ACCT ETHICS PAPER

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Danish Evidence of Auditors' Level of Moral Reasoning and Predisposition to Provide Fair Judgements

Bent Warming-Rasmussen

Carolyn A. Windsor

ABSTRACT. The community has legislatively con- ferred on external auditors a special but lucrative responsibility to provide fair and independent opinions about management's preparation of company fmancial statements. In return, auditors are obliged by professional standards to act vî ith integrity, indepen- dently and in the public interest. This study examined 174 auditors* predisposition to provide just and fair judgements, using Kohlberg's theory of developmental moral reasoning, one of the most widely accepted theories in justice psychology. Respondents came from five international audit firms in Copenhagen. Results indicated that auditors with pre-conventional or low level of just reasoning or comprised 64 respon- dents, the largest group in the sample. The pre-con- ventional level suggests that people will act in their own self-interest and do the right only to avoid punishment. Pre-conventional auditors have the abihty to "do deals", advantageous for business. When faced with an ethical crisis, however, auditors as this level will tend to focus on their own needs at the expense of others. The post-conventional or mid level of just reasoning comprised 59 auditors, second largest group in the sample. This level indicates that these auditors have the predisposition to act fairly on prin- cipal, particularly when faced with an ethical crisis. The conventional level or mid-just reasoning con- sisted of 51 auditors. People with a conventional level of just reasoning believe in law and order, the main- tenance of the status quo, however they tend not to be critical of laws, nor authority even if those laws and authority are unjust or evil.

K£Y WORDS: auditors' fair and independent opinion, just reasoning, Kohlberg's theory of moral development

I n t r o d u c t i o n

Society has conferred on the auditing profession' a special legislative franchise to provide inde- pendent financial audits of large organisations on the condition that the profession complies with the codes of ethical conduct (Mautz, 1984, 1988). The auditor's opinion is based on profes- sional judgement that gives credibility and integrity to the financial statements used by the community, (e.g. shareholders, investors, future investors, unions, retirees, future retirees, finan- cial institutions, government bodies etc.). Hence, the economic wellbeing of the community relies upon independently audited financial statements (ASOBAC, 1973; SEC, 2000). If the auditing profession loses public confidence, there is the possibility of more government regulation rather than focussing on why auditors did not act in accordance with ethical standards (Warming- Rasmussen, 1996). Moreover, the auditing pro- fession may lose its special franchise

An important attribute of professional judge- ment is the auditor's ability to make fair and just judgements. According to Mautz and Sharaf (1961) and Hansen (1990) auditor judgement is similar to that of a judge where auditors'judge- ments have to be fair, objective, impartial and independent. Kohlberg's (1969) cognitive moral developmental theory (CMD) or just reasoning is one way to examine auditors' psychological predisposition to provide fair judgements. Prior CMD studies have found that auditors' moral reasoning affect auditors' propensity to provide independent and fair judgements when faced with a hypothetical ethical dilemma (Ponemon

78 Bent Warming-Rasmussen and Carolyn A. Windsor

and Gabhart, 1990; Windsor and Ashkanasy, 1995; Gul and Tsui, 1996). Hence, auditors' level of moral reasoning can influence their profes- sional obligations and social responsibility per- formance. Furthermore, auditors with a high level of moral reasoning were found to provide independent judgements rather than those auditors with lower levels of moral reasoning (Ponemon and Gabhart, 1990; Windsor and Ashkanasy, 1995; Gul and Tsui, 1996).

The internationalisation of commerce and the auditing profession has meant that auditors from many countries use or refer to the International Federation of Accountants (IFAC) Code of Ethics for Professional Accountants (November 2001). Hence, auditors in several countries are guided by universal ideals mandated in IFAC Code of Ethics such as independence, honesty, integrity, impartiahty, fairness and ethical conduct. Because ethical decision-making and conduct are central to the credibility of auditing profession, several studies have examined auditors' cognitive moral reasoning. For example, Ponemon and Gabhart (1994) Hst several CMD studies of accountants and auditors usitig Rest's (1979a) Defming Issues Test (DIT) mainly in the United States and Canada (See also Louwers et al.. 1997).

