ETHICAL FINANCIAL REPORTING CHOICE: THE INFLUENCE OF INDIVIDUAL CHARACTERISTICS

Jane Cote, Claire Kamm Latham and Debra Sanders

ABSTRACT
This study explores the inuence individual characteristics identied in prior research have on ethical choice in a nancial reporting task. An action-based, multi-metric dependent variable is developed to measure ethical reporting choice. Intermediate accounting students participate in the task as part of a curricular assignment in a revenue recognition module. Results demonstrate that several, but not all, individual characteristics found in prior research do inuence accounting students ethical revenue recognition choices. Specically, the external locus-of-control, idealism, consequentialist, and Machiavellian characteristics are found to inuence ethical reporting choice. Keywords: Ethical reporting choice; personal moral philosophies; student participants; multi-metric dependent variable

Advances in Accounting Behavioral Research, Volume 16, 115148 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1475-1488/doi:10.1108/S1475-1488(2013)0000016010

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INTRODUCTION
Ethical values and adherence to a professional code of conduct are essential in the accounting profession. The competitive environment within the profession, the complexity and size of many nancial transactions, and the broad boundaries for acceptable reporting create numerous opportunities for ethical missteps. State boards of accounting, recognizing the challenges accountants face, mandate ethics instruction for Certied Public Accountant (CPA) license renewal. States, such as California, now require CPA candidates to have a strong foundation in ethics instruction with identiable accounting ethics coursework (California Senate Bill 773, 2011). The move toward International Financial Reporting Standards (IFRS) reects a more principle based reporting than most U.S. GAAP methods. As reporting standards are changing, it is important that our ethical instruction evolve simultaneously. New professionals will need to be prepared for more contextual reporting choices, and this may complicate the identication of ethical violations and pressures. Preparing accounting students to adopt professional values and codes of ethical conduct is an essential element in most accounting programs. Common ethical instruction frameworks include an emphasis on recognizing when an ethical issue is present, developing the choices to address the issue, and accessing the necessary resources to resolve the situation. The sizeable resources devoted to ethics instruction within the classroom and the profession demands ongoing assessment regarding variables affecting its efcacy. Individual characteristics inuence the lens through which individuals view ethical issues (e.g., Bailey, Scott, & Thoma, 2010; Kish-Gephart, Harrison, & Trevin o, 2010; OFallon & Buttereld, 2005). Accordingly, these traits will also inuence the impact instruction has on individuals future actions. Kish-Gephart et al. (2010) conducted a meta-analysis of 136 studies from multiple business disciplines to assess how individual variables impact unethical intention or behavior. This meta-analysis provides a foundation for exploring how the identied individual characteristics affect accountants ethical choice. This study explores whether the individual characteristics identied in the Kish-Gephart et al. (2010) meta-analysis remain signicant indicators of ethical choice when examined collectively. Knowing which individual characteristics affect ethical choice in this setting is a useful element in designing and conducting effective ethics instruction. Whereas tailoring instruction to each individuals traits is generally not feasible, instruction sessions can be created to appeal to students with varying approaches to ethical decision making.

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This study develops an action-based, multi-metric dependent variable. Participants choice regarding how to report nancial income is indicative of their approach to an ethical challenge in a nancial reporting decision context. Probability metrics and decision process responses provide additional insight into ethical choice. Together these multiple metrics reveal a rich representation of participants approaches to an ethical dilemma, which is more compelling than simply eliciting hypothetical intentions to act. The results of the experiment indicate that differences among 69 participants adherence to the tenets of ethical philosophies and locus-of-control focus affect their ethical judgments and behavior. Specically, this study nds that individuals with ethical perspectives that are idealistic or consequential and exhibiting an external locus-of-control have a greater likelihood to select the more appropriate treatment of the nancial income. Machiavellianism is negatively associated with selecting the more appropriate accounting treatment. These ndings advance research in accounting ethics by identifying relevant constructs to serve as independent variables. This can improve the efciency and effectiveness of future research. The dependent variable suggests a starting point for developing a generalizable method for measuring ethical choice in a nancial reporting context. Observing choice, rather than intentions, is advantageous as it reduces the social desirability bias that is prevalent in ethics research study designs. From a pedagogical perspective, the ndings are encouraging. The supported hypotheses identify traits that signal opportunities exist for teaching methods to shape accounting students ethical and professional actions. In addition, the ndings of this study reveal the relevant independent traits impacting ethical reporting choice and can serve as a foundation for adapting instructional methods to IFRS inuenced GAAP. The next section discusses research examining the ethical development of accounting students. This is followed by a review of personal characteristics that are hypothesized in this study to inuence ethical behavior. The method, including a description of experimental setting, independent measures, and dependent variable, is followed by the results and lastly a discussion of the relevance of the results is provided.

ETHICS AND ACCOUNTING STUDENTS

Considerable accounting research focuses on the ethical development of accounting students (Bailey et al., 2010). One main branch examines ethical education and a second branch investigates the ethical development of

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accounting students. The dening issues test (DIT) (Rest, 1979) and/or the Kohlberg moral development stages (Kohlberg, 1969) are the common measurement tools for assessing the moral development of accounting students. In one of the early studies, Jeffreys (1993) results follow the ethical development suggested by Rest and Kohlberg; as formal education increases, the level of moral development increases. In addition, she reports that accounting students exhibit a higher level of moral development than other business or liberal arts students when they begin in their major and, by the time they are seniors, the difference is signicant. Accounting students familiar with American Institute of CPAs (AICPA) Code of Professional Ethics also have tested at higher levels of moral reasoning than other business students (Fulmer & Cargile, 1987; Green & Weber, 1997). However, McCarthy (1997) nds students ethical scores are not signicantly improved through exposure to the AICPA code. Tests of other methods of heightening ethical awareness also do not show signicant inuences on students moral stages (Lampe, 1994; Ponemon, 1993; St. Pierre, Nelson, & Gabbin, 1990). Further, other studies show that accounting students are at a lower moral development level than other students (Ponemon, 1990; Lampe & Finn, 1992; Shaub, 1994). Differences in students personal moral philosophies and locus-of-control are not directly assessed in most of these studies. Omitting these constructs may contribute to the conicting conclusions. Less research focuses on the personal characteristics of accounting students and their ethical decisions. For example, Chan and Leung (2006) study accounting students ability to identify ethical issues in professional scenarios. They nd no relationship between their DIT P-score or ethical orientation (idealism/relativism) and their ethical sensitivity. However, students with an internal locus-of-control recognize more ethical issues than those with external focuses. Richmond (2001) identies Machiavellian traits to be negatively correlated with ethical reasoning and behavior. Machiavellianism is also a factor in the Tang and Chen (2008) study that reports business students have a higher propensity to engage in unethical behavior than psychology students. Other associated factors with unethical behavior in their study are the love of money and risk tolerance.

