An Exploration of Cultural Dissonance: Perceptions of First Tier Audit Firms Cultural Values,

An Exploration of Cultural Dissonance: Perceptions of First Tier Audit Firms’ Cultural Values, Espoused Professional Values and Auditors’ Underlying V...
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An Exploration of Cultural Dissonance: Perceptions of First Tier Audit Firms’ Cultural Values, Espoused Professional Values and Auditors’ Underlying Values

Dr Carolyn Windsor School of Accounting, Banking & Finance Griffith University, Nathan Campus, 4111 Australia Ph (617) 3875 7598 Fax (617) 3875 7760 Email: [email protected]

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An Exploration of Cultural Dissonance: Perceptions of First Tier Audit Firms’ Cultural Values, Espoused Professional Values and Auditors’ Underlying Values ABSTRACT First tier audit firms proclaim that professional values comprising independence, ethical behavior and accountability to the public interest, are fundamental to practice. This study investigates the relationships between personal factors underlying auditors' ethical decision-making and organizational culture in first tier, multi-national audit firms in one location. This present research explores two value levels of organizational culture in relation to first tier audit firms: 1) the espoused values that justify auditors' behavior, the proclaimed professional values or "what should be" and 2) the underlying subconscious values that are internalized by auditors as assumptions of how things really are. A field experiment was carried out with 131 experienced auditors in first tier audit firms. Results support hypotheses that personal constructs involved in ethical judgments are related to organization cultural values. "Outcome Orientation" dimension (made up of values, competitive, achievement orientation, analytical, high expectations of performance and results orientated) and "Aggressive" underlie auditors' ethical decision-making personal constructs. Ethical behavior, independence, autonomy and the public, values associated with professional ethics were found be significantly different from those values associated with career and promotion (outcome/reward orientation and people orientation). The evidence from this study suggest that the espoused values and underlying values of first tier audit firms in this sample are not harmonious, and in effect, these first tier audit firms suffer cultural dissonance. Cultural dissonance may lead to organizational dysfunction, with symptoms such as litigation and high staff over.

Key Words: Auditors’ decision-making, Organisational Culture, Moral Development, Beliefs in Justice, Professional Values, Espoused Values, and Underlying Values.

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Society has bestowed upon the auditing profession a special and lucrative franchise to audit large organizations on the condition that auditors adhere to explicit professional obligations to act ethically, independently and to be accountable to the public interest. This special franchise is protected by legislation, however the professional obligations to serve society are stipulated in the self-regulatory codes of professional conduct. To operationalise professional accountability, distinguished accounting bodies such as the International Federation of Accountants (IFAC, 1998) promulgate codes of ethical conduct that provide auditors with mandatory guidance about universal values such as honesty, integrity, fairness, the public interest, independence and so on. Trice and Beyer (1993) argue that professional or occupational cultures influence the values of members who identify with the profession. Following Trice and Beyer’s (1993) argument, professional values in the auditors’ codes of ethical conduct should strongly influence auditors’ decisions and behaviour. Furthermore, the auditing firms rely on the overt promotion of professional values to garner public confidence and credibility as well as given the responsibility to self-regulate. The purpose of this research, therefore, is to explore whether professional values concerning independence, ethical behavior, autonomy and public interest accountability are also the cultural values of 1first tier audit firms. Organizational culture is powerful, pervasive and persuasive, symbolizing members’ shared values and beliefs that unconsciously influence individual decision-making (Schien, 1985; Etzioni, 1988). Values have been described as normative beliefs about proper standards of conduct and preferred desired outcomes (Keeny, 1988). Importantly, values aid people seeking to make sense of behaviors or seeking to justify them (Sathe, 1985). When members become aware that the professed values of an organization are discordant with the true underlying values of its members, cultural dissonance occurs. This may lead to a dysfunctional organization, with symptoms of high staff turnover, high absenteeism, crisis management, low staff morale, and external threats such as litigation (Dick & Dalmeau, 1990; Argyris & Schon, 1974). Some of these symptoms are evident as large audit firms which face a global litigation crisis (see AICPA, 1993; Baxt, 1995; Lawson, 1988) 1 The author acknowledges the invaluable assistance of the first tier firms in these studies, whose co-operation made this research possible.

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and the continuing problem of high staff turnover. Although auditors profess independence and ethical conduct, they are accused of poorly performing professional obligations, not only to protect shareholders’ and investors’ interests from ‘corporate cowboys’, but also lacking public interest accountability (Sykes, 1994). Furthermore, Micheal H. Sutton, Chief Accountant of the United States Securities and Exchange Commission recently commented, Reflecting on auditor independence ... the aspect that concerns me most is the possibility of a growing perception that there may a real conflict between the public interest and the broader business interests of the public accounting profession (1997, p.90).

