Auditor Professionalism: The Importance of Internalizing Professional Standards and

Detection of Severely-Sanctioned Professional Violations

Author(s): Marietta Peytcheva and Danielle E. Warren
Source: Business & Professional Ethics Journal , 2011, Vol. 30, No. 1/2 (2011), pp. 33-57
Published by: Philosophy Documentation Center

Stable URL: https://www.jstor.org/stable/41340847

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BUSINESS & PROFESSIONAL ETHICS JOURNAL, VOL. 30, NOS. 1-2

Auditor Professionalism:

The Importance of Internalizing

Professional Standards and
Detection of Severely-Sanctioned
Professional Violations

Marietta Peytcheva and Danielle E. Warren

Abstract: The effectiveness of professional sanctions against violations

rests upon the severity of sanctions and detection of violations. Here we
examine perceptions of professional violation detection in auditing where
the professional standards may conflict with the interests of the auditor's
firm. Using a sample of future and experienced auditors, we test the re-
lationship between professional violations and auditors' perceptions of
the likelihood that severely-sanctioned violations will be discovered (a)
by the audit profession, and (b) by the auditor's firm. In our study, an
auditor's belief that professional bodies are likely to detect professional
violations relates positively to auditor professionalism. However, we find
beliefs that the audit firm will detect severely-sanctioned professional
violations negatively affect auditor professionalism. In our study, the
lowest level of professionalism occurs when auditors believe that their
own audit firm, but not the audit profession, will detect a professional
violation. We also find that auditors' internalization of professional stan-
dards relates positively to auditor professionalism. Implications for fu-
ture research and practice are discussed.

© Business & Professional Ethics Journal , 201 1 .

Correspondance may be sent to Marietta Peytcheva (Lehigh University),
map608@lehigh.edu; to Danielle Warren (Rutgers Business School),
dwarren@andromeda.rutgers.edu.

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34 Business and Professional Ethics Journal

Key words: auditor professionalism; professional standards professional vio-

lations; social control; social learning theory

Introduction

In the last ten years, the integrity of financial reporting has been scruti-
nized as a multitude of financial scandals were revealed. At the center
of these scandals are the external auditors who are supposed to embody
professionalism, which involves serving the public good with a commit-
ment of integrity, objectivity, and independence (AICPA 2007; Fogarty
and Kalbers 2000; Reynolds 2000). External auditors are mandated by
professional codes to uphold the public interest above all else, and to hon-
or the public trust (AICPA 2007). External auditors, however, are respon-
sible to not only to the accounting profession - the body that promulgates
professional codes - but also to their own audit firms. If the interests of
those two groups conflict, professionalism requires auditors to choose the
professional standards and principles over the interests of the audit firm
(AICPA 2007). Many argue the financial incentives and pressures of audit
firms can induce auditors to choose firm interests over the professional
code and thereby threaten auditor professionalism.
To counteract the influence of non-professional interests, profession-
al bodies institute sanctions such as suspension or revocation of licenses
when auditors are found guilty of severe professional violations. Here we
examine this practice with a focus on violation detection, an important
component of sanction effectiveness. While past sanctions literature em-
phasizes the role of violation detection, it overlooks the importance of
who detects the violation, which is particularly meaningful in a multi-
organizational work setting.
In addition to sanctions, which induce compliance with organiza-
tional standards, organizations also strive for employees to internalize
organizational values so workers follow the rules of an organization not
because they fear sanctions but because they adopt the organization's per-
spective of appropriate behavior (O'Reilly and Chatman 1986; Treviño et
al. 1999). In auditing, auditors who internalize the professional standards
and principles should exhibit professional behavior regardless of sanc-
tions. Thus, professional internalization is another approach to promoting
auditor professionalism.
In a study of experienced and future auditors, we examine percep-
tions of who will detect professional violations and the internalization
of professional standards as predictors of behavior that deviates from

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 A udit or Professionalism 3 5

professionalism. Our study contributes to the literature on professional-

ism by revealing the importance of perceived detection and internalization
of professional standards. Our findings suggest a need for improvement
in professional violation detection, broad communication of incidents of
violation detection to the auditing community, and education that will pro-
mote retention of professional standards.

Predictors of Auditor Professionalism

Although society at large, and the audit profession in particular, demand

auditor commitment to professionalism (AICPA 2007), the past decade
has provided us with multiple examples in which auditors have violated
professionalism in favor of the interests of their own firms. The Enron, Xe-
rox, and Adelphia debacles are only some high-profile illustrations of audit
failures in which the auditors have been charged with professional viola-
tions (SEC 2003; 2005; 2008). This misalignment between audit firms and
professional obligations, in particular the audit firms' orientation towards
profit maximization, is viewed as one of the major causes of the financial
scandals in 2001 . The U.S. government's move to split accounting services
from consulting services can be viewed as an attempt to reorient the audit
firms towards professional obligations (Duska and Duska 2003; Moore et
al. 2006; Zeff 2003). These scandals have brought about a new realization
of the importance of recognizing possible threats to auditor professional-
ism and understanding the antecedents of professional violations. Both ac-
ademic research and the accounting profession are concerned with threats
to auditor professionalism (Moore et al. 2006; Nelson 2006; РОВ 1994).
Behavioral theories, in particular social learning theory, provide an
informative lens for understanding the behavior of professionals. Social
learning theory emphasizes not only the modeling of desired behaviors -
an aspect of the educational process for professional certification - but
also retention of modeled behavior and the use of reinforcements. Here
we hone in on two features of social learning theory: reinforcements (spe-
cifically, sanctions for professional violations) and retention (specifically,
internalization of professional standards). We begin with a review of pro-
fessionalism and then follow with an application of social learning theory
to predictors of auditor professionalism.

