Knowledge of ethics, perceived

ethical problems and ethical

judgments
Maheran Zakaria
Universiti Teknologi MARA, Shah Alam, Malaysia, and
Hasnah Haron and Ishak Ismail
Universiti Sains Malaysia, Penang, Malaysia
Abstract
Purpose – The paper aims to investigate: the influence of knowledge of ethics (KOE) on
auditors’
perceived ethical problems (PEB); the influence of PEB on ethical judgments (EJ); and the
mediating
impact of PEB that mediate the relationship between KOE and EJ.
Design/methodology/approach – A total of 940 questionnaires were distributed to auditors of
audit firms in Malaysia and 250 auditors responded. However, only 224 questionnaires were
usable.
Data were analyzed using SPSS 16.0 and structural equation modeling (SEM) using AMOSS 16.0.
Findings – The results indicated that statistically significant relationships exist between KOE and
PEB, PEB, and EJ. Additionally, PEB are found to mediate the relationship between KOE and EJ.
Practical implications – This paper provides important implication for audit firms to enhance
sufficient knowledge of Malaysian Institute of Accountants (MIA)’s code of ethical principles
among
their members. Another implication is for professional bodies to design a complete and
effective code
of ethics, disseminate free information to members through web site and e-notification and
conduct
professional development programs with the latest development on a regular basis.
Originality/value – The number of studies on the impact of PEB as a mediator that mediates the
relationship between KOE and EJ is scarce. Therefore, this paper aims to fill this gap. The
findings
provide insights that it is imperative to emphasize the importance of KOE and PEB in enhancing
auditors’ EJ.
Keywords Knowledge capture, Ethics, Auditors, Malaysia
Paper type Research paper
1. Introduction
Almost all professions are demanded by a society to be ethical, especially the auditors.
Auditors have been given fiduciary and legislative duties to audit organizations. In
addition, they are also appointed to protect the interest of stakeholders. Therefore, they
must ensure that their judgments are ethical for the interests of those whom they are
responsible for. In Malaysia, the government has enforced that practicing auditors are
monitored by accounting professional body namely, Malaysian Institute of Accountants
(MIA, 2007a, b, c, 2009). To ensure auditors possess the profession’s ethical values, MIA
issues its professional code of ethics. These ethical codes are to help members identify
what are considered as ethically right or wrong. Moreover, it is hoped that these ethical
codes will hinder auditors from forming unethical judgments and thus prevent financial
scandals.
In recent years, there are many financial scandals in some very big corporations
in Malaysia. According to the former MIA President, Abdul Rahim Abdul Hamid,
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1985-2517.htm
JFRA
8,1
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Journal of Financial Reporting and
Accounting
Vol. 8 No. 1, 2010
pp. 50-64
q Emerald Group Publishing Limited
1985-2517
DOI 10.1108/19852511011055934
the responsibility of any wrongdoing in any company is on the shoulders of the
directors, senior management team as well as the auditors, among others (MIA, 2007).
As a result, litigations taken against auditors are increasing in number. For example,
Cold Storage Malaysia Berhad sued Arthur Andersen for RM500 million for
negligently giving a clean report (NST, 2002). Meanwhile, Mohamad Adam et al. (2002)
reported that two audit firms namely, Johari Abas and Anor and David Low See Keat
and Ors were charged by their clients due to their failure to detect wrongdoings of their
client companies in the course of their normal duties. Apart from these scandals, there
are many other financial scandals which include Transmile Group Berhad, Megan
Media Holdings, Southern Bank and Technology Resources Industries Berhad.
Hence, these financial scandals had caused a high level of accusation and criticism
by outsiders that auditors are unethical in their judgments (Lee et al., 2008). This
negative publicity has eroded the image of auditing profession in Malaysia and arise
studies to investigate the underlying factors that lead to ethical judgments (EJ).
