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Accountfug, Organfzations and Sockty, Vol. 21, No. 1. PP. 41-51, 1996 Copyright0 1995 ElsevierScience Ltd Printed in Great Britain.AUrights reserved. 0361-3682/% $15.00+0.00



JUDY S. L. TSUI City University of Hong Kong and FERDINAND The Chinese University A. GUL of Hong Kong

Abstract This study investigates the interaction effects of locus of control, a personality variable, and ethical reasoning on the behaviour of auditors in an audit conflict situation. Eighty experienced auditors from a sample of Big Six and Non-Big Six CPA firms in Hong Kong were provided with a case study involving an audit conflict situation and were asked to state the extent to which they would accede to the clients request. Subjects were also administered Rotters Locus of Control Scale and the Defining Issues Test (DITJ to measure ethical reasoning. Analyses of the data using multiple regression found that ethical reasoning moderated the relationship between locus of control and the auditors responses to accede to clients request in an audit contlict situation. An implication of these results is that the explicit recognition of both locus of control and ethical reasoning provides a better explanation for differences in auditors ethical decision making

The issue of ethical behaviour of accountants has recently been a source of much concern and research interest (Cohen et al., 1993). A discernable strand of thls research interest attempts to unravel and evaluate the factors that could affect ethical behaviour of accountants (Shaub, 1989; Ponemon, 1990; Ponemon & Gabhart, 1993). These studies emphasized the notion that the cognitive processes of individuals should not be treated as a black box, but should be explicitly recognized since these processes are expected to affect individuals ethical decision making (Ponemon, 1990;

1992a; 1992b; Ponemon & Gabhart, 1990). More specifically, these studies incorporate or expressly consider a psychological framework for the ethical reasoning process in order to answer the question what makes accountants more or less ethical? (Jones & Ponemon, 1993, p. 411). The psychological framework for ethical reasoning which is based on Kohlbergs (1969) Theory of Cognitive Moral Development uses the Defining Issues Test (Rest, 1979) to measure an individuals level of ethical reasoning. Using the P scores, individuals are classified

The authors would like to acknowledge the comments of Mark Young and Chee Chow, two anonymous reviewers and the editor. The research instruments used in this study are available from the authors.

1 The P score measures the relative importance of stages five and six of ethical reasoning. Ponemon (1992b, suggests that the higher P score implies a lower percentage of stages 1 through 4. 41

p. 182)


J. S. L. TSUI and F. A. GUL

into different levels of ethical reasoning. Based on this theory, several studies have found sup port for the notion that the levels of ethical reasoning are related to auditors professional judgments (Ponemon, 1990; 1992a; 1992b; Ponemon & Gabhart, 1990; Tsui, 1994). For example, Ponemon (1992b) found that those auditors with lower levels of ethical reasoning tended to underreport their chargeable time more severely than those with higher levels of ethical reasoning. Unfortunately, consideration of the cognitive process by way of the ethical reasoning process, by itself, is an inadequate characterization of the black box since it fails to recognize the role of other individual differences, such as personality which may be defined as individuals attitudes and beliefs (Pratt, 1980; Gul, 1984). Trevino (1986, p. 602) recognized this and argued that: the individuals cognitive moral development stage determines how an individual thinks about ethical dilemmas, his or her process of deciding what is right or wrong in a situation. However, cognitions of right and wrong are not enough to explain or predict ethical decision-making behaviour. Additional individual and situational variables interact with the cognitive compo nent to determine how an individual is likely to behave in response to an ethical dilemma. Trevino (1986, p. 602) went on to suggest that the individual differences variable, or specititally such personality variables as locus of control (Rotter, 1966), could interact with ethical reasoning to affect individual behaviour in an ethical dilemma. Locus of control is defined as (MacDonald, 1976, p. 169):
the extent to which persons perceive contingency relationships between their actions and their outcomes. Persons who believe that they have some control over their destinies are called internals; that is, they believe that at least some control resides within themselves. Xxtemafs, on the other hand, believe that their outcomes are determined by agents or factors extrinsic to themselves, for example, by fate, luck, chance, powerful others or the unpredictable.

