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  • Jennifer M Mueller-Phillips
    Antecedents to Unethical Corporate Conduct: Characteristics...
    research summary posted November 15, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.04 Moral Development and Individual Ethics Decisions, 04.06 Reporting Ethics Breaches – Self & Others 
    Title:
    Antecedents to Unethical Corporate Conduct: Characteristics of the Complicit Follower
    Practical Implications:

    The findings from these two studies illustrate that the susceptible follower problem associated with these characteristics is pervasive, influencing two steps within the ethical decision-making process. Furthermore, the results suggest that more than one in ten individuals are vulnerable in ethical dilemmas.  

    Citation:

    Mowchan, M., D. J. Lowe and P. M. J. Reckers. 2015. Antecedents to Unethical Corporate Conduct: Characteristics of the Complicit Follower. Behavioral Research in Accounting 27 (2): 95-126. 

    Keywords:
    ethics, toxic triangle, impulsivity and proactivity.
    Purpose of the Study:

    Despite the importance of ethical conduct in the accounting profession, many scandals in recent years have worked to shake public confidence in the ethics of the profession. Although the companies themselves, as well as members of the executive team, are often blamed for fraud, complicit fraudulent conduct by lower ranking accounting employees was also found in wrongdoing companies. Some court cases claim that if lower level staff accountants had refused to do as their supervisors asked and blown the whistle on the request, fraud could have been stopped entirely. Because of this, examining the characteristics of individuals at all levels of an organization to determine their impact on ethical conduct is important. The bulk of existing research has examined destructive leaders; very little research has centered on complicit followers. As such, the focus of this research is on complicit followers and, specifically, on three individual follower characteristics: impulsivity, authoritarianism/conventionalism, and proactivity. 

    Design/Method/ Approach:

    Two quasi-experiments were conducted among two separate groups of graduate accountancy students. 

    Findings:
    • The data show significant variations in the levels of these characteristics among master’s student participants.
    • The authors find that two of the characteristics individually, as well as two of the three interactions, have significant associations with intention for unethical complicity among subordinates and the ability to correctly identify ethical dilemmas in various accounting accruals earnings management and real earnings management contexts.
    • The authors find that low authoritarianism and high impulsivity, individually, lead to greater intention for unethical complicity among followers and reduced ability to identify ethical dilemmas.
    • The results reveal that individuals who are both low in authoritarianism and high in impulsivity are most willing to comply with supervisors’ requests for compliant misconduct and least able to identify ethical dilemmas.
    • The results reveal that willingness to resist requests for complicity in unethical conduct is strongest among individuals who are high in authoritarianism and high in proactivity.
    • The results reveal that the ability to identify ethical dilemmas is strongest among individuals who exhibit high authoritarianism and low proactivity.
    Category:
    Independence & Ethics
    Sub-category:
    Moral Development and Individual Ethics Decisions, Reporting Ethics Breaches - Self & Others
  • Jennifer M Mueller-Phillips
    Effects of Incentive Scheme and Working Relationship on...
    research summary posted January 12, 2017 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.06 Reporting Ethics Breaches – Self & Others, 14.0 Corporate Matters, 14.02 Corporate Whistle Blowers 
    Title:
    Effects of Incentive Scheme and Working Relationship on Whistle-Blowing in an Audit Setting
    Practical Implications:

    The results of this study suggest that, while both types of incentive schemes are effective in promoting whistle-blowing behavior in the absence of close working relationships, the effectiveness of a rewarding incentive scheme is more likely to be undermined by the presence of close working relationships than a penalizing incentive scheme. 

    Citation:

    Boo, E., T. B. Ng, and P. G. Shankar. 2016. Effects of Incentive Scheme and Working Relationship on Whistle-Blowing in an Audit Setting. Auditing: A Journal of Practice and Theory 35 (4): 23 – 38. 