Many studies of EJ have indicated that one should perceive ethical problems before he
or she forms EJ (Maheran et al., 2009; Malone, 2006; Marta et al., 2004; Ziegenfuss and
Martinson, 2002; Shafer et al., 2001; Marta, 1999; Patterson, 1994). In addition, two prior
studies also indicated that knowledge of ethics (KOE) influences perceived ethical
problems (PEB) (Maheran et al., 2008; Ziegenfuss and Martinson, 2002). It is noted that
studies in this area are limited and prior studies have not focused on themediating impact
of PEB that mediates the relationship between KOE and EJ. Hence, to fill this gap and to
suit the auditors and local context, this present study will investigate the influence of
KOE based on MIA code of ethics on PEB. Further, it will examine the influence of PEB
on EJ. Finally, this study will investigate the mediating impact of PEB that mediate the
relationship between KOE and EJ. As such, it will address the following three questions.
What is the relationship between KOE and PEB? What is the relationship between PEB,
and EJ? Do PEB mediate the relationship between KOE and EJ?
2. Literature review
The literature is reviewed in two sections. Section 1 discusses the theory and models of
EJ, and Ethics Education Framework (EEF). Meanwhile, Section 2 discusses the three
important ethic-related dimensions namely, KOE, PEB and EJ.
Hunt and Vitell’s (1986, 1993) theory of ethics states that personal characteristic
influences PEB, which in turn influences the formation of EJ. Meanwhile, EEF (2007),
issued by International Federation of Accountants (IFAC) proposes that knowledge of
ethical principles influences PEB before the formation of EJ.
Likewise, several EJ models namely issue contingent model (Jones, 1991), synthesis
integrated model (Ferrel et al., 1989), Four-component model Rest (1986) and EEF
(IFAC, 2007) also posit that there is a relationship between PEB and EJ.
2.1 Ethics education framework
International Education Practice Statements for Professional Accountants (IEPS) are
issued to assist IFAC members in the education and development of professional
accountants. They provide advice or guidance on how to achieve good practice in
maintaining professional values, ethics, and attitude. The statements highlight good
practices in ethics education by stressing the importance of workplace learning and
period of practical experience. IEPS develops EEF, which identifies four stages of
Ethics, problems
and judgements
51
learning continuum. The stages are based on four objectives of ethics education. These
include of knowledge, sensitivity or PEB, EJ and behavior (IEPS 8). The stage of EEF is
shown in the Figure 1.
2.2 The influence of KOE on PEB
Sullivan (2004) conceptualized KOE as members’ knowledge of a set of ethical
principles and statements issued by the professional body to regulate its members.
Being professionals, auditors are expected to have sufficient KOE and understand
what the codes of ethical standards comprise of. The underlying reason is that the
accounting professional body requires the auditors to apply similar standards in which
EJ are laid down in the profession’s ethical code. As such, harmonization and
convergence in judgments among the accounting professionals can be established.
In Malaysia, ethical principles of the accounting profession are embodied in MIA
By-Laws on code of ethics.The code is adopted from IFAC as to establish harmonization in
the accounting profession globally.Members are required to complywith the recommended
ethical values and principles. The purpose of the code is to enhance members’ knowledge
and guide them in recognizing ethical problems and thus formulating EJ.
PEB are individual’s recognition of an ethical issue and the realization that he or she
is an ethical agent ( Jones, 1991). Hence, different people may perceive differently which
leads to different reaction even under similar circumstances (Karcher, 1992).
Hunt and Vitell (1986) defined EJ as judgments by which one identifies ethical
problems and considers alternatives that best solve the problem to attain the most
beneficial outcome. Fang (2006) added that EJ are judgments in which one can freely
form based on the evaluation of the interests of all parties when facing ethical dilemmas.
As such, it can be concluded thatEJ are judgments formed after one has identified ethical
problems and has evaluated what is morally “right” or “wrong” according to the
profession’s ethics, and rules and regulations.
Past studies indicated that KOE is strongly related to PEB (Maheran et al., 2008;
Ziegenfuss andMartinson, 2002).Maheran et al. (2008) carried out a study to examine the
influence of KOE on EJ among 305 accountants and found that KOE is positively
associated to EJ. Another study was conducted by Ziegenfuss and Martinson (2002) to
investigate the influence of knowledge of Institute of Management Accountants (IMA)
code of ethics on the IMA members’ PEB. The results revealed that there is a statistically
significant relationship between the importance placed by IMAmembers on elements of
the IMA code of ethics and their PEB. The study concluded that adequate knowledge of
IMA code of ethics to a certain extent helps members in perceiving ethical problems.
