Business Ethics Project III

International Journal of Business and Public Administration, Volume 12, Number 1, Summer 2015 1

THE IMPLEMENTATION OF INTERNATIONAL CODES OF ETHICS AMONG PROFESSIONAL ACCOUNTANTS: DO

NATIONAL CULTURAL DIFFERENCES MATTER?

Leonard Branson Lisa Chen

Lindsey Anderson University of Illinois Springfield

ABSTRACT

The development of business as a global phenomenon has increased the need for the

development of standardized accounting and auditing regulations and practice. An effective international accounting regulation includes a strong professional framework, compatible financial accounting reporting standards, high-quality auditing and assurance practice, unified professional ethics and adequate professional education and licensure. Prior research has examined the impact of cultural differences on the adoption of accounting codes of ethics. More countries are entering the global marketplace and are accepting international standards. This study updates prior research to include more countries than prior studies, and extends prior research to include an examination of professional accounting organizations’ continuing efforts to effectively implement international codes of ethics. The cultural dimensions of individualism and uncertainty avoidance in which a professional accounting organization operates help predict the adoption of an international accounting code of ethics.

Keywords: Accountants code of ethics, Hofstede’s cultural dimensions

INTRODUCTION

The global business environment requires standardization and harmonization of

accounting practice. Empirical evidence shows that international accounting regulation promotes financial development and stimulates economic growth worldwide (Akisik, 2013). Effective international accounting regulation includes a strong professional framework, compatible financial accounting reporting standards, high-quality auditing and assurance practice, unified professional ethics, adequate profession education and licensure.

International Federation of Accountants (IFAC) is a global non-profit, non-political, and non-governmental organization for accountancy professionals. Established in 1977, IFAC has grown to a membership of 179 professional accounting associations in 130 countries and jurisdictions, representing over 2.5 million accountants currently (IFAC, 2014).

IFAC (2014) regulates the operations of international accounting activities through the following independent standard-setting boards: International Auditor and Assurance Standards Board (IAASB) which sets International Standards on Auditing (ISAs) for auditing; International Accounting Education Standards Board (IAESB) which develops International Education Standards (IESs) for accounting education; International Ethics Standards Board for Accountants (IESBA) which promotes professional accountants with the international Code of Ethics; and International Public Sector Accounting Standards Board (IPSASB) which establishes International Public Sector Accounting Standards (IPSASs) for public sector accounting. This study focuses on the work of IFAC in the global convergence of standards in accounting professional ethics.

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The IFAC promotes full integration and collaboration of the accountancy profession around the world. Members and associations of IFAC must comply with the Statements of Membership Obligations (SMOs). There has been a trend toward harmonization and convergence of professional accounting standards internationally, especially the last several decades (Clements, Neill, & Stovall, 2009a, 2009b; Cohen, 1992; Roussey 2010; Zehri & Chouaibi, 2013). IFAC’s members and associations have been assessing the similarities and differences among the accounting education, competences, and qualifications required by the accounting profession (IFAC, 2013).

International Education Standards Revision Project (IAESB, 2012) concluded all 8 International Education Standards (IESs) should be revised and redrafted by the 4th quarter of 2013 and be effective for implementation for periods beginning on or after July 2014.

IPSASB (2013) reports that many international governmental organizations (such as Organization for Economic Co-operation and Development (OECD), North Atlantic Treaty Organization (NATO), International Criminal Police Organization (INTEROL), and the Council of Europe (CoE)) and national accounting associations (such as Austria, Spain, South Africa, and Switzerland) have completed the adoption and implementation of IPSASs. Data from IFAC’s Membership & Compliance Program (IFAC, 2013) indicates that countries such as Canada, China, Hungary, South Africa, New Zealand, and United Kingdom have completed the revision of their Standards of Audit in accordance with comprehensive convergence of a single set of high-quality global auditing standards and they have adopted international auditing standards subsequently.