Few CMD studies of European accountants or auditors have been performed. Arnold, Barnardi and Neidermeyer (1999) however, conducted one study that examined auditors' independence judgments, individualism and litigation from Big 6 audit firms across Denmark, Ireland, Italy, Spain, Sweden The Netherlands and the United Kingdom. They used a modified audit-specific DIT based on Rest's (1979a) instrument (Thorne, 1999) rather than Rest's stories of universal dilemmas (Rest et al., 1999). As a result, Arnold et al.'s analysis did not include Rest's (1979a) P score, a measure principled reasoning. This present study examines Danish auditors' level of principled reasoning using Rest's (1979a, b) DIT as a means for comparison with other CMD studies.

The purpose of this study, therefore, is to examine cogtiitive moral development of auditors from the largest international audit firms in Denmark." The IFAC code of Ethics^ for Professional Accountants (2001), the Danish

"Law for State Authorized Public Accountants" (Lov om statsautoriserede revisorer § 12) and the Danish "Executive Order on auditors reports" (Erklieringsbekendtgorelsen § 1 ) requires the auditor to provide a fair and independent opinion about the financial statements prepared by management of all Danish corporations for the pubhc interest (Hasselager et al., 1998, p. 532). Moreover, auditors should act as a confidential agent of the community (ofFentlighedens tilllid- srepresentant) LSR § 6a in Hasselager et al. (1977, pp. 510-518). This study examines three levels of Danish auditors' 'fairness judgement' or CMD by splitting the sample into three groups'̂ rather the dichotomous high and low as in many prior studies in accounting research described by Thornton (2000). Moreover, the results of this study should benefit practitioners' understanding about the imphcations of a personal factor such as just reasoning development in providing fair opinions. The auditors in this study came from international audit firms in Copenhagen to add to this body of research. International audit firms were chosen because they perform about eight\' percent of audits in large and medium sized companies in Denmark.^ This study, therefore, aims to measure not only Danish auditors' pre- disposition to provide fair and just judgements but also to indicate auditors' level of moral reasoning as suggested by Rest (1979a, b).

Kohlberg's moral reasoning and auditors* fair judgements

One of the most widely used theories injustice psychology is Kohlberg's (1969) theory of developmental moral reasoning (see Rest, 1994). Kohlberg (1969, 1986) advanced both a psycho- logical theory of cognitive moral development and philosophical theory of normative ethics (Rest, 1979a; Rest et al., 1999). Kohlberg's normative theory adheres to deontological theories of Kant and Rawls (1971) that empha- sise justice or fairness judgements.'' According to Rawls (1971), considerations of justice and fairness are paramount, when the allocation of resources is rationally regarded as advantageous or disadvantageous in society.

Danish Evidence of Auditors' Level of Moral Reasoning 79

Based on Rawls' (1971) theory of social j ustice. Rest ( 1979a) argues that Kohlberg's theory is concerned with how the benefits and burdens of social cooperation are to be distrib- uted under the rules of a social system that assigns people's rights and responsibilities. Rest (1979a, p. 18) further states that.

Every person is born into an association and people band together for mutual advantage. . . . Social cooperation makes possible a better life. Therefore, participants in a social group have a mutuality of interests for maintaining that group. There is also a potential source of conflict of interests since each person cannot be assumed to be indifferent to the distribution of the benefits of social cooperation. Hence there are natural tendencies to want to collaborate and cooperate but also tendencies to preserve and protect individual interests.

Kohlberg's theory (1969) of moral reasoning is an appropriate framework to examine profes- sional auditors' predisposition to provide fair and independent decisions because it deals with macro rnorality or moral systems, rather than with micro morality or face-to-face, personal issues (Rest et al., 1999). Society has given the professional auditor a legislated right to audit large organisations. In return, the professional auditor must provide a fair and independent opinion about the veracity of organisational financial statements to the pubhc. The auditor, therefore, must balance the interests of the client- firm's management, the shareholders, creditors, lenders and the public interest when providing an opinion about the financial statements Johnstone et al. (2001). The auditor's ability to provide a fair and independent opinion is there- fore critical for good corporate governance and the public interest.

For Rawls (1971), considerations of fairness are paramount, when the allocation of resources is rationally regarded as advantageous or dis- advantageous. Hence, society directly or indi- rectly relies upon the professional auditor's judgement to ensure that the interests of powerful groups, including management, do not harm the public interest (see Goldman and Barlev, 1974). Moreover, the management of large private and public organisations is a powerful institution that

influences the distribution of economic, envi- ronmental and social resources throughout society and for future generations. An auditor's social responsibility therefore, goes beyond monitoring of management's behaviour (self- interested or otherwise) for the sake of good corporate governance and the public interest. Kohlberg's (1969) stage theory of moral reasoning is one way to examine auditors' predisposition to provide fair judgements.