Therefore, based onHunt and Vitell’s (1986, 1993) theory of ethics, EEF (IFAC Code of
Ethics for Professional Accountants, 2005) and previous studies (Maheran et al., 2008;
Figure 1.
EEF
Source: IFAC (2007)
Stage 1
Enhancing
ethics
knowledge
Stage 2
Developing ethical
sensitivity/
perceived ethical
problems
Stage 3
Improving
ethical
judgments
Stage 4
Maintaining
an ongoing
commitment
to ethical
behavior
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Ziegenfuss and Martinson, 2002), it is hypothesized that KOE is positively related to
PEB (Figure 2):
H1. KOE is positively related to PEB.
2.3 The influence of PEB on EJ
Many empirical studies were conducted in an attempt to find the relationship between
PEB and EJ (Maheran et al., 2009; Malone, 2006; Marta et al., 2004; Ziegenfuss and
Martinson, 2002; Kantor andWeisberg, 2002; Shafer et al., 2001; Marta, 1999; Patterson,
1994). Maheran et al. (2009) performed a study to investigate the relationship between
PEB and EJ. The results indicate that a strong relationship exists between these
constructs. Malone (2006) assessed the relationship between PEB and unethical
judgments of accounting students. The findings were significant whereby the PEB
have a negative relationship with unethical judgments. Another study conducted by
Marta et al. (2004) analyzed the EJ of Middle-Eastern marketers. The study examined
the influence of PEB on EJ and the results revealed that PEB are a positive factor of EJ.
The results were consistent with a study carried out by Kantor and Weisberg (2002)
that investigated whether perceived ethical problem had a relationship with EJ.
Likewise, the results were in tandem with a study carried out by Ziegenfuss and
Martinson (2002) that investigated the relationship between PEB and EJ.
Shafer et al. (2001) investigated the effects of PEB on auditors’ EJ. As hypothesized,
the study found that the greater the PEB the greater are the likelihood of the formation
of EJ. A study by Marta (1999) examined the impact of PEB on EJ conducted among
marketers. The findings confirmed the hypothesis that the respondents who are more
perceptive to the existence of ethical problems are more likely to form EJ. Finally,
Patterson (1994) conducted a study to determine the relationship between PEB and EJ
among 174 auditors. Also, the results reflected that the greater the PEB, the greater are
the likelihood of the formation of EJ.
Based on EEF (IFAC, 2007) and the EJ models ((Hunt and Vitell’s (1986, 1993) theory
of ethics, issue contingent model ( Jones, 1991), synthesis integrated model (Ferrel et al.,
1989), four component model (Rest, 1986) and past studies (Maheran et al., 2009;
Malone, 2006; Marta et al., 2004; Ziegenfuss and Martinson, 2002; Shafer et al., 2001;
Marta, 1999, Patterson, 1994), the following hypothesis is formulated:
H2. The higher the PEB, the higher is the likelihood of the formation of EJ.
2.4 PEB as a mediator
The perception of ethical problems is the beginning stage that triggers EJ as one can
make EJ only after recognizing the existence of ethical problems; Hunt and Vitell’s
(1986, 1993) general theory of marketing ethics; issue contingent model ( Jones, 1991);
synthesis integrated model (Ferrel et al., 1989); four component-model (Rest, 1986)).
Additionally, these models indicate that if one does not perceive the existence of ethical
Figure 2.
Theoretical framework
H1
Knowledge of
ethics
Perceived ethical
problems Ethical judgments
H2
H3
Ethics, problems
and judgements
53
problems, then EJ will not exist. Hence, it appears that the PEB are a mediator that
mediates the relationship between culture and EJ. To date and to the researchers’ best
knowledge, there is no study that examines PEB as a mediator. Based on Hunt and
Vitell’s (1986, 1993) general theory of marketing ethics, integrated synthesis model
(Ferrel et al., 1989), contingency and synthesis model (Ferrel et al., 1989), this study
predicts that PEB will mediate the relationship between organizational ethical climate
and EJ. Therefore, it is hypothesized that:
H3. PEB mediate the relationship between KOE and EJ.