ETHICAL CHOICE AND ITS ANTECEDENTS

In the meta-analysis by Kish-Gephart et al. (2010), the following individual characteristics are analyzed to determine their inuence on ethical intentions or behavior: cognitive moral development (CMD), idealism, relativism,

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Machiavellianism, locus-of-control, and job satisfaction. Demographic characteristics are gender, age, and educational level. While the metaanalysis determines the strength of effect size across multiple independent research studies, it does not determine the strengths of these characteristics when examined simultaneously. Accordingly, this study includes all of the characteristics (with the exception of job satisfaction)1 examined by Kish-Gephart et al. (2010) and supplements with three additional constructs identied in the literature but not included in the meta-analysis due to the lack of sufcient studies exploring the constructs. These additional constructs are: deontological focus, consequential focus (Trenkamp, 2009), and risk preferences (Trevin o & Youngblood, 1990). The next sections of the chapter will review each of the factors examined in this study.

Cognitive Moral Development CMD theory concentrates on the second stage of Rests four-component model of moral functioning, the development of moral judgment (Rest, 1979, 1986). Kish-Gephart et al. (2010) describe the theory as explaining the progression of individuals ability to reason concerning moral rightness or wrongness over time. The CMD construct is measured predominantly by the DIT (and the updated DIT-2) (Rest, 1986). Literature generally supports a positive relationship between CMD and ethical judgment, yet less clear evidence exists concerning the relationship between CMD and ethical action (Bailey et al., 2010; Kish-Gephart et al., 2010; OFallon & Buttereld, 2005). The construct captures a capacity to make ethical judgments rather than the ethical decisions themselves; hence Bailey et al. (2010) suggest this lack of support is tied to a lack of clarity concerning what the DIT/DIT-2 actually measures and, thus a failure to reect that ethical judgment is only part of the larger picture of ethical behavior. In other words, the failure to act ethically may result from slippage within one or more components, resulting in a failure to recognize the moral dimension of a situation (Bailey et al., 2010, p. 6). It may be the individual does not view the matter as an ethical issue (i.e., it possesses low moral intensity) and, as such, the individual may employ a utilitarian model rather than utilize ethical judgment. In addition, the DIT/DIT-2 assesses individuals default moral schema (Bailey et al., 2010), that is, the judgments they would make in the absence of clearly dened professional ethics codes or context-specic situations where the path to an ethical judgment is evident. Therefore, in studies exploring moral judgment in the presence of a professional code of

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conduct or a clearly dened protocol for assessing moral judgment, the DIT/DIT-2 may be unable to effectively explain the role that CMD has on the participants responses. While the meta-analysis of Kish-Gephart et al. (2010) supports a positive relationship between CMD and ethical intention or behavior, other ndings in accounting do not support this relationship (Chan and Leung, 2006; Patterson, 2001; Tsui & Gul, 1996). Since the support for a relationship between CMD and ethical choices is unclear in accounting, the rst hypothesis is stated in the null as follow. H1. CMD is not associated with ethical choice.

IdealismRelativism Individuals ethical judgments are inuenced by their personal moral philosophies. Deontology, teleology (consequential), and ethical skepticism form the basis for the personal moral philosophy from which idealism and relativism factors are derived (Forsyth, 1980; Schlenker & Forsyth, 1977). Idealism and relativism describe what individuals believe and are not based on an individuals moral development as other taxonomies of ethical ideologies. Forsyth (1980) suggests that idealism and relativism parsimoniously explain individual variations in moral judgments. Idealism incorporates the idea that ethical actions can consistently lead to positive consequences regardless of the situation. Consequently, ethical actions, under idealism, must not cause harm to another person (Forsyth, Nye, & Kelley, 1988). A nonidealist admits that consequences often have a mix of positive and negative outcomes. Relativism involves the acceptance or rejection of universal moral principles as a basis for ethical judgment. A relativist is skeptical, rejects universal principles, and favors a situational approach that considers the individuals involved. The circumstances rather than the moral principles are more important in an ethical judgment. A nonrelativist believes in the idea of universal morals and is less concerned with the nature of the situation (Forsyth, 1992). While idealism and relativism might be considered as the opposite ends of a continuum, Forsyth (1980) suggests that they are two conceptually separate dimensions and together they can be used to classify individuals ethical ideologies. A single individual can hold both idealistic and relativistic perspectives simultaneously, and not be conicted. The intensity to which individuals align with idealism and relativism inuences their actions along an absolutist to situational continuum.

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Forsyth and others (Arrington & Reckers, 1985; Barnett, Bass, & Brown, 1994; Forsyth, 1985; Forsyth & Berger, 1982; Forsyth & Pope, 1984; Singh & Forsyth, 1989) examine the relationship between idealism/relativism and ethical choices. In general, the research suggests that the do-no-harm-toothers, idealist philosophy leads to judging ethically ambiguous actions more harshly than nonidealists. Relativists tend to judge ethically ambiguous actions based on the specic factors of the given situation and the individuals involved, whereas nonrelativists believe universal moral principles should guide ethical choice. Research results have been inconclusive regarding the relationship between ethical choice and idealism/relativism intensity. While high idealism is positively associated with ethical choice, it is difcult to predict the relationship between relativism and ethical choices. Accordingly, the hypotheses are stated as follows. H2. High idealism is positively associated with ethical choice. H3. Relativism is not associated with ethical choice.

