Ethical decision making of auditors in Thailand: effects on professional image, audit trustworthiness, and customer commitment.

• Author: Pornpundejwittaya, Pairat

1. INTRODUCTION

   Over the last few decades, globalization and internationalization have emerged worldwide and continued to have a growing impact on several aspects of society most particularly on business organization and practices. The process of globalization entails integration of economic, technological, socio-cultural and political forces which have changed the world permanently, for both better and worse. In the midst of this complex integration of various forces, a new social system dominates many countries in Europe, America and in Asia. This social system known as "Capitalism" drives the production of goods and services for a profit and makes the market highly competitive. Nevertheless, of course, the profit motive is not a choice but something that is imposed on capitalists as a condition for not losing their investments/businesses and their position as capitalists. Competition with the other capitalists forces them to reinvest as much as their profits as they can afford to keep their means and methods of production up to date. However, there are two main problems involved in businesses that are generally caused by principles and agents. One is an agency problem that can be sub-divided into moral hazard and adverse selection, and another is a problem of risk sharing. To evade experiencing these predicaments, it is essential to engage an auditor who is an independent qualified accountant to examine and review the business accounts and judge the accuracy of the financial statements prepared by the organizational staff.

   As mentioned above, moral hazard is one of the factors causing agency problems. Take the case of Enron Corporation as prominent evidence, only months before Enron's bankruptcy filling in December 2001, the firm was widely regarded as the 7th largest company in the USA and one of the most innovative, fastest growing, and best managed businesses in the country. Based on the report, the downfall of Enron was perpetuated by its key officials who were charged with securities fraud, lying about Enron's financial health through manipulation of publicly reported financial reports filed with the Securities and Exchange Commission (SEC). Enron in its report misstated revenues and earnings and keep hundreds of millions of dollars in debts off its books. With the swift collapse, it raises financial oversight issues and the auditors' ethics is put on the line for the accounting and auditing failures.

   WorldCom also suffers the same fate as Enron. The company took the telecom industry by storm when it began in 1990 and by 2001, WorldCom owned one-third of all data cables in the United States. In addition, they were the second-largest long distance carrier in 1998 and 2002. However, the company was confronted with specific financial predicaments that put immense pressure on its officials to project a healthy financial standing at all times resulting to massive accounting and auditing frauds that led to its eventual bankruptcy. By analysis, the main causes of fraud were a) presenting over accounts of cash flow and; b) hiding huge amount of director's loan, both amounting to approximately 3,000 and 400 million dollars respectively. Both Enron and WorldCom were audited by Arthur Andersen. As a consequence of these horrendous financial debacle, the audit company was seriously affected and the public became critical of the auditing practice and the accounting professional because of the auditors failure to exercise due diligence that contributed to the eventual downfall of both companies.

   The accounting and auditing failures are contributory factors in the business insolvency, as experienced by WorldCom. The company had deviated from accounting principles resulting in an overstatement of its revenues and profits and even worse had lent over 300 million dollars to its CEO to cover loans that the former took to buy the shares without declaring in the company's finance report (balance sheet). These two bankruptcy cases also occurred in Thailand during the "TomYum Kung Crisis" in 1997. At that time, 56 Thai financial institutions lost approximately over 60 thousands million baht and eventually declared bankruptcy. Society was puzzled and asked questions as to whether the root cause of the problems was particularly about those two issues mentioned above which stemmed from the ethics of the executives and the auditors of the audit firms. Did their interest in preserving their income cloud their judgment? Anderson, the audit firm of Enron, WorldCom, and some Thai business, was one of the "Big Five" large international accounting firms. Its demise left only four big international accounting firms (now called the "Big Four") consisting of PriceWaterhouseCoopers, Deloitte & Touche, Ernst & Young, and KPMG. From this major financial debacle, it is clear to opine that professional reform for restoring the societal confidence in ethical decision of auditors is indispensable.