3. Methodology
3.1 Population
The population of this study consisted of audit practitioners who work with public
audit firms and members of MIA. The list of audit firms’ addresses from which this
study drew the sample was taken from MIA’s 2007 directory. The questionnaires were
sent to audit firms to be distributed to their audit staff who are MIA’s members. As of
June 30, 2007, there were 1,374 audit firms in Malaysia.
3.2 Sample
Samples were selected based on the number of audit firms located in every state in
Malaysia. A proportional sampling was done based on a stratified random sampling.
According to Krejcie and Morgan (1970) the proposed sample size for population 1,400 is
302 or equivalent to 23.0 percent. Therefore, in order to obtain this sample size (1,374
firms £ 23 percent ¼ 304 firms), about 940 questionnaires were distributed to 304 audit
firms throughout Malaysia. The selected firms (that were taken from MIA’s 2007
directory) were contacted through telephone calls. Firms which express an interest to
participate were given three copies of the research booklets (300 firms £ 3
questionnaires ¼ 900 questionnaires). However, the Big 4 firms were given ten copies
each (10 questionnaires £ 4 firms ¼ 40 questionnaires) amounting to 940 questionnaires
being distributed (900 questionnaires þ 40 questionnaires ¼ 940 questionnaires).
3.3 Variables and measurements
3.3.1 Knowledge of ethics. The exogenous variable of this study is KOE. KOE is the
level of ethical knowledge based on the acceptable professional code and principles. In
order to suit the local environment, this study assessed the respondents’ KOE based on
their understandings of MIA code of ethics. The respondents were required to indicate
their understandings of the provisions stated in MIA By-Laws professional code and
ethics in nine scenarios. One scenario was given for each question, accumulating to
nine scenarios, which involved nine main areas that included fees, method of practice,
advertising, competence and due care, loans to clients, commission, referrals, changes
in professional appointment, and confidentiality.
3.3.2 Perceived ethical problems. The study employed two endogenous variables
namely, PEB and EJ. PEB would be measured by a single item from the three ethical
scenarios namely, low balling, underperform audit service, and confidentiality adopted
from the study carried out by Cohen et al. (1992). The three ethical scenarios employed
were non-compliance to MIA By-Laws of confidentiality Section 12 and Acts
discreditable to the Profession Section 18.
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Here, PEB were a type of sight, measured by a single test to assess the extent of how
clearly one could discern an object. After the respondents read a scenario, they had to
state their degree of agreement whether the situation involved an ethical problem (on a
nine-point Likert type scale from 1–strongly disagree to 9–strongly agree).
3.3.3 Ethical judgments. This study also measured EJ through one item based on the
same scenarios that measured PEB (Cohen et al., 1992). The respondents were required to
state their degree of agreement with the action described in the scenarios (please rate the
auditor’s action as to howethical you believe itwas), measured on a nine-point Likert-type
scale (1–very ethical, 9–very unethical). A high score indicated a respondent was
more likely to form EJ (respondents perceived the situation as unethical).
4. Data analysis and results
The results and discussion were analyzed in four sections. Section 1 presented the
profile of respondents. Meanwhile, Section 2 presented statistical and descriptive
results using SPSS 16.0. Section 3, then presented the results of structural analysis by
employing AMOS 16.0 program. Finally, Section 4 discussed the hypotheses testing.
Approximately, 940 questionnaires were distributed via mail to the identified audit
firms located throughout Malaysia. The firms’ addresses were obtained from MIA
directory list. Of the 940 questionnaires sent out, 250 were returned. However, only
224 were usable, giving a total response rate of 23.8 percent. The remaining
26 questionnaires were received from non-MIA’s members, thus they were excluded
from the analysis.