Kohlberg's stages of moral reasoning and social co-operation

Kohlberg (1969) makes the claim that basic problem solving strategies used by people the world over can be reduced to just six stages in a developmental sequence. All people begin using Stage 1 reasoning that progresses to Stage 2, then Stage 3 and so on. The decisional processes involved with the higher stages (Stage 5 and Stage 6) take a more complex, society wide per- spective. At these higher stages, a person realises that societies can be governed by diverse systems of law. The principles determine, regulate and criticise the laws and role systems of a co-oper- ative society. Whereas, at Stage 4, the morally right is whatever the law says. Stage 6 represents visions of an ideal society that balance burdens and benefits of co-operative living and optimise each person's stake and welfare in the social order. The secret is not just to have ideals but to have ideals that can win the support of other people as good ways for organising society (Rest, 1994).

Kohlberg (1969, 1976) identified three broad levels of moral development through which an individual progresses: The pre-conventional level comprises Stages 1 and 2. Here a person responds to notions of right or wrong, particularly when personal consequences are itwolved, (i.e. pun- ishment, reward, or an exchange of favours), or when authority figures impose physical power upon the individual. Reasoning at the conven- tional level consists of Stages 3 and 4, where doing "right" at this level conforms to society's expectations, family or peer groups. In post- conventional reasoning (Stages 5 and 6), "right"

80 Bent Warming-Rasmussen and Carolyn A. Windsor

is influenced by universal values or principles; the individual defines moral values apart from the authority of groups, and relies upon self-chosen altruistic principles but non-arbitrary to guide reasoning. Table I provides Rest's (1994) descrip- tion of the six stages and three levels of Kohlberg's theory (1969).

Kohlberg (1969) found that the six stages of moral development are invariant. A person gradually moves from Stage 2 through to Stage 3 on the way to Stage 4, rather than leaping from Stage 2 to Stage 4. Development may terminate at any stage, but Kohlberg found that the majority of adults reached the conventional level at Stage 4 and, but on rare occasions progressed to Stage 6. The rate of moral development varies, as Kohlberg indicated that some young people achieved higher stages than older adults did. Furthermore, Kohlberg's (1969) - stage theory posited that an individual's moral development is not only invariant but also innately predis- posed.'' • .

Over the years, criticisms have emerged regarding Kohlberg's theory. Kohlberg and his associates have responded to their major criti- cisms (see Kohlberg et al., 1983; Kohlberg, 1986; Modgil and Modgil, 1986), addressing such issues as stage sequeticitig, subjectivity in the scoring method, gender and cultural biases. Snarey's (1985) review of Kohlberg's claim of cross-

cultural universality, revealed support for much of Kohlberg's theory. Gilligan (1982) voiced criticisms about gender bias. She argued that because Kohlberg focused on justice as the central denning feature of the moral domain, he failed to recognise an important area of morality, namely caring and responsibility. Various researchers, however, such as Lifton (1985), Nunner-Winkler (1984) and Walker (1984) provide general empirical support for the appli- cation of Kohlberg's theory to both sexes.

Rest et al. (1999) acknowledge that there are limits to Kohlberg's approach and that CMD is one component of the psychological process of morality. They argue that there are four compo- nents that lead to moral behaviour: moral judge- ment, moral motivation, moral sensitivity and tnoral character. Furthermore they state that, "Some critics have said that Kohlberg's theory (dealing with moral judgement) is too cerebral, that it misses the 'heart of tnorality'". But the special function of the construct of moral judge- ment is to provide conceptual guidance for action choice in situations in which moral claims confiict (see p. 10). In fact, auditors are often faced with situations where conflicting moral claims among the various interests associated with the fair presentation of financial statements (see Goldman and Barlev, 1974).

TABLE I Six stages in the concept of moral reasoning and cooperation

Pre-conventional Level : J'^i ' Stage 1: The morality of obedience; do what you are told. Stage 2: The morality of instrumental egoism and simple exchange; let's make a deal.

Conventional Level Stage 3: The morality of interpersonal concordance; be considerate, nice, and kind; you'll make friends. Stage 4: The morality of law and duty to the social order; everyone in society is obligated to and protected

by the law.

