Effects of Auditors' Ethical Orientation and Self‐Interest Independence Threat on the Mediating Role of Moral Intensity and Ethical Decision‐Making Process

• Author: Zuraidah Mohd‐Sanusi,Razana Juhaida Johari,Vincent K. Chong
• Date: 01 March 2017
• Published date: 01 March 2017
• DOI: http://doi.org/10.1111/ijau.12080

Effects of Auditors’Ethical Orientation and Self-Interest Independence Threat on

the Mediating Role of Moral Intensity and Ethical Decision-Making Process

Razana Juhaida Johari,

1

Zuraidah Mohd-Sanusi

1

and Vincent K. Chong

2

1

Universiti TeknologiMARA, Malaysia

2

University of West ern Australia, Australia

This study examinesthe effects of individual ethical orientation, independence threat (a contextualfactor), and moral

intensityon auditors’ethical decision-making processusing Jones’s issue-contingentmodel of ethical decision-making

in Malaysia. A quasi-experimental design was employed to test the proposed hypotheses formulated for this study.

Using WarpPLS, results support the positivedirect effects of the independence threats, ethical orientation, and moral

intensity of auditors on their ethical decision-making process. Results also suggest that moral intensity mediates the

relationships between the auditors’ethical orientation as well as auditor self-interest threat on the auditors’ethical

decision-making. Auditors with strong ethical orientation relativism, as compared to idealism, demonstrate

undesirable ethical decision-making processes. Furthermore, low moral intensity underscores the effectiveness of

auditors’decision-making due to low ethical sensitivity and hence leads to inappropriate ethical decision-making

processes and behavior. This study puts forward an auditing perspective through which to understand the ethical

dilemmas and the importance of auditors’moral intensity and ethical orientation in decision-making skills.

Key words: Auditors’independence, ethical orientation, moral intensity, ethical decision-making process, ethical

sensitivity

INTRODUCTION

Aseriesofglobalcorporatefailures,suchasthecasesof

Banco Espirito Santo in 2014, Satyam in 2009, Enron in

2002, and Oilcorp Berhad in 2008, as well as Transmile

Berhad in 2007 has weakened the auditing profession. These

failures also marred the credibility of auditors, thereby

resulting in ethical and independence issues becoming

highly focused topics in accounting research (Bennie, Cohen

& Simnett, 2011). The lack of warning from auditors resulted

in the failure of companies, thereby raising serious questions

about the quality and reliability of audited information. The

public also questioned the ethical behavior of auditors

because they are responsible for safeguarding the interests

of stakeholders (Cullinan, 2004).

In 2010, Malaysia enhanced its efforts to scrutinize the

accounting profession with the establishment of the Audit

Oversight Board. Moreover, this country adopted the new

structure of Clarified Statements of Auditing Standards

2012. Similarly, regulators initiated the strengthening of

the culture of corporate governance and ensuring that

companies comply with the laws and ethical values

stipulated by the Malaysian Code of Corporate

Governance 2012. New laws and auditing standards

primarily aim to provide an enhanced guidance toward

the effective and ethical exercise of the duties of auditors.

However, despite increased attention from practitioners

and scholars, reports on unethical practices and behaviors

involving the auditing profession continue (Cullinan,

2004; Barrainkua & Espinosa-Pike, 2015). Barrainkua and

Espinosa-Pike (2015) determined that auditors who

underreport are affected by the pressures they perceive.

Such pressures are related to the audited budgets, ethical

acceptability of auditors’underreporting, and influence of

peers and superiors on the resolution of ethical conflicts.

Our study aims to investigate the effects of ethical

orientation (an individual factor) and independence threats

(a contextual factor) on the ethical decision-making

process of auditors in Malaysia. We test this important

issue on auditors from firms in Malaysia because the

respondents’country of origin is considered a crucial

factor in investigating ethics-related issues (Curtis,

Conover & Chui, 2012). Practitioners in Malaysia view

the reported local fraud cases as isolated circumstances;

however, fraud in a series of material misstatements that

disgraced auditors as independent parties became a major

concern (Shah, 2007). Moreover, the Malaysian Securities

Commission reported 12 cases of wrongdoing among

auditors to the Malaysian Institute of Accountants (MIA)

(MIA Annual Report, 2010). This activity indicates

constant attempts to abuse the markets either through

manipulating share prices or perpetrating corporate fraud,

such as manipulating the financial accounts of companies

(Anwar, 2007).

Numerous studies have attempted to analyze the

factors affecting the ethical decisions of auditors in

Malaysia (Zakaria, Haron & Ismail, 2010; Ghazali &

Ismail, 2013; Haron, Ismail & Na, 2015). However, no

study has investigated the effects of ethical orientation

and independence threats on auditors’ethical decision-

making process using Jones’s (1991) issue-contingent

model of ethical decision-making in the Malaysian

context.

