Do Auditing and Reporting Standards Affect Firms’ Ethical Behaviours? The Moderating Role of National Culture

Journal of Business Ethics, Feb 2015

This paper aims to examine the impact of national cultural values on the relation between auditing and reporting standards and ethical behaviours of firms. Based on a regression analysis using data regarding 54 countries between the years 2007 and 2012, we found that the impact of the perceived strength of auditing and reporting standards on the perceived ethical behaviours of firms is accentuated when a society is characterized by low power distance and in-group collectivism, and high institutional collectivism, future orientation and uncertainty avoidance. Empirically, the study addresses a gap in the literature by highlighting the influence of national culture on the effectiveness of legal settings and regulations on ethical behaviours.

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Do Auditing and Reporting Standards Affect Firms’ Ethical Behaviours? The Moderating Role of National Culture

Do Auditing and Reporting Standards Affect Firms' Ethical Behaviours? The Moderating Role of National Culture Yasemin Zengin Karaibrahimoglu 0 1 Burcu Guneri Cangarli 0 1 0 B. Guneri Cangarli Faculty of Business, Izmir University of Economics , Sakarya Cad. No: 156 Balcova, Izmir 35330 , Turkey 1 Y. Zengin Karaibrahimoglu (&) Faculty of Economics and Business , Accounting , University of Groningen , Nettelbosje 2, 9747 AE Groningen , The Netherlands This paper aims to examine the impact of national cultural values on the relation between auditing and reporting standards and ethical behaviours of firms. Based on a regression analysis using data regarding 54 countries between the years 2007 and 2012, we found that the impact of the perceived strength of auditing and reporting standards on the perceived ethical behaviours of firms is accentuated when a society is characterized by low power distance and ingroup collectivism, and high institutional collectivism, future orientation and uncertainty avoidance. Empirically, the study addresses a gap in the literature by highlighting the influence of national culture on the effectiveness of legal settings and regulations on ethical behaviours. Ethical behaviour; Strength of auditing and reporting standards; Culture; GLOBE - The corporate scandals emerging during the last two decades have increased the amount of attention given to the ethical behaviours of firms (EBF). All around the world, civic organizations, as well as public and private institutions are facing the challenge of how to improve EBF. For this purpose, in recent years, forums and panels have been organized in many different jurisdictions (e.g., Global Ethics Forum, European Business Ethics Forum) and ethical codes of conducts have been developed by different professions and corporations (e.g., IFAC for professional accountants, APA for psychologists; and Code of Conduct or Ethics for companies such as Amazon, Apple, and Coca Cola). New regulations have also been set (e.g., the use of corporate governance principles for corporations, the introduction of international auditing and reporting standards). The ultimate aim of these efforts is to enhance EBF through the clarification of ethical values and increasing public interest in ethics, which is considered to be an important driver of the economy (Garrison et al. 2008). We follow Sims (1992, p. 506) and define ethical behaviour as behaviour which is morally accepted as good and right as opposed to bad or wrong in a particular setting. Previous research shows that in addition to company-specific (micro) factors, such as personal and organizational values, EBF are also strongly affected by country-specific (macro) factors, including social, cultural, legal, political and institutional environments (Bartels 1967; Ekici and Onsel 2013; Vitell et al. 1993). As a legal and institutional determinant, corporate governance is seen as a vital mechanism for the prevention of unethical corporate behaviours (Carcello 2009; Felo 2011). Corporate governance is a broad concept that surrounds all internal (company-specific) and external (country-specific) mechanisms with a role in monitoring management to protect all stakeholders rights (GarcaOsma 2006). From this point of view, all capital market regulationsincluding political, legal and institutional settingsthat aim to enhance the quality of auditing and financial reporting are closely associated with strong corporate governance (Karaibrahimoglu 2010). Stronger auditing and reporting standards are assumed to provide more reliable information (Boolaky and OLeary 2012), and consequently improve EBF. However, ethics can be affected by many contextual factors, and improving the quality of legal and institutional settings alone may not be sufficient to enhance EBF. In fact, ethical values, attitudes and behaviours evolve under the influence of culture (Hunt and Vitell 1992; Scholtens and Dam 2007). Culture, defined as the collective programming of the mind (Hofstede 2001, p. 9), affects various stepsfrom awareness to behaviourin ethical conduct (e.g., Alas 2006; Dubinsky et al. 1991). Accordingly, in the business ethics literature, cultural differences are perceived as the main indicators explaining variation in practices in economic or entrepreneurial activities (Alderson and Kakabadse 1994; Becker and Fritzsche 1987; Bodley 2005; Hawkins 1993; Kaptein 2004; Karnes et al. 1989; Langlois and Schlegelmilch 1990; Mensah 2013; Schultz et al. 1993). Although there are a small number of universally accepted ethical values, such as honesty or loyalty, their practical interpretations in business can vary across cultures (Smith and Hume 2005; Vitell et al. 1993). Therefore, it can be argued that the practical implementation of international auditing and reporting standards, and hence their impact on EBF can be affected by the cultural context. Although the recent literature on standards stresses the importance of cultu (...truncated)


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Yasemin Zengin Karaibrahimoglu, Burcu Guneri Cangarli. Do Auditing and Reporting Standards Affect Firms’ Ethical Behaviours? The Moderating Role of National Culture, Journal of Business Ethics, 2016, pp. 55-75, Volume 139, Issue 1, DOI: 10.1007/s10551-015-2571-y