    Keywords:
    reward and penalty, incentive scheme, working relationship, and whistle-blowing.
    Purpose of the Study:

    Prior research shows that providing an incentive, either in the form of a reward or a penalty, can help promote whistle-blowing behavior. Other studies show that close relationships between employees can exert a negative impact on whistle-blowing behavior. An important yet unanswered question is whether and to what extent the effectiveness of different types of incentive schemes to promote whistle-blowing could be undermined by the presence of close working relationships likely to be forged among team members in audit firms and other organizations. Furthermore, the current incentive system in the auditing profession is dominated by penalties; however, many are calling for a shift toward incorporating more ways to reward auditors rather than penalize them, suggesting the importance of understanding the implications of alternative incentive systems. Also, there has not been much research done on the effectiveness of punitive schemes, despite their prevalence in the profession. Finally, whistle-blowing has been found to be a significant means by which frauds and other forms of misconduct are detected, which suggests the crucial importance of understanding factors that could enhance or undermine its effectiveness. 

    Design/Method/ Approach:

    The authors conduct an experiment involving 90 auditors from a Big 4 firm in Singapore. The participants are presented with a hypothetical scenario in which an audit manager encountered a wrongdoing by the engagement partner who allowed the client to materially misstate sales revenue, and assess their propensity to report the act through the firm’s whistle-blowing hotline after making no headway despite having voiced concerns to the partner. 

    Findings:
    • The authors find that a rewarding incentive scheme, relative to the control group, increases auditors’ whistle-blowing propensity in the absence, but not in the presence, of a close working relationship.
    • The authors find that a penalizing incentive scheme increases auditors’ whistle-blowing propensity regardless of the presence of a close working relationship.
    • The authors find that auditors’ whistle blowing propensity is reduced by the presence of a close working relationship in the rewarding incentive scheme, but not in the penalizing incentive scheme or the control group. 
    Category:
    Corporate Matters, Independence & Ethics
    Sub-category:
    Corporate Whistle Blowers, Reporting Ethics Breaches - Self & Others
  • Jennifer M Mueller-Phillips
    The Effect of Evidence Strength and Internal Rewards on...
    research summary posted November 17, 2014 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.06 Reporting Ethics Breaches – Self & Others, 14.0 Corporate Matters, 14.02 Corporate Whistle Blowers 
    Title:
    The Effect of Evidence Strength and Internal Rewards on Intentions to Report Fraud in the Dodd-Frank Regulatory Environment
    Practical Implications:
    • These experimental findings suggest that employees may not bypass internal reporting outlets (such as hotlines), despite the incentive provisions enacted by the Dodd-Frank Act, which encourage employees to report information regarding violations of relevant securities laws to the SEC. This finding should be of interest to audit committees and management as it suggests that the internal hotlines developed under SOX remain a viable resource for identifying wrongful behavior within organizations.
    • Rather than adding a motivation for internal reporting, a monetary incentive may replace or crowd out intrinsic motivations, such as moral or ethical motivations, and offer a different motivation for internal reporting. Thus, the introduction of a monetary incentive for internal whistleblowing may not increase employees’ likelihood of blowing the whistle internally. Therefore, audit committees and management may wish to carefully consider whether offering an internal reward will have the desired effect. It may be more prudent to dedicate resources toward actions that will strengthen intrinsic motivations for internal whistleblowing, such as emphasizing employees’ ethical obligation to report internally and highlighting the benefits to the organization when employees report internally rather than externally.

    For more information on this study, please contact Alisa G. Brink. 

    Citation:

    Brink, A. G., D. J. Lowe, and L. M. Victoravich. 2013. The effect of evidence strength and internal rewards on intentions to report fraud in the Dodd-Frank regulatory environment. Auditing: A Journal of Practice & Theory 32 (3): 87-104.

    Keywords:
    Fraud; whistleblowing; Dodd-Frank Act; Sarbanes-Oxley Act; SEC; rewards; motivational crowding.
    Purpose of the Study:

    There are many unanswered questions and concerns regarding the consequences of the fraud whistleblowing environment created by the Sarbanes-Oxley (SOX) and Dodd-Frank Acts. While SOX requires audit committees to implement anonymous internal reporting channels, the Dodd-Frank Act offers substantial monetary incentives that encourage reporting to the Securities and Exchange Commission (SEC). To mitigate concerns that employees might bypass internal channels, some companies are considering offering internal whistleblowing incentives. The purpose of this study is to experimentally examine the effect of monetary incentives offered by companies to encourage internal whistleblowing in the new regulatory environment established by SOX and the Dodd-Frank Act. Further, we investigate the impact of evidence strength (strong or weak) on reporting intentions to internal and external channels in the presence and absence of such internal reporting incentives. 