Machiavellianism The political philosophy of Niccolo Machiavelli (14691527) expounded in his works The Prince (1985/1515) and The Discourses on Livy (1984/1517), known as Machiavellianism, claims that in the pursuit of their desired outcomes individuals can justify various forms of duplicity and deception. This philosophy has been identied as a personality trait (Christie & Geis, 1970) and used to create behavior typologies. High Machs (individuals aligned with Machiavellian concepts) believe the rights and perspectives of other individuals and organizations are incidental. Others are merely a tool to manipulate to gain ones own desires. Machiavellianism is based on deviousness, expediency, exploitation, and manipulation of circumstances and arguments to achieve personal goals without regard to others feelings or needs. High Machs lack the virtues of trust, honor, and caring, and are likely to display antisocial behavior (Tang & Chen, 2008). Numerous empirical ethics studies examine the relationship between Machiavellianism traits and ethical orientation (cf. Kish-Gephart et al., 2010; Rayburn & Rayburn, 1996). Although not completely lacking morals, high Machs operate under a different set of ethical guidelines that are not consistent with conventional morality (Christie & Geis, 1970). Wakeeld (2008) concludes that high Mach accountants may exhibit tendencies to

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ignore the rules when seeking a predetermined outcome. Over a broad range of empirical studies, the nding that Machiavellian tendencies are associated with unethical choice is robust (Kish-Gephart et al., 2010) and thus the next hypothesis is directional. H4. High Machiavellianism is negatively associated with ethical choice. Locus-of-Control The locus-of-control construct is part of social learning theory that predicts how reinforcements change expectancies. Reinforcement is the process of strengthening or weakening a behavioral response to a stimulus. When reinforcement is viewed as based upon an individuals own behavior, there is an internal locus-of-control. When the reinforcement follows an action but individuals do not consider that it was based upon their own actions, there is an external locus-of-control. With the external focus, the individual may perceive that the reinforcements may be due to chance, inuence of authority, forces beyond their control, or simply unpredictable because of the great complexity of the surrounding forces (Rotter, 1966). Locus-of-control is measured along a single continuum, where individuals will exhibit varying degrees of internal and external locus-of-control traits. Since a normal curve distribution is assumed for the populations under investigation, internal and external should not be viewed as a typology (Rotter, 1975). As noted by Kish-Gephart et al. (2010), though locus-ofcontrol does not contain any moral underpinnings, several studies have used locus-of-control as a variable to explain ethical choice. The OFallon and Buttereld (2005) review of business ethics literature reports that, in studies where individuals locus-of-control scores are used to determine an association with ethical choice, several report no signicant differences. However, of those studies that do nd an association, the dominant conclusion is that individuals scoring closer to the internal locus-of-control trait have positive associations with ethical choice. Trevin o (1986) theorizes that individuals identied as having an internal locus-of-control are more likely to take personal responsibility for behavior and thus act more ethically. Trevin o and Youngblood (1990) nd empirical support for this link. Externals, on the other hand, have a greater propensity to make unethical choices and have more difculty judging ethically ambiguous behavior (Bass, Barnett, & Brown, 1999; Kish-Gephart et al., 2010). While internals are more likely to resist attempts to inuence their values, external are more susceptible to suggestions, conformity, and attitude change

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(Cherry & Fraedrich, 2000). Thus, it may be that externally focused individuals can be inuenced more by ethical arguments and are thus more likely to conform with others behaviors, whether ethical or unethical. Rotter (1975) warns against associating internal focus with good behavior and external with bad behavior. While internal locus-of-control individuals may be more socially skilled and better adjusted, this does not always make them the good guys and the external focused the bad guys. For example, studies show alcoholics, delinquents, and drug addicts are more internally focused than college students. This may be due to trying to appear cooperative in treatment programs or having been told repeatedly that it is up to them to rehabilitate (Rotter, 1975). While all studies do not nd support for a link between locus-of-control and ethical choice (see OFallon & Buttereld, 2005), many studies do nd an association between ethical choice and internal locus-of-control. Thus, the hypothesis for locus-of-control is stated as follows: H5. Internal locus-of-control is positively associated with ethical choice. DeontologicalConsequential Two normative theories that are frequently advanced as the central frameworks for business ethics are deontology and consequentialism (Brady & Dunn, 1995). Deontology has its primary focus on the intrinsic qualities of the action, the concept of duty, and adherence to morally mandated behavior. It is the action itself (do what is right) that is important and the consequence is secondary (Tanner, Medin, & Iliev, 2008). Individuals with deontological viewpoints may feel compelled to act as morality dictates regardless of whether they actually want to behave in such a manner (Koehn, 1995). Conversely, consequentialism, as the name suggests, focuses on the ultimate outcome when judging the ethical appropriateness of any action; the means are justied if they result in a positive outcome that provides the greatest good. Actions are performed to achieve the greatest benet and not necessarily because they are the morally appropriate behavior (Micewski & Troy, 2007). While there is a tradition of considering deontological and consequentialist orientations as mutually exclusive, the consequence of an action often denes whether it is ethical (Benton, 2009). The differences in the frameworks are more in the approaches they use to resolve the ethical issue than in the conclusion reached. Thus, some writers (e.g., Brady, 1985; Nozick, 1981; Pastin, 1986) suggest that these frameworks have a greater

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practical use if seen as complementary rather than as competing (Brady & Dunn, 1995). Both rule based and end-result based moral theories are important tools in solving ethical dilemmas and successful business professionals balance the inuences of each framework when making strategic decisions (Brady, 1987; Coty & Lynn, 1992; Pastin, 1986). Together they provide the foundation for ethical decision making in business. Recent research by Tanner et al. (2008) empirically demonstrates that deontological and consequential frameworks are key factors in decision making and overall they have a moderately positive correlation. While there are individuals that can be categorized as purely deontological or consequential in their orientations, the Tanner et al. (2008) results strongly indicate that most individuals combine both frameworks when making business decisions. Surprisingly, Tanner et al. (2008) appears to be the only study to empirically test the relationship between deontological and consequential frameworks. This is likely the reason that deontological/ consequential characteristics were not included in the meta-analysis by Kish-Gephart et al. (2010). Given that differences in deontology and consequentialism are more in the approaches and less in ethical conclusions reached, the null hypotheses regarding these orientations are the following. H6. Consequentialism is not associated with ethical choice. H7. Deontology is not associated with ethical choice. Risk Preference Most business decision choices are multifaceted in nature and involve uncertainty regarding the likelihood of possible outcomes. Accordingly, decision making under conditions of uncertainty is analogous to a gamble with a variety of possible outcomes having differing associated probabilities. While most individuals tend to be risk averse in their decision making (Bernoulli, 1954/1738), personal risk propensities vary across individuals and are dependent on the type of decision gambles involved (Hung & Tangpong, 2010; Kahneman & Tversky, 1984; Vlaev, Stewart, & Chater, 2008). Due to these personal risk preferences, individuals will assign different subjective probabilities to the alternative outcomes of a decision and their optimum choice will vary (Kahneman & Tversky, 1979). Consequently, an individuals risk preference is important in business decisions because it signicantly inuences the choices selected by the decision maker (Hung & Tangpong, 2010).