more likely to behave unethically than internals who are able to rationalize and control their behaviour. Similarly, internals who believe that events are under their control would take responsibility in their determination of right and wrong, thus behaving more ethically than externals. Rotter (1966) argued that the intemalexternal construct is a unidimensional personality variable that is stable (Ashlcanasy, 1985, p. 1328). Thus, personality traits such as locus of control are relatively more stable in an individual (Roford & Penno, 1992, p. 128) than ethical reasoning levels since these levels may be improved through ethical intervention and formal education. Thus, a more fruitful approach to the study of how auditors make ethical decisions should explicitly recognize that ethical reasoning levels and locus of control would jointly influence ethical decision making (Trevino, 1986). Such a model (Fig. 1) is likely to significantly improve attempts at not only predicting and understanding ethical behaviour, but also developing ethical intervention strategies. The present study which extends previous accounting ethics literature explores and tests the notion that the effects of locus of control on auditors decision making depend on an individuals level of ethical reasoning. The particular decision-making task that is selected for study is the auditors ability to resist management pressure in an audit contlict situation. Two reasons motivated this decision. First, client pressure in an audit conflict situation is prevalent in the audit environment. Evidence regarding the prevalence of management pressure was, for example, provided by Finn et al. (1988) who found that
Ethical Reasoning


of Control

b Auditors ResponseID Accede IO Clients Request

Trevino (1986) suggested that since externals rely on fate, luck and chance, they are

Fig. 1



CPAs identified client pressure to alter tax reports and con&t of interest/Independence situations as posing the most difficult ethical situations (Glory et aZ., 1992, p. 286). Second, there is no systematic empirical evidence linking locus of control and ethical reasoning to auditors behaviour in confIict situations.* Audit conflict is thus a source of much concern and research interest (Knapp, 1985; Gul, 1991). In particular, the problem regarding the auditors ability to resist management pressure in audit conflict situations was identified as early as 1938 (Mckesson & Robbins, 1941) and more recently by the Cohen Commission (AICPA, 1978). Arising from this, prior studies have concentrated on the effects of different contextual variables, such as client financial condition, size of audit fees and management advisory services, on the auditors ability to resist management pressures in audit conflict situations (Knapp, 1985, 1987; GuI, 1991; Gul & Tsui, 1992). No study has examined the question of whether locus of control and ethical reasoning will jointly affect auditors behaviour in an audit conflict situation. In addition, the theoretical linkages between personality, ethical reasoning and ethical behaviour need to be empirically demonstrated before the accounting profession and educators attempt to undertake ethical interventions to promote more ethical professional behaviour since such interventions may be more effective for individuals with particular personality traits. Evidence on these issues will provide a better understanding of the ethical behaviour of accountants. In summary, this study adds to the literature on auditors ethical behaviour in emphasizing the processes3 involved in ethical decision making by considering two issues. First, it takes into account the

joint influence of ethical reasoning and lndividual differences on auditors ethical behaviour, and second, it sheds some light on the behaviour of auditors ln an audit conflict situation.



The research value and endurance of locus of control as a significant predictor of human behaviour in a wide variety of situations is welI documented (Jennings & Zeithmal, 1983; Findley & Cooper, 1983). In accounting literature, it has been studied in different decision contexts such as, for example, in budgetary participation (Brownell, 1982; Frucot & Shearon, 1991). Based on locus of control theory, it is likely that auditors behaviour in an audit conflict situation will be infhtenced by whether he/she is an internal or an external. For example, since an external believes that outcomes are beyond control and can be attributed to fate, luck or destiny, he/she is less likely to take personal responsibility for the consequences of ethical/unethical behaviour and is more likely to rely on external forces (Trevino, 1986, p. 601). Thus, individuals who are externals are more likely to accede to a clients request in an audit conflict situation. On the other hand, since an internal is more likely to take responsibility for consequences and rely on his or her internal determination of right and wrong to guide behaviour (Trevino, 1986, p. 601) he/she is less likely to accede to client pressure in an audit conflict situation. This relationship between locus of control and auditors behaviour, however, may be dependent on the auditors ethical reasoning since this cognitive variable has been found to affect the behaviour of accountants in a

