged a revival of ethics, manifested in training programs, appointment of corporate ethics officers and company ethics videos as well as pronouncements by individual accounting firms and professional bodies” (Cooper & Neu, 2006, p. 5).
However, after more than 15 years after the Enron scandal, there is sufficient evidence for public to seriously doubt audit industry ability to improve their ethics. As evidence, there are financial scandals which involved big accounting and audit firms which continued to arise year after year, even though not in the same frequency and magnitude.
1.2 Research motivation
In pursue to improve trust in corporate world, both US and the European countries witnessed a shift in paradigm towards the regulation of the auditing profession. After the Enron scandal, US Congress passed the Sarbanes-Oxley Act which aimed to cease corporate fraud by improving the corporate governance and strengthening the function of auditing. However, both public and academia seriously doubt the ability of new regulation to treat definitively the issues surrounding the corporate world as, in their opinion, integrity and objectivity is outside the scope of any legislation. “Although, a stricter regulation can be effective in covering certain legal loopholes, the real determinants in (un)ethical behavior are the ethical beliefs held by individual auditors.” (Kung & Huang, 2013, p. 481). Verschoor (2004) argues that an individual who does not take into consideration the consequences of his actions will always find new ways to bypass the laws.
Goldberg & Centers (2012) signal a deficiency within the assumptions which lay grounds both for regulation setting but also for education and research, that is, the assumption “that individuals recognize when they encounter ethical situations and that a better understanding of ethics results in better ethical decisions” (p. 23). Goldberg & Centers (2012) argue that in “most of the cases of unethical behavior and corruption are unintentional - being a result of ethical decisions bounded by unconscious psychological processes and the fading of the ethical dimensions of the problem. Therefore, the laws and regulation directed at intentional corruption are often of little efficacy in protecting the society.” (p. 23)
An extensive part of the research on business ethics focus on study of such concepts as ethical decision-making, ethical behavior and ethical judgement, however, a relatively small amount of studies take into consideration the idea that the starting point for all concepts mentioned before is ethical perception. Without recognizing the ethical sensibility of a specific situation, the individual simply does not get to the stage of ethical judging or ethical decision.
1.3 Research question
As mentioned above, despite the extensive previous literature on the professional ethics in accounting and auditing sector, up to date a few studies have examined auditors’ perception of ethics. Furthermore, the previous research failed to compare the similarities/differences in perception of ethics between the professionals from Western and Eastern European countries. In order to address the gap in the literature, this study uses a qualitative case study approach to investigate the following research question:
“What are the determinants of ethical perception of the auditors within big audit firms? A case study from a Big Four firm in the Netherlands and Romania.”
Sub-questions which will help answer the main research question are:
1) What are ethics in audit?
2) What are the ethical particularities of an auditor?
3) What is the difference between audit sectors in Romania and the Netherlands? 4) What is the difference between Big Four firms in Romania and the Netherlands?
5) What are differences in determinants of auditors’ perception of ethics in Romania and the Netherlands?
6) What are the differences in auditors’ perception of ethics in Romania and the Netherlands?
The current research contributes to existing literature in two ways. Firstly, this provides new insights into the existing research on ethics in audit by examining what are the determinants of auditors’ perception of ethics.
Secondly, it contributes to the literature on factors influencing ethical perception in audit. By examining two apparently different cultural spaces (i.e. the Netherlands and Romania), the current study shows what are the similarities and differences in dealing with ethical concerns in Big Four firms from these two countries.
The remaining part of the paper proceeds as follows: Chapter 2 provides a description of the sector and of the research context; Chapter 3 lays out the theoretical dimensions of the research; Chapter 4 is concerned with the research design and methodology employed for this study; Chapter 5 presents the findings of the research and Chapter 6 – the final chapter outlines the main conclusions and the limitations of the study.
Chapter 2. Sector description
2.1 Assurance services
According to American Institute of Certified Public Accountants1, assurance service is “an
independent professional service, typically provided by an independent professional, with the goal of improving information or the context of information so that decision makers can make more informed, and presumably better, decisions.”.
International Framework for Assurance Engagements (2005, p. 6) defines assurance engagements as “an engagement that involves the evaluation or measurement of a subject
matter that is the responsibility of another party against identifiable suitable criteria, in order to express a conclusion that provides the indented users with a level of assurance about the subject matter”.
Assurance sector comprise a wide variety of type of services but the service with the biggest importance and market share is, by far, audit. Audit services are a sub-category of assurance service which, depending on their objective can be classified in three main categories:
• Financial audit;
• Compliance audit;
• Operational audit.
In order to answer the main research question, namely, “What are the determinants of auditors’
perception of ethics in big audit firms?”, the present study will focus exclusively on financial
audit due its market share within the total assurance services as well as due to their importance for the public.
2.2 Financial Audit
American Accounting Association (1973) defines financial audit as “a systematic process of
objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria - and communicating the results to interested users”.
At the international level, the emergence of audit services was originally caused by the development of capital markets. Shareholders imposed on listed firms a series of requirements with respect to financial reporting, requirements which were based on trust granted by the independent and professional opinion of the external auditors.
Audit is required as “monitoring device because of the potential conflicts of interests between
owners and managers as well as those among different classes of security holders” (DeAngelo,
1981, p. 185). The main roles of an external audit are the following:
• ensuring compliance with applicable criteria – financial audits provide assurance that the
company financial statements are compliant with relevant accounting standards;
• enhancing credibility in financial statements and in the firm as a whole – financial audit plays a crucial role in certifying the legitimacy of the financial information. Existing and potential providers of capital (i.e. lenders and investors) require a certain level of assurance in order to view a firm as being trustworthy.