Professionalism
The sociology literature suggests that professions emerge to serve the
public interest and are granted a specific status because of the functions

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36 Business and Professional Ethics Journal

they perform (Reynolds 2000). Professionals are expected to serve the

welfare of society, even when this service jeopardizes their personal inter-
est (Fogarty and Kalbers 2000). Thus, a necessary condition for profes-
sionalism is the service of the public good (Reynolds 2000).
Auditors' main duty is to protect the public interest, and auditors
must exercise professional judgment in fulfilling this duty (Dobson and
Armstrong 1995). Actions consistent with auditor professionalism there-
fore will be consistent with professional values such as preserving the
public trust, protecting the public interest, acting with integrity in the face
of conflict of interest, and maintaining objectivity and independence. The
American Institute of Certified Public Accountants (AICPA) Code of Pro-
fessional Conduct stipulates that CPAs should "accept the obligation to
act in a way that will serve the public interest, honor the public trust,
and demonstrate commitment to professionalism" (AICPA 2007, ET 53,
Article 2). Dunfee and colleagues explain that while "The general respon-
sibilities of auditors to act objectively and to perform audits with com-
petency and due care arise from their professional roles," the demands
for professionalism in auditing arise from multiple origins (Dunfee et al.
2004, 73-74). "Some of an auditor's specific obligations are imposed by
law or contract; others stem from the actions of professional bodies and
general social norms" (Dunfee et al. 2004, 74).
Auditor professionalism has been a focus of concern for the account-
ing profession long before the accounting scandals of the last decade, as
evidenced by the 1994 report "Strengthening the Professionalism of the
Independent Auditor" promulgated by the Advisory Panel on Auditor In-
dependence to the Public Oversight Board (РОВ 1994). After the more
recent accounting scandals, both academic research and the accounting
profession have renewed their focus on the concept of auditor profession-
alism, and have re-examined existing threats to it. In its inspections of au-
dit firms, the PCAOB has been focusing on professionalism, emphasizing
auditors' commitment to the public interest (Goelzer 2003). Academics
have stressed the importance of understanding the factors determining au-
ditor professionalism and its interplay with the sources of pressure within
audit firms (Nelson 2006).
Some have argued that threats to professionalism arise from charac-
teristics of an auditor's work environment. In a review of the profession,
Zeff (1987, 66) states: "Independence is the anathema; serving as clients'
advocates is in vogue." This perspective pits professional obligations to
independence against advocating for clients, an action that best serves the
financial well-being of the audit firm. Prior research also suggests that

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 A uditor Professionalism 3 7

there is a shift in the focus of the audit profession, leading critics to assert
that "the profession has ceased to be a profession and succumbed to the
pressures endemic to being a business driving by the profit motive" (Duska
and Duska 2003, 174). Researchers have also proposed that the changes in
the context and conditions of the auditor's work over the last few decades
have led auditors to make judgments driven by commercialism and busi-
ness concerns rather than professionalism (Gendron et al. 2006).
Attachment to the audit firm, however, need not come at the expense
of professionalism. Some evidence suggests that auditor professionalism
is positively affected by the auditor's firm commitment such that audit firm
commitment induces a sense of professional identity. For instance, Taylor
and Curtis (2010) found, in a survey with practicing auditors from a Big-4
audit firm, that high levels of professional identity increased the likelihood
that auditors would engage in whistleblowing and report observed viola-
tions, and that the auditor's commitment to the firm led to perseverance
in reporting intentions. Kalbers and Fogarty (1995) conducted a literature
review and concluded that there is no clear evidence that auditors' pro-
fessionalism and organizational commitment are mutually exclusive. In
a similar vein, Bamber and Iyer (2002) found, in a survey of CPAs em-
ployed as auditors in Big-5 firms, that auditors' professional identification
positively related to their organizational identification. While an auditor
can remain committed to the audit firm and the profession, we do not have
empirical evidence on professional behavior when auditors favor the audit
firm over the profession and many scholars theorize that such situations
will lead to professional violations (Moore et al. 2006; Warren and Alzóla
2009). One way to promote the importance and visibility of professional-
ism is to selectively assign professional licenses, regularly re-educate au-
ditors on professional standards, monitor for violations, and assign severe
sanctions when the profession's standards are broken (e.g., Grcic 1985;
Shafer et al. 1999; Fogarty and Kalbers 2000; Moore et al. 2006).

