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The Impact of Guanxi on the Ethical Decision-Making Process of Auditors – An Exploratory Study on Chinese CPAs in Hong Kong

The Impact of Guanxi on the Ethical Decision-Making Process of Auditors – An Exploratory Study on Chinese CPAs in Hong Kong

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ABSTRACT.Using professional accountants asrespondents in Hong Kong, this study strives todevelop a model to depict the effect of ethical rea-soning on the relationships between guanxi andauditors; behaviour in an audit conflict situation. Theresults of the study found that (1) there is a signifi-cant relationship between an auditor’s ethical judge-ment and one’s moral cognitive development; (2)there is a relationship between an auditor’s ethical judgement and the existence of guanxi; and (3) theimpact of guanxi on an auditor’s judgement isdepending on the level of ethical reasoning.
Introduction
Professional ethics is more than just instrumentalto the maintenance of a moral, ethical and honestimage among the public. This is basically theonly way which professional bodies can ensurethe empowered trust from the society can beupheld. The maintenance of high professionalethical standards relies on an understanding of themoral reasoning process. This reasoning processforms part of the entire moral consciousness of an individual’s belief system and from whichdecision is made when an individual is facingdifficult dilemmas. In this research, this moralreasoning process of professional accountants isinvestigated by utilising the theory of ethicaldevelopment. In addition, the influence of guanxi is included as the individual differencesvariable and is hypothesised to have an interac-tion with the ethical reasoning process; hence,influencing individual behaviour in an ethicaldilemma.
 Ethical reasoning research in theaccounting profession
A wide range of ethical decision making modelscan be found in the literature (Dubinsky andLoken, 1989; Ferrell and Gresham, 1985; Ferrellet al., 1989; Hunt and Vitell, 1986; Jones, 1991;and Trevino, 1986.) One common feature of these models is the incorporation of the cogni-tive moral development process into their theo-retical frameworks. As represented by the worksof Jones (1991) and Ferrel et al. (1989), thesemodels suggest that the ethical decision-makingis a four-stage process: awareness, cognition, eval-uation and intention. Based on these models, itis argued that differences in ethical behavioursare affected by the kind of moral thinkingsadvanced through the first three stages of themoral development process.In addition, a volume of prior research hasalso covered the underlying ethical reasoningprocesses of professional accountants in practice.In general, findings of these studies suggested that(1) professional accountants have not reachedtheir potential for higher levels of ethical rea-soning (Armstrong, 1987, 1993; Lampe and Finn,
The Impact of Guanxi onthe Ethical Decision-MakingProcess of Auditors – An Exploratory Study onChinese CPAs in Hong Kong
1
 
 Journal of Business Ethics
28
: 87–93, 2000.© 2000
Kluwer Academic Publishers. Printed in the Netherlands.
 Alan K. M. AuDanny S. N. Wong 
 Alan Au is the Strand Leader in Marketing at the OpenUniversity of Hong Kong.Danny Wong is the Vice President (Academic) of the OpenUniversity of Hong Kong.
 
1992; Ponemon, 1990, 1992a; Shaub, 1989,1994); and (2) ethical reasoning could be a major determinant of professional judgement (Arnoldand Ponemon, 1991; Peonmon, 1990, 1992a,1992b; Ponemon and Gabhart, 1990; and Tsui,1996) as well as unethical behaviour (Ponemon,1992b).However, some authors (Pratt, 1980; Gul,1984; Tsui, 1996) have argued that simply byconsidering the cognitive development impact onthe ethical reasoning process may be inadequatesince ethical decision-making behaviour cannotbe just predicted by an understanding of thecognitive process and other “. . . individual andsituational variables [can] interact with thecognitive components to determine how anindividual is likely to behave in response to anethical dilemma” (Trevino, 1986, p. 602). Hence,the focus of this research is to investigate theimpact of guanxi, as an individual variable, onauditors’ professional judgement.
What is guanxi?
Guanxi is closely related to the Confucian doc-trines which stress the ties of kinship and closepersonal relationships. In business terms, guanxior personal connection can be seen as the man-ifestation of group orientation through whichinterpersonal associations can replace formalorganisational structure (Boisot, 1986; Coleman,1993; Putnam, 1993; Walder, 1986). The impor-tance of guanxi over formal business relationshipscan be illustrated through the conclusion of business contracts in Chinese communities. InChinese business communities, business contractsmay be specified in legal terms but the imple-mentation of them can be based on trust. Thisis supported by a study conducted by Kao (1996)which indicated that guanxi is the pre-requisitefor the conclusion of a contract in Taiwan. Inaddition, many studies (Alston 1989; Hall andXu, 1990; Leung and Yeung, 1995; Nee, 1992,1989; Putnam, 1993; Redding, 1990; Xin andPearce, 1996; Yang, 1994) also stressed theimportance of guanxi in the Chinese businessenvironment. If the Chinese uses guanxi as asubstitute for formal structural support, theinfluence of guanxi on the ethical reasoningprocess will be a very interesting topic to study.Since no serious research has looked into theinfluence of guanxi in the ethical decision-making process, this study is designed to fill inthis research gap. As an exploratory study, thescope of this study is limited to only investigatethe impact of guanxi on the moral decisionmaking process of Chinese professional accoun-tants in Hong Kong when they are confrontedwith an ethical dilemma.
Statement of hypothesis
The most important question this study strivesto answer is the effect of ethical reasoning onthe relationships between guanxi and auditors’behaviour in an audit conflict situation. Thisstudy hypotheses that auditor’s behaviour in anaudit conflict situation will be influenced by theexistence of guanxi in the Chinese culture. Inaddition, this relationship between guanxi andauditors’ behaviour is also hypothesised to bedepending on the level of cognitive moral devel-opment of the auditors. Besides, since the rela-tionship between cognitive moral developmentand the behaviour of an auditor has been sup-ported by previous research, as manifested in theearlier section, this study also provides further evidence to the validity of this relationship. Themodel is depicted in Figure 1 below.Hence, based on this model, the followingthree hypotheses are tested:88
 Alan K. M. Au and Danny S. N. Wong 
Figure 1. The effect of ethical reasoning and guanxion ethical judgement.
 