* Conflict theory (Thomas, 1992) suggests that auditors con&t auditor.

with the client can pose an ethical dilemma for the

3 Noreen (1988, p. 359) in the context of agency theory, concluded that . an agreement (i.e. ethical code) to abstain from opporhinistic behaviour cannot be enforced effectively by external rewards or sanctions; instead, the sanctions for unethical behaviour must be internaked. Flory el al. (1992, p, 288) pointed out that the intemahzation of these sanctions calls for better understanding of ethical behaviour.


J. S. L. TSLJI and F. A. GUL

variety of ethical decision-making situations. For example, Ponemon & Gabhart (1990) in developing an experimental case to examine auditors ethical judgment in an independence context, found that auditors at lower levels of moral cognitive development are more sensitive to factors relating to penalty than affiliation in making independence judgments. Ponemons (1992b) study also found that auditor underreporting is signiIicantly related to the level of ethical reasoning. Those auditors with lower DIT scores underreported their chargeable time much more severely than those with higher DIT scores. The evidence suggests that individuals with higher DIT scores are more likely to resist management pressure in an audit con&t situation. Thus, following Trevinos (1986) suggestion, it is likely that locus of control and levels of ethical reasoning are important components of the black box and would jointly influence individuals behaviour in an audit conflict situation. Locus of control is treated as the primary independent variable with ethical reasoning as a moderating variable since, as pointed out earlier, the literature suggests that locus of control is a relatively more stable characteristic (Ashkanasy, 1985; Koford & Penno, 1992) than ethical reasoning levels which could be improved by education and other forms of intervention (Ponemon & Gabhart, 1993). Based on this reasoning, for example, an external who has low DIT scores is more likely to accede to a clients request in an audit conflict situation than an external who has high DIT scores. This reasoning and evidence provided above suggest the following hypothesis:

METHODS The research instrument was administered in the premises where the subjects work. This ensures an adequate response rate in which subjects were requested to complete the research instrument in the presence of the researcher. It is also an advantage for the researcher to be able to observe important behaviours such as the conscientiousness of the subjects and the time taken in completing the research instrument. A pilot test of the research instruments with 11 academics who are professional accountants and had prior auditing experience as well as 10 experienced auditors was conducted prior to administering the questionnaires. Subjects Since the subjects in this study are required to make a decision on an auditor-client conflict situation, auditors with professional qualification and at least four years of audit experience* were selected as respondents. Qualified subjects were selected by contact managers/ partners in each of their firms to participate in this study. The subjects came from four Big Six and five Non-Big Six CPA tirms in Hong Kong. A sample size of 80 senior experienced auditors was obtained for analysis (18 subjects were dropped from the analysis due to failure to satisfy the consistency check in the DIT). The mean age was 31.56 years (range from 26-47) and mean auditing experience was 8.4 years (range from 4-28). Of the 80 respondents, 51 came from the Big Six and ranged in positions from partners (14), managers (46) supervisors (16) to seniors (4). Measurement of variables Locus of control was measured using Rotters Social Reaction Inventory (1966),5 a 23 item

Hl: The effects of locus of control on the extent to which an auditor would respond as acceding to clients request in an audit conflict situation wIII depend on the level of ethical reasoning.