• identifying potential inaccuracies in firm’s processes – financial auditors have an external
look at the company’s accounting processes as well as at company’s operations and state potential defects within these processes;
• identifying potential deficiencies of the firm’s internal audit process – as part of the audit,
auditors are verifying company’s internal audit function in order to identify potential misstatements which can pass through internal control function.
Also, financial audit services play a vital role in the functioning of capital markets as they certify the financial information provided by the listed companies and therefore, enhance decision-making processes and consequently, more effective allocation of capital.
Another characteristic of financial audit that increases its leverage on market is the fact that the demand for financial audit services by public companies is inelastic as the public companies are legally required to obtain an independent audit opinion on their financial statements, with no substitution for such services available.
In conclusion, financial audit proves to one of the key factors in the global economy due to its role of certification of the financial information provided by firms. However, the benefits granted by this role come bundled with massive responsibilities and continuous public scrutiny.
2.3 “Big Four” firms
2.3.1 History of audit industry
In the broad sense of the term, the audit industry comprises the firms providing professional services both in audit and in other areas, such as advisory, accounting and tax. The audit firms generally provide to the public three types of services: audit (or assurance), tax and consulting (or advisory). The primary source of revenues for audit firms is supply of external audit services.
Historically, the professional services industry went through a continuous process of concentration of the market, therefore, during the 19th century, the market was comprised of big amount of small audit firm providing a wide range of services. Further, the 20th century was
dominated by eight big accounting firms which were called “the Big Eight”. Most of the Big Eight originated in alliances formed between British and U.S. audit firms in the 19th or early
20th centuries. Since 1989, firms continued to merge and after the Enron scandal and fall of
Arthur Andersen, Big Eight reduced to Big Four.
2.3.2 Big Four firms – General information
The term „Big Four“ refers to the four major professional services networks specializing in accountancy and professional services: Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers. The Big Four companies serve as auditors for the majority of publicly traded companies, and deal with a number of private companies as well. For example, according to the latest statistics2, the Big Four companies audit 241 out of 250 (i.e. 96%) of the firms included in Financial Times Stock Exchange 250 index which comprise top 250 firms with the highest market capitalization listed on London Stock Exchange. The combined revenue of the Big Four (Ernst & Young, KPMG. Deloitte and PricewaterhouseCoopers) amounted to more than 134 billion U.S. dollars in 20173. At the level of European Union, Big Four firms audited 98%4 of 633 companies included in the major large and mid-cap indices in
2
https://www.accountancyage.com/2018/03/05/big-four-dominate-ftse-250-audit-market-q1-rankings/
[last accessed: 10/06/2018] 3
https://www.statista.com/statistics/250479/big-four-accounting-firms-global-revenue/ [last accessed: 10/06/2018]
4
five of the largest countries of Europe in financial year 2017. The detailed statistics regarding the number of the audited firms at the level of EU is presented in Table 1 below.
Table 1- European audit market share rank
Auditor #Companies %
PricewaterhouseCoopers 190 30%
KPMG 159 25%
Deloitte 142 22%
Ernst & Young 131 21%
BDO 6 1%
Grant Thornton 5 1%
Source: Audit Analytics Europe
2.3.3 Big Four firms – Description
The Big Four firms in each country are members of a professional services network. Each Big Four company is a network of firms, owned and managed independently, which have entered into agreements with other member firms in the network to share a common name, brand and quality standards. Each network has established an entity to co-ordinate the activities of the network (hereinafter referred to as “International Firm”)5. The International Firm performs commercial activities for the global benefit of the members of the network, however, it does not provide professional services to external clients – the mission of providing services to clients is undertaken exclusively by member firms.
As mentioned above, the member firms are generally owned and managed at the local level. Each firms is solely responsible for its own obligations and liabilities. The International Firm and other member firms are not responsible for obligations and liabilities of another member firm.
5
One of the main objectives of the International Firms is to facilitate the supply of professional services by the member firms. International Firm establishes and implements the quality policies and working standards in a uniform manner at the level of all member firms.
In agreement with International Firm, member firms are compelled to comply with policies and regulations established by International Firm, including quality standards that regulate the services provided by each member firm. Additionally, member firms commit to follow a common set of values at the global level.
As mentioned before, the International Firm establishes and implements quality control policies at the level of each member firm. These policies are included in the Global Manual on Quality and Risk Management which is available to all firms’ personnel.
These policies and related procedures are designed to guide member firms to comply with relevant professional standards, legal and regulatory requirements, as well as to help member firms’ staff to act with integrity and objectivity and fulfill their tasks in a consciousness manner. These procedures and policies are based on International Standard on Quality Control (ISQC1) and on International Code of Ethics for Professional Accountants issued by International Ethics Standards Board for Accountants (IESBA).
The changes in the policies on quality and risks as well as the changes on ethics and independence policies are included in alerts and are communicated to all employees via email.
Ethics and Independence
International Firm establishes detailed policies and procedures for independence which incorporate the requirements of the Code of Ethics of IESBA. These procedures are supplemented by additional procedures in order to ensure the compliance with standards issued by Chamber of Financial Auditors of Romania and by ASPAAS. These procedures cover areas such as firm independence, personnel independence, post-employment relations, partner rotation and the approval of assurance and non-assurance services.
In order to ensure that the policies and procedures are implemented and followed, each local firm appoints a Partner responsible with Ethics and Independence whose main task is to manage and implement the ethical independence procedures at the level of member firm.