First tier audit firms claim to hold these professional values, though evidence suggests that audit firms and their members are more concerned about business than upholding professional standards requiring ethical behavior (e.g. McNair, 1991). Furthermore, the Securities and Exchange Commission recently censured a large first tier firm after finding that 1,301 partners out of a total of 2,698 had independence violations during a Commission ordered internal review (Fardella, Hollander-Blumoff, Fleischer, Fukuyama & Klosterman, 2000). The SEC report indicated that the censured first tier accounting firm acknowledged widespread independence non-compliance and this reflected serious structural and cultural problems within the firm (Fardella et. al, 2000). The cultural and structural problems appear to highlight the discordance between the transcendental values in the profession’s ethical code of conduct and commercial values that focus on the audit firms’ economic wealth and self-interest. These structural and cultural problems could very well be the result of the rapid increase in the size of first tier audit firms through mergers and other growth strategies (Fardella et al. 2000). On one hand, the auditing profession proclaims fundamental ideals of a profession, such as integrity, honesty, objectivity and independence from client influences. On the other hand, the majority of professional auditors are employees of large privately owned audit firms whose objectives are tempered by the business of economic survival in a competitive market for accounting services (see Fardella et al.). Earlier in-depth interviews with audit partners (Minichiello, Aroni, Timewell, & Alexander, 1991) indicated that the participating audit firms’ focused on servicing client needs, viewing themselves as service industry businesses rather than a

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profession with public interest obligations. Results from the in-depth interviews corroborate that large audit firms have ‘up or out’ culture (McNair, 1991), rigid career paths and promotion based on mainly business considerations (Windsor, 1995). These systemic organizational values tend to encourage a competitive, male dominated, culture stressing survival of the fittest through “hard work, competition and aggression,which are problematic for those subjected to it” (Grey, 1998, p.582; see also Windsor, 1995, 2000). This Darwinian culture of the massively large modern audit firm may not encourage the values associated with professional autonomy. As early as 1971, Lengerman found widespread belief among CPAs themselves that large organization work situations provide much less opportunity for professional autonomy to CPA members or employees, even where such large organizations are professional CPA firms (p.673). Lengermans’ (1971) finding is supported by the SEC commissioned report (Fardella et al., 2000) where the censured first tier accounting firm acknowledged that, particularly as accounting firms have grown larger, acquired more clients and provided more services, and financial arrangements have increased in number and complexity, welldesigned and extensive controls – as reflected in the SEC’s order in this matter – are needed both to facilitate Independence and detect non-compliance (p.33).

The question is, do auditors working in first tier multinational audit firms identify with the profession’s proclaimed values of professional autonomy, independence from the client, ethical decision-making and public interest accountability; or do auditors identify more with cultural values of the large audit firms that aim to remain in business? Organizational Culture and First Tier Audit Firms Evidence suggests that the influence of organizational culture in accounting firms may encourage a business focus rather than an emphasis on the ethical values necessary for professional compliance. For example, Ponemon (1992), found that processes of ethical socialization influence accounting firm culture that influence individual capacities to develop higher levels of moral reasoning necessary for auditor independence. Hence, the belief and value systems engendered in organizational culture of audit firms influence the attitude of mind essential for auditor integrity

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and independent behavior. In fact the organisational culture of a first tier audit firm that Grey (1998, p.581) describes them as the ‘Big Six Firm’ club. He further argues that the meaning of being a professional becomes inextricably bound up with the culture of the firm, and “the firm” arrogates itself a certain conception of what being a professional means. To investigate the influence of organizational cultural values on factors affecting auditors’ ethical constructs, Schein's (1985) concept of organizational culture serves as a framework for analyzing the overt and underlying values of organizational culture of the first tier audit firms. While conceptual models of organizational culture may oversimplify complex phenomena, such models serve an important role in guiding empirical research and in generating theory (Hatch, 1993). Schein's (1985) conceptual framework distinguishes three levels of organizational culture: (1) visible artifacts, (2) overt values, and (3) basic, underlying assumptions and values. Visible artifacts are the most observable level or outer layer of organizational culture, comprising the constructed environment; for example, its architecture, office layout, technology, members' dress, visible or audible behavior patterns, and public documents such as charters and employee orientation materials. At this level of analysis, Schein (1985) claims that artifacts such as technology, visible and audible behavior patterns are easily obtained. The difficulty is to discern the underlying behavior pattern (or why the organization behaves the way it does) from this type of data. The second level reflects the formal values of the organization that prescriptively govern members' behavior; for example, corporate strategies, guidance manuals, codes of conduct or philosophies and in case of audit firms, professional standards. These values determine why an organization’s members behave the way they do, and are reinforced by myths and rituals which enhance feelings of recognition, importance, group affiliation and loyalty (Argyris & Schon, 1974; 1978; Dick & Dalmau, 1990). The values associated with organizational procedures and policies manuals as well as professional standards represent the formal and espoused values proclaimed by the first tier audit firms, or what auditors are supposed to do.