Adoption and implementation of international code of ethics is a subarea of the globalization of the accounting profession. Under IESBA guidance and facilitation, many IFAC member bodies have adopted an international code of ethics or have planned to complete the adoption process in the near future (IFAC, 2013). Our empirical investigation found 80% of IFAC member organizations have accepted an international code of ethics which are being implemented within their jurisdictions currently. Prior research has examined the impact of cultural differences on the adoption of internal accounting codes of ethics (Bailey & Spicer, 2007; Clements, Neill, & Stovall, 2009b; Spalding & Oddo, 2011).

All IFAC members are required to participate in the IFAC’s Member Body Compliance Program (MBCP) and demonstrate that they are maintaining their good standing with the requirements of IFAC membership. There are three parts in MBCP. Part 1 requires a member to provide information in an assessment of the regulatory and standard-setting framework and Part 2 is a survey of the Statements of Membership Obligations (SMO). Specifically, members provide detailed information about how they attempt to meet the IFAC’s membership requirements. The data indicating whether or not the organization has adopted the IFAC Code of Ethics is included in Part 2. Part 3 is the Action Plan and a member needs to update it annually to explain how they are making progress toward or continue to uphold IIFAC’s requirements.

In order to become an IFAC member, a national accounting organization must provide information about the applicant’s history, legal status, operation, governance structure. In addition, they complete a survey including Part 1 and Part 2 which indicates whether or not the organization is in compliance with the program initially. After joining IFAC, a member needs to submit the Action Plan and update it every year. Prior research collected data from Part 2 in IFAC’s compliance program only. This study investigates the relationship between a country’s cultural dimensions and the implementation of the international code of ethics by an IFAC national accounting organization as indicated in their Action Plan in Part 3.

International Journal of Business and Public Administration, Volume 12, Number 1, Summer 2015 3

LITERATURE REVIEW

National Culture and Professional Ethics Each individual exhibits a unique personality as each of us inherits some physical and emotional traits through our parents’ genes. In addition to innate traits we are born with, we learn many other things through social interactions with societal members around us. National culture is to a specific society as personality is to a particular individual. The core values of culture are inherited in every society. The most widely used cultural framework in accounting research is that of Hofstede’s (1980) cultural values.

Culture is defined by Hofstede as “the collective programming of the mind which distinguishes the members of one human group from another” (Hofstede, 1980). The core element of national culture is “a broad tendency to prefer certain states of affairs over others” (Hofstede, 2001). Hofstede’s statements of national culture are consistent with Williams (1968) who contends that culture is a shared value. Hofstede (1980) investigated the work-related values in one of the world’s largest multinational organizations, International Business Machines Corporation (IBM). Through his extensive national values’ study of 116,000 questionnaires in more than 72 countries and in 20 languages, Hofstede developed his first and most influential cross cultural theory and identified four dimensions of national culture: Power Distance (PDI), Individualism versus Collectivism (IDV), Masculinity versus Femininity (MAS), and Uncertainty Avoidance (UAI).

From these dimensions, countries are given scores that identify if they have a high, medium or low score. The dimensions are measured on a scale from 0 to 100. However, some countries may have a score above 100 because they were assessed after the original scale was created. The scores for each country on the four dimensions represent variations in behaviors of people. The fifth cultural dimension, Long-Term Orientation (LTO) in the Chinese Value Survey, was added into the theory subsequently (Hofstede & Bond, 1988; Hofstede, Hofstede, & Minkov, 2010).

Vitell, Nwachukwu, and Barnes (1993) proposed their framework for the examination of cultural factors that could impede the ethical decision making of business practitioners. They depicted the relationships between cultural dimensions from Hofstede’s framework and ethical decision making of business practitioners in their testable propositions. It is important to note that although the propositions are not tested empirically in the study, their work provides a theoretical foundation on the impact of national cultural differences on adoption of professional ethical guidelines globally (Vitell, Nwachukwu, & Barnes, 1993).

Davis, Bernardi, and Bosco (2012) examined the last three decades of published articles in the Journal of Business Ethics and reported that approximately 84% of the articles published in Journal of Business Ethics used Hofstede’s cultural dimensions of uncertain avoidance and 16 % of studies used uncertainty avoidance as a research variable or to compute a variable.