Professional Violations
Many factors affect auditor violations of professional standards. Auditors
may be motivated by personal interests, client interests, firm interests, or
simply a lack of knowledge. While professional violations may vary in their
causes, many point to professional violations in which auditors are driven
by the financial success of audit firms (Moore et al. 2006; SEC 2003, 2005,
2008). More specifically, a focus on audit firm profitability, which can in-
volve catering to clients, who are the auditing firms' main source of income,
provides auditors with an incentive to violate professional standards.

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38 Business and Professional Ethics Journal

Professional violations for which auditors can be disciplined by

the AICPA include violations of independence, conflicts of interest, and
knowing misrepresentations in the presentation of financial statements
and records, among others (AICPA 2010). Disciplinary actions by the
AICPA include admonishments, suspension of membership, or expul-
sion. Prior research on violations sanctioned by the AICPA have found
that the most frequently sanctioned violations include violations of tech-
nical standards, failure to cooperate with an investigation of one's profes-
sional conduct, 'acts discreditable' to the profession, as well as violations
of independence, due professional care, professional competence, and
general standards of the Code of Conduct (Moriarity 2000; Tidrick 1992).
State Boards of Accountancy can also issue disciplinary sanctions in
response to violations. Violations for which State Boards of Accountancy
disciplines auditors include failure to return client documents, failure to
perform work for which the auditor was engaged, failure to communicate
with one's client, making false claims, failure to engage in continuing
professional education, unlicensed practice, and failure to respond to in-
quiries by the Board, among others (e.g., Maryland Board of Public Ac-
countancy 2009; Pennsylvania Board of Accountancy 2010).

Professional Sanctions
Extensive literature exists on the effect of workplace sanctions on employee
behavior (Arvey and Ivancevich 1980; Hollinger and Clark 1982, 1983;
Warren and Crowe-Smith 2008). But as social control theory proposes,
departures from legal standards or societal and professional norms can be
controlled by a variety of mechanisms, including laws, rules, norms and
socialization (Laufer and Robertson 1997). These formal and informal so-
cial control mechanisms act to influence and constrain employee behavior
(Laufer and Robertson 1997), specifically accountants (Dirsmith et al. 1997).
Accounting research has focused specifically on the role of formal
sanctions in eliciting ethical auditor behavior (Hwang and Schneider 1996;
Noreen 1988; Shockley 1982). Noreen (1988) discusses professional sanc-
tions in the context of agency theory, and suggests that sanctions for viola-
tions of professional codes must be internalized in order to be effective.
Shockley (1982) proposes a theoretical model for auditor independence,
in which formal sanctions by professional organizations increase auditors'
ability to withstand client pressures. Missing from the literature, however,
is an examination of how professional behavior is affected by auditors'
perceptions of detection of professional violations. In the sanctions litera-
ture, the likelihood of detection, which is a component of the perceived

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 Auditor Professionalism 39

certainty that a sanction will follow from a violation, plays a key role in the
effectiveness of a sanction (Hollinger and Clark 1983). Here we examine
situations in which expectations of violation detection affects professional
behavior. Our study contributes to this literature by studying how auditor
professionalism is affected by auditors' belief regarding which entity or
entities are likely to detect professional violations (the auditor's own firm,
the accounting profession).
Sanction Severity. As mentioned earlier, the professional bodies use
sanctions such as admonishment, fines, and suspension or revocation of a
CPA's license to deter professional violations (AICPA 2010). These sanc-
tions are meant to reinforce the desired behaviors of the profession. Em-
pirical research has examined the significance of formal professional sanc-
tions as a determinant of auditor professionalism. Hwang and Schneider
(1996) used a survey with practicing auditors to test the effect of formal
sanctions by professional organizations such as the AICPA and State CPA
Societies on auditors' ethical judgments. They found that formal sanctions
by professional organizations are an effective deterrent of clear violations
of professional codes (such as assisting the client with fraud), but are less
effective in cases of more ambiguous independence violations (such as
providing consulting services to an audit client - behavior that was still
permitted at the time of the study).
Gul and colleagues (2003) tested an ethical compliance model of the
relationship between penalties and ethical behavior, with a survey of Chi-
nese auditors, and documented a negative relationship between the per-
ceived level of penalties and unethical behavior. This suggests that severe
professional sanctions will have the greatest deterrence effect against pro-
fessional violations. Shafer et al. (1999) documented the effectiveness of
formal sanctions such as litigation and unfavorable peer review as deter-
rents of unethical behavior in a survey with practicing auditors. However,
they failed to find a significant deterrence effect of disciplinary sanctions
by professional organizations in their sample (Shafer et al. 1999).
Although the accounting profession uses both formal and informal
sanctions as social controls (Dirsmith et al. 1997), some research suggests
auditors perceive the severity of the profession's formal sanctions to be
greater than all other sanctions (Peytcheva and Warren 2011). Peytcheva
and Warren (201 1) examined how the source of a sanction affects the per-
ceived severity of formal and informal sanctions and found that formal
sanctions by professional bodies were perceived as the most severe com-
pared to sanctions imposed by the client or the audit firm. Specifically, the
loss of professional license was viewed as most severe.