    Design/Method/ Approach:
    • An experiment was conducted at two large public universities during the latter part of 2011.
    • The experiment consisted of a case describing a controller who discovered evidence indicating that his superior, the CFO, engaged in fraudulent financial reporting. Two variables were manipulated between participants, resulting in four different scenarios. The manipulated variables were the presence of an internal whistleblowing incentive (present or absent) and strength of evidence indicating that the CFO had engaged in the fraudulent act (strong or weak). Participants indicated the likelihood of reporting this act (1) directly to the SEC, and (2) through an internal reporting hotline.
    • Participants were evening and executive M.B.A. students with an average age of 33 years and about 11 years of professional work experience.
    Findings:

    The results from the experiment suggest that:

    • Participants’ reports of fraudulent financial reporting to internal channels are likely to exceed reports to the SEC regardless of whether there is an internal incentive or strong evidence of wrongdoing.
    • Participants indicated that if they were to report both internally and externally, they would report through the internal hotline first.
    • The impact of an internally offered financial incentive on SEC reporting intentions depends on the strength of evidence supporting the claim.
      • When evidence is weak, an internal incentive decreases the likelihood that employees will report to the SEC.
      • When evidence is strong, the presence of an internal incentive increases the likelihood of external reporting.
    Category:
    Corporate Matters, Independence & Ethics
    Sub-category:
    Corporate Whistle Blowers, Reporting Ethics Breaches - Self & Others
  • Jennifer M Mueller-Phillips
    The Effect of Social Confrontation on Individuals'...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.06 Reporting Ethics Breaches – Self & Others, 06.0 Risk and Risk Management, Including Fraud Risk, 07.0 Internal Control 
    Title:
    The Effect of Social Confrontation on Individuals' Intentions to Internally Report Fraud.
    Practical Implications:

    The study contributes by contending and showing that for fraudulent financial reporting, reporting intentions to different internal report recipients are influenced by a particular situational antecedent: unsuccessful social confrontation. The authors believe that the research and related findings will be useful for audit committees and other senior executives concerned with the timely reporting of fraud. Such groups not only are responsible for establishing internal reporting channels, but also are responsible for training and communicating with employees about what to do should they discover wrongdoing such as fraud. The evidence on the effects of social confrontation on reporting intentions for two different internal report recipients should be helpful in training and communicating with employees regarding what to do in response to discovering fraud.

    Citation:

    Kaplan, S. E., K. R. Pope, and J. A. Samuels. 2010. The Effect of Social Confrontation on Individuals' Intentions to Internally Report Fraud. Behavioral Research in Accounting 22 (2): 51-67.

    Keywords:
    fraudulent financial reporting, misappropriation of assets, reporting intentions, social confrontation, transgressor, fraud
    Purpose of the Study:

    Fraud is a serious social and economic problem that adversely affects a broad range of stakeholders, including audit committee and board members, top managers, employees, auditors, creditors, shareholders, and pensioners. In their 2006 Report to the Nation on Occupational Fraud and Abuse, The Association of Certified Fraud Examiners (ACFE) estimates annual fraud losses to be approximately $652 billion, approximately 5 percent of the annual revenues of all U.S. organization. Curtailing fraud, however, is a particularly challenging problem facing organizations. Detecting fraud is difficult because those engaging in fraud generally attempt to conceal their behavior, fraud is not a predictable event, and auditors often have limited experience detecting fraud.

    The purpose of this paper is to report the results of an experimental study that provides evidence on the impact of an unsuccessful social confrontation with a supervisor, apparently engaging in fraud, on one’s reporting intentions to two different, legitimate internal report recipients.