The contact partners/managers of CPA tirms who participated in this study confirmed that auditors with four years of audit experience in Hong Kong would normally handIe auditor-cIient con%? situations. 5 See Rotter (1966) for test-retest reIiabiIity, convergent validity, discrhninant vaklity and other internal consistency tests.



forced-choice scale. It consists of 23 paired statements. Each pair statement is characterized by an internal statement and an external statement. One point is awarded for each external statement. Scores can range from 0 to 23. Low scores on the scale were classified as internals while those with high scores were classified as externals. The widely used Defining Issues Test6 (Rest, 1979) was employed to measure the subjects cognitive moral development levels. Even though the P score from the DIT is not exactly equivalent to Kohlbergs Moral Judgment Interview (Colby & Kohlberg, 1987) it is considered an appropriate surrogate to measure the relative importance on stages five and six ethical reasoning. The DIT measure employed in this study requires participants to analyze four hypothetical moral dilemmas. For each dilemma, the participants have to rank order, from a list of twelve items, four that are most significant in influencing the resolution of each dilemma. From the most important ranked question to the least important one, a weighting of the scale from 4 points being the most important to 1 as least important is given. The P score is calculated from the sum of the weighted total of the four most important ranked items. It is expressed as a continuous variable from 0 to 100%. The DIT scoring procedure includes an M L

(meaningless) score which acts as a consistency and social desirability check on the data. The M score indicates the extent to which the subjects select items that are lofty sounding but meaningless. Rest (1993, p. 13) suggested that data obtained from participants with an M score equal to or greater than eight for the six-story version should be discarded from analysis. Since a four-story version of the DIT is used, an M score of five would proportionately be the cutoff point for elimination from the analyses. The data were also checked for consistency and those who failed the test (a total of 18 subjects) were also eliminated from the sample for purposes of analysis. The extent to which the auditor was willing to accede to client pressure in an auditor-client conflict situation was measured by using an adapted version of a short case developed by Knapp (1985) and used by GUI (1991) (see Appendix). In the case, the auditor disagrees with management that certain unrecorded liabilities are immaterial and should not be recorded in the financial statements. The sub ject was requested to role play as the auditor of the company and indicate the likelihood that he/she will ignore the unrecorded liabilities. A reasonable inference can then be made regarding the extent to which the auditor is willing to resist client pressure in an audit conflict situation and it is therefore an indication of unethical behaviour. lo

See Rest (1979) for validation of the DIT in terms of predictive validity, face validity, criterion group validity, longitudinal change studies, convergent-divergent validity, experimental enhancement studies and discriminant validity For test-retest reliability and Alpha Cronbach, see Rest (1986). The Moral Judgment Interview developed by Colby & Kohlberg (1987) is also recognized as one of the very reliable and valid instruments for measuring cognitive moral development. However, the DlT is adopted because it is an objective recognition instrument which is considered more scientihc, valid and reliable. * The original DIT has six hypothetical moral dilemmas. However, a four-story version is used in this study because the other two stories are considered too specific for Western cultures (Ma, 1988). The subjects were administered the English version of the DIT even though their tirst language (ii most cases) would not be English. It is considered appropriate in these circumstances because these subjects are qualified accountants and are well versed in English. 9 Preliminary discussions with experienced auditors on the conduct of the study indicated that a short case was preferable in view of the severe constraints on auditors time. i0 Knapp (1985) argued that an inference can also be made regarding auditor independence levels.


J. S. L. TSUI and F. A. GUL

A continuous scale from 0 to 100% was used to measure the likelihood that the auditor wiii ignore the unrecorded liabilities as recommended by management. A lower Rkellhood that the auditor will ignore the unrecorded liabilities is indicative of the extent to which the auditor will accede to a clients request and therefore it is suggested that through the auditors response, one can infer that he/she is more/less independent. The higher the iikelihood that the auditor will ignore the unrecorded liabilities, the greater is the extent to which the auditor will accede to the clients request. Such a decision may reflect the extent of the auditors independence. This interpretation is consistent with Ponemons (1992b, p. 176) viewpoint that the behaviour of the auditor underreporting of time reflects the ethical values that the individualbrings to the task. In the present study, the auditors response in acceding to the clients request should similarly reflect some aspects of an individuals beliefs on independence and ethical inclinations. As part of the debriefing questions, respondents were asked whether they bad encountered similar conflict cases and to describe the most memorable one. Most of the respondents indicated that they had encountered similar cases before in their auditing careers. Data analysis Multiple regression was used to analyze the data (Pedhazur, 1982). To test for twoway interaction effects, the foilowing multiplicative model is employed: Y = o + PlXl + PZX, + P;u1X** (1) where: Y is the auditors response in acceding to clients request; X1 is ethical reasoning; Xa is the locus of control; X,X, is the interaction term; and H1:ps # 0. According to Southwood (1978, p. 1155) the interaction term is expressed as the cross-pro duct . . . as occurring between independent variables in their effect on the dependent variable. If the fi for the interaction term does not X1 =
= = -b/P3 -5.04/-0.10