Post-conventional Level Stage 5: The morality of consensus-building procedures; you are obligated by the arrangements that are

agreed to by due process procedures. Stage 6: The morality of nonarbitrary social cooperation. Morality is defined how rational and impartial

people would ideally organise cooperation.

Cited Rest (1994, p. 5).

Danish Evidence of Auditors' Level of Moral Reasoning 81

Methodology

While much praise and criticism for Kohlberg's theory has focused on the validity of the theory, it is important to examine the instrumentation used to measure moral stage development (Evans, 1986). Kohlberg developed the Moral Judgement Interview (MJI) where data are collected though semi-structured interviews asking subjects to explain their concerns about the presented dilemmas. The MJI is a directed conversation between interviewer and respondent concerning the resolution of moral dilemmas. The subjects' responses are then classified, coded and evaluated, and then tested for reliability by obtaining inter- rater agreement (see Golby and Kohlberg, 1987). Rest (1986) argues that Kohlberg relied on face validity, longitudinal change and internal consis- tency as the main grounds for claiming validity for this assessment procedure.

Rest's (1979b) Defining Issues Test (DIT) is a widely used instrument to assess moral develop- ment (see also McCrea, 1985; Rest, 1993, 1994; Rest et al., 1999). DIT is an objective test of moral development in questionnaire form whose output of 'P' score is continuous rather than MJI's coded responses. Rest's 'P' score indicates what percent of a subject's thinking is at a prin- cipled level of Kohlberg's levels 5 and 6 (Armstrong, 1987). The DIT has been exten- sively vahdated in accounting and audit environ- ments (see Ponemon and Gabhart, 1994; Thornton, 2000). Rest (1979b, 1993) cites Cronbach alpha reliabihty for the 3-story DIT typically around the mid- to high 0.70s. In the present research, a reason for using the shorter 3-story version was the time constraints experi- enced by professional auditors. More importantly, this study intends to follow other behavioural accounting researchers and use Rest's DIT rather than Kohlberg's MJI approach.

Procedure

An audit partner from each of the participating international audit firms in Copenhagen was approached for permission to distribute the questionnaires. Once permission was granted the audit partners were then briefed on how to

distribute and collect the questionnaire booklets so as to minimise internal validity problems such as history and maturation. The co-opted partners were instructed not to participate in the exper- iment, nor to advise auditor respondents about the substance of the questionnaires.

The questionnaire booklets and DIT instruc- tions were distributed to experienced auditors using secretarial services provided by the partic- ipating firms, under supervision of the co-opted audit partners. Participating auditors were guaranteed full anonymity and confidentiality. Neither the researchers nor the senior partners knew who participated in the study. Following the analyses, feedback interviews were conducted with the co-opted senior audit partners to discuss the preliminary results to ensure their participa- tion in the study.

Defining Issues Test (DIT). This comprised the 3-story version of Rest's (1979b) scale, which is based on Kohlberg's (1969) cognitive theory of moral reasoning development. The scale presents three brief stories that portray moral dilemmas in everyday life. Respondents answer questions concerning the importance of considering various aspects of each of the three stories using 5-point response scales, with 1 representing least importance, and 5 greatest importance. Calcula- tion of P-scores is based on a formula set out by Rest (1979b, 1993).

Respondents. Subjects from populations a large city location participated in this study. Care was taken in the distribution of questionnaires to ensure that there was no dominance by a partic- ular firm. 500 questionnaires were couriered to the participating audit partners in Copenhagen. 195 were returned but 21 were eliminated from the study because they were either incomplete or inconsistent, leaving 174 useable questionnaires, a 35% response rate. The sample comprised of 19.5% partner/owners, 16.7% employed CPAs, 48.9% supervisory staff, and 14.9% of non-man- agement staff. The majority of the respondents came from mid to upper levels of audit firm management as they have the most influence regarding audit judgements. See Table II for a description of the respondents.

82 Bent Warming-Rasmussen and Carolyn A. Windsor

TABLE II Respondents from Danish international audit firms

Sample

n = 174

Mean age

35.4 yrs (9.37)

Female

Male

122

Mean yrs exper.