Westerman, Beekun, Stedham, and Yamamura (2007) investigated antecedents to ethical decision making by using university business graduate students from three countries: Italy (n=45), Germany (n=47), and Japan (n=66). They found respondents from both Germany, low in power distance and individualistic, and Japan, moderately high in power distance and collectivistic, are less likely to use peers in ethical decision making. In contrast, Italian respondents, moderately high power distance and individualistic, are more likely to be influenced by peers in their ethical decision making (Westerman, Beekun, Stedham, & Yamamura, 2007).

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Accounting research from a national perspective identifies important differences between members of different cultural groups in their approaches to ethical decision making involved in the increasing globalization of industries and financial markets. International accounting literature provides empirical evidence of national culture on ethical responses. Smith and Hume (2005) conducted their research, using six countries and a survey approach, on the relationship between responses on ethical topics and the Hofstede’s dimensions of individualism and power distance. While the power distance hypothesis was not supported, the individualism hypothesis was supported by the research. Hume and Smith discovered that “accountants of individualistic (high IDV) societies are more likely to adhere to personal principles even if the results are detrimental to the organization. Accountants of collectivistic (low IDV) societies are more likely to subordinate individual values for those that benefit their organization” (Smith & Hume, 2005). This research supports that there are ethical belief differences among the various cultures worldwide.

Shu-Hui, Chen, and Hui-Ling. (2010) assessed the effect of national culture on ethical attitudes by using the university accounting students from Taiwan (n=286) and the United States (n=263). The results of the study indicated that there are significant differences in the responses to whistle-blowing dilemmas between the two national cultures. Consistent with the implication of Hofstede’s cultural dimensions of individualism, power distance, and uncertainty avoidance, their study showed that the students (Taiwan) from a more collectivist oriented society are more likely to cover for their superior/colleagues’ questionable activities than those from an individualistic oriented society (U.S).

Curtis, Conover, and Chui. (2012) surveyed 527 accounting students from diverse cultures of People of Republic of China (n=115), Japan (n=91), Mexico (n=121), and the United States (n=201) to examine the relationship between country of origin and ethical decision making. The results indicated that there is a significant relationship between the Power Distance Index of Hofstede’s cultural dimension and ethical decision among accounting students. This study also revealed that there is a significant association between country origin and gender in ethical decision making, but it is also context specific (Curtis, Conover, & Chui, 2012).

Adoption of IFAC Code of Ethics The literature review of contemporary business ethics research reveals that the most important research paradigm in business ethics focuses on examining the application of business ethics theory in an international context due to globalization of investment and financial markets (Donaldson, 1989; Donaldson & Dunfee, 1994; Ma, Liang, Yu, & Lee, 2012). This stream of research integrates both macro social and micro social contracts into their theory of ethics at the organizational level. These cross-culture studies provide evidence that the convergence of international code of ethics is plausible based on “hypernorms”. According to international business ethic researchers, hypernorms are those universal principles derived from the macro social contract and operate among members of national group cross cultural contexts (Bailey & Spicer, 2007; Donaldson & Dunfee, 1999; Ma et al., 2012; Spicer, Dunfee, & Bailey, 2004).

There is evidence that ethical diversity is related to cultural diversity. Based on Hofstede’s conceptualization of the cultural dimensions, Cohen (1992) suggested a framework of examining cultural and socioeconomic factors on the effect of acceptability of international codes of professional conduct. There is a growing body of literature providing support for their framework.

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International Federation of Accountants (IFAC) plays an important role in international accounting regulation. One of the major achievements in its global accounting policies is the harmonization and implementation of a unified code of ethics for accountants worldwide. The first version was published in 1990 and it was recommended for IFAC members to adopt, but it was not mandatory. Farrell and Cobbin (2001) surveyed 112 IFAC members and 36 non-IFAC national accounting associations, resulting in 61 completed and usable respondents in their sample. The survey revealed that 89% of respondents knew about the existence of the international code of ethics for accountants, 28% of national accounting associations claimed that they had adopted the international code in full, and another 36% of the organizations reported that they had adopted partially. Nearly 10% of respondents indicated that there are influences of culture difficulties which an accountant will be expected to give priority ahead of full independence and loyalty to an association.