equal 0, this implies that the interaction is significant. The interaction term in itself does not tell us much about the nature and form of the interaction. To obtain this information, the partial derivative of equation (1) needs to be examined (Schoonhoven, 1981; Govindarajan & Fisher, 1990; Gul & Chia, 1994). Table 1 presents the descriptive statistics for the variables in the model.

RESULTS AND DISCUSSION The results reported in Table 2 showed that Hi:j33 # 0, may be accepted. Since there is a significant interaction between ethical reasoning and locus of control on the dependent variable, the analysis was pushed to the second stage by studying the partial derivative of equation (1). The following partial derivative equation depicts this relationship: GY/sx, = p* + &Xi. The point of inflection calculated to be 50.411 is within the range of scores obtained
TABLE 1. Descriptive statistics Variables Ethical reasoning (RR) XI Locus of control (lx) x, Auditors response (AR) Y Mean 29.72 10.10 24.06 Standard deviation 13.90 3.98 23.62 RaQw 2.5-67.5 2.0-18.0 0.0-95.0

TABLE 2. Results of multiple regression analysis Variables Ethical reasoning @R) X1 Locus of control (LC) X, Ethical reasoning X locus of control @R X Lc) P Adjusted ti F-value X,X2 0.7P (0.45) 5.04 <I .35) -0 IO (0.k) 21% 18% 6.73

p < 0.10; l *p < 0.05; N = 80. Standard errors are in parentheses.








-2 i-3 I-4

-5 ~-6 k

Where XI = Ethical reasoning (ER) X2 = Locus of control (LC) Y = Auditors response to accede to clients request GYISX~ = Bz + pgx, = 5.04 - 0.10x* Point of inflection on XI = -pz/p, = 5.04/-o. 10 = 50.4

Fii. 2. The effect of ethical reasoning (X,) on the relationship between auditors response to accede to clients request cy) and locus of control (X3

for ethical reasoning. Figure 2 displays graphically the analysis of the partial derivative. In graphing the partial derivative, ethical reasoning levels are shown on the horizontal axis since it is treated as the moderator variable in the locus of control/auditor decision making relationship. The graph shows that at lower levels of ethical reasoning, the relationship between locus of control and the dependent variable, auditors likelihood of acceding to clients request, is positive. In other words, higher scores on the Rotters (1966) scale (more external) are associated with higher likelihood of acceding to clients request (lower

independence). However, it is important to note that under higher levels of ethical reasoning, there is a negative relationship between locus of control and auditors response in acceding to clients request. This suggests that at higher levels of ethical reasoning, externals may not respond in the predicted direction (i.e. demonstrate lower levels of independence). To further illustrate the above relationship, Table 3 shows a 2 X 2 matrix of the dependent variable scores (auditors response to accede to clients request) by locus of control (internals vs externals) and ethical reasoning (high P scores vs low P scores). Individuals were classified into each of the categories on the basis of median scores of both variables. Those who are internals responded with lower likelihood in acceding to a clients request whether they exhibit high or low levels of ethical reasoning. In other words, internals do not differ in their responses to resist management pressure under different levels of ethical reasoning. This confirms the notion that internals are more independent and ethical irrespective of their levels of ethical reasoning. On the other hand, externals responded differently under different levels of ethical reasoning. This is consistent with the analysis of the partial derivative graph which showed that the relationship between locus of control and the dependent variable changes beyond 50.4.* Table 3 shows that externals had lower scores under higher levels of ethical reasoning than those at lower levels of ethical reasoning. To put it simply, externals at higher levels of ethical reasoning would be more independent and ethical than those at lower levels of ethical reasoning. These findings have important and broad implications for the accounting profession and accounting educators. As shown from the results, those auditors who are internals at low or high levels of ethical reasoning would behave independently and ethically. Ethical intervention for these groups of individuals to improve their levels of ethical reasoning may