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There are different views regarding the nature of individual risk propensities. Some researchers view risk preference as a stable personality trait that is consistently applied across varying decision scenarios (Fischhoff, Lichtenstein, Slovic, Derby, & Keeney, 1981; Ghosh & Ray, 1997; Keinan, Meir, & Gome-Nemirovsky, 1984). Others view risk preferences as more uid such that the preference can change with the decision context or framing of the decision (Kahneman & Tversky, 1979; Keil et al., 2000; MacCrimmon & Wehrung, 1990; Tversky & Kahneman, 1981; Weber, Blais, & Betz, 2002). Thus, the individual may have a tendency to be risk averse but may be risk seeking in certain decision settings or frames. In their cumulative version of prospect theory, Tversky and Kahneman (1992) suggest that individuals are more likely to have a risk averse preference for perceived gain situations and be risk seeking in loss scenarios with moderate to high probabilities. For outcomes with small probabilities, the risk preferences are the opposite; risk seeking for gains and risk aversion for losses. Thus, it may not be the actual type of decision (such as an ethical decision) but the individuals perception of the decision choices probability function that inuences the risk behavior. Regardless of the view, risk preference is considered to inuence decisions made under conditions of uncertainty, leading to the following null hypothesis. H8. Risk preference is not associated with ethical choice. In summary, this study examines the inuence of individuals CMD, idealism, relativism, Machiavellianism, locus-of-control, deontology, consequentialism, and risk propensity on an ethical accounting choice.

METHOD
Participants and Procedures In week six of the semester, 80 students, in two sections of intermediate accounting (taught by the same professor, who is not an author), completed measures of CMD, idealism, relativism, Machiavellianism, locus-of-control, deontology, consequentialism, and risk propensity, as well as other measures unrelated to the current study.2 After the students completed the instrument, a guest lecturer conducted an ethics session where ethical philosophies (e.g., utilitarianism, deontology, distributive justice, rights, and virtue ethics) and ethical decision-making frameworks were presented. This was followed

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by a case discussion using the ethical frameworks. Moral philosophies provide a structure for examining the concepts of right and wrong and are instrumental in developing an individuals framework for how one feels s/he should behave (Fraedrich & Ferrell, 1992). The purpose of the ethical instruction session was merely to ensure that all students had equivalent exposure to ethical philosophies and decision-making frameworks. The professor assigned a case, due in week eight, requiring students to calculate the proper amount of revenue to report. Included in the case was a situation where the supervisor was insisting on reporting a revenue number that would result in a favorable bonus for him and an implied benet for the accountant. This revenue estimate was not consistent with the number recommended by the auditor. Plus, the accountant suspected the supervisor may have falsied documents to support the supervisors preferred revenue estimate. There was no indication by the professor or in the case instructions that this assignment was related to the ethics lecture or that data for an experiment was being collected.3 It was merely an assignment similar to others required for the class. Thus, there is little likelihood of a demand bias by the students as they were not aware, at this point, that their assignment was providing data for this study. The case is provided in Appendix A. The assignment requirements included selecting a choice among three revenue options. The case materials and revenue options are designed such that the choice selected revealed whether they acquiesced to pressures from the supervisor. In addition, participants provided a level of condence for selecting this choice, assigned likelihoods to each of the choices, and answered supplementary questions to demonstrate the process used to make their choice. Participants turned in this assignment during week eight.4 Independent Variable Measures and Construct Validation Existing construct measures from the literature are used or adapted. Individual characteristics (moral philosophies, value orientations, and personality constructs) identied in prior ethical decision-making literature (cf. Kish-Gephart et al., 2010) as inuencing individuals attitudes and behaviors prior to the instruction sessions are captured.5 Cognitive Moral Development Instrument CMD is measured by the widely used DIT-2 psychometric instrument. The DIT-2 asks participants to respond to a series of questions based on six

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hypothetical dilemmas. Responses to the DIT-2 are analyzed by the Center for the Study of Ethical Development (cooperated by the University of Minnesota and University of Alabama), which provides a P-score, the prevalent DIT indicator used in accounting student ethics research. It represents the relative importance individuals give to the highest two stages of moral development, stages 5 and 6, described as post conventional moral reasoning. It has been used to examine whether moral reasoning is linked to ethical student behavior and whether ethical reasoning increases with ethical instruction, as well as examining the inuence of various personality and environmental characteristics on CMD. The P-score is used as the CMD construct. IdealismRelativism Scale Forsyth (1980) developed the ethics position questionnaire (EPQ) to measure individual differences in personal moral philosophies of idealism and relativism. The EPQ consists of 20 attitude statements, 10 capturing idealism, and 10 capturing relativism. The selection of items for each scale was based on having a high inter-item consistency for measuring the two desired constructs, stability across time, and the two scales being orthogonal (Forsyth, 1980). It was also important that the scales capture different individual characteristics of Kohlbergs stages of moral development because Forsyth (1992) is striving to identify the personal moral philosophy used to make ethical decisions. The response to each statement is measured on a seven point Likert-type scale ranging from strongly disagree (1) to strongly agree (7). Prior research has used the mean of the item responses to each of the two scales as the aggregated measure for the idealism and relativism constructs, and this same approach is applied in this study. Machiavellianism Scale Experiments reviewed in Kish-Gephart et al. (2010) examining Machiavellianism used scales based on the Christie and Geis (1970) MACH IV 20 question scale. Christie and Geis (1970) are among the rst psychologists to study Machiavellianism and develop a measurement scale. The MACH IV scale collects the participants beliefs regarding the appropriateness of manipulation of interpersonal relationships for personal benet. To minimize response bias, one-half of the statements support Machiavellian

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concepts and the other half are worded to be opposite in nature (and reversed scored). The Christie and Geis (1970) scale development is based on 38 studies using college students examining the differences in the behavior and characteristics of high Machs participants from low Machs participants. The classic Christie and Geis (1970) scale is modied by several researchers. While some adjust the scoring methods or scale denitions, others add and delete items within the scale. While authors debate the scales content validity and dimensionality (cf. Panitz, 1989; Ross & Robertson, 2003), Tansey, Brown, Hyman, and Dawson (1994), recognize the need to adjust the scale to insure stability across samples. Given prior research predominantly used the MACH IV scale, the same scale and methods are used in this study. As suggested in Tansey et al. (1994), an exploratory factor analysis is conducted and similarly unstable factor loadings are found. Using their approach, eight items are identied that possess high item to total correlations. These comprise the self-interest construct.6 The mean score of responses to these items is the Machiavellianism metric.