It is important to note that although the study considered the influences of national cultural, the relationships between national culture and the adoption of a unified code of ethics was not tested empirically. Rather the presence or absence of cultural difficulties in adopting the fundamental principles contained in the international code of ethics was analyzed through self- reporting by participants (Farrell & Cobbin, 2001). Clements, Neill, and Stovall (2009a) analyzed the status of the adoption of the IFAC Code globally by using 158 IFAC national accounting organizations. They found 42 IFAC national accounting organizations had adopted the unified code of ethics and another 38 IFAC national accounting organizations had adopted the Code with modifications. Their investigation showed that 50.6% of IFAC members had adopted the international code of ethics as their own code of ethical conduct (Clements, Neill, & Stovall, 2009a).

In an attempt to investigate the association between national culture and the adoption of the IFAC Code within IFAC members, Clements, Neill, & Stovall, (2009b) employed Hofstede’s cultural dimensions and tested the impact of cultural differences on the convergence of international accounting codes of ethics empirically. Their study revealed that there is a significant negative relationship between the adoption of international code of ethics and national culture variables, suggesting that national accounting associations in high Individualism and Uncertainty Avoidance cultures are less likely to adopt the unified code of ethics and more likely to retain an organizational specified code of conduct (Clements, Neill, & Stovall, 2009b).

The data on the adoption decision in Clements, Neill, and Stovall (2009b) study was collected directly from the IFAC website. When an organization becomes a member of IFAC, they are required to complete a three part questionnaire. The second part of the questionnaire is a self-assessment that addresses various items such as, auditing and accounting standards, ethics, education and so forth. The study collected data on whether the sample IFAC member organizations adopted the IFAC code or not. However, IFAC members update their Statements of Membership Obligations (SMO) regularly through their Action Plan within IFAC’s compliance program.

The Action Plan is part of a continuous process within the IFAC Member Body Compliance Program to support the ongoing development and improvement of the accountancy profession around the world. It is incomplete if a study assesses the initial response at the time IFAC member completes the membership requirement only without examining SMO within an action plan. Many IFAC members did not report that they adopted or had the plan to adopt the Code when they became IFAC members initially, but they have subsequently made changes and adopted the IFAC Code after they joined IFAC.

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OBJECTIVES AND HYPOTHESES The theory and empirical literature described above imply that there is an association

between cultural dimensions and the adoption of international code of ethics. The primary objective of our study is to investigate the relationship between a country’s cultural dimensions and the implementation of the international code of ethics by an IFAC national accounting organization as indicated in their Action Plan in Part 3. The hypotheses are as follow:

Hypothesis 1: IFAC members in countries that are high on individualism are less likely to adopt

international code of ethics than IFAC members in countries that are high on collectivism.

Hypothesis 2: IFAC members in countries with a high power distance index are more likely than IFAC members in countries with a low power distance index to adopt international code of ethics

Hypothesis 3: IFAC members in countries that are high in uncertainty avoidance will be more likely to adopt international code of ethics than IFAC members in countries that are low in uncertainty avoidance

Hypothesis 4: IFAC members in countries that are high on Masculinity will be less likely to adopt international code of ethics than IFAC members in countries that are high on femininity.

METHODOLOGY

Sample and Data Collection

The data related to professional accountants’ organizational adoption/implementation of

the IFAC Code of Ethics was taken directly from IFAC website which relates to the development of SMO action plans for continuous development and improvement for IFAC members. The scores for Hofstede’s cultural dimensions for each country were taken directly from Hofstede’s website. Statistical Techniques IBM SPSS 20th edition was used to conduct a binary logistic regression. The block entry method was chosen for the analysis. The dependent variable in this analysis is a categorical variable. In their Action Plan part 3 professional accounting organizations either claim to be making continuous improvement in their implementation of the IFAC international code of ethics, or they are not. The independent variables used to predict the likelihood of an organization’s continuing efforts to improve its adoption of the IFAC code of ethics are the four characteristics of national culture as defined and measured by Hofstede. The scores for individualism, power distance, uncertainty avoidance, and masculinity were adopted directly from Hofstede’s research.