I2 A P score of 50.4 is considend

a relatively high level of moral reasoning as the average P score for this sample is only 30.


J. S. L. TSUI and F. A. GUL

TABLE 3. A comparison of auditors response to accede to clients request by locus of control and ethical reasoningi Rxtemals High ethical reasoning Low ethical reasoning n = 62 29.34 37.06 Internals 12.33 13.33

that the random sampling was not employed (Campbell & Stanley, 1963). Generalizing the results to other subjects and settings should be viewed with caution though this is not a serious limitation since Hong Kong has a sophisticated audit environment similar to the situations in other Pacific-rim countries and the West.

thus be a waste of resources. On the other hand, since ethical reasoning levels affected the ethical behaviour of externals, the focus of attention in terms of ethical intervention should perhaps, if realistically possible, be on those auditors who are externals. The profession should then concentrate in searching for ethical Interventions for those effective accountants who are externals in order to nurture and raise their levels of ethical reasoning so as to ensure that they would behave more Independently and hopefully more ethically. Such realization would focus accounting education research and resources in the right direction. This study focused on locus of control, but the effects of other personality or individual factors such as ego-strength, as suggested by Trevino (1986) in her theoretical interactionist model, could also be evaluated in future research. In evaluating this study, several caveats should be noted Including the usual limitations of questionnaire survey studies and the fact

CONCLUSION The interaction effects of locus of control and ethical reasoning on auditors response in acceding to clients request in an audit conflict situation was examined using multiple regression analysis. Results showed that ethical reasoning moderated the relationship between locus of control and auditors ability to resist management pressure. In other words, both personality and ethical reasoning are significant determinants of auditors behaviour and action in an ethical dilemma situation. In particular, the results suggest that ethical intervention may be more appropriate for externals who were found to demonstrate different ethical behaviour depending on their levels of ethical reasoning. Strategies designed to raise auditors levels of ethical reasoning may be more effective if they are selectively applied in terms of personality differences.

American Institute of Certified Public Accountants (AICPA), Commission on Auditors Responsibilities:

Report, Conclusions, and Recommendation (New York: AICPA, 1978). Ashkanasy, N. M., Rotters Internal-External Scale: Confitmatory Factor Analysis and Correlation with Social Desirability for Alternative Scale Formats, Journal of Personal&y and Social Psychology (1985) pp. 1328-1341. BrownelI, P., A Field Study Examination of Budgetary Participation and Locus of Control, The Accounting Review (1982) pp. 766-777. CampbcII, D. T. & Stanley, J. C., Experimental Rand-McNally, 1963). and Quasi-Experimental Design for Research (Chicago:

I3 The sample for comparison is reduced by 18 since subjects with median scores on both locus of control scores and ethical reasoning scores were excluded.