The terms “Code of Ethics” and “Code of Conduct” are frequently used interchangeably, however, these are two distinct documents. While Codes of Ethics outline general principles that govern behavior and influence decision-making within an organization, Codes of Conduct outline particular behavior that are required or prohibited as a condition of ongoing employment6. In simpler terms, Code of Conduct applies the principles stated in the Code of
Ethics to relevant situations within an organization.
According to the transparency reports for 2016/2017 of both Big Four firms, the general policies and associated procedures with respect to conduct are set-up within a Global Quality & Risk Management Manual (also called Audit Guide). Both firms state that the policies and associated procedures are based among others on Code of Ethics for Professional Accountants issued by IESBA.
Recruitment and performance evaluation
The leitmotiv maintained by all Big Four firms is that “their most important assets are their people”. In order to ensure the quality of the services provided to the clients, Big Four firms allocate considerable amount of resources on personnel recruitment and development.
All candidates require a professional position and are hired further to a complex selection process that may include, but it is not limited to: checking the job application, competence interviews, psychometric testing and technical skills testing, review of qualifications and recommendations.
Further to enrollment, new employees participate in a comprehensive initiation program usually called “Induction Days”, which includes, among others, courses in such areas as ethics and independence.
All Big Four firms’ staff, including partners, go through a process of setting annual performance appraisal. Each employee is ranked according to the fulfillment of objectives set at the beginning of each year, demonstration of firm’s global behavior, technical capabilities and market knowledge. The results of yearly performance evaluation have a direct influence on promotion and remuneration, both for firms’ partners as well as for the rest of the employees.
6
Organizational structure
In general, the departments in Big Four firms are established according to the type of supplied services: audit and assurance, tax consultancy and advisory. The departments can be specialized on a specific industry or market or they can be non-specialized which implies that the department can audit companies from different industries. The employees within the departments are divided into two main groups: professional staff, that is the staff who is working on audit engagements and support personnel which refers to staff which is in charge of support activities to the audit personnel.
With respect to the audit engagements, the work is performed by audit teams who usually perform their activity either at the audit client’s premises or in the office of the Big Four firm. The number of professional employed in an audit team can vary based on the size and the complexity of the audit engagement. The audit team is led by a management professional (i.e. Partner, Senior Manager, Manager) who is in charge of managing the audit engagement. The audit team is formed of junior and senior staff, supervisors and managers. In general, the size of an audit team varies between 4 and 6 professionals. The audit teams are established for a singular audit engagement, therefore, the same professional can work in multiple audit teams during the year.
The general hierarchy in an audit department within a Big Four firm is presented in the Figure 1 below. As the Big Four firms are a network of an independent professional firms which are managed independently, the hierarchy and the positions within the audit department can vary depending on the firm and the country, however, it generally follows the general hierarchical structure.
Partner Senior Manager Manager Assistant Manager Senior Associate Junior Associate
Figure 1 - Hierarchical structure within a Big Four firm
2.4 Development of audit in Romania
At least from the normative perspective, in Romania, the development of audit started relatively late. For example, the definition of audit activity was set-out only in 1999. The professional body that organized the audit profession (i.e. Chamber of Financial Auditors of Romania) was founded in 2000. However, even though the audit was not defined until 1999, the audit services have been there for long time. Until 1989, as part of the centralized economy, a strong focus was on verifying how the state resources were managed by the firms on behalf of the state as the sole owner, Later, during the 90s, as part of the process of transition to free-market, there was an increased demand for more transparent and credible financial information. Therefore, until 1999, the accountants were hired by firm’s censors in order to express an independent opinion on whether the firm’s financial statements were representing a fair, clear and full view of the patrimony and the outcome of the economic entity.
From the moment it was established in 1999 and up until now, the financial audit legislation in Romania was subject to multiple changes. In 2010, the definition of financial audit was reformulated and supplemented as follows: “the financial audit is the activity performed by
financial auditors for expressing an opinion on the financial statements or some of their components, other assurance and professional services, according to the International Audit
Standards and other regulations adopted by the Chamber of Financial Auditors of Romania
(CAFR, 2010)”.
In 2007, Romania became a member-state of the European Union and since then, it is subject to the accounting, auditing and financial reporting requirements established in EU Regulations and Directives as transposed into national laws and regulations.
The financial audit also comprises statutory audit which represents a legally required review of a company’s financial statements. This requirement is usually provided in a firm’s Constitutive Act or any other contract which sets-out the foundation of a firm. In Romania the statutory audit was introduced in 2008 as a result of implementation of European regulations into the national legislation and it comprises the audit of annual financial statements and the audit of consolidated financial statements.
According to Romanian legislation, not all the companies are required to audit their financial statements, and therefore to implement statutory audit. The requirement to audit the financial statements applies only to firms which, at the balance sheet date, exceed the limits of two of the three size criteria on: total assets - 3,650,000 euros; net turnover - 7,300,000 euros and average number of employees during the financial year - 50.
Furthermore, together with the establishment of statutory financial audit, the Romanian Government introduced a system of public oversight by the establishment of the Public Oversight Board of the Statutory Audit Activity (CSIPPC) which undertook the role of external quality assurance for statutory audit engagements and for the audit firms providing assurance services for public interest firms.
Public Oversight Board’s main responsibilities are supervising the quality control regarding the statutory audits; monitoring the way in which the European regulation on independence of statutory auditors is transposed into Romanian legislation framework; supervision of the investigation on audit quality but also conduction of its own investigations on audits/audit firms/auditors; supervision of the activity of the Body of Expert and Licensed Accountants of Romania (CECCAR) and the activity of the Chamber of Financial Auditors of Romania (CAFR) and supervision of the education of the statutory auditors and members of CECCAR.