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The deepest level of organizational culture comprises underlying influences, beliefs and assumptions, and is the core of the pervasive informal organizational culture (Schein, 1985). These values are unconscious, taken for granted beliefs and habits of perception, thoughts and feeling and reflect 'what are'. According to Schein (1985), to understand the influence of organizational culture on members' values and overt behavior, it is necessary to delve into the underlying assumptions, because this is the ultimate source of values and action. The assumptions behind the pattern of values are gradually internalized as underlying assumptions of how things really are, become taken for granted and drop out of awareness. The values of this level influence the actual practices of first tier audit firms or what auditors do. Organization cultural layers are not experienced as neatly as the model implies though. On one hand, people claim to hold certain beliefs and values and claim to observe these values in their behavior. This is their espoused cultural level. On the other, there are beliefs and values that are implied by people's actual behavior or their underlying values of the cultural core. Argyris and Schon (1974) maintain that the two levels are often discrepant, but the person is not aware. If people become aware, dissonance results. This may lead to a dysfunctional organization, with symptoms of high staff turnover, high absenteeism, crisis management and external threats such as law suits (Dick & Dalmau, 1990). In this research Schein's (1985) three level model is configured as layers of processes, varying in depth, accessibility, and malleability outlined in Figure 1. Rousseau (1990) argued that layering the elements of organizational culture defines culture as having multiple dimensions including underlying and espoused values investigated by this research. FIGURE 1 ABOUT HERE

The research of O’Reilly, Chatman and Caldwell (1991) was found to be appropriate to investigate the values in first tier audit firms’ organizational culture in this study. O’Reilly et al. (1991) analyzed organizational behavior research and accounting practitioner literature and found fifty-seven value items. These values were then tested on a large sample of accounting practitioners from first tier CPA firms in the United States. O’Rielly et al. (1991) identified seven

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dimensions comprising organizational cultural values in the CPA firms’ sample (See Table 1). These are, innovation, stability, respect for people, outcome orientation, attention to detail, team orientation and aggressiveness. The seven dimensions were replicated across industries in a later study by Chatman and Jehn (1994) and were found to be stable. In particular, results regarding accounting firms were similar to the earlier O’Rielly et al. (1991) study. This study, therefore, extends the work of O’Rielly et al. (1991) by identifying the underlying organizational cultural values that influence ethical decision-making in audit firms within Schein’s (1985) model of organizational cultural layers. TABLE 1 ABOUT HERE

Psychological Factors and Underlying Values of Auditors’ Ethical Judgments Windsor and Ashkanasy (1995) established underlying psychological characteristics of moral reasoning development and beliefs in justice affect auditors’ independent decision-making when pressured by client economic factors in an independence dilemma (see also Windsor, 1995 for more explanation). Auditors' moral reasoning development (Kohlberg, 1969; Rest 1979) and just world beliefs (Lerner, 1980, 1981) were found to be underlying psychological factors of auditor independence judgments (see Windsor, 1995; Windsor and Ashkanasy, 1995). Here, auditors had to decide whether to acquiesce to management's request not to disclose negative financial information in a hypothetical dilemma where management had varying levels of economic bargaining power from strong to weak. This present study extends these findings by investigating the relationships between organizational culture in first tier accounting firms and these two personal constructs identified in earlier work. Gaa (1992) argued that this construct is a measure of "moral expertise" in the specific context of auditor judgments. It is based on a fundamental assumption that moral reasoning reflects an underlying organization of thinking which becomes more complex and sophisticated with the individual's moral development (KohIberg, 1969). Moral Reasoning Professional auditors are required to make judgments independent of clients and peers, regarding the veracity of entities’ financial disclosure to ensure professional obligations in the the