Cohen, J. F., Pant, L. W. & Sharp, D. J., Culture-Based Ethical Conflicts Confronting Multinational Accounting Firms, Accountfng Horfzons (September 1993) pp. I-13. Colby, A. & Kohlberg, L., The Measurement of Moral Judgment (New York: Cambridge University Press, 1987). Findley, M. J. & Cooper, H. M., Locus of Control and Academic Achievement: A Literature Review, Journal of Personality and Social Psychology (1983) pp. 419-427. Fii, D., Chonko, L. & Hunt, S., Ethical Problems in Public Accounting: The View from the Top, Journal of Business Etbfcs (August 1988) pp. 605-615. Flory, S. M., Phillips, T. J. Jr, Reidenbach, R. E. & Robin, D. P., A Multidimensional Analysis of Selected Ethical Issues in Accounting, & Accounting Review (1992) pp. 284-302. Frucot, V. & Shearon, W. T., Budgetary Participation, Locus of Control, and Mexican Managerial Performance and Job Satisfaction, The Accounting Review (1991) pp. 80-99. Govindarajan, V. & Fisher, J., Strategy, Control Systems, and Resource Sharing: Effects on Business-Unit Performance, Academy of Management Journal (1990) pp. 259-285. Gul, F. A., The Joint and Moderating Role of Personality and Cognitive Style on Decision Making, The Accounting Review (April 1984) pp. 264-277. Gul, F. A., Size of Audit Fees and Perceptions of Auditors Ability to Resist Management Pressure in Audit Conflict Situations, Abancs (September 1991) pp. 162-172. Gul, F. A. & Tsui, J., An Fmpirical Analysis of Hong Kong Bankers Perceptions of Auditor Ability to Resist Management Pressure in an Audit Conflict Situation,Journal of Internatfonaf Accountfng Auditing and Taratfon (1992) pp. 177-190. Gul, F. A. & Chia, Y. M., The Effects of Management Accounting Systems, Perceived Environmental Uncertainty and Decentralization on Managerial Performance: A Test of Three-Way Interaction, Accounting, Organfzatfons and Society (1994) pp. 413-426. Jennings, D. F. & Zeithrnal, C. P., Locus of Control: A Review and Directions for Entrepreneurial Research, Academy of Management Proceedings (1983) pp. 417-421. Jones, S. K. & Ponemon, L. A., A Comment on A Multidiiensional Analysis of Selected Ethical Issues in Accounting, The Accountfng Review (April 1993) pp. 411-416. Knapp, M. C., Audit Conflict: An Empirical Study of the Perceived Ability of Auditors to Resist Management Pressure, ?Be Accounting Review (April 1985) pp. 202-211. Knapp, M. C., An Empirical Study of Auditor Committee Support for Auditors Involved in Technical Disputes with Client Management, l?be Accounting Review @ly 1987) pp. 202-211. Koford, K. & Penno, M., Accounting, Principal-Agent Theory, and Self-interested Behaviour, in Bowie, N. E. & Freeman, R. E. (eds), Etbfcs and Agency Zbeoy An Introductfon, pp. 127-142 (1992). Kohlberg, L., Stages and Sequences: The Cognitive Developmental Approach to Socialization, in Goslin, D. A. (ed.), Handbook of Socfalfzatfon Tbeoy and Research, pp. 347-480 (Chicago: Rand McNally, 1%9). Ma, H. K., Objective Moral Judgment ln Hong Kong, Mainland China, and England, Journal of CrossCultural Psychology (March 1988) pp. 78-95. MacDonald, A. P., Internal Rxternal Locus of Control, in Robinson, J. P. & Shaver, P. R. (eds), Measure of Socfal Psycbologfcal Attftudes (Institute for Social Research, 1976). Mckeeson & Rohbins, Inc., Summary of Findings and Conclusion of the SEC,Journal of Accountancy @Wry 1941) pp. 90-95. Noreen, E., The Economics of Ethics: A New Perspective on Agency Theory, Accounting, Organfzatfons and Society (1988) pp. 359-369. Pedhazur, E. J., Multiple Regression in Bebavfoural Research, Explanatfon and Predfctfon (Holt Rinehart Winston, 1982). Ponemon, L. A., Ethical Judgments in Accounting: A Cognitive-Developmental Perspective, Crftical Perspectives on Accounting (1990) pp. 191-215. Ponemon, L. A., Ethical Reasoning and Selection Socialization in Accounting, Accounting, Organfzatfons and Socfety (April/May 1992a) pp. 239-258. Ponemon, L. A., Auditor Underreporting of Tie and Moral Reasoning: An Rxperimental-Lab Study, Contemporay Accountfng Research (1992b) pp. 171- 189. Ponemon, L. A. 81 Gabhart, D. R. L., Auditor Independence Judgments: A Cognitive-Developmental Model and Experimental Ikidence, Contemporay Accountfng Research (1990) pp. 227-251. Ponemon, L. A. & Gabhart, D. R. L., Etbfcal Reasonfng In Accountfng and Audftfng (CGA-Canada Research Foundation, 1993).