Locus-of-control Scale Julian B. Rotter (1966) constructed the Internal-External (I-E) locus-ofcontrol scale based not only on theoretical variables and their hypothesized characteristics but also the situations, kinds of behavior, and populations to which the instrument would be applied. A foundational assumption for the I-E scale is that there will be an interaction between individuals and their situations. Behavior of individuals will differ based on the situations, although some generalization may be possible (Rotter, 1990). Since the locus-of-control is a broad construct, the I-E scale is developed to be an easily administered instrument applicable in numerous different specic situations and not be situation dependent. Even so, reduced forms of the I-E scales are constructed to be tailored to specic populations, such as the eleven item MacDonald and Tseng (1971) scale. Trice (1985) created a college student scale utilizing a true/false format that includes numerous educational and career statements and no political statements. Consistent with MacDonald and Tseng (1971) and Trice (1985), only political statements are removed and this reduced Rotter scale with forced-choice format is used for the locus-of-control construct. In this analysis, a high score indicates an internal control focus.

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DeontologicalConsequential Scale Unlike other ethical frameworks, there is no generally accepted scale measuring deontological and consequential orientations. Some scales have been constructed to correspond to a specic ethical issue (Reidenbach & Robin, 1988; Tanner et al., 2008) whereas Trenkamp (2009) developed a set of 20 questions to evaluate deontological and consequential orientations that are not based on a specic scenario. The mean score for responses to each of the Trenkamp (2009) question sets are used in this study as the consequential and deontological constructs.

Risk Propensity Scale A variety of methods are used to determine an individuals risk preference in business decisions, including one-item self-assessments (Schisler, 1994; Williams & Narendran, 1999), gambling questions (Chow & Haddad, 1991; Kim, 1992; Young, 1985), scenario choice instruments (Kahneman & Tversky, 1979; Kogan & Wallach, 1964), and general risk propensity statements (Jaworski & Kohli, 1993; Hung & Tangpong, 2010). However, determining risk preferences in ethical decision makings settings has not been evaluated. The Hung and Tangpong (2010) general risk propensity scale was selected for this project because it is a renement of the Jaworski and Kohli (1993) scale and has predictive validity. The mean score for the responses to the scale items is the risk propensity construct. Examples of scale items are provided in Appendix B.

Dependent Variable Measures Marketing research literature highlights dissatisfaction with the accuracy of behavior predictions, noting poor predictions are due primarily to the manner in which intentions are measured (Day & Gan, 1991; Wright & MacRae, 2007). Day and Gan (1991) demonstrate the limitations when offering a simple choice (i.e., yes/no/dont know) as well as concerns with intentions scales with several gradational descriptions that are given to different interpretations by respondents. Brennan (2004) points to promising results with the use of probability descriptors in supplementing choice. Building on this literature, the current study incorporates three measures, detailed in the case provided in Appendix A, to capture behavioral intention

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in the ethical dilemma: a three-choice selection of revenue estimates, one condence-in-choice measure (seven point Likert-type scale), and assigning a likelihood percentage to the three possible revenue choices (Total=100%). Regarding the rst measure, the revenue choice itself, the three possible solution choices are as follows. The $350,000 revenue estimate choice is determined by the cost to cost method, is supported by the auditors and represents the most ethical choice. The $500,000 revenue estimate represents an alternative accounting choice if the milestone method is used; however, it is not supported by the auditors and represents the neutral ethical choice. The case supervisor, clearly not satised with the $350,000 estimate choice returns the following day, accepting the cost to cost method but now presents a questionable rationale for revising the calculations to support a $475,000 revenue estimate. This estimate represents the least ethical choice. In sum, the case provides an ordinal measure of three ethical reporting choices (most ethical, neutral ethical, and least ethical, coded 3, 2, and 1, respectively), one condence measure (Likert scale of 17) and three likelihood percentages that the participants are required to assign (total to 100%) for a total of ve items captured for each participant. We conduct an exploratory factor analysis on these items.7 Table 1, Panel A, presents the primary factor solution for the three reporting choices, the one condence measure and the three likelihood percentages, all of which comprise our dependent variable measure. This factor is designated ethical reporting choice (hereafter, ERC). The items that

Table 1.

Ethical Reporting Choice Dependent Variable Factor Used in Regression.

Rotated Component Matrix

Panel A: Factor loading Revenue choice (most, least and neutral ethical choice) Percentage likely to choose most ethical revenue choice Percentage likely to choose least ethical revenue choice Minimum Maximum Mean

.987 .987 .959 Standard Deviation

Panel B: Dependent variable measures underlying ethical reporting choice factor used in regression Revenue choice 2 3 2.81 .394 Percentage likely to choose most 0 100 68.913 27.7180 ethical revenue choice Percentage likely to choose least 0 100 20.913 26.7415 ethical revenue choice

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load on this factor are the revenue choice, the likelihood the participant would choose the most ethical option, and the likelihood the participant would choose the least ethical option. All three items are related to decisions to choose one option over the other two. In contrast, the second factor, termed Ambiguity (not shown), contains the condence response and the neutral choice, both less direct indicators of action than those represented in the ERC factor loadings.8 Therefore, the ERC factor score is the resultant dependent variable. Panel B provides descriptive information on the items underlying ERC.