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public interest. Auditors’ decision-making, particularly ethical decision-making and moral reasoning (Kohlberg, 1969; Rest, 1979) has attracted much research; (for example, Ponemon, 1990, 1992, 1993; Ponemon & Gabhart, 1990; Gaa, 1992; Lampe & Finn, 1992; Shaub, Finn & Munter, 1993; Windsor & Ashkanasy, 1995, 1996). Moral Reasoning Development refers to that aspect of individual psychology which identifies how people determine which course of action is morally right in a given situation (Rest, 1986). The fundamental assumption of moral judgment is that a person's moral judgments reflect an underlying organization of thinking. Kohlberg's (1969) research defined a structure of moral reasoning and its development comprising three levels, pre-conventional, conventional and postconventional. The three levels have 6 stages from the unprincipled stage to the highly principled stage. This emphasizes the ethical cognitive or reasoning aspect of decision-making, and addresses how the cognitive processes of moral decision making become more complex and sophisticated with the individual's development. Trevino and Victor (1992) argued that competition and aggressiveness and market oriented behavior in organizations was less conducive to ethical behavior. Hence the following is hypothesized: H 1. Moral reasoning development (DIT P-scores) are positively related to auditors’ perceptions of organizational culture characteristics such as respect for people and team orientation; but negatively related to characteristics such and aggressiveness and outcome orientation.

Belief in Justice Professional auditors are also required to provide independent judgments about the fairness of the financial statements. Mautz and Sharaf (1961) describe auditor judgments similar to that of a judge of legal cases where judgments have to made regarding conflicts and controversies between different parties and interest groups. Hence, auditors should also have a sense of justice regarding their judgments on the veracity of financial statements that economic impact on society. The personality construct ‘beliefs in justice’ was found to influence independence judgments (Windsor & Ashkanasy, 1995). Lerner (1980) discovered that people with a ‘just world’ motive believe the world operates in a consistent, just manner where the good are rewarded and the bad is punished.

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A person’s ‘belief in justice’ operates at preconscious level that is inculcated through life’s experience affected by significant social and cultural forces. Hence, it is appropriate to include the personality factor ‘just world beliefs’ in this investigation of organization cultural influence. This research, therefore, will specifically examine the relationship between audit firm organizational cultural values and auditors’ ethical decision-making characteristics identified in earlier research, followed by an investigation into whether cultural dissonance exists in first tier audit firms. Lerner (1980) identified beliefs in a ‘Just world ‘as a perception that the world operates in a consistent, just manner where the good are rewarded and the bad are punished. People who believe in a just world believe that they get what they deserve. They further see "deserving" to be based on the outcomes that they can ultimately expect to receive (Lerner, 1980). People with ‘just world’ motives employ strategies to block out, or justify injustices to avoid the pain associated with injustice to others. The following Hypothesis resulted: H2

Personal beliefs in a just world are positively related to auditors’ perceptions of Organizational culture characteristics associated with performance rewards such as an outcome orientation, and stability but negatively related to innovation.

Method Experimental Instrument. This consisted of a questionnaire booklet in three parts: (1) Collins' (1974) belief in justice scale, (2) Rest's (1979) DIT scale, and (3) a short version of the O'Reilly et al. (1991) organizational culture scale. These are described as follows. Belief scale. This comprised the 11-item just/unjust world sub-scale of Collins' (1974) Likert-scale version of Rotter's (1966) internal -external control questionnaire. Responses to each of the items were based on a 7-point Likert scale, with 1 representing strong disagreement, and 7 strong agreement. Defining Issues Test (DIT). This comprised the 3-story version of Rest's (1979) scale, which is based on Kohlberg's (1969) cognitive theory of moral reasoning development. The scale presents three brief stories that present moral dilemmas in everyday life. Respondents answer questions concerning the importance of considering various aspects of each of the three stories using 5-point response scales, with 1 representing least importance, and 5 greatest importance.

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Organizational Culture Measure. It is argued that the seven dimensions found by O'Reilly et al. (1991) underlie the development of individual beliefs and moral reasoning development that, in turn, affect auditor independent judgement as found by Windsor and Ashkanasy (1995). An additional ten items were included based on KohIberg's (1969) theory of moral development (see also Victor and Cullen, 1988). Four were professional items related to higher moral reasoning, i.e. ‘being rewarded of audit independence’; ‘providing audits for the public interest’; ‘upholding higher ethical principles than the rules of ethical conduct’; and ‘following self-chosen ethical principles’. The remaining six items were based on elements of low moral reasoning. This measure was the result of the pilot study carried out earlier. The measure included the 26 items that loaded on the 7-factor structure identified by O'Reilly et al. (1991). Items reflected values such as respect for individuals, team orientation, etc. Respondents were asked to score each of the value items from 1 (not at all) to 5 (to a very great extent). Procedure: The procedure employed in the present study involved close co-operation of audit partners, who were briefed on how to expedite distribution and collection of the questionnaire booklets (to ensure that internal validity problems such as history and maturation were minimized). The partners who assisted in this way were instructed not to participate in the experiment, nor to advise participating auditors about the substance of the questionnaires. Sample: The study sample comprised 131 respondents, consisting of experienced auditors drawn from a cross-section of large multi-national chartered accounting firms located in a single metropolitan center in Australia. Care was taken in the distribution of questionnaires to ensure that there was no dominance by a particular firm. One hundred thirty-five (81 %) of the 167 auditors originally contacted responded, however four responses were unusable, a total of 131 useable reponses. The completed responses came from 26 audit partners, 58 senior managers/managers, 19 assistant managers/supervisors, and 28 audit seniors. There were thirty-six females and ninety-five males. Seventy-seven of the respondents' ages were less than 30, forty-four between 30 and 40, and ten were over 40. Eighty-one respondents had more than six years of Audit Division experience, with only three having less than two years' experience. The remaining respondents had two to six years auditing experience.