    Design/Method/ Approach:

    The experiment involved a 2 x 2 design. Participants were evening M.B.A. students from a major university. A total of 96 participants completed the instrument. Among these participants, the mean age was 28.1 years, and mean work experience was over six years. Two-thirds of the participants were male. The evidence was gathered prior to September 2010.  

    Findings:

    The findings indicate that participants’ reporting intentions were jointly influenced by social confrontation and the reporting channel. Specifically, reporting intentions to the supervisor’s supervisor were stronger than reporting intentions to the internal auditor following an unsuccessful social confrontation with the transgressor. In contrast, participants’ reporting intentions to the supervisor’s supervisor were not stronger than reporting intentions to the internal auditor when social confrontation had not occurred. This pattern was also observed when controlling for social desirability bias. Further, the effect of social confrontation on reporting intentions did not vary across the two different fraudulent acts. The results, based on two different fraudulent acts, allow the authors to generalize beyond a hypothetical study that included only one fraudulent act. Overall, the authors view the results as consistent with participants increasing their consideration of the report recipient’s power as the witness' exposure to risk increased. That is, following an unsuccessful social confrontation with the transgressor, the witness lost anonymity, which also increased the witness’ exposure to risk and potential retaliation from the transgressor. Further, the results suggest that increasing one’s emphasis on the report recipient’s power following an unsuccessful social confrontation may extend to various kinds of fraud.

    Category:
    Independence & Ethics, Internal Control, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Reporting Ethics Breaches - Self & Others
  • Jennifer M Mueller-Phillips
    Whistleblowing in Audit Firms: Do Explicit Protections from...
    research summary posted November 15, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.06 Reporting Ethics Breaches – Self & Others, 14.0 Corporate Matters, 14.02 Corporate Whistle Blowers 
    Title:
    Whistleblowing in Audit Firms: Do Explicit Protections from Retaliation Activate Implicit Threats of Reprisal?
    Practical Implications:

    This experiment illustrates the fact that organizations should carefully craft their whistleblower hotline policies so as to minimize the salience of retaliation risk. For example, instead of describing explicit protections from retaliation, the organization could explicitly describe the its commitment to ethical behavior. Furthermore, organizations may wish to publicize successful instances of employee whistleblowing as a means of increasing the availability of instances in which whistleblower retaliation did not occur.

    Citation:

    Wainberg, J. and S. Perreault. 2016. Whistleblowing in Audit Firms: Do Explicit Protections from Retaliation Activate Implicit Threats of Reprisal? Behavioral Research in Accounting 28 (1): 83-93. 

    Keywords:
    whistleblowing, corporate governance, vividness congruency theory
    Purpose of the Study:

    Whistleblower hotlines are becoming increasingly important in audit firms since auditors are generally viewed as the first line of defense against corporate malfeasance; however, surveys consistently indicate that a substantial number of employees who witness misconduct still choose not to report. Workplace retaliation is the primary reason that individuals are fearful of reporting any wrongdoing that they witness. This is not an irrational fear, as there have been numerous well-publicized examples of lives and careers that have been irreparably damaged as a result of whistleblower retaliation. Consequently, the Association of Certified Fraud Examiners has begun recommending that organizations specifically emphasize anti-retaliation protections offered to employees in addition to basic assurances of confidentiality and anonymity. These specific protections are intended to encourage whistleblowing reporting, but the vividness congruency theory suggests that the inclusion of these protections in whistleblower hotline descriptions may actually inhibit such reporting due to the fact that such explicit protections may activate fearful imagery that is incongruent with the message of protection being offered. 

    Design/Method/ Approach:

    The authors created an experiment in which graduate level students enrolled in an auditing course participated.  