RESULTS
Table 2, Panel A, provides demographic data for the 69 participants providing usable data for this study.9 Hensen and Roberts (2006) note that factor analysis literature has several rules of thumb concerning the sample size needed to conduct an analysis, yet there appears to be little uniformity or agreement among the guidelines. Stevens (1996) supports using the participant to variable ratio as an appropriate means to determine sample size with a range of 5 20 participants per variable being acceptable. With a participant to variable ratio of 8.625, the study sample falls within this range. As the table illustrates, approximately 59% of the participants are under the age of 25 and 91% are under 34 years old. Participants are predominantly junior (59.4%) and senior (31.9%) level undergraduates and 88% full-time students. The participants are fairly equally represented by males and females. Prior research is equivocal regarding whether gender is a factor in ethical judgment with some evidence that females have higher moral standards (Cohen, Pant, & Sharp, 1998) and others nding no statistical difference based on gender (Geiger & OConnell, 1999; Rogers & Smith, 2001; Stanga & Turpen, 1991). This study nds no statistical gender difference and also nds no statistical difference among other demographic characteristics. The participants demographic characteristics are presented descriptively but not included in the statistical analysis. Panel B of Table 2, provides descriptive statistics (minimum, maximum, mean, and standard deviation) for the independent variables. The mean P-score (33.2514) is consistent with the mean P-score of accounting undergraduate students in earlier studies (e.g., Bailey et al., 2010). Correlations for the study variables are displayed in Table 3. To test the eight hypotheses, a regression analysis is performed with ERC as the

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Table 2.
Age Category N Percentage Category Gender N

Descriptive Statistics.
College Status Attend School Category N Percentage

Percentage

Category

Percentage

Panel A: Participants Under 25 41 59.4 2534 22 31.9 3544 6 8.7 Total 69 100.0

Female Male Total

34 35 69

49.3 50.7 100.0

Junior Senior Othera Total Maximum

41 22 6 69

59.4 31.9 8.7 100.0 Mean

Full time Part time Total

61 8 74

88.4 11.6 100.0

Minimum Panel B: Independent variables Ethical Reasoning Score (P-score) Idealism Relativism Machiavellianism Locus-of-controlb Consequentialism Deontological Risk Propensity
a b

Standard Deviation

6.00 2.000 1.000 1.000 2.00 1.900 2.500 1.900

62.00 7.000 6.200 5.714 18.00 5.000 6.300 6.300

33.2514 5.14000 4.05800 3.01863 11.8261 3.44203 4.84638 4.14638

14.19957 1.19100 1.04280 .853955 3.66605 .714638 .692094 .885268

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Includes nondegree and postbaccalaureate students. A high score indicates an internal locus-of-control focus.

Ethical Financial Reporting Choice

Table 3.
Ethical Reporting Choice Ethical Reasoning Score (P-score)

Correlations.

Consequentialism Deontological Locus-of- Idealism Relativism Machiavellianism Risk Control Propensity

Ethical reporting choice Ethical reasoning score (P-score) Consequentialism Deontological Locus-of-control Idealism Relativism Machiavellianism Risk propensity

1 .078 .180 .030 .161 .211 .046 .251 .007 1 .146 .008 .286 .157 .013 .033 .153 1 .046 .100 .196 .283 .074 .011

1 .217 .444 .333 .394 .178 1 .144 .232 .104 .213 1 .112 .319 .292

1 .359 .110

1 .289

Correlation is signicant at the .05 level (two-tailed). Correlation is signicant at the .01 level (two-tailed).

133

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dependent variable and all independent variables are included. Model results are presented in Table 4. The overall model is signicant (p=.013) with an adjusted R2 of .167. The regression analysis does not support H1. Therefore, there is no basis for concluding an association between CMD and ERC in this study. As addressed by OFallon and Buttereld (2005) and Bailey et al. (2010), the DIT/DIT-2 commonly used to measure CMD may represent individuals ethical judgment but does not extend to their ethical actions. Model results do marginally support H2, nding a positive relationship between idealism and ERC (p=.053).10 This is consistent with the belief that ethical actions will lead to positive outcomes regardless of the situation and the philosophy of do-no-harm-to-others. As such, when confronted with a choice between revenue estimates that are encouraged by management but not fully supported by the auditors, participants scoring higher on the idealism scale are more likely to defy their supervisor and choose the ethically superior estimate. In contrast, the null for H3 could not be rejected and no association between relativism and ERC was found.

Table 4.
Summary R .515 R
2

Model Results.
Adjusted R2 .167 Standard Error of the Estimate 2.597136 F 2.701 Signicance .013

.265 df 8 60 68

Sum of Squares Regression Residual Total 145.743 404.707 505.450

Mean Square 18.218 6.745

Standardized Coefcients Beta (Constant) Ethical reasoning score (P-score) Idealism Relativism Machiavellianism Locus-of-control Consequentialism Deontological Risk propensity

Signicance

H1 H2 H3 H4 H5 H6 H7 H8

.163 .265 .162 .316 .317 .300 .056 .178

.689 1.362 1.970 1.252 2.429 2.525 2.474 .414 1.417

.494 .178 .053 .216 .018 .014 .016 .681 .162

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Consistent with prior research, the model results support the H4 prediction of a negative inuence of Machiavellianism on ethical choice (p=.018).11 High Machs are able to justify the manipulation of arguments as well as duplicity to achieve the desired outcome. H5 examines the association between locus-of-control and ERC. The results are statistically signicant but in the opposite direction hypothesized (p=.014).12 A low locus-of-control score in this case reects high external focus. The ndings demonstrate that the external focus viewpoint led to the more ethical choice. While some prior research nds that those with external locus-of-control tend toward unethical choices (Bass et al., 1999; Kish-Gephart et al., 2010), Cherry and Fraedrich (2000) surmise externally focused individuals can be inuenced more by arguments and be more susceptible to conformity required by the AICPA Code of Conduct. The students did have ethics instruction prior to the assignment of the experimental case. Therefore, the contextual environment where ethics instruction was presented preceding the technical topics may have contributed to the result. This nding has potential for building effective instructional methods. The null for H6 tests the association between consequentialism and ERC. The rejection of the null (p=.016) indicates that the ERC is more evident with participants who score higher on the consequentialist scale. This implies that these individuals, who focus more on the ultimate outcome and generally choose options that create the greatest good, are more likely to adopt the ERC. Selecting the option unquestionably supported by auditors provides the greater good to the owners of the company than selecting the option beneting the personal interests of an individual supervisor. On the other hand, the deontological test of H7 is not signicant. Thus, participants who hold views where the consequences of their choices are secondary to their moral beliefs do not demonstrate conclusive evidence that their choice was the highest ethically supportable decision. Finally, the null for H8, examining the association between risk propensity and ERC, cannot be rejected. Upon reection, a situational risk preference scale might have been more appropriate than a general risk preference scale in this situation, especially with consequentialist participants. Additional questions yield insight into what participants consider when making their decisions and the process undertaken. Positive factors in supporting the selection of the most ethical choice include auditor support for the choice and a belief that the choice reected the best nancial representation. Participants also note (it is) the right thing to do, provides them a clear conscience, and further commented that Smith (the supervisor) is unethical as well as noting I will not lose my license.