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40 Business and Professional Ethics Journal

In our examination of the effect of auditors' belief about the entity

likely to discover professional violations of auditor professionalism, we
focus on a sanction assessed as extremely severe by practicing auditors:
the revocation of an auditors' professional license (Peytcheva and Warren
2011). Thus, we study auditors' perceptions of the entities likely to dis-
cover the most severe professional violations because theory suggests that
the entity assigning the most severe sanctions will have a strong influence
over behavior.
Detection of Violations. The effectiveness of formal sanctions as a de-
terrent to professional violations, however, depends upon auditors' beliefs.
Criminology theory models the likelihood of committing a violation as a
function of the severity of punishment and the likelihood that the behavior
will be discovered (Mazar et al. 2008; Nagin and Pogarsky 2003). Past
research suggests the likelihood of getting caught is a more effective pre-
dictor of violations than the severity of punishment (Blumstein et al. 1978;
Nagin and Pogarsky 2003; Ward et al. 1994). Further, extant research sug-
gests that not all professional violations observed by CPAs are likely to be
reported, and therefore are unlikely to elicit punishment. Using a survey
with a sample of CPAs, Beets and Killough (1990) find that CPAs would
report only half of the professional violations they observe.1 Therefore we
focus our study on the likelihood of detection of professional violations.
We theorize that auditors' perceptions about which professional or-
ganization is likely to discover severely-sanctioned violations - the audit
profession versus the auditor's firm - affect the perceived likelihood that
a violation will eventually result in a punishment. We propose that, when
there is a conflict between the interests of the auditors' audit firm and the
audit profession, auditors will assign different likelihoods of a personal
negative outcome depending on the body that detects a professional viola-
tion. If auditors believe that a violation will be detected by the audit pro-
fession, they may perceive a high level of certainty that the behavior will
be sanctioned by the profession.

Hypothesis 1. Perceptions that severely -sanctioned professional

violations will be detected by professional bodies are positively re-
lated to professional behavior

Auditors act as members of the accounting profession, but also as

members of their own accounting organizations. To the extent that the
interests of individual audit firms are not always aligned with the profes-
sional standards, auditors are subject to competing influences and pres-
sures. As pointed out by Lord (1992), auditors are most concerned with

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 A uditor Professionalism 4 1

pressures stemming from within their own audit firm, because an auditor's
career growth is ultimately determined by partners within the audit firm.
The various types of social influence pressures within audit firms can stem
from both superiors and peers (DeZoort and Lord 1 994), and can involve
pressures to obey superiors' instructions, pressures to conform to in-group
norms, or pressures to comply with requests from any level within the
organization (DeZoort and Lord 1997).
Prior research has found that pressures within the audit firm can lead
to quality-threatening behavior by individual auditors, such as failure to
properly document work, biasing sample selection, acceptance of weak
client explanations, and underreporting of time worked on an engagement
(Sweeney et al. 2010). Auditors have also expressed more general con-
cerns that the mounting pressure on audit firms to be profitable and com-
mercially successful can increase the occurrence of unethical behavior
(Helliar and Bebbington 2004, 37).
If an auditor believes that professional violations in favor of the
auditor's firm will be known to the audit firm, the auditor may assume
the firm would not punish the unethical behavior. Previous research us-
ing surveys of CPAs has found that CPAs would report only about half of
all observed ethical violations (Beets and Killough 1990). Furthermore,
the auditor may perceive that actions upholding the economic interest of
the audit firm would be viewed favorably by superiors and peers. To the
extent that the auditors value membership in the firm and their social ties
with the firm's employees, social approval from colleagues can be a strong
motivating factor in exhibiting behavior that departs from the professional
standards. Conceptualizing threats to auditor independence as conflicts in
social identities, Warren and Alzóla (2009) assert that violations of auditor
independence stem from identification with the auditing firm or clients as
the auditor's ingroup rather than the profession. According to their theory,
when an auditor's most salient social identity is associated with their audit
firm, an auditor will favor the firm in situations that place the firm's inter-
ests at odds with the profession (Warren and Alzóla 2009).
In light of past research that favors the influence and interests of
audit firms over professional bodies, we propose that when individuals
believe that professional violations will be detected by audit firms, they
are less likely to behave in a professional manner.

Hypothesis 2. Perceptions that severely-sanctioned professional

violations will be detected by the audit firm are negatively related to
professional behavior.

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42 Business and Professional Ethics Journal

We propose an interaction between the belief that a violation will be

detected by a professional body and the belief that the violation will be de-
tected by the audit firm. Specifically, we propose that the greatest threats
to auditor professionalism will occur when auditors believe both the like-
lihood of detection of violations by the audit profession to be low and the
likelihood of such violations being detected by their own audit firm to be
high. The reason for this is that auditors will perceive both a decreased
likelihood of punishment from the profession, and an increased likelihood
that their own firm will know of an act that has sustained its interests. In
such a scenario, auditors may even expect a favorable response to their
actions from their firm. Our hypothesis is as follows.

Hypothesis 3. Professional behavior will be the lowest when audi-

tors perceive a low likelihood that professional violations will be
detected by professional bodies but a high likelihood that such be-
havior will be detected by the audit firm.

