Ethics, Equity, and Regulation: Volume 15

The results of recent research suggest that certain provisions of the Sarbanes–Oxley Act of 2002 (SOX) may have been less successful than intended (e.g., Abbott, Parker, & Peters, 2009). Based on two different descriptions of economic bonding between auditors and their clients, we propose an explanation of why this might be so by showing that the effect of SOX mandates, and regulation in general, aimed at enhancing auditor independence is dependent on whether shareholders or managers monitor the auditor. The results of prior empirical studies are examined in context of the framework we describe, and suggestions for future research on this important topic are outlined.

This chapter reports on the findings of the fourth wave of a longitudinal study of the image of accountants regarding perceptions of their instrumental and expressive traits. The four waves were conducted in 1972, 1982, 1992, and 2002. The images germane to this research were those reflected in the “looking glass” of undergraduate students, a relevant peer group of those potentially contemplating entry into the accounting profession. The accountant's stereotype has been blamed for harming the ability of the profession to attract individuals with excellent human relations and communications skills. The negative image originated when accounting was a male-dominated endeavor. Gender typing is important in forming impressions of vocational choices. Thus, this study investigates the manner in which the accountant's image has evolved as its gender composition has become balanced. My focus is on comparing the 2002 wave with the 1972 and 1992 waves. The latter comparison covers the period of the “Enron era” scandals.

The premise for this research is quite simple: Is what one sees/hears a reasonably accurate reflection of reality? When it comes to the reputation companies have with regard to sustainable development, we propose that, as Cervantes had Don Quixote say, “the proof of the pudding is in the eating.”

This study is about the actual relationship between company environmental performance – in this case, relative amounts of toxic chemical releases – and third-party judgments regarding company reputation for sustainability. Our particular concern is this: Are companies that are touted as high achievers regarding sustainable development the best relative performers in their industry with respect to guarding the environment?

We studied 52 Fortune 500 companies with U.S. operations that were cited in at least one of three major international reputational listings as being high achievers for sustainable development. Matched to these highly reputable firms – based on industrial classification and size – were a similar number of firms that had not been given a “good reputation” recognition.

We find no significant difference between the firms that are reported to be engaged in best practices with respect to sustainable development and those that have no such public recognition. The 52 sample companies and their matches from the Fortune 500 population are indistinguishable with respect to environmental performance. As performance does not differ, we are led to the conclusion that perception and reality do.

Standards for Accounting and Review Services (SSARS) Number (No.) 1, “Compilations and Review Services” (AICPA, 1979), provides guidance for public accountants associated with unaudited financial statements through compilations and reviews. SSARS No. 8, “Amendment to SSARS No. 1, Compilation and Review of Financial Statements” (2000), extends this guidance to plain paper statements. Unlike traditional compilations, plain paper statements are intended only for the use of informed members of management.

To examine the effects of SSARS No. 8, we surveyed practicing Certified Public Accountants (CPAs) and bank loan officers to measure their perceptions of what constitute “submitted financial statements,” “third parties,” “informed members of management,” and other key terms that aroused concerns described in SSARS No. 8 comment letters. We find that several years after the issuance of SSARS No. 8, CPAs, even those somewhat familiar with SSARS No. 8, and bankers who have experience with plain paper statements do not fully understand the definitions and applications of SSARS No. 8. In addition, several of the concerns cited in the statement's Exposure Draft (ED) comment letters linger. The results suggest the need to either better education plain paper statement users or revise the standards, perhaps prohibiting a CPA's association with plain paper statements. We also identify future research questions.