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Factors which inuencing the neutral or less ethical choice included a lack of denitive evidence, individuals personal stake in the matter as well as the impact on colleagues (no bonus) and a heightened concern over people not liking them. Consistent with their consequentialist scores, most participants describe weighing the consequences of the reporting decision (e.g., impact on career and impact on relationships vs. impact on the company). One participant reports the need to understand his/her own ethics to be able to do the right thing. Over 50% asked a fellow student, peer or family member for advice.

DISCUSSION
The research goal is to determine whether the individual characteristics identied in the Kish-Gephart et al. (2010) meta-analysis remain signicant indicators of ethical choice when examined collectively. The task is a nancial reporting decision that involves an ethical dilemma. The constructs that are signicantly related to ERC provide valuable insights. As the results demonstrate, creating ethics instruction for accounting students having universal effectiveness is not a simple task. Idealism, Machiavellianism, external locus-of-control, and consequentialism are not complementary traits. Therefore, ethics instruction needs to be multipronged to address the varied attitudes. Simply instructing students that ethical reporting is the right thing to do will inuence only a fraction of the accounting student population. Rather, effective instruction needs to address the variety of motivations for making the ERC. An idealistic motivation, where doing the right thing will lead to positive outcomes with no one harmed, will be receptive to some students. Challenging students to accept that the ERC is in their own self-interest will appeal to those with Machiavellian attitudes. Students with an external locus-of-control will be receptive to instruction that demonstrates the authoritative reasons for making the ERC. And nally, consequentialist views would respond to arguments that emphasize the greatest benet for the involved stakeholders. A carefully designed curriculum can address each trait without disparaging the others. These ndings can also guide future research to address the changes in ethical instruction that will be necessary as the accounting profession transitions from primarily rule-based principles toward more contextbased principles. Accounting students are typically classied as preferring rule-based systems. However, the ndings here demonstrate that accounting students do reason contextually in ethical decision settings. With

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a consequentialist perspective, students evaluate more than the rules when making their decisions. This insight can be instructive during the ethical training transition necessitated by the reporting methods evolving toward IFRS inuenced GAAP. This study develops ERC, a multi-method variable measuring choice along with the convictions the participants invest in that choice. Substantial further investigation is needed to determine stability across reporting domains and to assess construct validity. It is a preliminary effort to capture actions rather than attitudes or intentions with a quantiable metric. Using choice, rather than attitudes or intentions, as the dependent variable allows a more direct observation of ethical decision making under managerial pressure. In addition to the contributions to instructional innovations, the results of this experiment can provide direction for future research in the area of ERC. Data collection is expensive and when studies include numerous independent variables, the risk for participant fatigue is high. Participant fatigue can hinder valid results. These ndings, while requiring additional study to assure they are robust, can result in more efcient and effective study designs. Preparing accounting students to address the ethical challenges faced by the profession can be more difcult than preparing them for the technical challenges. This experiment demonstrates that ethical choice is impacted by individual characteristics and beliefs. Shaping these beliefs into a professional framework for ethical decision making requires thoughtful curriculum design. Whereas technical topic mastery can be tested in the classroom, the students mastery of professional ethical choice will be tested on the job. Therefore, research that can guide curricular innovation is critical to meeting the expectations of the profession and its stakeholders.

NOTES
1. Since the participants are students, job satisfaction is not a relevant factor for this study. 2. There are no signicant differences across descriptive characteristics found between participants in the two sections of the intermediate course. 3. The study received exempt certication from the universitys Ofce of Research Assurances Institutional Review Board. 4. Students provided personal four digit numbers on index cards with their names on the opposite sides. They used these numbers when completing the personal characteristics questionnaire. An individual not involved in the experiment used these cards to place the corresponding number on the students assignments.

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The students names were removed from the assignments to ensure that the experimenters could not identify the students. 5. These independent scale measures derived from existing construct measures of individual characteristics identied as inuencing individuals attitudes and behaviors prior to instruction from the literature were captured in the rst class session before the class session which provided the baseline of ethics instruction. 6. Scale items included are 1, 2, 5, 7, 11, 13, 17, and 20. 7. As the rst measure, ethical reporting choice, is an ordinal variable comprised of three categories, we use polychoric correlation, as the rst step creating input to the factor analysis. This approach is recommended when there are three items from which participants make a choice (Lee, Zhang, & Edwards, 2012). 8. While signicant, Ambiguity provides little explanatory effects and is not sufciently powerful to provide predictive benets. The weakness in the Ambiguity factor is that it represents participants inability to decide. In a model representing choice, it then offers little insight into the research questions. 9. Where feasible, mean replacement and predictive value methods are used for seventeen missing observations. Five participants did not complete at least one scale and are eliminated from the study. Six participants did not complete the case, thus providing no dependent variable measurements and are eliminated from the study. 10. Results for H2 are presented as a two-tailed test. Signicance for a one-tailed test is .026. 11. Results for H4 are presented as a two-tailed test. Signicance for a one-tailed test is .009. 12. Results for H5 are presented as a two-tailed test. Signicance for a one-tailed test is .007.

ACKNOWLEDGMENTS
The authors would like to express their appreciation for helpful comments from Joseph Cote, Ph.D., Mary Gentile, Ph.D., and Anne Christensen, Ph.D., participants at the 2011 First Global Faculty Conference on Giving Voices to Values: Teaching, Learning and Research, the 2012 Western American Accounting Association Annual Meeting and the 2012 First International Conference on Education in Ethics. The guidance provided by the editor and two anonymous reviewers has also been valuable.