Professional Internalization and Professional Behavior

Bandura's conceptualization of social learning theory emphasizes the im-

portance of not only reinforcements but also retention of learned informa-
tion in predicting future behavior (Bandura 1977). In related literatures,
the adoption of organizational values and rules is conceptualized as a
process of internalization, but internalization has been conceptualized at
varying degrees from mere retention of information to complete align-
ment of values (e.g., Koestner et al. 1996; O'Reilly and Chatman 1986).
Grcic (1985), who conceptualizes internalization as developing con-
science, suggests the process involves favoring the group's moral norms
when they conflict with personal self-interest. While several literatures
describe the internalization process differently, all suggest that internal-
izing an organization's values will predict behaviors that align with the
interests of that organization.
Here we focus on the internalization of professional standards and
principles as predictors of professional behavior. As Wagner (1965, 605)
indicates, "As our effective knowledge increases through practice, educa-
tion, research, and other types of experience, greater objectivity can be
obtained by expanding the number and properties of known elements."

Hypothesis 4. Auditors ' professional internalization is positively re-

lated to professional behavior.

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 Auditor Professionalism 43

Method

Study Design
We test our hypotheses using a survey in which we measure participants'
perceptions that severely-sanctioned violations will be discovered by pro-
fessional bodies and by the auditor's own firm. We present participants
with two different scenarios. Both scenarios involve a conflict between
the interests of the audit firm and professional standards. Participants take
the role of an auditor facing the dilemma in the scenario, and answer how
they would act in the situation. At the end of the survey, we measured
participants' level of internalization of professional standards.2

Sample
We conducted our study with two samples of participants: a sample of
experienced auditors and a sample of graduate accounting students in a
Master of Accountancy program at a large state university. The sample
of experienced auditors was recruited through the endorsement of a State
Society of CPAs; an email requesting participation and expressing sup-
port for the research by the State Society was sent to its members. Forty-
three auditors completed the survey online. The mean (median) age of
participants was 45 (44) years; 31 men and 12 women participated in
the survey.
The sample of future auditors included 28 Masters of Accounting
students from a large state university, who participated in the survey ap-
proximately six months before they sat for the CPA exam. Students in
this program are heavily recruited by the Big 4 audit firms. The sample
consisted of 14 women and 14 men; the mean (as well as the median)
age of participants was 26 years. Participants in this sample completed
the survey in the first part of a lecture on accounting ethics. Participants
provided informed consent, and were subsequently debriefed.

Independent Variables
Detection by Profession . Using a seven-point scale, we measured partici-
pants' perception of likely detection of violations by the audit profession
by their agreement with the statement that a severely sanctioned violation
will be detected by a professional association. Responses were coded as
'high likelihood' or iow likelihood' based on a median split.
Detection by Firm. Using a seven point scale, we measured partici-
pants' perception of the likelihood that violations will be detected by their
audit firms by their agreement with the statement that a severe sanction

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44 Business and Professional Ethics Journal

will be detected by the audit partner. Responses were coded as 'high like-
lihood' or 'low likelihood' based on a median split.
Professional Internalization. Participants' level of internalization of
professional standards was measured by the extent to which participants
agreed with the statement that the behavior described in the scenario de-
parts from professional codes (1= strongly disagree, 7 = strongly agree).
The first question asked respondents for a professional assessment of the
passing of a former client's audit files to a new audit firm. The second
question asked for a professional assessment of a partner moving an audi-
tor off a client's case based upon a technical disagreement.

Dependent Variables
Auditor Professionalism. Auditor professionalism was operationalized as
judgment that aligns with professional standards. In our experiment, par-
ticipants were presented with two different scenarios involving a conflict
between the interests of their own audit firm and professional standards.
Professionalism was measured by the degree to which respondents chose
behaviors that upheld the profession's standards.
In Scenario 1 , participants were asked to imagine that they are an audi-
tor whose client fails to provide payment for audit services and fires them
without paying his bills. The successor auditor requests the client files. Pro-
fessional standards require that the predecessor auditor respond promptly and
fully when contacted by the successor auditor (AICPA 1998, AU 315.10).
Professionalism was measured by asking participants how likely they are to
provide the files in this situation (1 =very unlikely, 7= very likely).
In Scenario 2, participants took the role of a partner in an audit firm
whose biggest client complains about an auditor who disagrees with the
client on a technical issue. This scenario reflects the findings of previous
research that auditor professionalism may be compromised by a domi-
nant client, the loss of whom would impact negatively the audit firm (e.g.,
Johnstone et al. 2001; Turner et al. 2008). Professionalism was measured
by asking participants whether they would move the auditor from this cli-
ent's account (1 =very unlikely, 7= very likely). Answers to this question
were reverse-coded, so that higher numbers correspond to higher levels of
professionalism.

Results

We conduct our statistical analyses using the combined sample of practicing

auditors and future auditors. We include the indicator variable Practicing

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 Auditor Professionalism 45

Auditor in our model (1 for practicing auditors, 0 otherwise), in order to

control for possible differences in professional behavior between practic-
ing auditors and future auditors. The effect of this variable is insignificant
in both Scenario 1 (F = 1 .82, p = 0. 1 83) and Scenario 2 (F = 2.70, p = 0. 1 05).

