Research on Professional Responsibility and Ethics in Accounting

Cynthia Jeffrey, Cynthia Jeffrey

• Publisher: Emerald Publishing Limited
• Year: 2018
• ISBN:
  9781787549746
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

Research on Professional Responsibility and Ethics in Accounting is devoted to publishing high-quality research and cases that focus on the professional responsibilities of accountants and how they deal with the ethical issues they face. The series features articles on a broad range of important and timely topics, including professionalism, social responsibility, corporate responsibility, ethical judgments, and accountability. The professional responsibilities of accountants are broad-based; they must serve clients and user groups whose needs, incentives, and goals may be in conflict. Further, accountants must interpret and apply codes of conduct, accounting and auditing principles, and securities regulations. Compliance with professional guidelines is judgment-based, and characteristics of the individual, the culture, and situation affect how these guidelines are interpreted and applied, as well as when they might be violated. Interactions between accountants, regulators, standard setters, and industries also have ethical components. Research into the nature of these interactions, resulting dilemmas, and how and why accountants resolve them is the focus of this journal.

SELF-FULFILLING PROPHECY? AN EXAMINATION OF EXPOSURE TO AGENCY THEORY AND UNETHICAL BEHAVIOR

M. Christian Mastilak, Linda Matuszewski, Fabienne Miller and Alexander Woods

ABSTRACT

Commentators have claimed that business schools encourage unethical behavior by using economic theory as a basis for education. We examine claims that exposure to agency theory acts as a self-fulfilling prophecy, reducing ethical behavior among business students. We experimentally test whether economics coursework or a manipulated competitive vs. cooperative frame affects measured ethical behavior in simulated decision settings. We measure ethical behavior using established tasks. We also measure ethical recognition to test whether agency theory reduces recognition of ethical issues. Exposure to agency theory in either prior classwork or the experiment increased wealth-increasing unethical behavior. We found no effect on unethical behavior that does not affect wealth. We found no effect of exposure to agency theory on ethical recognition. Usual laboratory experiment limitations apply. Future research can examine why agency theory reduces ethical behavior. Educators ought to consider unintended consequences of the language and assumptions of theories that underlie education. Students may assume descriptions of how people behave as prescriptions for how people ought to behave. This study contributes to the literature on economic education and ethics. We found no prior experimental studies of the effect of economics education on ethical behavior.

Keywords: Agency theory; experiment; wealth maximization; ethical behavior; unethical behavior; education

INTRODUCTION

Agency theory, the foundation for many economics, accounting, and finance courses taken by accounting and other business students, claims that agents and principals have differing preferences, and proposes that contracts can help align those goals (Eisenhardt, 1989). A criticism made of agency theory is that it assumes individuals who are motivated by self-interest act to maximize their own wealth, while generally ignoring or minimizing preferences for other values such as fairness and honesty (e.g., Cohen & Holder-Webb, 2006; Ferraro, Pfeffer, & Sutton, 2005).¹ Moreover, agency theory often uses language that minimizes ethical dimensions of actors’ behavior. For example, when maximizing wealth, economic actors do not “lie” or “steal”; rather, they act “opportunistically” and “pursue self-interest,” even if it means profit maximizing is associated with unethical behavior in which they knowingly misrepresent information or take what belongs to others.

It is not surprising, then, that researchers posit a link between the dominance of agency theory in business schools and unethical behavior among accountants and other business practitioners. These scholars suggest that agency theory’s description of behavior becomes a self-fulfilling prophecy, either by transforming assumptions into social norms or through the use of language (Ferraro et al., 2005; Ghoshal, 2005, Ghoshal & Moran, 1996; MacKenzie & Millo, 2003; Merton, 1948). That is, they claim that the repeated use of agency theory and its related language to describe managers’ behavior ends up prescribing the future behavior of students whose instruction was based on that language. For example, Ghoshal (2005) writes (p. 85): “Combine agency theory with transaction cost economics, add in standard versions of game theory and negotiation analysis, and the picture of the manager that emerges is one that is now very familiar in practice: the ruthlessly hard-driving, strictly top-down, command-and-control focused, shareholder-value-obsessed, win-at-any-cost business leader.”