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APPENDIX A: CASE ASSIGNMENT

ABC Company Percentage of Completion Problem Part I. ABC Company has applied the % of completion method for revenue recognition to long-term contracts. Smith, the ABC Company manager and your supervisor, has created a recognition schedule using milestones to determine the percentage complete. Given its well-developed cost tracking system, it is apparent that the cost to cost method is a logical choice for estimating long-term contract revenue and ABC Companys auditors strongly suggest using cost to cost as the best representation of events for recognizing revenues for 2009. The CFO supports this decision in theory but is not sure the results will be benecial. Smith provides you with the below partial listing of ABCs Chart of Accounts. Some of the accounts were setup incorrectly and are no longer in use. Also provided below is ABCs Schedule of Contracts in Process, using milestones. Smith requests that you complete the following procedures in mid January, 2010, for the year ending December 31, 2009. Please use the excel le provided to complete this portion of the assignment. Complete part II of this assignment only after nishing the excel spreadsheet. Part II. Regardless of the outcome of your calculations on the excel spreadsheet, please assume the amounts in the following information are the actual amounts from the analysis. You present your calculations of the cost to cost method to Smith, which estimates revenue at $350,000. The milestone method estimates revenue at $500,000. The decrease in revenue to be recognized under the cost to cost method is not what Smith desires and he is critical of your performance. Smith reminds you that bonuses for company personnel are based on revenue and that people are already counting on these bonuses. As an example, he tells you how using cost to cost would reduce his bonus for the year by $10,000. He had already started the paperwork to buy a new house because he was counting on the bonus and is sure that he is not the only one. Your meeting is interrupted and you both agree to discuss this more the next morning. The next morning Smith appears much less irritated with you. He notes that, after he rereviewed his Schedule of Contracts in Process following your meeting yesterday, he realized that the schedule was incomplete. He tells you that the roong subcontractor had nished the roof on the project before

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year end and that this additional work had yet to be accounted for in his earlier schedule. Smith then states he is obtaining the documentation to support this cost. You are somewhat surprised as you recall driving by the site and seeing the roof half-complete in early January. This missing work represents quite a large sum. Including this work in the cost to cost method increases the revenues from $350,000 to $475,000. Smith is much happier with these results and praises you on your skill in effectively utilizing the cost to cost method. Since this is the method that the auditors think should be used, Smith feels that forwarding these revised nal cost-to-cost revenue results is appropriate. Smith indicates that it is not necessary to send any supporting statements as headquarters has only requested the revenue number. REQUIRED: 1. Which revenue estimate for the percentage of completion do you think you should forward to headquarters? Please place an X before the estimate you would send to headquarters. ________$350,000 (original cost to cost)a ________ $500,000 (milestone)b ________ $475,000 (revised cost to cost)c 2. How condent are you in your choice regarding the revenue estimate to forward to headquarters? Not Condent 1 2 3 Somewhat Condent 4 5 6 Very Condent 7

This is the estimate supported by the auditors. It represents the most ethical choice.

b c

This is the estimate that represents an acceptable accounting choice, however, it is not supported by the auditors. It represents the neutral ethical choice.

This is the estimate supported by the individuals (participant) supervisor. The participant suspects the supervisor of providing additional ctitious amounts to improve the revenue estimate. It represents the least ethical choice.

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Since you may be unsure regarding your response in question 1, please indicate, for each of the three choices, the likelihood you would choose the option. The total likelihood for all three items must be 100%: Option: Method Revenue Estimate $350,000 $500,000 $475,000 100% % likelihood you would choose this option

A: Original cost to cost B: Milestone: milestone C: Revised cost to cost

Total (your three % must equal 100%)

What were the positive and negative factors (pros and cons) that inuenced your decision? What process did you use to make this decision? As permitted for this assignment, did you talk with anyone regarding which estimate to send to headquarters? _____ No _____ Yes If yes, please indicate the type of individual (student, friend, fellow employee, etc) with whom you conversed. Please, DO NOT provide the individual(s) name(s).

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APPENDIX B: EXAMPLES OF SCALE ITEMS

IdealismRelativism (Forsyth, 1980; 20 items: two examples shown for each construct) How much do you agree with the following statements? CIRCLE the most appropriate number (17) to the following questions. yA person should make certain that their actions never intentionally harm another even to a small degree (=Ideal 1). yRisks to another should never be tolerated, irrespective of how small the risks might be (=Ideal 2). yThere are no ethical principles that are so important that they should be part of any code of ethics (=Relative 1). yWhat is ethical varies from one situation and society to another (=Relative 2). Machiavellianism (Christie & Geis, 1970; 20 items: three examples provided, one with reverse coding) How much do you agree with the following statements? CIRCLE the most appropriate number (17) to the following questions. yNever tell anyone the real reason you did something unless it is useful to do so (=Mach 1). yOne should take action only when sure it is morally right (=Mach 2 reverse coded). yAnyone who completely trusts others is asking for big trouble (=Mach 8). Locus-of-Control (Rotter, 1975; 18 items: three examples provided) Select one from either set below (forced choice format) yMany of the unhappy things in peoples lives are partly due to bad luck (=LOC 2). yPeoples misfortunes result from the mistakes they make. yOne of the major reasons why we have wars is because people dont take enough interest in politics (=LOC 3). yThere will always be wars, no matter how hard people try to prevent them. yIn the long run people get the respect they deserve in this world (=LOC 4).

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yUnfortunately, an individuals worth often passes unrecognized no matter how hard one tries. DeontologicalConsequential (Trenkamp, 2009; 20 items: four examples provided) How much do you agree with the following statements? CIRCLE the most appropriate number (17) to the following questions. yI believe there are universal characteristics that dictate my ethical decisions (=Deontolog3). ySome actions are wrong no matter what consequences arise (=Deontolog8). yThe rightness of an action is determined by how useful it is (=Consequent2) yI believe that the rightness or wrongness of an action should be evaluated by its consequences (=Consequent18) Risk Propensity (Hung & Tangpong, 2010; 10 items: three examples provided) How much do you agree with the following statements? CIRCLE the most appropriate number (1-7) to the following questions. yI believe that higher risks are worth taking for higher rewards (=RiskProp1). yTo me, the best possible plan is the plan that is risk-free (=RiskProp4 reverse coded). yI seek new experiences even if their outcomes may be risky (=RiskProp10).