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Results Scale reliability Scale reliability for the O'Reilly et al. (1991) 7-factor structure varied from .80 (Team Orientation) to .37 (Aggression), suggesting that some components of the original scale may not be appropriate for the present sample. To investigate this, Principal Axis Factor Analysis with Varimax Rotation was used. Six factors were identified in this analysis (using scree and Eigen value > 1 criteria). The ten additional items based on Kohlberg’s theory (1969) did not result in additional factors nor were part of the O’Reilly et al. dimensions and were dropped from this part of the study (see Table 2). TABLE 2 ABOUT HERE Overall, the factor structure identified by O'Reilly et al. (1991) remained relatively intact. Only two items were deleted, and eighteen items remained in their original dimensional categories. The primary departure from the original structure was the Aggressive item. This item did not fit into the factor structure, and served only to lower reliability when it was included in any of the other dimensions. The Aggressive item was, however, the only one which correlated significantly with moral reasoning development (see Table 3), and was therefore retained as a single item variable in the present study. TABLE 3 ABOUT HERE

Cross-firm Difference Check. A MANOVA was used to test for the possibility of cross-firm differences in organizational culture scores. The dependent variables were the six dimensions of organizational culture identified above, plus "Aggressive" as a separate variable. The independent variable was the firm (six levels). This resulted in a non-significant multiple F (Pillais F = 1.45, d.f. = 35,600, ns), which is consistent with findings by Chatman and Jehn (1994).

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Multiple Regression. This was used to investigate Hypothesis 1, that just world belief scores would be related to the measures of organizational culture. The independent variables were the six dimensions of organizational culture identified in the factor analysis, plus the single item measure "Aggressive" (see Table 2). This resulted in a significant multiple R = .33, F = 2.08, d.f. = 7,123, p< .05 (R2 =.10; adjusted R2 =.06). Only one Beta-weight was significant, however, on the outcome orientation dimension (b = .30, t = 2.90, p < .01). Similar analysis was used to test Hypothesis 2, that DIT P-scores would be related to dimensions of organizational culture. This also resulted in a significant multiple R = .36, F = 2.5 1, P < .05 (R2 = .13, adjusted R2 .08). In this instance, significant Beta-weights were obtained for outcome orientation (b = .25, t = 2.4 1, p < .05) and the "Aggressive" variable (b = -3 1, t = -3.12, p < .0 1). TABLES 4 & 5 ABOUT HERE Results Hypothesis 1 and 2 Results of the analysis in the present study partially supported Hypothesis 1 in that a positive relationship was shown to exist between ‘just world’ beliefs and the organizational culture dimension of outcome orientation. Correlation with stability and innovation were in the predicted directions, but not significant. The relationship with "outcome orientation" is clearly consistent with the concept of belief in justice, that people believe that they will ultimately be rewarded for their achievements. Thus, people who hold such beliefs are more likely to value an outcome orientation. Results in respect to Hypothesis 2 were also partially supportive, but there were some important departures. DIT P-scores were negatively related to scores on the "Aggressive" item, as expected. The correlation with outcome orientation was positive but not significant. In the multiple regression, however, the Beta-weight for outcome orientation was positive and significant. The positive relationship between outcome orientation and DIT P-scores was opposite to expectations, despite a positive correlation between "Aggressive" value item and outcome orientation. (The Betaweight might be a spurious result and should be treated with caution, see Kemery and Dunlap, 1986). Correlations with the ‘Respect for People’ and ‘Team Orientation’ dimensions were in the expected direction, but not significant.