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THE RESULTS OF THIS STUDY

Over time more and more professional accounting organizations are responding to the need to take part in the convergence of a professional code of ethics. In the 2009 study by Clements, O’Neill and Stovall there were158 IFAC members and they were able to collect data on the cultural dimensions for 104 organizations. By 2013-2014 there are 179 IFAC members, and this study was able to collect cultural dimension data on 113 professional accounting organizations. Using the enter method all variables were forced into the model in an effort to see which cultural dimensions helped predict the likelihood that a professional accounting organization would continue to work on implementing the IFAC code of ethics. As indicated in Table 1 Individualism and Uncertainty Avoidance are the two cultural variables that help predict the likelihood of a professional accounting organization in a country/culture to adopt and implement the IFAC code of ethics. The beta coefficient for both variables is negative, so the higher the score for Individualism and Uncertainty Avoidance, the less likely the organization is to adopt the IFAC code of ethics.

Table 1 Variables in the Equation

B S.E. Wald df Sig. Exp(B) 95% C.I.for EXP(B)

Lower Upper

Step 1a

PDI -.009 .015 .391 1 .532 .991 .963 1.020

IND -.036 .014 6.599 1 .010 .965 .939 .992

MAS .016 .014 1.226 1 .268 1.016 .988 1.045

UAI -.032 .013 6.230 1 .013 .968 .944 .993

Constant 4.749 1.668 8.108 1 .004 115.419 a. Variable(s) entered on step 1: PDI, IND, MAS, UAI.

In addition, since Exp (B) is less than one for both variables confirms the inverse relationship between the scores of these variables and the likelihood of an organization adopting the IFAC code of ethics. Both the lower and upper limits of the 95% confidence interval for EXP(B) for both individualism and uncertainty avoidance are less than 1, confirms that the variables will consistently have a negative impact on predicting the likelihood of adoption. By contrast the confidence intervals for PDI and MAS range from less than one (.963 and .988) to more than one (1.020 and 1.045). This indicates they would sometimes have a positive relationship to adoption and sometimes they would have a negative relationship to adoption. They would not be reliable predictors.

A Hosmer and Lemeshow test was conducted to see how close the model fits the data. The null hypothesis here is that there is no difference between the observed and predicted values. The authors do not want to reject the null hypotheses so values above .05 are desired. As indicated in table 2 the significance value is .367, which indicates there is a high confidence there is no difference between the predicted and actual values in the derived model (Field, 2013).

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Table 2 Hosmer and Lemeshow Test

Step Chi-square df Sig.

1 8.708 8 .367 An additional test was conducted to confirm the four cultural dimensions are truly

independent of one another and they do not influence one another. The collinearity statistics (SPSS 20th edition) indicate there are no serious collinearity problems in the model. Field (2013) claims a tolerance factor less than .1 indicates collinearity problems and a VIF value greater than 10 indicates a problem. In this case the tolerance values range from .517 for Individualism to .869 for Masculinity and the VIF values range from 1.151 for Masculinity to 1.934 for Individualism.

CONCLUSION

The current study uses updated information from member’s action plan in which many members update their SMO continuously. Eighty percent (143 of 179) of members provided this information in 2013. Many IFAC members did not report that they adopted or had a plan to adopt the Code when they became IFAC members initially, but they have subsequently made changes and adopted the IFAC Code after they joined the IFAC.

These changes are reflected in their action plan. This research uses data from SMO of the action plan subject: IESBA Code of Ethics for professional accountants. This study adds to the body of research in this area by including more organizations than previous studies, and by looking at data from current reports that reflect the current state of implementation of the IFAC Code of Ethics.

The authors of the current study found that both Individualism and Uncertainty Avoidance have a significant and negative relationship to the current (2013-2014) implementation of the IFAC Code of Ethics. Cultures with higher Individualism and higher Uncertainty Avoidance are less likely to adopt a code of ethics prescribed by others.

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About the Authors: Leonard Branson is Professor and Chair of the Accountancy Department at the University of Illinois Springfield. His research interests include examining the management control systems of profit and not for profit organizations. Lisa Chen is Assistant Professor of Accountancy at the University of Illinois Springfield. Dr. Chen’s research interests are in behavioral aspects of accounting as well as empirical research in not for profit organizations. Lindsey Anderson is a practicing accountant in Central Illinois.

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