Besides the external quality supervisory board, there are two professional accountancy organizations in Romania: (1) the Body of Expert and Licensed Accountants of Romania (CECCAR) and the Chamber of Financial Auditors of Romania (CAFR).
CECCAR was firstly established in 1921 and was re-established in 1992, after the fall of communism. Its main responsibilities are the following:
• maintaining registries of its members;
• set initial and continuing professional development requirements for its members; • establish ethical standards and an investigative and disciplinary system for its members7.
The Chamber of Financial Auditors of Romania (CAFR) is the professional body which organizes, coordinates and authorizes financial audit activity in Romania8.
The main activities of CAFR are including among others, the following: • accreditation of the financial auditors;
• providing initial and continuous professional education to CAFR members; • training trainees and organizing the exams for admission into the profession; • controlling and monitoring of CAFR members activities.
According to legislation that establishes the statutory audit in Romania, all statutory audits have to be carried out in compliance with ISA as issued by the IAASB. CAFR, under the supervision of the Public Interest Oversight Board for the Accountancy Profession, is responsible for the translation of auditing standards for application in Romania. CAFR reports that as of 2017, 2015 ISA has been translated and is being applied.
With respect to ethical requirements, CFAR is responsible for establishing ethical requirements for auditors and has translated and adopted the IESBA Code of Ethics. The 2015 version of the IESBA Code of Ethics was adopted and translated by CFAR in December 2016.
The audit market in Romania and the demand for audit services is continuously increasing due to economy development, emergence of new companies and the entry of the multinational companies on Romanian markets. The evolution of the firms providing professional services such as, accounting and auditing and non-assurance services is presented in Table 2 below.
7
https://www.ifac.org/about-ifac/membership/country/romania [last accessed 04.05.2018]
8
Table 2 - Evolution of professional services firms in Romania No. of employees 2008 2009 2010 2011 2012 2013 2014 2015 2016 0-9 8.260 8.420 7.752 7.196 7.574 7.680 7.858 8.132 9.251 10-49 134 146 144 156 172 186 187 181 177 50-249 7 7 9 11 13 13 12 14 14 >249 2 2 1 1 2 3 3 5 6
Source: National Institute of Statistics in Romania
2.5 Big Four firms in Romania
Together, EY, Deloitte, KPMG and PwC are employing over 2800 consultants on the Romanian market which means that the sales efficiency (turnover reported to the number of employees) in Big Four companies is of approximately 57.000 euros/employee/year.
EY is the market leader on the local market with group revenues of 44 million euro for the financial year 2016. Table 3 below is presenting the Big Four companies revenues for 2015 and 2016 in EUR mln..
Table 3 - Big Four firms' market share in Romania
.Source: KPMG/PwC/Deloitte/ EY 2016/2017 Transparency reports
2.6 Audit market in the Netherlands
In contrast to the Romanian accounting and audit market which is relatively young, the Dutch accounting and auditing are at an international high-water market of professional, technical
Company Revenues – 2016 – Revenues – 2015 – EY 44,0 38,6 Deloitte 41,9 37,5 KPMG 38,9 35,6 PwC 35,6 32,7
and international development (Choi & Mueller, 1992, p. 371). The accounting and audit sectors in Netherlands are similar to British Commonwealth Model.
In its quality of Member State of the European Union, the Netherlands is subject to multiple EU laws which are transposed into its national legislation. The accountancy profession in the Netherlands is subject to two regulatory acts: the Audit Firms Supervision Act (Wet toezicht
accountantsorganisaties) and the Auditors Profession Act (Wet op het accountantsberoep).
The Audit Firms Supervision Acts sets out the role of the Dutch Authority for Financial Markets (AFM) as the public oversight entity for financial markets. This responsibility includes among others, the supervision of the entities that provide audit reports. The AFM, with supervisory authority over the profession, monitors the profession’s performance through its quality assurance (QA) review system. It has authority to sanction audit firms for non-compliance with applicable regulations and standards, while the Disciplinary Court for Auditors handles disciplinary cases against auditors.9
Professional education and Ethics
According to the Dutch legislation, The Netherlands Institute of Chartered Accountants (Royal NBA), the Accountability Training Committee (CEA), the Dutch Flemish Accreditation Organization (NVAO), and universities are responsible for initial and continuing professional development of the accountancy profession in the Netherlands.10
The roles in education of the professionals from the accountancy profession are divided as follows:
• the Accountability Training Committee (CEA) is responsible for the theoretical professional education of Registered Accountants (RAs) and Accounting Consultants (AAs), the accreditation and supervision of education providers.
• the Dutch Flemish Accreditation Organization (NVAO) is in charge with accreditation and quality assessment of academic programs in the Netherlands, including university degree programs for accountants.
• the Royal NBA is responsible for the design of the professional profile and work experience assessments of the accounting and auditing profession.
9https://www.ifac.org/about-ifac/membership/country/netherlands/ [last accessed: 19.05.2018] 10https://www.ifac.org/about-ifac/membership/country/netherlands/ [last accessed: 19.05.2018]
With respect to ethical requirements, the Royal NBA is responsible for setting ethical requirements for auditors. The ethical requirements for the accountancy profession in the Netherlands are based on IESBA’s International Code of Ethics.
According to AFM statistics, during the period 2010 – 2018, the number of firms that hold the license to conduct audits has been constantly decreasing. According to the AFM website, currently there are 298 firms which are authorized to provide audit reports, 9 large audit firms and 289 medium-size and small audit firms. The evolution of the number of the firms holding the license to provide audit services is presented in the Table 4 below.