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Overall, the interpretable finding in relation to Hypothesis 2 was that moral reasoning development indicated a negative relationship to the ‘Aggressive’ value in audit firm organizational culture. Higher levels of moral reasoning development were associated with less aggression. Cohen, Plant, and Sharp (1994) also found ‘aggressiveness’ to be an important factor in auditor-client relationships. They further proposed that moral reasoning development might be associated with aggressiveness. These results suggest that this is indeed the case when aggressiveness is measured in the context of an organizational cultural value dimension. "Outcome orientation" (composed of competitive, have high expectations of performance, achievement oriented, results oriented, analytical value items) and the single item, ‘Aggressive’ were the values that significantly influenced auditors' underlying characteristics of ethical decision-making.

Cultural Dissonance: Espoused Professional Values and Underlying Values. Organization cultural layers are not experienced as neatly as the model implies though. On one hand, people claim to hold certain beliefs and values and claim to observe these values in their behavior. This is their espoused cultural level. On the other, there are beliefs and values that are implied by people's actual behavior or their underlying values of the cultural core. Argyris and Schon (1974) maintain that the two levels are often discrepant, but the person is not aware. If people become aware, dissonance results. This may lead to a dysfunctional organization, with symptoms of high staff turnover, high absenteeism, crisis management and external threats such as law suits (Dick & Dalmau, 1990). To avoid organizational dissonance and the associated problems, members should be aware that there is no difference between the espoused values and the underlying values that affect individual decision-making (Dick & Dalmau, 1990). In this study, it is argued that the professional values promulgated in the auditing profession’s ethical code of conduct are also proclaimed as values of the first tier audit firms, hence are part of the espoused value system of their organizational cultures. The items reflecting professional ethics are ‘being rewarded for independence’; ‘providing audits for the public interest’, ‘upholding ethical values beyond the ethical rules of conduct’ and ‘following self-chosen ethical principles’ (autonomy). The results of

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hypotheses 1 and 2 indicate that the ‘outcome dimension’ was related to auditors’ psychological factors moral reasoning and justice beliefs. The ‘aggressive’ item was negatively related to moral reasoning. Moral reasoning and justice beliefs were found to underlie auditors’ ethical decisionmaking in an independence dilemma (see Windsor & Ashkanasy, 1995). The ‘outcome dimension’ comprised ‘competitive’, ‘achievement orientation’, ‘analytical’, ‘having high expectations of performance’ and ‘results oriented’ The items reflecting professional ethics did not emerge as underlying values related to auditors’ ethical decision-making constructs of moral reasoning and personal beliefs in justice. If items reflecting professional ethics are as important as professed by the sample audit firms, then there should be no difference between mean scores of professional values and the underlying values that affect auditors’ ethical decision-making. As a result of this argument, the following null hypothesis states: H3

There will be no significant differences between values that reflect professional values and the underlying first tier audit firms’ cultural values that influence auditors’ ethical decision-making.

Results of Hypothesis 3 To see if there were no significant differences between the espoused professional values and the underlying values affecting ethical decision-making, the mean scores of the above value items were analyzed using a two-tailed t test. The results in Table 6 indicate that the null hypothesis is rejected at .05 level of significance. The results indicate a significant difference between espoused professional values (identified in this study as ‘being rewarded for independence’; ‘providing audits for the public interest’, ‘upholding ethical values beyond the ethical rules of conduct’ and ‘following self-chosen ethical principles’) and underlying values affecting ethical decision-making identified in the ‘outcome dimension’ (comprising ‘competitive’, ‘achievement orientated’, ‘analytical’, ‘having high expectations of performance’ and ‘results orientated’). The results suggest that the first tier audit firms in this sample are experiencing cultural dissonance because espoused professional values differ from underlying values of audit firms’ revealed by the participating auditiors.