    Findings:
    • The authors find that the inclusion of explicit protections from specific forms of retaliation can lead to an increase in the salience of such threats, thereby significantly lowering the likelihood that the misconduct will be reported through whistleblower hotlines.
    • The authors find that, rather than diminishing the fear of retaliation, auditors’ perceptions of reporting risk were intensified by the presence of explicit protections in the hotline policy. 
    Category:
    Corporate Matters, Independence & Ethics
    Sub-category:
    Corporate Whistle Blowers, Reporting Ethics Breaches - Self & Others
  • Jennifer M Mueller-Phillips
    Whistleblowing in Audit Firms: Organizational Response and...
    research summary posted December 1, 2014 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.06 Reporting Ethics Breaches – Self & Others, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting 
    Title:
    Whistleblowing in Audit Firms: Organizational Response and Power Distance
    Practical Implications:

    The results of this study are important for audit firms to consider when designing their ethics and whistleblowing policies. The evidence indicates that auditors’ are sensitive to power distance, and while no main effect for prior organizational response was found, prior research suggests that there are other costs associated with the perception that a firm does not respond to reports of ethical violations. Furthermore, it indicates that gender plays a role in an auditor’s sensitivity to power distance, and that the perceived moral intensity of the violation, which influences reporting likelihood, is moderated by the position of the observer, relative to the perpetrator. The study highlights the importance of firm culture and the implementation and enforcement of effective whistleblowing and ethical polices on the likelihood of employees to report observed ethical violations. 

    For more information on this study, please contact Eileen Z. Taylor.

    Citation:

    Taylor, E. Z., and M. B. Curtis. 2013. Whistleblowing in Audit Firms: Organizational Response and Power Distance. Behavioral Research in Accounting 25 (2): 21-43

    Keywords:
    Whistleblowing; ethical dilemma; power distance; gender
    Purpose of the Study:

    Employee fraud is a threat to all organizations, and whistleblowing is the most common way these frauds are detected. This paper investigates whether two factors, prior organizational response and power distance, affect auditors’ likelihood to report observations of colleagues’ unethical behavior. Prior organizational response (to whistleblowing reports) should result in a greater reporting likelihood, since evidence from practice and research indicates that a whistleblower’s primary goal is to stop the unethical behavior from continuing. Organizations that historically pay attention to whistleblowing reports should give potential whistleblowers the confidence that their report will be effective. Power distance, the level of the perpetrator in relation to the level of the potential whistleblower (peer or superior), is also likely important, as employees may be reluctant to whistleblow on someone of higher rank.

    The authors hypothesize that whistleblowing likelihood will be positively associated organization responsiveness to prior reports and that such likelihood is also associated with the relative position of the observer—individuals are more likely to report on peers than on superiors. They also investigate whether gender of the observer (potential whistleblower) matters, in relation to power distance, hypothesizing that females are more sensitive to power distance than are males.    

    Design/Method/ Approach:

    One hundred and eight audit seniors from Big-4 firms completed an experimental survey in Fall 2009. All participants read the same vignette of an ethical dilemma they observed within their firm, with modifications made for the different treatments. In the “responsive organization treatment”, participants were told that in the past, when the organization received a whistleblower report, they had taken appropriate action, whereas in the “nonresponsive treatment”, participants were told that in the past, when the organization received a whistleblower report, they had not taken appropriate action. To examine power distance, in the vignette, the perpetrator was referred to either as a “manager” (superior) or as a “fellow in-charge” (peer). The unethical behavior entailed observing the perpetrator destroy a page of review comments without addressing them.

    After reading the vignette, participants rated the seriousness of the unethical behavior and their responsibility to report it, as a measure of moral intensity. In order to assess whistleblowing likelihood, participants also rated how likely they were to report the violation to the employee hotline, using a scale of 0 to 100, if (1) your identity could be protected, and (2) your report could be anonymous

    Findings:
    • The authors find that auditors in this study were sensitive to power distance, such that they were significantly more likely to whistleblow on their peers than on their superiors. 
    • Additionally, the authors find that power distance and prior organizational response interact, such that auditors are were more likely to report on their peers when the organization’s prior response was weak or negative, than when it was responsive. However, auditors were less likely to report superiors when the organization’s prior response was weak or negative, than when it was responsive.
    • The authors find that men appear relatively less sensitive to power distance than do women.
    • The authors find that the perceived moral intensity of the case is significantly related to reporting likelihood, and that power distance moderates the effect such that those with a lower perception of moral intensity are much more influenced by power distance.
    Category:
    Governance, Independence & Ethics
    Sub-category:
    Internal auditor role and involvement in controls and reporting, Reporting Ethics Breaches - Self & Others

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