   In prior researches, there were topics on descriptive professional of ethical decision making. Many researches examined the influence of individual and organizational factors that influence ethical decision-making (Loe et al., 2000). Individual factors have been identified by age (Shafer, Morris, and Ketchand, 2001; and Sankaran and Bui, 2003), cognitive moral development/ethical judgment (Ryan, 2001; and Shapeero, Koh, and Killough, 2003), gender (Cohen, Pant, and Sharp, 2001; Abdolmohammadi, Read, and Scarbrough, 2003; Shu-Hui Su, 2006), locus of control (Shapeero, Koh, and Killough, 2003), and level of education (Cohen, Pant, and Sharp, 2001; and Kevin M. Misiewicz, 2007). Organizational factors have been identified including codes of ethics (Douglas, Davidson, and Schwartz, 2001), ethical climate/culture (Douglas, Davidson, and Schwartz, 2001), industry type (Shafer, Morris, and Ketchand, 2001), organizational size (Shafer, Morris, and Ketchand, 2001), job context variables (McDevitt and Van Hise 2002), organizational culture (Jones and Hiltebeitel, 1995), and environmental influences (McDevitt and Van Hise 2002).

   Kohlberg's theory of cognitive moral development has been adopted widely in many researches, especially on ethical decision-making of research. Rest (1986) develops his researches from the work of Lawrence Kohlberg (1969, 1980) which the summary of findings is associated with Kohlberg's theory. Further, Rest's outcome was an original framework of the ethical decision making and is frequently cited in many works involving the four basic components: awareness (recognize the moral issue), judgment (make a moral judgment), intent (establish moral intent by resolving to place moral concerns ahead of other concerns), and behavior or action (act on the moral concerns). Prior researches find that ethical behavior plays a major influence in quality, including positive correlation with customer satisfaction, trust and commitment. In addition, more customer satisfaction and trust are associated with more customer commitment (Sergio Roman and Salvador Ruiz, 2005). This study investigates consequences of ethical decision making, that component with professional image, audit trustworthiness, and customer commitment. Brand loyalty is commitment to a certain brand. In some cases, loyalty and commitment have indeed been used interchangeably. This would suggest that when the focus of commitment is predominantly the brand, commitment and brand loyalty become synonymous. And, this study defines "customer commitment" as loyalty of clients to continued auditors' performance. The prior consequences are loss of customer trust and employee turnover as reflected on the Enron and WorldCom case. These facts compel Congress to enact new rules such as the passage of the 2002 Sarbanes-Oxley legislation in an effort to alter certain ethical standards of accounting and auditing practices. Thus, the first objective of this study is to examine the effects of ethical decision making on professional image and audit trustworthiness. Then, the second objective of this study is to investigate the effect of professional image on audit trustworthiness. Further, the third objective of this study is to examine the effects of professional image and audit trustworthiness on customer commitment.

   There was a growing belief that organizations were social actors responsible for ethical or unethical behaviors of auditors. Bommer et al. (1987) suggested that environment among professional, personal, work and government has an effect on ethical decision process. Moral reasoning of auditors is affected by professional expectations (Jones and Hiltebeitel, 1995). Frankel (1989) suggested that ethical behavior relationship could improve social expectations (Brooks, 1989) which are more than business expectations (Jamal and Bowie, 1995). Thus, the finally objective of this study is to investigate the effect of professional environment (legitimacy requirements, desires of stakeholders), and social expectation (integrity and objectivity and professional competence) on ethical decision making.

   Taken together, this study assays to address four main inquiries. Firstly, how does ethical decision making affect professional image and audit trustworthiness? Secondly, how does professional image influence audit trustworthiness? Thirdly, how do professional image and audit trustworthiness influence customer commitment? Finally, how do types of professional environment and social expectation affect ethical decision making of auditors?

   This study is structured as follows: Section1 provides an overview of the study. Section2 reviews the literature pertaining to the major constructs in this study and details the conceptual model and the development of hypotheses. Section3 outlines the research method including the operationalization of concepts, the design, the development of survey instrument, and the data collection procedures. Section4 presents data analysis procedures and the findings of...