Table 4 - Evolution of audit firms in the Netherlands
As of January, 2018 2010 2011 2012 2013 2014 2017 2018
Accounting organizations 475 474 456 440 413 338 298
PLE11 audit license holders 15 15 13 12 11 10 9
source: Trends in Accountancy 2017-2018
With respect to the market share, the audit market in Netherlands is dominated by Big Four firms, with Deloitte leading the top (EUR 814 mln.). The top ten accounting firms as of year-end 2016 from the perspective of yearly revenues (EUR mln.) are presented in the Table 5 below.
Table 5 - Top audit firms by market share in the Netherlands
Company Revenues (2016) Revenues (2015)
1 Deloitte 814,0 785,00
2 PricewaterhouseCoopers 744,0 697,00 3 Ernst & Young 727,0 710,00
4 KPMG 608,0 592,00
5 BDO 249,9 232,00
6 Flynth 129,0 130,00
7 Accon avm 93,8 100,00
8 Baker Tilly Berk 90,7 85,00
9 Mazars 82,0 77,00
10 Alfa 72,5 69,00
source: Trends in Accountancy 2017-2018
2.7 Big Four firms in the Netherlands
With respect to the presence of Big Four firms, the Netherlands shows the same picture as other developed industrial countries. Each of the Big Four firms has multiple offices all over the Netherlands, ranging from 1212 office for KPMG, 1313 offices for PWC and 151415 for EY and
Deloitte.
As of end of 2017, the aggregate number of personnel working in Big Four firms in the Netherlands was 17.543 employees – on top with Deloitte which employs 5,047 workers. The detailed statistics of number of employees per each of the Big Four firms is presented in Figure 2 below.
Figure 2 - No. of employees of each Big Four firm in the Netherlands
source: KPMG/Deloitte/PwC/EY Transparency Reports
2.8 Conclusion
Second chapter aimed to provide a comprehensive description of the research setting of the present study. Considering the main research question of this study, namely, “What are the
determinants of auditors’ perception of ethics in big audit firms?” as well as the fact that this
12
https://home.kpmg.com/nl/nl/home/over-ons/offices.html/ [last accessed: 19.05.2018]
13https://www.pwc.nl/nl/onze-organisatie/kantoren.html/ [last accessed: 19.05.2018] 14http://www.ey.com/nl/nl/ourlocations/ [last accessed: 19.05.2018]
15https://www2.deloitte.com/nl/nl/footerlinks/onze-kantoren.html/ [last accessed: 19.05.2018]
5.047 4.975 4.506 3.015 1.000 2.000 3.000 4.000 5.000 6.000
is a comparative study between Big Four firms from Romania and the Netherlands, the following aspects were described above:
• Assurance and Financial audit services; • Financial audit services market in Romania; • Financial audit services market in the Netherlands; • Big Four firms form Romania and the Netherlands.
The chapter outlines the similarities and differences between financial services audit market in Romania and the Netherlands. In both countries, the market leaders in professional services market are Big Four firms. However, in terms of the market value and the general development stage of audit markets, the Netherlands is far ahead of Romania – in the end, a predictable difference considering the overall economic development of two countries and non-existence of free markets in Romania because of communism up until 1989.
Chapter 3. Theory development
3.1 Ethics
The development and expression of ethical attitudes and behavior are areas of practical concern to the business community as indicated by the increasingly large number of studies, articles and interviews published in both academic journals and popular business publications. Prior literature defines ethics in a multiple ways. Beauchamp & Bowie (1983, p. 3) define ethics as the "inquiry into theories of what is good and evil and into what is right and wrong, and thus
is inquiry into what we ought and ought not to do.". Barry (1979) defines ethics as "the study of what constitutes good and bad human conduct, including related actions and values.”
In multiple studies, the meaning of ethics and morality are used interchangeably, however, some studies strive to make a distinction between these two terms. For example, Crane and Matten (2004, p. 11) state that morality “is concerned with the norms, values, and beliefs
embedded in social processes which define right and wrong for an individual or a community”.
Starting from this definition of morality, Crane and Matten (2004) define ethics as “the study
of morality and the application of reason to elucidate specific rules and principles that determine right and wrong for any given situation” (p. 11). Therefore, morality is an individual
or a community’s ability to discern between right and wrong in a specific situation while ethics is concerned with systematizing and rationalizing the morality into a set of rules which offer guidance in situation of moral uncertainty.
Lewis and Unerman (1999) define ethics as „[being] concerned with understanding what
determines whether something is good or bad, right or wrong” and enlighten clear rules and
principles which determine the right and wrong for any situation (p. 522). Furthermore, following a relativistic approach, Lewis & Unerman (1999) state that the concepts of good and bad or right and wrong may differ depending on context – what could be very normal to do in one culture can be absolutely unacceptable in another culture. Lewis & Unerman (1999) identify two different approaches to ethics: ethical absolutism and ethical relativism. Ethical
absolutism approach argues that “the moral values have to be absolute because the opposite position of ethical relativism means that any behavior is morally accepted and thus society cannot condemn any behavior as immoral no matter how extreme it is” (idem, p. 529).
However, Lewis & Unerman (1999) reject both extreme positions as, in their opinion, these two approaches are far too simplistic. Instead, they argue in favor of the method of universal
prescriptivism – “a consolidation of the two extremes – which identifies both behavior which can never be considered morally right in any society and behavior which can be regarded as morally right by one society and morally wrong by another society” (p. 531).