H
1
:There is no significant relationshipbetween an auditor’s ethical judgementand one’s moral cognitive development.H
2
:There is no significant relationshipbetween an auditor’s ethical judgementand the existence of guanxi.H
3
:The impact of guanxi on an auditor’s judgement is depending on the level of ethical reasoning.
Research methods
Subjects in this research are professional accoun-tants in public practice in Hong Kong. Thesample size is 70. Since the subjects are requiredto make decisions on an auditor-client conflictsituation, only experienced auditors are invitedto participate in this research. After consultationwith 3 partners of one of the Big Six professionalaccountancy firms in Hong Kong, it is establishedthat auditors with 3 years of audit experiencemay be required to face auditor-client conflictsituations. Hence, the selection criterion in termof audit experience is set at 3 years or more.Convenience sampling method is adopted toselect the sample for this survey. The use of non-probabilistic method in this research is becauseof the difficulties involve in selecting the subjectsby random sampling. The main difficulty is arisenfrom the time required to complete the ques-tionnaire. It is estimated that the entire researchinstrument required subjects to spend approxi-mately 40 minutes to finish the exercise.
Research instruments
A questionnaire is developed to collect therequired information for this study. The ques-tionnaire is divided into four parts. The first partis the introduction in which instructions to fillout the questionnaires together with illustrationsare provided to the respondents.The second part is related to the measurementof the level of the cognitive moral developmentof the subjects. The Defining Issues Test (DIT)developed by Rest (1979, 1986) is adopted toprovide such a measurement.The third part of the questionnaire is designedto capture the respondent’s response on an ethicaldilemma involving guanxi and the professionalintegrity of an auditor. This part of the ques-tionnaire is developed to identify and examinethe role of guanxi in the decision-making processof auditors. The auditor’s response to the auditconflict situation is assessed through a scenario.The purpose of the scenario is to investigate theability of the respondents to resist the temptationto help a good friend when it requires a viola-tion of the profession’s code of conducts. Inparticular, the respondents are presented with amoral dilemma relating to their professionalintegrity in maintaining client confidentiality andtheir personal responsibility to a close friend. Inthis case, the auditor’s close and long-time friendwho has help the auditor and the auditor’s familytremendously for many years asks the auditor for a professional advice on a major investment ona company which the auditor has just completeda statutory audit. This close friend has themajority of his personal wealth invested in thiscompany and does not have a healthy financialposition. In addition, the auditor also knowsthat the company is, in fact, in deep financialtroubles.The fourth part of the questionnaire is devisedto capture the respondent’s response on anauditor-client conflict situation. The author’sresponse to the audit conflict situation is, again,assessed through a scenario. The purpose of thescenario is to investigate the ability of the respon-dents to resist pressure from the client in theseconflicts situations. In this case, the respondentsare presented with a moral dilemma relating totheir professional integrity in maintaining clientconfidentiality and their social responsibility as acitizen. In this case, the auditor overheard a con-versation between the senior management of a construction equipment company that their equipment, though complied with the govern-ment’s safety standards, has a defect in it.However, no hard evidence is detected duringthe normal course of audit. This auditor is alsoauditing another company which has concludeda substantial contract with this constructionequipment company. The auditor is faced witha dilemma in whether such information obtained
Ethical Decision-Making Process of Auditors
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