Descriptive Statistics
Descriptive statistics for auditor professionalism are shown in Table 1 .
Panel A shows descriptive statistics for Scenario 1 , and Panel В shows
descriptive statistics for Scenario 2. The means for professional behav-
ior move in the predicted directions across both scenarios. Means are
higher when auditors assess a higher likelihood that violations will be
detected by professional bodies (4.82 vs. 3.65 in Scenario 1, and 5.76
vs. 4.88 in Scenario 2). Means are lower when auditors assess a higher
likelihood that professional violations favoring their own audit firms will
be detected by the firm (4.25 vs. 4.54 in Scenario 1, and 5.00 vs. 5.89 in
Scenario 2). Finally, we note that in both scenarios, professional behavior
is at its lowest level (2.58 for Scenario 1, and 4.00 for Scenario 2) when
auditors believe that professional violations favoring the interests of their
own audit firm are likely to be discovered by the firm itself but not by
the profession.

Table 1. Descriptive Statistics For Auditor Professionalism3

Panel A. Scenario 1

JfliiilH
LOW Detection by Firm 4.57 2.31 14
LOWDetection HIGH Detection by Firm 2.58 1.83 12
by Profession
Total 3.65 2.30 26

LOW Detection by Firm 4.52 2.56 21

HIGH Detection HIGH Detection by Firm 5 08 , 98 24
by Profession
Total 4.82 2.26 45

LOW Detection by Firm 4.54 2.43 35

Total HIGH Detection by Firm 4.25 2.25 36

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46 Business and Professional Ethics Journal

Table 1 (continued). Descriptive Statistics For Auditor Professionalism3

Panel B. Scenario 2

** Std. m*
Mean ~** ~ Deviation
Deviation ^ ^ m* N

LOW Detection by Firm 5.64 1.28 14

LOW Detection HIGH Detection by Firm 4.00 1.48 12
by Profession

Total 4. HS 1.5 H 26

LOW Detection by Firm 6.05 1.07 21

HIGH Detection hjqj-j DeteCtion by Firm 5.50 1.18 24
by Profession
Total 5.76 1.15 45

LOW Detection by Firm 5.89 1.16 35

Total HIGH Detection by Firm 5.00 1.45 36
Total 5.44 1.3H 71

Hypothesis Testing
Hypothesis 1 predicted a positive relationship between auditor percep-
tions that professional violations will be detected by professional bodies
and professional behavior. Table 2, Panel A shows the model test for Sce-
nario 1. Table 3, Panel A shows the model test for Scenario 2. Hypothesis
1 is marginally supported in Scenario 1 (F = 2.57, p= 0.057), and support-
ed in Scenario 2 (F = 7.77, p= 0.003).

Table 2. Scenario 1
Panel A. ANOVA For Auditor Professionalism4

Detection by Profession 1 10.72 2.57 0.057

Detection by Firm 1 10.80 2.59 0.056
Profession X Firm 1 18.49 4.43 0.020

Professional Internalization 1 53.02 12.70 0.000

Practicing Auditor 1 7.58 1.82 0.1 83

Error 65 4.17

Model

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 Auditor Professionalism 47

Panel В. Planned Contrast to test Hypothesis 36

^ P LP.LF ^ № HP, H F V HP.LF

MLRHF< ^

Hypothesis 2 predicted a negative relationship between auditor be-

liefs that professional violations will be detected by the auditors' own au-
dit firm and professional behavior. Table 2, Panel A shows that Hypoth-
esis 2 is marginally supported in Scenario 1 (F = 2.59, p = 0.056). Table 3,
Panel A shows that Hypothesis 2 is supported in Scenario 2 (F= 15.49,
p = 0.000). We therefore observe partial support for Hypothesis 2.

Table 3. Scenario 2
Panel A. ANOVA for Auditor Professionalism7

Detection by Profession 1 11.16 7.77 0.003

Detection by Firm 1 22.24 15.49 0.000
Profession X Firm 1 4.37 3.04 0.043

Professional Internalization 1 4.58 3.19 0.039

Practicing Auditor 1 3.87 2.70 0.105

Error 65 1 .44

Model

Panel B. Planned Contrast to test Hypothesis 39

žÉy-
V LP.LF + № H PH F P HP.LF

LP.HF

Hypothesis 3 predicted that professional behavior will be at its low-

est level when auditors perceive a low likelihood that violations favor-
ing their firm's interests will be detected by professional bodies but a
high likelihood that such behavior will be known to the audit firm itself.

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48 Business and Professional Ethics Journal

We test this hypothesis using planned contrasts. Table 2, Panel A shows

that professional behavior is lowest in the predicted cell for Scenario 1
(t=3.15, p = 0.001). Table 2, Panel В shows that professional behavior
is lowest in this cell for Scenario 2 (t= 3.91 , p = 0.000). Hypothesis 3 is
therefore supported.
We observe a significant interaction between auditors' beliefs that
violations will be discovered by professional bodies and beliefs that vio-
lations will be discovered by their own firms. This interaction is in effect
both in Scenario 1, as shown in Panel A of Table 2 (F=4.43, p = 0.020),
and in Scenario 2, as shown in Panel A of Table 3 (F= 3.04, p= 0.043).
Hypothesis 4 predicted that the level of internalization of profession-
al standards will be positively related to professional behavior. Panel A of
Table 2 shows that professional internalization is significant in Scenario
1 (F= 12.70, p=0.000). Panel A of Table 3 shows a significant effect of
professional internalization in Scenario 2 (F = 3.19, p = 0.039). Hypothesis
4 is therefore supported.