Given that the purpose of this study is to investigate the auditors’ perception of ethics, the best suitable definition should regard ethics as a discipline which is concerned with understanding what determines the concepts of right and wrong instead of investigating which actions are right and wrong. Therefore, the study will focus on definition given by Lewis & Unerman (1999) which state that ethics are “concerned with understanding what determines whether
something is good or bad, right or wrong” (p. 522).
3.2 Business ethics
3.2.1 Theorizing business ethics
Business ethics is a form of applied ethics or professional ethics which covers a wide range of normative issues in the business world. Professional ethics are defined as “a code of values and
norms that actually guide practical decisions when they are made by professionals”
(Airaksinen, 2003, p. 2). Consequently, business ethics are defined as the study of business situations, activities and decisions which address issues of right and wrong (Crane & Matten, 2004). Business ethics is “mainly concerned with those issues which are not covered by law or
no certain consensus on whether something is right or wrong” (Crane & Matten, 2004, p. 359).
Generally, the research on business ethics is divided into two main branches: normative theories “which resides largely in the realm of moral philosophy and guides individuals as to how they
should behave, and descriptive (or empirical) ethics, which resides largely in the realm of management and business and is concerned with explaining and predicting individuals’ actual behavior" (O’Fallon & Butterfield, 2005, p. 375). In simpler words, “normative models are more theoretical and focus on how individuals should behave while positive models (or descriptive ethics) focus on how individuals actually behave” (Craft, 2012, p. 222).
Considering the purpose of the study, namely, to investigate the determinants of ethical perception in case of auditors, the following sections will focus on review of research on descriptive ethics.
3.2.2 Ethical perception
Ethical perception or rather the perception in general is a complex concept that lowers its roots deep into the study of philosophy. It is worth mentioning that for the scope of this study, the term “perception” will not be used in sensory sense, that is, the effect produced by external stimuli and captured by one of the five senses, but rather as individuals’ responsiveness to a specific situations.
Wittmer (2000) defines ethical perception as “the relative awareness or recognition of the
‘ethical dimensions’ within an ethical situation” (p. 185). In turn, Rest (1994) associates ethical
perception with moral sensitivity. According to Rest (1994) “moral sensitivity is the awareness
of how our actions affect other people. It involves being aware of different possible lines of actions and how each of line of action could affect the parties concerned.” (p. 23). Blum (1991)
comes with a more comprehensive definition and states that ethical perception includes “anything contributing to or encompassed within the agent’s take on the situation his
salience-perception prior to his deliberating about what to do” (p. 707).
Even though the most of the research on business ethics is studying phenomena as ethical decision making, ethical judgement, ethical behavior and ethical perception using the same theoretical models, academia recognizes that the afore-mentioned terms have different meanings. A large piece of research is focusing on identifying and evaluating this distinction. (Audi, 2013; Vieth & Quante, 2010, Blum, 1991).
Blum (1991), for instance, relates moral perception to the phenomenon of moral judgment which is defined as “the faculty which bridges the gap between moral rules (and principles)
and particular situations” (p. 701). However, Bloom (1991) argues that moral perception
cannot be entirely identified with moral judgment as, in certain situations, moral perception comes on the scene prior to moral judgment. In simpler words, in a specific situations, moral perception can lead to actions which may not involve moral judgment at all.
Furthermore, Vieth & Quante (2010) argue that, “ethical perspective perceptions as input and
actions as output are independent from one another” (p. 6). Another analogy between
perception and actions is made by Audi (2013), which states that the actions and perceptions are different in terms of what one would call success conditions. "Action succeeds when it
changes the world to fit the relevant aim(s) of the agent while perception succeeds when it represents a change in a perceived object, where the perception represents the world” (p. 7).
In simpler terms, the agent's actions are altering the outside world while the perceptions are altering the inside world of the agent.
Despite the difference in meaning, the research proved that aforementioned concepts are strongly interrelated. For example, Ho (2010) states that “ethical perception plays a crucial
role in the ethical decision-making process because the process begins with an individual recognition that a decision situation has an ethical content” (p. 157). Generally, all important
theoretical models on ethical decision-making identified ethical perception as an essential condition which triggers the ethical decision-making process (Hunt & Vitell, 1986; Jones, 1991; Rest, 1994; Ferrell & Gresham. (1985)).
In conclusion, the content of this section proves again that ethical perception is extremely subjective, that it is specific to each individual and that even though they have some tangent points, it must not be confused with ethical behavior, ethical judgment or other concepts from ethical theories.
3.3.3 Previous literature on business ethics
Up until now, there is a vast range of research on business ethics which analyzes multiple variables such as ethical decision making, ethical judgment, ethical behavior, ethical perception, etc. O’Fallon & Butterfield (2005) in their review of ethical decision making literature state that “during the period 1996 – 2013, the researchers have produced more
empirical studies in the area of ethical decision making than in four decades prior to that years combined” (p. 411) and it is clear that the demand as well as the supply in this area of research
is constantly increasing.
During the mid-80s’ and early 90s, the field of descriptive ethics developed a number of theoretical models on ethical decision making (e.g. Ferrell and Gresham, 1985; Hunt & Vitell, 1986; Trevino, 1986; Jones, 1991, Rest, 1986). In general, all these theoretical models identified several factors which influence the decision making process within business. In most of the cases, the theoretical frameworks suggest that factors influencing decision-making process are divided into two main groups: individual factors and organizational factors. The summary of the most influential theoretical models on ethical decision making is presented in the Table 6 below.