In late 2008, a crisis of unprecedented proportion unfolded on Wall Street that called for the government bailout of institutions. Although the crisis wreaked havoc on the lives of firm stakeholders and taxpayers, many of the executives of these rescued firms received bonus compensation as the year closed, which called into question the relationship between pay and performance. Equity compensation is viewed by many as the answer to the principal–agent dilemma. By giving an executive stock in the firm, as an owner, his interests will now be aligned with those of shareholders, and the executive will work to enhance firm performance. Equity compensation was on the rise during the 1990s when stock options became the largest component of executives’ compensation packages [Murphy, K. J. (1999). Executive compensation. Handbook of Labor Economics, 3, 2485–2563]. During the first decade of the new millennium, usage of restricted stock in compensation plans contributed to the executives’ total package. Whatever the form, equity compensation should induce managers to make decisions for the betterment of the firm.

Empirical evidence, however, has contradicted this ideal notion that mangers who are partial owners of the firm work to maximize firm value. Rather, managerial power in the form of earnings management and manipulation of insider information come to the forefront as a means by which executives can maximize the equity portion of their compensation packages. The Sarbanes–Oxley Act of 2002 as well as new accounting rules set forth by the Financial Accounting Standards Board may help to remedy some of the corporate ills that have surfaced in the past. This will not be possible, however, without compliance and increased corporate governance on the part of firms and their executives. Compensation committees must take great care in creating a compensation package that incites the executive to not only act in the best interest of his firm but also consider the welfare of the common good in his actions.

Ethics play an important role in society; however, many economics models assume that individual players act “economically” rational and ignore situations where an individual may forgo economic benefit for the public good. This chapter models the strategic interaction between auditors and management and allows for management to choose the economically irrational outcome of behaving ethically even when doing so defies their own financial self-interest. One of the model's assumption is that a certain percentage of managers do not engage in a “strategy” to misreport their financial statements because doing so is “unethical”. If recent accounting scandals are indicative of an ethical crisis in this country, this model offers hope because an increase in the percentage of unethical mangers leads to a decrease in fraudulent reporting. The model also illustrates the effects of an increase in the rewards for committing fraud (e.g., greater numbers of stock options, restricted stock, and accounting-based performance incentives) and an increase in the penalty for detected fraud (e.g., stiffer penalties for fraud from Sarbanes–Oxley).

Purpose – This chapter aims to identify stakeholder perceptions on the service performance accountability of Malaysian local authorities.

Design/methodology/approach – A questionnaire survey provides the primary source of information, and both descriptive and analytical methods are employed to support the analysis of the empirical findings.

Findings – The chapter shows that despite a strong interest amongst stakeholders for greater accountability of Malaysian local authorities, a standard definition and scope of accountability has not emerged. However, the findings do indicate a new bond of accountability emerging between local authorities and its broader public than previously existed.

Research limitations – The findings and discussion are limited to the propositions put forward in the questionnaire. Alternative research methods would complement the findings.

Originality/value – The findings contribute to our understanding of accountability as interpreted by key stakeholders of local authorities located within the context of a developing country. This could potentially assist Malaysian public sector administrators whereby, and arguably, enhancing the public accountability of local authorities may contribute to an improvement in the performance management of Malaysian local authorities.

There is ample evidence that many firms do not fully disclose environmental liabilities. Since it is likely that full disclosure of these liabilities may lead to greater accountability by a firm, it is important to identify factors related to the treatment and disclosure of these specific liabilities. This study reports on factors found to be related to the intentions of 263 financial executives to accrue and disclose environmental liabilities based on scenarios developed for this research. Using the Theory of Planned Behavior, we find that intentions to accrue and disclose environmental liabilities are positively related to an executive's attitudes, subjective norms, perceived behavioral control, and sense of obligation. We also provide evidence that the magnitude of the environmental and financial consequences has a positive, significant relation to these intentions and find that financial executives from privately held companies are less likely to accrue and disclose environmental liabilities than those from companies that are publicly traded. These findings suggest that encouraging positive attitudes toward environmental accruals and disclosures, enhancing the behavioral control of financial executives over the accrual decision, and heightening their moral obligation to disclosure these liabilities may lead to better accounting treatment and transparency of environmental matters.