Discussion

Extant research has highlighted the importance of understanding the

factors that enhance, or impede, auditor professionalism (e.g., Bamber
and Iyer 2002; Libby and Thorne 2007; Moore et al. 2006; Nelson 2006).
This research has suggested the importance of recognizing that auditors
are members of groups with conflicting interests, such as audit firms and
the audit profession. Researchers have suggested that auditor profession-
alism is jeopardized in situations of organizational-professional conflict
(Brierley and Cowton 2000), and have found that formal sanctions act as
deterrents to professional violations (Hwang and Schneider 1996; Shafer
et al. 1999). Missing from this literature is empirical research that captures
the effects of professional violation detection and professional standard
internalization on professional behaviors.
We grounded our research in social learning theory (Bandura 1977,
1 986) which stresses the importance of modeling, retention and reinforce-
ments in predicting behavior. As Ashkanasy et al. (2006) point out, this
process of social learning is based on anticipatory reflection, and is partic-
ularly applicable to unethical behavior in organizations. Given the profes-
sion's role in modeling, education and reinforcing professional behavior,
we would expect auditor behavior to follow professional standards. In this
paper, we have provided evidence of factors that may disrupt this pro-
cess. In line with social learning theory, we find that low internalization

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 Auditor Professionalism 49

of professional standards can negatively affect professional behavior. Our

second finding encompasses an aspect of the workplace not fully captured
by social learning theory, which is the detection in a multi-organizational
setting. More specifically, perceptions that professional violations will be
detected by auditing firms rather than professional bodies appear to have
a countervailing effect on professional behavior. In this section, we con-
sider the importance of these two findings relative to the existing literature
and present future avenues for research.
At first glance, one may assume that professional bodies, which
have the ability to revoke professional designations, have the most ef-
fective means of reinforcing desired behaviors. In a study of auditors,
Peytcheva and Warren (2011) found that the strongest professional sanc-
tions - revocation and suspension of licenses - were perceived as the
most severe of all sanctions experienced by auditors, including those of
auditing firm. The difficulty arises in the detection of the violations asso-
ciated with these sanctions. Individuals vary in their perceptions of who is
most likely to detect violations and these perceptions have very important
consequences for predicting professional behavior. We find that profes-
sionalism is at its lowest level when auditors believe both the likelihood
of detection by the profession to be low and the likelihood of detection by
the firm to be high.
In light of research on the moral reasoning of upper management
at audit firms, these findings are not surprising. Using a sample of CPAs
from different firms, Ponemon (1990) measured cognitive moral develop-
ment of auditors at varying hierarchical levels and found an association
between auditors' hierarchical position in their firm and their capacity for
ethical reasoning. More specifically, the capacity for ethical reasoning is
lower for auditors at higher hierarchical levels. In a later study, Ponemon
(1992) explored selection-socialization in accounting, and corroborated
the previously documented results, using cross-sectional, longitudinal,
and experimental methodologies. Results from that study confirm the ex-
istence of socialization in audit firms, whereby those progressing to higher
hierarchical levels have both lower and more homogeneous levels of ethi-
cal reasoning (Ponemon 1992). Considering these results, it is possible
that lower-level auditors assume that if a professional violation is detected
by the audit firm's higher ranked managers, they will not report the viola-
tion to the professional bodies. Furthermore, if auditors are following the
directives of the higher-ranked individuals within the audit firm instead of
professional standards, then the auditors may be misguided by those who
demonstrate lower levels of moral reasoning. Our findings coupled with

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50 Business and Professional Ethics Journal

Ponemon's results have implications about the effectiveness of profes-

sional sanctions as deterrents to professional violations. If auditors believe
higher ranked individuals within the audit firm are most likely to detect
professional violations and these individuals demonstrate lower levels of
moral reasoning, then lose their preventative strength.
Our study is subject to several limitations, in addition to the limita-
tions common to all survey research. First, we observe only partial support
for our hypotheses. This partial support may be driven by our small sample
size or by differences in the scenarios used in the study. Future research
may explore how different real-life scenarios impact auditor professional-
ism. Further, the fact that our study employs graduate students in addi-
tion to CPAs as respondents may limit the generalizability of our results.
Despite our attempt to control for potential differences between practicing
auditors and students in our statistical tests, the lack of significant differ-
ences between auditors and students in our study may be partially driven
by the relatively small sample size. Although researchers have observed
that students may be used in the absence of a theory specifically predict-
ing interactions between the variables of interest and respondents' level
of experience (e.g., Liyanarachchi and Milne 2005; Liyanarachchi 2007;
Peecher and Solomon 2001), further research could shed light on potential
differences in the way internalizing professional sanction and perceptions
of violation detection affect auditors with different levels of experience.
Also, future research is needed to determine whether these findings gener-
alize to different professional scenarios and contexts.
It is important to emphasize that although our research focused on
sanctions imposed by the audit profession, we do not examine sanctions
imposed by regulators, such as the SEC or the PCAOB because they did
not surface in our initial interviews conducted with practicing auditors
when we began this research program. SEC sanctions, however, may be
effective deterrents of unprofessional behavior in the post-Sarbanes-Oxley
environment. Future studies should examine the differential impact of
regulator-imposed sanctions, as compared to professional sanctions, on
auditor behavior, and to examine the interactive effect of such sanctions
with auditor perceptions of the likelihood that audit firms would detect
violations leading to such sanctions.
Because of the potential conflict between audit firm profitability and
professional standards, we encourage future research on the effects of vio-
lation detection processes of the professional bodies. A field study that
examines the most common patterns in detection of professional viola-
tions would provide important information on how to promote detection