Table 6 - Review of ethical decision making models
Ferrell & Grisham (1985) Trevino (1986) Hunt & Vitell (1986) Jones (1991)
• model is focused on marketing but can also be used in other domains;
• Framework is multidimensional,
process oriented and contingent in
nature;
• Variables are categorized into:
individual contingencies and organizational contingencies;
• Individual contingencies: personal
background and socialization characteristics (e.g. educational and business experiences, knowledge, values, attitudes);
• Organizational contingencies:
• effect of external organizations (e.g. customers, other firms);
• intra-organizational influences (e.g. peers and supervisors);
• Organizational contingencies are categorized into two groups: significant
others and opportunity factors;
• Variables are interdependent as well as ultimately affecting directly or
indirectly, the dependent variable – ethical / unethical behavior.
• ethical decision-making in organizations is explained by the interaction of individual and
situational components;
• The individual reacts to an ethical dilemma with cognitions determined by his or her
cognitive moral development stage – direct influence on
ethical / unethical behavior;
• Individual moderators:
• ego strength;
• field dependence;
• locus of control;
• Situational moderators:
• Immediate job context : Reinforcement and Other pressures;
• Organizational culture: Normative structure, Referent others, Obedience to authority, Responsibility for consequences;
• Characteristics of the work: Role taking and Resolution of moral conflict.
• the model addresses a situation in which an individual confronts a problem perceived as having ethical content;
• the perception of ethical content is the situation trigger;
• model argues that the individual process the situation both from
deontological and teleological
perspective in order to determine the action alternatives;
• the processing of the ethical situation is determined by one’s Norms and Values;
• Norms and Values are influenced by the following factors: Personal factors,
Cultural factors, Professional factors and Industry and Organizational factors;
• proposes that an ethical decision-making model must be “issue-contingent” such that it explicitly considers the characteristics of the moral issue itself;
• introduces the concept of “moral intensity”;
• moral intensity is comprised of six
components: (1) magnitude of consequences, (2) social consensus, (3) probability of effect, (4) temporal immediacy, (5) proximity and (6) concentration of effect;
• magnitude of consequences refers to the total
harm/benefit resulting from the moral action;
• social consensus is defined as the degree of
agreement that an alternative is bad or good;
• probability of effect refers to the probability
that the action will take place and that it will cause the harm/benefit expected;
• temporal immediacy is defined as the time
between the action and the consequences;
• proximity refers to the feeling of closeness
that the moral agent has for the victims/beneficiaries of the action;
• concentration of effect is defined as the
“inverse function” of the number of individuals affected by the action.
As mentioned above, with respect to factors of influence on ethical decision-making, the models generally identify two types of factors: inherent factors which depend on the individual and external factors which are not under the control of the individual but are rather dependent on the context to which the individual is belonging to.
3.3.3.1 Individual factors
Individual factors received, by far, the lion’s share of attention within the literature on ethical decision making. Individual factors are identified as those factors that are uniquely associated with the individual decision maker. Thus, these factors include those variables that are a result of birth (e.g. nationality, sex, age, etc.) as well as those resulting from human development and socialization process (e.g. personality, attitudes, values, education, religion, etc.). Therefore, the individual factors represent “the sum of the life experiences and circumstances that an
individual involves into the decision-making process” (Ford & Richardson, 1994, p. 206). The
following sections summarize the findings of the literature on the influence of the individual factors on ethical decision-making process.
Gender
Ambrose & Schminke (1999) defined two patterns within existing research on gender and ethics: “alpha” view which recognizes the differences between genders in dealing with ethics and “beta” view which state that the other factors which influence the ethics are prevailing and overcome the gender influence.
The results with respect to connection between an individual’s gender and ethical judgement are mixed. Generally, previous research identified that women are more inclined towards more ethical judgment compared to men. (Mason & Mudrack, 1996; Reiss & Mitra, 1998) Contrary to these results, Weeks et al. (1999) have found that men have more ethical judgement. However, a big part of the previous research reports no connection between ethical judgement and gender (O’Fallon & Butterfield, 2005)
In conclusion, the literature investigating the gender influence on the ethical decision-making process and its outcomes often do not identify the differences between genders, however, in case of studies that identify such differences, their results show that women tend to be more
ethical than men. Considering these results the current study expects no influence of gender on ethical perception of the auditors within Big Four firms. (no association)
Nationality and culture
Most of the research on nationality and culture influence on ethical perception founds that there significant differences in the way different cultures grasp ethical/unethical behavior. For example, Okleshen & Hoyt (1996) finds that US students are less tolerant of unethical situations than New Zeeland students. Çhristie et al. (2003) investigates the impact of national culture on the ethical attitudes of business managers in India, Korea and the United States and identifies that culture has a strong influence on business managers’ attitudes toward both business ethics in general and various questionable business practices in particular. Specifically, they state that there is a strong relationship between cultural dimensions of individualism and power distance and ethical attitudes of business managers toward certain questionable business practices Jackson (2001) investigates the attitude towards ethics of 425 managers from 10 countries on 4 continents and reports that ethical attitudes differ across national groups. Furthermore, it finds that individuals appear to see other as less ethical than them, a feature which was universally observed in all 10 countries. Davis et al. (1998) in their cross-cultural study on ethical judgements of business students from three socio-cultural regions: the East Central United States, Eastern Europe and Indonesia finds out that culture influences decisions in ethical decision making-process.