4.1 Profile of respondents
The results indicated that 67.5 percent of respondents were male, while the remaining
33.5 percent were female. Meanwhile, the respondents’ highest level of qualification was
as follows; 67. 9 percent hold a degree, followed by professional qualifications
(67.9 percent), master (3.1 percent) and PhD (3.1 percent). In terms of level of position,
42.9 percent was seniors, 29.0 percent was managers and the remaining 28.1 percent was
partners. For job tenure with the present firm, 37.1 percent had been with the firmfor less
than three years, 45.5 percent within three-six years, 10.7 percent within seven-nine years
and 6.7 percent above nine years. Almost 22.8 percent had membership with MIA for a
period of less than three years, 54.0 percent within three-six years, 14.7 percent within
seven-nine years and 8.5 percent above nine years. In terms of their experience as an
auditor, 15.6 percent had an experience below three years, 66.1 percent within three-six
years, 10.7 percent within seven-nine years and 7.6 percent above nine years. In addition,
about 29.0 percent of respondents had encountered unethical situations such as low
balling, under perform audit and confidentiality, in which it indicated that unethical
situation was really practiced and encountered by audit practitioners. Finally,
14.7 percent of the respondents were attached to Big 4, and the remaining 85.3 percent
were employed with non-Big 4. All information is presented in percentages to facilitate
interpretation. The results are presented in Table I.
4.2 Descriptive analysis
The descriptive analysis was carried out to measure the minimum, mean, maximum,
standard deviation and skewness of KOE, PEB, and EJ. The results indicated that the
level of minimum values were 24.00, 2.00, and 3.00, respectively. Meanwhile, the level
Ethics, problems
and judgements
55
of mean value of KOE, PEB, and EJ was 3.12, 6.72, and 6.72, respectively. The level of
standard deviation was 2.79, 1.18, and 1.13, respectively. Finally, the level of skewness
of KOE, PEB, and EJ was 0.03, 20.60 and 20.46, respectively. The skewness is useful
in determining the existence of outliers (the distribution of data were within normality
if the skewness value was between 21.00 and 1.00). The descriptive statistics are
illustrated in Table II.
%
Gender
Female 33.5
Male 67.5
Years being member of MIA 22.8
Below 3 years 54.0
3 to 6 years 14.7
7 to 9 years 8.5
Job tenure with present firm
Below 3 years 37.1
3 to 6 years 45.5
7 to 9 years 10.7
More than 9 years 6.6
Years being an auditor
Below 3 years 15.6
3 to 6 years 66.1
7 to 9 years 10.7
More than 9 years 7.6
Level of education
Degree 67.9
Professional qualification 25.9
Master 3.1
PhD 3.1
Level of position
Senior 42.9
Manager 29.0
Partner 28.1
Encountered unethical situation
Yes 29.0
No 71.0
Firm category
Big 4 14.7
Non-Big 4 85.3
Note: n ¼ 224
Table I.
Profile of respondents
Variables Minimum Mean Maximum SD Skewness
Knowledge of ethics 24.00 3.12 9.00 2.79 0.03
Perceived ethical problems 2.00 6.72 9.00 1.18 20.60
Ethical judgments 3.00 6.72 9.00 1.13 20.46
Table II.
Descriptive statistics of
constructs in the study
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4.3 Structural analysis
The study adopted SEM using AMOS 16.00 program. The results of SEM structural
analysis were analyzed in two sections. Section 1 measured the fitness of the model.
Meanwhile, Section 2 presented two models of the study produced by AMOS
16.00 program.
4.3.1 Model fitness. The overall fit of the model can be determined as the fit function
has a x 2 distribution. Meanwhile, the goodness of fit (GFI) of the model can be
determined and compared to other competing models. Additionally, the GFI of a model
can be evaluated from multiple indicators. None of the various indexes has been
determined to provide the best solution. Rather, the results of the various measures
must be evaluated in conjunction with one another when determining the best fitting
model. According to Hair et al. (2006), multiple fit indexes should be used to assess a
model’s GFI and should include: the x 2, one absolute fit index (i.e. GFI, and root mean
square (RMSEA) or standardized root mean square residual (SRMR), one incremental
fit index (i.e. GFI or Tucker Lewis-Index (TLI)), one GFI index (GFI, CFI, TLI, etc.) and
one badness of fit index (RMSEA, SRMR, etc.). The indexes used in the present study
were described in the following paragraph.
