ETHICAL REASONING AND SELECTION-SOCIALIZATION IN ACCOUNTING

1. ETHICAL REASONING AND SELECTION-SOCIALIZATION IN ACCOUNTING By: Lawrence A. Ponemon Presenter: Sara Aliabadi October 16, 2008

2. Questions • What is the relationship between accounting firm socialization and the ethical reasoning level of individuals entering and remaining in the profession? • Does selection-socialization play a role in the management of accounting firms hiring decision?

3. Psychology of ethical reasoning • Kohlberg (1969) Post-conventional morality Conventional morality All individuals begin at Pre-conventional morality

4. Kohlberg definition To understand the three levels, we have to think of them as three different types of relationships between the self and society's rules and expectations. • To a pre-conventional person, rules and social expectations are something external to self; • a conventional person identifies self in relation to others; • a post-conventional person’s values are in terms of self-chosen principles.

5. Six stages of moral reasoning • Pre-conventional Stage 1- Avoid punishment Stage 2- My benefit • Conventional Stage 3- Cooperation with environment Stage 4- Cooperation with society • Post-conventional Stage 5- Follow own ethical principles Stage 6- Focus on fairness of the laws

6. Prior Studies • Kohlberg and colleagues developed Moral Judgment Interview (MJI), and Rest developed the Defining Issues Test (DIT) to assess the level of ethical reasoning. • The MJI: a series of standardized models requiring the individual to resolve a moral dilemma • The DIT: a self-administered questionnaire that provides an objective measure of ethical reasoning

7. Prior Studies (continued) • Other studies have been concerned with the justice orientations that define moral stages, resulting in possible cultural and gender biases in psychometric tests (Gibbs, 1977; Gilligan, 1977; Lyons, 1982). • Several studies examined public accounting professionals’ ethical reasoning and development (Armstrong, 1984; Ponemon & Gabhart, 1990; etc.).

8. Prior Studies (continued) • Findings of these studies suggest that accountants do not develop ethical reasoning capacities equal with individuals having similar socio-economic and educational backgrounds. • Some studies suggest that, employees who get a promotion are likely to be perceived by management as having personal characteristics matching with the culture and philosophy of the organization (Nystrom & McArthur, 1989).

9. Hypotheses • H1: Accountants with too low or high a level of ethical reasoning will either change (develop) or leave the firm. • H2: Accountants with ethical reasoning levels closer to that of the management of the firm are more likely to be selected for promotion.

10. Empirical Studies • A random sample of CPAs from all over the U.S. • A representative sample of auditing professionals at various positions within one office of an international accounting firm participated in a two-year longitudinal study. • Managers of the same international accounting firm participated in a field experiment requiring them to predict promotion potential for a sample of actual audit seniors.

11. Empirical Studies • The DIT was used to measure each individual CPA’s level of ethical reasoning. • Three mailings to 650 CPAs were made with a 31% response rate. • Table 2 contains the sample demographics. • The sample is well balanced in terms of gender, area of practice, and type of public firms.

12. Cross sectional • Table 3 reports DIT scores • The results show that majority of CPAs are within conventional level of ethical reasoning. • Selection-socialization processes would cause CPAs DIT P scores to become more homogeneous at higher position levels. We don’t have full support for this (standard deviation's behavior). • Results show that supervisors have higher P scores than managers, and managers have higher P scores than partners.

13. Why do DIT results decrease in managers and partners? • Individual managers and partners may retrogress to lower ethical stages as they progress in their careers. • A generation gap may still exist between CPAs at higher and lower ranks within the accounting profession. • Socialization within the accounting firm may have resulted in the selection and promotion of only those individuals at lower levels of ethical reasoning.

14. Longitudinal Study • Consistence with H1 finding suggests that auditors with lower levels of ethical reasoning are more likely to leave the firm. • H2 is again partially supported (Figures 1-3). • Both cross-sectional and longitudinal studies show that DIT scores increase form 40 to 42 for staff and seniors and then decrease from 42 to 36 for seniors and mangers.

15. Field experiment • The results of this part of study suggest that managers’ promotion assessments tend to be biased in favor of seniors possessing ethical reasoning that is similar with their own capacity. • Audit manager promotion decisions are influenced by the ethical reasoning levels of the individual senior.

16. Implications and Conclusion • The ethical values encouraged by firm management are inconsistent with higher levels of ethical reasoning. • The ethical development of those entering and remaining in the accounting profession is hindered.

17. Implications and Conclusion • Partners and managers tend to be at the conventional level(stage 3) of ethical reasoning. It means that they try to please peers, clients, etc. • This study demonstrates the salience of firm socialization processes on the ethical reasoning levels of individuals remaining in or leaving the firm.