In conclusion, previous literature on influence of nationality on individual’s ethics shows strong correlation between nationality and culture and ethical perception, ethical judgement, ethical behavior, and ethical decision making. Nevertheless, the previous literature did not investigate the influence of the two cultural spaces investigated in the study at hand (i.e. the Netherlands and Romania) on ethical perception, a research gap which the current study intends to cover. Considering the lack of the previous literature, the expectations regarding the influence of the nationality and culture on ethical perception are ambiguous. (uncertain
expectation)
Ethical experience
Ethical experience is not a factor per se but it is rather the sum of the individual variables which may influence one’s experience with ethical dilemmas, such as, age, religion, ethics training and professional and educational experience (Tenbrunsel & Smith-Crowe, 2009). Kohlberg’s
theory of cognitive moral development (1981) defines six stages of moral development which are grouped into three categories:
(1) preconvention (or pre-moral) category which includes individuals who do not establish their ethical standards based on society’s standards but on their physical needs. For individuals in this category, the main incentive to follow the rules is fear of physical punishment.
(2) conventional category which is usually reached by children at the age of ten and it is also the most common moral category for adults. Individuals in this category determined their judgments of right and wrong based on norms and rules accepted by society.
(3) post-conventional category is comprised of individuals who do not reject the ethical standards established by society, however, they find these standards insufficient.
For the purpose of this study, the following paragraphs comprise a review of the literature on influence of two variables which form ethical experience: age, education and professional experience and religion.
Religion
Most of the research report religion as being positively associated with ethical judgement, for example, Wagner & Sanders (2001) founds that individuals with high religious beliefs are less inclined to judge an unethical act as being fair while Wimalasiri et al. (1996) findings support the generally observed relationship between moral reasoning and religious orientation. On the other hand, Giacalone & Jurkiewicz (2003) finds that spirituality negatively influences an individual’s perception of a questionable business practice.
In conclusion, previous literature identifies mixed results with respect to influence of religion on ethical perception. In the determination of its expectations with respect to the effect of
religion on ethical perception, the current study takes into consideration two points of views.
First, the grounds of majority of the existing religions are based on “the Golden rule” (e.g. “treat others how you wish to be treated”) which appears similar to Kant’s Categorical Imperative – a central philosophical concept in Deontological theories on ethics, therefore, it is expected that that dogmas stated by religions shall be a fair representation of the rules and norms as stated by the society. On the other hand, in case of any divergences between the religious dogmas and the societal ethical standards, the priority in which set of norms should
be followed differ amongst individuals based on multiple factors, such as the importance of the religiosity, personal values, cultural and political context and several other circumstances. Considering these two opposing arguments, the current study cannot deliberately develop an expectation regarding the influence of religion on ethical perception (unknown correlation).
Age
With respect to influence of age on ethical decision-making, the results are mixed. Some studies have found that older employees or employees with more work experience tend to show a more ethical attitude (Barnett & Karson, 1989). In contrast with these findings, Browning & Zabriskie (1983) have found that younger managers have a more ethical perspective than older managers. However, there are several studies which did not identify a significant relationship between age and ethics perception (O’Fallon & Butterfield’s, 2005).
As mentioned above, the literature on influence of age on ethical perception generally shows mixed results. Furthermore, the current study investigates the ethical perception of auditors within Big Four firms – an professional area with high education and expertise requirements, it is expected that the effect of education and professional education outweighs the effect of age on ethical perception, therefore, the individual variable age is not considered to have influence on ethical perception in case of auditors within Big Four firm - (no association);
Education and professional experience
With respect to education and professional experience, the results are again mixed. The studies which analyze ethical perceptions of students found no significant correlation between major and ethical attitude. (Loe et al., 2000). However, in case of professional studies, previous research finds a correlation between the professional experience and ethical perception, in the sense that employees positively increase their ethical perception with advancement in career (; Browning & Zabriskie, 1983; Kidwell, Stevens & Bethke, 1987). Weeks et al. (1999) finds that there is a difference in ethical judgement across career stages – employees express higher ethical attitude in the latter stages of their career.
In conclusion, the previous research on influence of education on ethical perception shows a positive correlation between education and ethical perception; the same results are identified in by the literature investigating the influence of professional experience on ethical perception. Furthermore, as mentioned before, auditing is an professional area with high educational and
professional experience standards – standards which amongst others pose a high focus on ethics and independence of its members. Therefore, it is expected that the variable education and variable professional experience are positively associated with ethical perception (positive
correlation).
Affect and arousal
Affect is a concept used in psychology to describe the experience of feelings and emotions16
while arousal is a basic psychological response to the presentation of stimuli17. The research
on effect of arousal and effect on one’s ethics is relatively scarce. Mantel (2005) have found that an individual who has a positive affect is more likely to act in an ethical way than in case of an individual in a neutral affect. In contrary, Ambady & Gray, (2002) have found that an individual who experiences positive emotions is more likely to analyze an ethical dilemma in a more thorough way, however, this more elaborate processing of an ethical dilemma may lead to less rigorous judgements which leads “unintended unethicality” behavior when individuals act in way which they perceive as being ethical, though in fact it is not.
Previous research identified positive correlation between this factor and the ethical perception. For the purpose of this study, the hypothesis is stated as follows: as long as an individual’s (i.e. auditor) level of satisfaction with respect to the job and the organization is high, the individual will feel motivated to “give back” and therefore will show more willingness to act ethically
(positive correlation).
Summary
This section analyzed the previous literature on influence of the factors directly associated with individuals working within business organizations. As mentioned before, individual factors are either innate either acquired by the individual though learning and socialization processes. This section analyzed the following individual factors: age, gender, nationality and culture, religion, education and professional experience, affect and arousal and ethical values. Previous literature identified multiple other individual factors, however, the focus was specifically on this factors due to their appropriateness to studied social context. For some of the analyzed factors, such as
16https://en.wikipedia.org/wiki/Affect_(psychology)/ [last accessed: 11/06/2018] 17https://en.wikipedia.org/wiki/Affect_(psychology)/ [last accessed: 11/06/2018]