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 A uditor Professionalism 5 1

as well as identify barriers to detection. For instance, if violations are

rarely detected through reporting by audit firms then the perceptions of
the participants in our study are warranted and remedies should be consid-
ered. One approach to promoting reporting by the audit firms is to provide
incentives for cooperation by accounting firms and possibly sanctions for
not reporting professional violations by other auditors.
It is possible that the audit firms do indeed work in conjunction with
professional bodies to detect and sanction professional violations, and that
the perceptions of our study population do not reflect the realities of these
partnerships. This is an empirical question that can be answered with a
study similar to the one just mentioned. If a strong partnership exists be-
tween the audit firms and professional bodies, then the findings should be
widely disseminated because our study findings suggest altering percep-
tions of the partnership between audit firms and professional bodies can
promote professional behavior.
In addition, retention of professional standards is a critical aspect of
the process and cannot be underappreciated. No set of sanctions will be
effective if the auditors do not internalize the standards of the profession.
Unfortunately, the set of professional standards is large, complex and con-
stantly growing (Montagna 1968). One approach to achieving internaliza-
tion of professional standards is to keep auditors focused on professional
role models who demonstrate the application of professional standards
and, in turn, positively affect retention of professional standards. If audi-
tors have difficulty retaining the information, they will at least turn first to
the professional bodies for guidance. In a similar vein, Warren and Alzóla
(2009) recommend promoting the saliency of the professional identity
through emphasis on the profession's traditional image, which empha-
sized community and knowledge, in order to ensure auditor professional-
ism. In alignment with this perspective, Wagner (1965, 605) states, "our
task is to enhance the prestige and effectiveness of professional judgment
in order to achieve greater objectivity."

Conclusion

Auditor professionalism, namely objectivity, is an issue that lies at the

center of our financial system; without a strong belief in the integrity of
public financial reporting, our financial system would crumble. Thus, we
have taken first steps in identifying two critical issues in maintaining au-
ditor professionalism and provided guidance for further research. In this
paper, we provided findings that support the importance of internalization

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52 Business and Professional Ethics Journal

of professional standards and perceptions of professional violations detec-

tion to displays of auditor professionalism.

Endnotes

We thank Danielle Lombardi and Sean Quach for research assistance.

This research was funded by grants from the Research Resource Commit-
tee of Rutgers Business School - Newark and New Brunswick, and the
Prudential Business Ethics Center.
1. This study is conducted in the period before the enactment of
Sarbanes-Oxley (2002), and while it suggests that not all violations are
likely to be reported in that environment, it is not clear that the propor-
tion of unreported violations can be generalized to a post-Sarbanes-Oxley
environment.
2. The scenarios were developed from interviews with a sample of
senior auditors, audit managers, an audit partner and academics with prior
audit experience. The suggestions of these professionals were incorporat-
ed into the study. The survey instrument was pre-tested with a sample of
upper-level accounting students to ensure clarity of the survey questions.
3. In Scenario 1, auditor professionalism was measured by partici-
pants' answers to the questions "How likely are you to provide the files,"
recorded on a 7-point Likert scale (l=very unlikely, 7= very likely).
Higher values indicate greater professionalism. In Scenario 2, profession-
alism was measured by the answers to the question "How likely are you
to move the auditor," recorded on a 7-point Likert scale (1 = very unlikely,
7= very likely). This variable was reverse-coded so that higher values in-
dicate greater professionalism.
4. Auditor professionalism was measured by participants' answers
to the questions "How likely are you to provide the files," recorded on
a 7-point Likert scale (l=very unlikely, 7= very likely). Higher values
indicate greater professionalism.
5. We report one-tailed p-values when the results meet directional
predictions and two-tailed p-values otherwise.
6. jj, represents the cell mean for the perceived likelihood (H = high,
L=low) of violation detection by the respective constituency (P= profes-
sion, F = auditor's firm).
7. Auditor professionalism was measured by participants' answers
to the question "How likely are you to move the auditor," recorded on a
7-point Likert scale (1 =very unlikely, 7= very likely). This variable was
reverse-coded so that higher values indicate greater professionalism.

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 Auditor Professionalism 53

8. We report one-tailed p- values when the results meet directional

predictions and two-tailed p-values otherwise.
9. Represents the cell mean for the perceived likelihood (H = high,
L=low) of violation detection by the respective constituency (P= profes-
sion, F = auditor's firm).

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