Jones’s (1991) model is based on Rest’s (1986) model of

ethical decision-making that comprises four sequential

components, namely ethical sensitivity, judgment,

intention, and behavior. Jones (1991) introduced the moral

intensity component to complement Rest’s ethical

decision-making model. Moral intensity includes six

components, namely magnitude of consequences, social

consensus, probability of effect, temporal immediacy,

proximity, and concentration of effect. Jones (1991)

explained that these components can be aggregated into

one construct. He assumed that moral intensity varies by

Correspondenceto: Dr. Razana Juhaida Johari, Senior Lecturer, Facultyof

Accountancy,Level 6, Bangunan Perakaunan,UniversitiTeknologi MARA,

42300, Bandar Puncak Alam, Selangor Darul Ehsan, Malaysia. Email:

razana@salam.uitm.edu.my

International Journal of Auditing doi: 10.1111/ijau.12080

Int. J. Audit. 21:38–58 (2017)

©2017 John Wiley& Sons Ltd ISSN 1090-6738

issue and that individuals recognize and respond to such

differences in a variety of methods.

We adapt Jones’s (1991) model because prior studies on

ethical decision-making called for further research that

empirically tests not only the effect of Jones’smoral

intensity but also the effect of ‘all four variables of Rest’s

model’(Craft, 2013, p. 254; see also Singhapakdi, Vitell &

Kraft, 1996; McMahon & Harvey, 2006). In addition, prior

auditing studies have determined Jones’s model as one of

the most appropriate and relevant frameworks in studying

the ethical decision-making processof auditors (see Coram

et al., 2008). Forexample, Coram et al. (2008) suggested that

highlighting the moral intensity of a reduced audit quality

(RAQ) act may reduce the likelihood of fraud. They

acknowledged that ‘By theorizing that the underlying

dimensions of a moral issue are important determinants

of ethical decision-making and behavior, Jones (1991)

provides a framework to better understand what drives

an auditor to respond ethically or unethically’(p. 146). We

further expand Jone s’s model by including an individual

and a contextual factor, namely ethical orientation and

independence threats, respectively. Our study analyzes

the two dimensions of ethical orientation, namelyidealism

and relativism;

1

and focuses on self-interest threatas one of

the independencethreats to auditors. Figure1 presents our

proposed theoretical model on the ethical decision-making

process of auditors.

Our theoretical model includes ethical orientation

because the ethical decisions of auditors have been

determined to be influenced by personal value orientation.

Numerousstudies have determined that ethicalorientation

can affect ethical decision-making (e.g., Marta,

Singhapakdi & Kraft, 2008; Marques & Azevedo-Pereira,

2009; Callanan et al., 2010; Fernando & Chowdhury,

2010). Forsyth (1980) suggested that ethical orientation

can be used to understandan individual’s ethical behavior

and explain specific individual actions. Moreover, ethical

orientation represents the manner by which individuals

think about and respond to certain arguments (Forsyth,

1980; Hunt & Vitell, 1986).

We include independence threat as another factor in

our theoretical model because the independence of

auditors has been regarded as the cornerstone of

professional auditing. Independence is a unique quality

among auditors because it distinguishes them from other

professions and professional activities (Mautz & Sharaf,

1961). Independence threat can arise from situations,

actions, or relationships that are likely to affect an

auditor’s ability to comply with fundamental ethical

principles. Any threat to audit independence should be

taken seriously because it can affect auditors’ethical

decision-making process. Furthermore, independence

threat can result in auditors compromising their

independence, thereby potentially leading to unethical

actions (DeAngelo, 1981).

To date, no study relying on Jones’s (1991) model to test

the effect of ethical orientation and self-interest threat on

the ethical decision-making process of auditors has been

conducted. We believe that analyzing the relationships

among these factors will enrich our understanding of the

ethical decision-making process of auditors. Our findings

significantly contribute to the auditing literature. First,

our study extends the ethical decision-making literature

within the auditing profession through the use of an

expanded Jones’s model, which includes personal ethical

orientation (an individual factor) and self-interest threat (a

contextual factor). Our results support the positive direct

effects of the auditors’ethical orientation, self-interest

threat, and moral intensity on the ethical decision-making

process of auditors. Second, our supplementary analyses

suggest that moral intensity mediates the relationships

between the auditors’ethical orientation and self-interest

threat on their ethical decision-making. This contribution

is significant to the auditing literature because no previous

Figure 1. An integrative model of auditors’ethical decision-making process.

Auditors’Ethical Orientation and Self-Interest Independence Threat 39

©2017 John Wiley & Sons Ltd Int. J. Audit. 21:38–58 (2017)