First, the study assessed the model fitness based on several fitness indexes
produced by AMOS 16.00. The results indicated that GFI were 0.99, respectively.
In addition, RMSEA, normal fit index (NFI), relative fit index (RFI), and TLI also
exceeded the value of 0.90. The results are shown in Table III.
4.3.2 Variable development. KOE, PEB, and EJ have been used previously and
revealed a single factor (Maheran et al., 2008, Marta, 1999). The data were analyzed
using SEM for which it summarized the relationships between the latent exogenous
and endogenous variables through a set of linear structural equations (Bollen, 1989).
The relationships among constructs were tested in the structural phase.
4.3.3 Structural model. The structural model presented the path diagram that
measures the strength of magnitudes of association among constructs. The strength of
relationship between the variables is shown in Figure 3
The detailed results of testing hypotheses using standardized estimate are shown
in Table IV.
The results also indicated that PEB were explained by 0.10 variance of KOE.
Meanwhile, EJ were explained by 0.84 variances of PEB. The results are illustrated
in Table V.
x 2 NFI GFI TLI RFI RMSEA
26.45 0.96 0.99 0.94 0.95 0.03
Table III.
Goodness of model
fit statistics
Figure 3.
Structural model
0.04
0.32 0.92
Knowledge of
ethics
Ethical
judgments
Perceived
ethical problems
Ethics, problems
and judgements
57
4.4 Hypotheses testing
H1 was formulated to test the following statement: KOE is positively related to PEB.
The results of path analysis model indicated that KOE is positively related to PEB
(standardized coefficient ¼ 0.32, p , 0.001). As such, the H1 is supported and the
study concludes that KOE is positively related to PEB.
H2 was developed to test the following statement: the higher the perceived ethical
problem, the higher is the likelihood of the formation of EJ. The results of path analysis
indicated that PEB are positively related to EJ (standardized coefficient ¼ 0.92,
p , 0.001). Likewise, H2 is also supported and the study concludes that the higher the
PEB, the higher are the likelihood of the formation of EJ.
H3 was proposed to test the following proposition: PEB mediate the relationship
between KOE and EJ. According to Baron and Kenny (1986) a construct is considered a
mediator if it carries the influence of the independent variable (KOE) on dependent
variable (EJ). Basically, mediating effect or indirect effect is present using SEM if the
following three conditions are fulfilled:
(1) The independent variable is significantly associated with the mediator
(standardized coefficient ¼ 0.32, p , 0.001).
(2) The mediating variable is significantly associated with the dependent variable
(standardized coefficient ¼ 0.92, p , 0.001).
(3) The independent variable is not significantly associated with the dependent
variable (standardized coefficient ¼ 0.04, p . 0.05).
The results of the study indicated that all the three requirements for the mediating to
exist are fulfilled. In other words, the relationships between KOE and PEB, and PEB and
EJ were significant. However, the relationship between KOE to EJ was insignificant.
This means that KOE could not proceed to EJ but it had to pass through PEB before EJ.
As such, this study concludes that PEB mediate the relationship between KOE and EJ.
Hence, H3 is also supported. The summary of the hypotheses is illustrated in Table VI.
4.4.1 The relationship between KOE and PEB. The results of path analysis from
SEM indicated that KOE is positively related to PEB (standardized coefficient ¼ 0.32,
p , 0.001). In other words, the higher the level of auditors’ KOE, the higher is their
ability to perceive ethical problems.
Variable Variable Coefficient
KOE ! PEP 0.32 *
PEP ! EJ 0.92 *
KOE ! EJ 0.04
Note: Significant at: *p-value , 0.001
Table IV.
Testing hypotheses using
standardized estimate
Variable Squared multiple correlations
PEP 0.10
EJ 0.84
Table V.