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TABLE 6 ABOUT HERE Furthermore, the means of value items reflect a different picture about the organizational culture of first tier firms and what auditors valued most in their organizations in this sample (see Table 7). The overall results show that auditors reported the following values most highly (from 1 least valued to 5 most highly valued): ‘Working in collaboration with others’ (4.33), ‘being team oriented’ (4.31) followed closely by ‘being people oriented’ (4.24). These three value items comprise the ‘people orientation’ dimension that did not influence the underlying personal factors of auditor ethical decision -making. The items that made up the people orientation are closely followed by the items ‘having high expectations of performance’ (4.16), and ‘being results oriented’ (4.13). The items ‘being rewarded for audit independence’, ‘providing audits for the public interest’ and ‘upholding higher ethical principles’ scored means of 2.99, 3.24 and 3.36 respectively. This suggests that on the surface, auditors preferred ‘people oriented’ and ‘performance orientation’ values more highly than professional values associated with independence and ethical decision-making. TABLE 7 ABOUT HERE Discussion In effect, these results suggest that the profession's proclaimed values of independence, autonomy, ethical principles and the public interest appear not to match the reality of first tier audit firms' underlying values associated with auditors’ ethical decision-making (i.e. ‘Outcome Orientation Dimension’, and ‘Aggressive’). Hence, the perceived organizational values of first tier audit firms were different to the values that influenced auditors’ subconscious decision-making processes identified in the multivariate analysis. The results indicate the existence of cultural dissonance in this sample of first tier audit firms as defined by Dick and Dalmau (1990). They further argue that when cultural dissonance occurs, the organization is dysfunctional. Symptoms of a dysfunctional organization are high staff turnover, high absenteeism, disaffected staff, and crisis management as well as external threats such as lawsuits against the organization. Results of this study may indicate that the cultural socialization in audit firms may not encourage ethical behavior. Ponemon (1992) found that processes of ethical socialization affected

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the level of moral reasoning, where partners had on average, a lower level of moral reasoning than lower ranks, suggesting that those accountants with higher moral reasoning may not be promoted (perhaps seen as a whistleblower and troublemaker). Willmott (1993) also argues that those people who do not conform to the organisation’s prevailing value system or have a different worldview are ostracised and eventually leave. Another explanation is that many accountants and auditors have little exposure to the influence of transcendental values (away from self) such as honesty, integrity, altruism and the public good on human behaviour. Many accountants and auditors are exposed to the self-interested model through the positivist influence in accounting education and research. Frank, Gilovich and Regan (1993) present preliminary evidence that economists’ exposure to the self-interested model does in fact encourage self-interested behaviour. They found that economists were less honest, less co-operative, more likely to cheat and were less likely to provide contributions to the public good (free riding). If these findings can be translated to the behaviour of accountants and auditors, it may explain why the accounting profession tends to have lower moral reasoning than the average moral reasoning in the population (Armstrong, 1987; Lampe & Finn, 1992) hence the problems with carrying our their professional obligations to society. The study reported here is subject to three limitations. The first is that this study was based on a sample of auditors in first tier firms in one location. Care should therefore be exercised in extrapolating the results to other locations and employment situations. Secondly, this study is based on a survey measure of organizational culture, which may not provide an adequate representation of the actual dimensions of organizational culture in the audit firms (see Trice & Beyer, 1993). Nevertheless, the O'Reilly et al. (1991) scale has been well validated (see Rousseau, 1990; Chatman & Jehn, 1994), and proved stable in the present study. (See also Windsor, 1995; Windsor & Ashkanasy 1996). Conclusion This research examined whether professional values comprising independence, ethical decision-making and public interest accountability influenced audit firm culture. The results of earlier in-depth interviews indicate that the participating audit firms’ focused on servicing client

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needs, viewing themselves as service industry businesses rather than a profession with public interest obligations. This study found that auditors’ decision-making was influenced by underlying values that were performance and reward oriented rather than concerned with professional values of independence, ethical behavior and the public interest. This finding is supported by Grey (1998) who decribed the promotion structure that inculcates a competitive, aggressive, male dominated culture not only for current members but those who have left the ‘Big Six Firm” club. Furthermore, the organizational cultures of first tier audit firms in this sample were found to be relatively homogenous indicating a lack of diversity between the values of the firms. Although first tier audit firms proclaim professional values, this study indicates that that the rhetoric of professional values is more form and less substance, hence, leading to cultural dissonance and the associated problems of litigation and high staff turnover experienced by first tier firms.

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Organizational Culture A rtifacts EspousedValues andB eliefs

U nderlying Values &B eliefs

Figure 1: Schein’s (1985) Model of Organizational Culture, configured in layers as suggested by Rousseau (1990).

22

Table 1. Organizational Culture Dimensions (O”Reilly, Chatman & Caldwell, 1991)

Dimension 1. Respect for People Respecting individual rights Fairness Tolerance

Dimension 2. Aggressiveness Aggressive Competitive Socially responsible (-)

Dimension 3. Team Orientation Team orientated Collaboration People orientated

Dimension 4. Stability Stability Predictability Security No rules (-)

Dimension 5. Innovation Innovation Opportunities Experimenting Risk taking Careful (-) Rules oriented (-)

Dimension 6. Outcome Orientation Achievement oriented Action oriented High expectations Results oriented

Dimension 7. Attention To Detail Precise Attention to detail Analytical

23

Table 2 Results of Factor Analysis Item

Fairness 23 02 Respecting individual rights 27 27 Tolerance 12 13 Socially responsible 07 35 Competitive 10 05 Achievement orientated 06 12 High expectations 06 17 Results orientated 06 00 Analytical 27 05 People orientated 70 11 Team orientated 70 28 Collaborative 69 08 Action orientation 14 05

Factor: 3 6 .69 .02

1 4

2 5

-.00 .03

. .