Thus, these researchers claim that the use of agency theory in business education contributes at least to some degree to unethical behavior among business managers. Put another way, the claim by some accounting scholars is that business schools, which use agency theory as a foundation as they teach managers to maximize wealth, are encouraging those managers to focus on quantitative financial outcomes, with little regard for more qualitative outcomes, the effects of their decisions on others, or any other ethical concerns (Cohen & Holder-Webb, 2006). These bold claims deserve study.

Despite these claims and their implications for business education, we are aware of no experimental study that investigates whether exposure to agency theory contributes to unethical behavior. Existing research is generally nonexperimental, and thus is subject to confounds such as self-selection effects. For example, studies that find economics students to be less cooperative than noneconomics students cannot determine whether the economics students became less cooperative as they studied economics, or chose to study economics because it appealed to their previously existing uncooperative preferences (Frank, Gilovich, & Regan, 1993, 1996; Yezer, Goldfarb, & Poppen, 1996).

The present study seeks to address this gap and to directly test the claims by the above-cited scholars. To do so, we examine the effects of agency theory on ethical behavior in a laboratory experiment. Our experimental design reflects our expectation that all business majors must have a basic understanding of accounting concepts, and are likely to be involved in accounting decisions, and that accountants in business are likely to be involved in business decisions that may or may not be accounting related. Accordingly, our research participants are business students, and we examine ethical behavior in a variety of accounting-related and other business decisions. First, we manipulated exposure to agency theory by invoking a frame either consistent with agency theory’s assumptions or inconsistent with those assumptions (that is, a cooperative frame). We did this via a prisoner’s dilemma game, with loaded names and instructions (cf. Kay & Ross, 2003). We also measured prior economics coursework as a proxy for exposure to agency theory assumptions. We then measured participants’ recognition of ethical issues and their ethical behavior using scenarios and tasks that contained ethical dimensions. Our sample included only business students who are required to take economics coursework prior to graduation. Thus, all of our participants have self-selected into a discipline that requires them to take economics courses, and we have no issues with self-selection effects. We predicted that participants who have been exposed to agency theory assumptions (either in the frame treatment or through prior coursework) would be more likely to act unethically than participants not so exposed with respect to decisions which directly affected their wealth. Further, to test critics’ claims that agency theory focuses individuals’ attentions on profit at the expense of moral concerns, we investigated whether decisions were associated with recognition of ethical issues.

Our results support the notion that agency theory can act as a self-fulfilling prophecy. As predicted, we found that participants exposed to the agency theory frame were more likely to act unethically than participants in the cooperative frame when they could benefit financially from such unethical behavior. We also found that, among those in the cooperative frame, participants who had taken prior economics coursework acted less ethically than participants who had not yet taken that coursework. Thus, prior exposure to agency theory assumptions, either by experimental manipulation or through prior economics coursework, resulted in less ethical behavior.

Consistent with agency theory’s primary assumptions that agents pursue self-interest by acting to maximize wealth, we found this unethical behavior only in the task that involved real financial gain for the participants. In decision scenarios where the unethical behavior did not have a direct effect on the wealth of participants, there was no difference in behavior between the two treatment groups. Finally, we found that differences in behavior among treatment groups did not result from differences in the recognition of ethical issues.

Thus, we conclude that the self-fulfilling prophecy effect of the exposure to agency theory assumptions on ethical behavior is supported for the behaviors most closely tied to the assumption found in agency theory that individuals primarily have utility for wealth. Taken together, our findings are consistent with the claims of those scholars who suggest that agency theory acts as a self-fulfilling prophecy (Cohen & Holder-Webb, 2006; Ferraro et al., 2005; Ghoshal, 2005; Ghoshal & Moran, 1996).

Evidence from this study will help educators better understand the link between the theories they teach and the behavior their students will exhibit as future business leaders. More evidence is certainly needed; however, it appears that educators can have a real – though unintended – effect on the behavior their students believe is appropriate for business managers.

The remainder of the chapter is structured as follows. The next section reviews the literature and then develops hypotheses. The following sections describe the experiment, the results, implications and conclusions, respectively.

LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

Social Science Theories as Self-Fulfilli...