Squared multiple
correlations for PEB
and EJ
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KOE was assessed based on MIA By-Law on code of ethics for professional
accountants that came into force on April 2, 1990 and it has been updated from time to
time. Being a member of IFAC, MIA adopts the code of ethics issued by IFAC Code of
Ethics for Professional Accountants (1990). This is to maintain harmonization in
ethical practices with the other countries, globally. Also, being aware of the importance
of KOE, IFAC, through its IEPS developed an EEF (2007). This framework proposed
professional accountants to equip themselves with fundamental knowledge on matters
concerning professional values, ethics and attitude in order to enable them to be more
perceptive of ethical problems. Thus, it is hoped that these ethical principles will help
practitioners to be more likely to form EJ. In addition, Hunt and Vitell’s (1986, 1993)
theory of ethics predicts that personal characteristic and professional environment that
consist of formal code of ethics and codes of enforcement influence one to perceive
ethical problems.
Hence, based on the results, which are consistent with prior studies (Maheran et al.,
2008; Ziegenfuss and Martinson, 2002) and in tandem with IFAC’s EEF (2007) and
Hunt and Vitell’s (1986, 1993) theory of ethics, it can be concluded that KOE is
positively related to PEB.
4.4.2 The relationship between PEB and EJ. The results of path analysis of
structural equation model indicated that the higher the PEB, the higher is the
likelihood of the formation of EJ. The results are consistent with prior studies
(Maheran et al., 2009; Malone, 2006; Marta et al., 2004; Ziegenfuss and Martinson, 2002;
Shafer et al., 2001; Marta, 1999; Marta, 1999; Patterson, 1994).
In real situations, evidences had shown dishonest practices by Transmile Group
Berhad, Megan Media Holdings Berhad, Southern Bank Berhad, and Technology
Resources Industries and Cold Storage Malaysia Berhad were the results of failure to
perceive ethical problems, cause auditors to be unable to deter unethical judgments.
For example, in Transmile scandal, it is assumed that if the management perceived
inflated revenues were unethical, they would not engage in this behavior. As such, the
scandals would not have happened. Similar to its external auditors (Messrs Delloite
and Touche), the public accused them of being failure to report the financial
statement’s misrepresentation. Should they perceive that the practice of inflating
revenues were unethical (incompliance with accounting standards) they should reveal
it to the proper authorities. Based on the results, supported by many EJ models (Hunt
and Vitell’s (1993, 1986) theory of ethics; issue contingent model ( Jones, 1991);
synthesis integrated model (Ferrel et al., 1989); four ethical component model (Rest,
1986)), EEF proposed by IFAC and consistent with prior studies (Maheran et al., 2009;
Malone, 2006; Marta et al., 2004; Ziegenfuss and Martinson, 2002; Shafer et al., 2001;
Marta, 1999; Patterson, 1994) it can be concluded that the higher the PEB, the higher is
the likelihood of the formation of EJ.
Hypotheses statements Results
H1. KOE is positively related to PEB Supported
H2. The higher the PEB, the higher is the likelihood of the formation of EJ Supported
H3. PEB mediate the relationship between KOE and EJ Supported
Table VI.
Summary of the
hypotheses
Ethics, problems
and judgements
59
5. Theoretical and practical implications of the study
The study supports the theory of ethics proposed by Hunt and Vitell (1993, 1986) that
PEB influence EJ. Additionally, KOE influences PEB, and PEB mediate the
relationship between KOE and EJ. The study also supports previous studies
(Maheran et al., 2009; Malone, 2006; Marta et al., 2004; Cherry and Fraedrich, 2002; Shafer
et al., 2001; Marta, 1999; Rallapalli et al., 1998; Patterson, 1994) that PEB influence EJ and
KOE influences PEB (Maheran et al., 2008; Ziegenfuss andMartinson, 2002). As such, the
results provided support to the theoretical works of ethics theory and literature thus
enhancing the understanding of EJ, which is important for practical implication.
The findings provide practical implication to audit firms to ensure that their
members possess sufficient knowledge of MIA ethical principles. The findings also
contribute implication to accounting professional bodies to design a complete and
effective code of ethics, rules and regulation, penalties and enforcement as to be in line
with the requirements of IFAC. In addition, the results indicate that knowledge in
ethics is essential in assisting auditors to perceive ethical problems.