J. S. L. TSUI and F. A. GUL Pratt, J., The Effects of Personality on Subjects Information Processing: A Comment, The Accounting Revfew fJuly 1980) pp. 501-506. Rest, J. R., Peoelopment in /udg&zg Moral Issues (Minneapolis: University of Minnesota Press, 1979). Rest, J. R., Moral Development Advances in Research and Tbeo y (New York: Praeger, 1986). Rest, J. R., Guide for the Defining Issues Test - How to Use the Optical Scan Forms and the Cent&s Scoring Service. (Centre for the Study of Ethical Development: University of Minnesota, 1993). Rotter, J. B., Generalized Expectancies for Internal Versus External Control of Reinforcement, Psycbological Monograpbs (1966) p. 609. Schoonhoven, C. B., Problems with Contingency Theory: Testing Assumptions Hidden Within the Language of Contingency Theory, AdmhW-atfve Science Quarterly (1981) pp. 349-377. Shaub, M. K., An Empirical Examination of the Determinants of Auditors Ethical Sensitivity, PhD dlssertation, Texas Tech University (1989). Southwood, K. E., Substantive Theory and Statistical Interaction: Five Models, American Jounral of Sociology (March 1978) pp. 1154-1203. Thomas, K. W., Conflict and Negotiation Processes in Organizations, in Dunnette, M. D. (ed.), Handbook of Industrial and Organizational Pvcbology (2nd ed.) (Palo Alto, CA: Consulting Psychologists Press, 1992). Trevlno, L. K., Ethical Decision Making in Organizations: A Person-Situation Interactionist Model, Academy of Management Review (1986) pp. 601-617. Tsui, J., Auditors Ethical Behaviour: A Study of the Dete rminants of Auditors Decision Making in an Audit Conflict Situation, PhD dissertation, The Chinese University of Hong Kong (1994).


This questionnaire is part of a research project which aims to identify and examine some of the factors that could affect auditors decision making. Note that there are no right or wrong answers to these questions which merely ask for your own perceptions on a range of issues. We appreciate that normally you would require more information than is provided here before you make such decisions. However, for purposes of this study, we ask you to make your decisions based on the limited information provided. Please be assured that the questionnaire is anonymous and the information obtained will be kept strictly confidential. None of the information collected is suBiciently detailed to identify you or your tirm.

AUDIT DECISION ASSUME Th54T YOU AR,!? THE ALJDlTOR OF DAWON DEVZLOPMENT LID Dayson Development Ltd is a Hong Kong manufacturer specializing in electronic toys. In the current years audit, a dispute has arisen between you and the management of Dayson over the materiality of certain unrecorded liabilities discovered by you during the audit. Daysons Chief Flnanclal Officer argues that the total amount of unrecorded liabllitles is immaterial and thetefore it is unnecessary to make adjusting entries in the financial statements. Daysons management believes that it should know as well as anyone what financial statement readers would or would not deem to be a material amount. In your opinion, the amount is material and adjustments should be made in the financial statements. 1. As the auditor, how likely is it that you will IGNORE the unrecorded liabilities? Please indicate your choice by marking with an X on a specific point on the following scale,











J 1 I Very low likelihood 2.

1 I

1 I

Very hish likelihood

As the auditor, have you encountered cases that are similar to Q. 1 above in which you were involved in an audit conflict situation with client management?


BEHAVIOUR IN AN AUDIT how many cases?




If so, please indicate approximately Please describe

briefly the most memorable

audit conflict case that you have encountered.