.64 .18

.08 .01

. .

.56 .12

-.08 .09

. .

.43 .13

.09 .17

. .

-.18 .05

.68 .03

. .

.21 .17

.54 .18

-. .

.11 .06

.52 .12

. .

-.11 .10

.36 .20

-. .

.08 .25

.33 .13

. .

.31 .05

.13 -.12

. .

.14 .15

-.07 .12

. .

.19 -.00

.01 .17

. .

.04 .57

.09 .11

. -.

24

Experimental 19 12 No rules 25 29 Opportunities 06 11 Innovative 12 01 Risk taking 01 11 Careful 09 20 Attention to detail 12 05 Precise 14 10 Rules orientated 27 16 Security 11 64 Stability 15 77 Aggressivea 12 22 Predictabilityb 14 35 Eigen values 1.62 0.68 Percentage of Variance 6.2 2.6

.28 .51

.21 .00

. -.

.20 .50

-.23 -.11

-. .

-.02 .48

.39 .24

-. .

.29 .42

.37 .27

. -.

-.01 .42

.10 -.14

-. .

.09 -.07

.20 .67

-. .

.19 .05

.11 .64

. .

-.03 .09

.18 .66

. .

-.17 -.25

.28 .35

. .

.24 .00

.09 .11

. .

.23 .04

.12 .15

. .

-.42 .34

.35 .04

. .

-.12 .05

.17 .09

. .

4.79 1.26

2.32 1.03

18.4 4.8

Notes: Factor weights for adopted factors shown underscored.

8.9 4.0

25

aAggressive item included in analysis as a separate variable bPredictability item omitted

26

Table 3. Revised Organizational Culture Dimensions

Dimension 1. Respect for People Fairness Respecting individual rights Socially responsible Tolerance

Dimension 2. Outcome Orientation Competitive Achievement orientated High expectations Results orientated Analytical

Dimension 3. People Orientation People orientated Team orientated Collaborative

Dimension 4. Action Orientation Action orientated Experimental No rules Opportunities Innovation Risk taking

Dimension 5. Detail Orientation Careful Attention to detail Precise Rules oriented

Dimension 6. Stability Stability Security

Value Item Aggressive

1

Table 4 . Means, standard deviations, and intercorrelations among measures.

Correlationsa __________________________________________________ Variable

Mean

s.d.

1

2

3

4

5

6

7

8 1.

DIT P-score

38.57

14.98

2.

Belief in a just world

42.04

7.51

.09

.73

3.

Respect for people

15.29

2.70

.13

-.13

4.

Outcome orientation

20.17

2.56

.13

.24*** .12

5.

Team orientation

12.89

1.87

.02

-.06

.42*** -.17* .80

6.

Innovation

17.21

2.73

-.09

-.04

.30*** .42*** .21** .66

7.

Attention to detail

14.42

2.43

-.06

.11

.17** .36*** .20** .16*

.70

8.

Stability

6.72

1.76

-.02

.03

.39*** .23*** .33*** .14

.30*** .

Aggression

2.62

1.05

-.21** .09

.74 .66

79 9. 09

Notes n = 131 *p < .10, **p < .05, ***p < .01

-.15* .35*** .06

.33*** .21*

.

2

aFigures on the diagonal represent Cronbach alpha reliabilities (Note that Variable 9: Agression is a separate item. ALso refer text for comments on reliability of DIT P-scores.)

1

Table 5. Results of Multiple Regression Analyses Predictor variable

Criterion Variable

Dit-score

Just world beliefs

Multiple R F d.f. R2 Adjusted R2

0.36* 2.51 7,123 0.13 0.08

0.33* 2.08 7,123 0.10 0.06

Beta-weights Respect for people Outcome Orientation People Orientation Action/Innovation Attention to detail Stability Aggressive

0.07 0.25* -0.04 0.08 0.04 -0.03 -0.28**

-0.14 0.29* -0.06 -0.12 -0.10 0.06 0.00

* p < .05, ** p < .01

2

TABLE 6: Organizational Cultural Dissonance Mean differences of espoused professional values and underlying values that affect auditors’ ethical judgment in first tier audit firms

Espoused Professional Values

mean

SD

t

p< .05 Critical Value 2.69

t

p

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