The MIA By-Laws are part of the rule-based system and the results reveal that it is an
important factor for identifying ethical problems which in turn influence the formation
of EJ. However, having good MIA By-Laws are meaningless, if members are not aware
of what are dictated or stipulated in them. The professional bodies particularly MIA
should play more roles to increase members’ KOE. Thus, human capital is an important
element in the auditing profession that should be given great concern.
Also, MIA can enforce auditors to attend seminars and trainings by increasing their
compulsory point of Continuing Professional Development. Furthermore, to encourage
full participation, it is suggested that MIA conducts free professional development
programs. Hence, this program should be provided on a regular basis as to equip
auditors with the latest development of the accounting and auditing issues. This, in
turn, helps the auditors to deliver their work in line with the high expectations of the
society and profession.
To ensure that only quality auditors are in practice, MIA is also suggested to have a
pre-admission assessment. Thus, those who wish to be a member of MIA are required to
sit for this assessment and to attend an interview. The assessment will cover evaluations
on MIA By-Laws on professional code of ethics, accounting and auditing standards, the
Company Act and other statutory requirements. As such, they can understand these
identified areas better and thus will be able to handle ethical problems in real situations.
From the practical perspectives, the outcomes of this study offer several
recommendations to those in the accounting industry. The findings suggest that audit
practitioners must perceive ethical problems before they could form EJ. Besides, it is
practically proven that those who are able to perceive ethical problems are more likely
to form EJ. Hence, this can be achieved through training programs that specifically
expose practitioners to ethical problems which could be threats to EJ.
6. Limitation and suggestion for future research
Even though this study provides support for several theoretical works, there are
certain limitations that need to be acknowledged. The first limitation identified is a low
score of squared multiple correlation (0.10) for the relationship between KOE and PEB.
This is due to the fact that this study only examined a part of a few processes which are
proposed by Hunt and Vitell’s (1993, 1986) theory of ethics that potentially affects the
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formation of EJ. Therefore, future study should be extended and should examine a few
variables suggested by the Hunt and Vitell theory which includes the professional and
organizational environment, cognitive moral development, and personal traits.
The second limitation noted is that respondents were required to form judgments
based on limited information provided in the scenarios. However, in real working
environments, respondents would normally require additional information that is
available in three scenarios namely confidentiality, low balling, and under performing
audit. Future studies are suggested to conduct an in depth interview besides including
more ethical scenarios under auditing context.
The third limitation identified is that this study did not examine the effect of the size
of the firms (Big 4 and non-Big 4) that could have a significant impact on EJ. Hence,
future studies are suggested to examine the effect of this factor on PEB and EJ.
7. Conclusion
From this study, it can be concluded that KOE appears to influence PEB which in turn
influence the formation of EJ. Additionally, PEB are found to mediate the relationship
between KOE and EJ. Hence, the major premise of Hunt and Vitell’s (1993, 1986) theory
of ethics that predicted personal characteristics influence PEB and EJ is supported.
Although these relationships were extensively tested in the marketing ethics literature,
this study has shown that they are consistent in relation to the auditing context and
perhaps generalized to individual EJ. It is hoped that the findings of this study will not
only help professional bodies as well as audit firms to reform profession image and
reputation but also maintain auditors’ ethicality in forming judgments.
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About the authors
Maheran Zakaria is a Council Member of MIA, Kelantan Branch. Currently, she is a Senior
Lecturer at Faculty of Accountancy of University Technology MARA, Machang Campus,
Kelantan. She obtained her PhD from Universiti Sains Malaysia in 2010. Her research interests
are ethics, accounting education, and behavioral studies.
Hasnah Haron is a Professor, Dean at Graduate Business School, Universiti Sains Malaysia.
Her research interests are auditing, ethics, corporate governance, and financial accounting.
Ishak Ismail is an Associate Professor, Dean at School of Management, Universiti Sains
Malaysia. His research interests are ethics, marketing and management.
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