12.4 (9.54)

Partner/ owner

34 19.5%

Employed CPAs

29 16.7%

Supervisory Level

85 48.9%

Non-ni'ment employees

26 14.9%

Results

As set out in Table I, Kohlberg (1969) cate- gorised Stages 1 and 2 of moral reasoning devel- opment as the pre-conventional level. Stages 3 and 4 of moral reasoning development as tbe conventional level, and Stages 5 and 6 as the post-conventional level. Rest's (1979b) DIT measures level of moral reasoning development using scores to represent Kohlberg's Stages 5 and 6. This is called tbe mean P-score; it ranges from 0 to 70, and indicates the level of moral reasoning development. The higher the P-score, the more highly developed is the respondent's moral reasoning.*^

Rest (1979b) recommended that the P-scores could be used to categorise the auditors into high, mid and low groups, corresponding, respectively, to Kohlberg's (1969) pre-conven- tional, conventional, and post-conventional levels of moral reasoning development.'' Based on a large normative sample. Rest determined that P-scores of 27 and 42 were the appropriate cut- off scores to define tbe three groups. The sample was divided into three groups, with high, medium, and low moral reasoning P-scores using the cut-off scores. A discriminant analysis was

performed, with DIT P score the dependent variable and the three levels of moral reasoning, low, mid and high as the independent variables. Wilks' Lamda test indicated a significant differ- ence between groups (F = 421.1, d.f = 2, 171, p < 0.000). Table III describes the DIT " P " scores for the three groups from the discriminant analysis.

Discussion and implications

The average DIT ' P ' score for Danish auditors in this study was 35.48. The responsibiUty to provide a fair and independent opinion requires the auditor to have the highest level of business and professional ethics to engender public trust in a privately regulated professional body (ASOBAC, 1973; Limperg, 1985).

The sample of auditors was divided into three groups for each of Kohlberg's (1969) three levels of moral reasoning as set out in Table I. It is interesting that the largest group in this study was the pre-conventional group of 64 auditors at Stages 1 and 2. The second largest group com- prised the 59 post-conventional auditors in Stages 5 and 6 with 51 auditors in the conventional

TABLE 111 Discriminant analysis of auditors' DIT "P" scores in Danish Internarional audit firms

Average DIT group score

Pre-conventional or Low DIT Group

Conventional or Mid DIT Group

Post-conventional or High DIT Group

35.48 (15.19)

n = 174

19.95 (5.90) n = 64

34.90 (3.61) « = 51

52.82 (8.16)

« = 59

Danish Evidence of Auditors' Level of Moral Reasoning 83

group consisting of Stages 3 and 4. This study reveals that 37 percent of auditors are predisposed to at the p re-conventional level with 64 auditors in that group. The pre-conventional level is made up of Stages 1 and 2, or low levels of fairness judgement. At stage 1 auditors comply with the morality of obedience particularly when threat- ened by punishment or reward. Auditors at this stage would do what they are told. Auditors at stage 2 would experience the morahty of instru- mental egoism and simple exchange or let's make a deal. This pragmatic and self-interested stage would be more successful in a business context, making deals and following opportunities for personal gain. These auditors in Stages I and 2, when faced with an ethical crisis though, would be more predisposed to accommodate an unethical chent or act to ensure their personal gain, either economically or progressing their career.

Fifty-nine auditors (34 percent) and the second largest group of the sample were at post-con- ventional level or a relatively high level of fairness judgements. Stage 5 auditors would comply with the morality of consensus-building procedures. They are obligated by the arrangements that are agreed to by due process procedures. Stage 6 auditors would view the morality of non- arbitrary social cooperation. Morality here is deñned how rational and impartial people would ideally organise cooperation. These auditors would be most predisposed to be highly princi- pled during an ethical crisis. While auditors with high levels of moral reasoning would "do the right thing", they may cause discomfort to their colleagues by not accommodating an unethical client or act.

Finally, 29 percent of the sample comprised auditors with conventional level of moral rea- soning. The conventional level consists of Stages 3 and 4. At Stage 3, morality relates to inter- personal harmony. In other words, just decisions are about being considerate, nice and kind and making friends, but no further to wider society. Stage 4 proposes that the morality of law and duty to the social order are paramount to an orderly society. Everyone in society is obligated to and protected by the law to maintain the status quo and it appears to be reasonable moral

motivation. Moreover, Rest (1979a) found that the majority of the population had a conven- tional level of moral reasoning. The problem with people predisposed to conventional level of just reasoning is that they tend not to be critical of the laws, the status quo, or authority, even though the laws or authority may be unjust or evil.'" Hence, auditors at the conventional level of just reasoning may not question the authority or the status quo within the audit firm or the chent firm when clearly that authority could be behaving unethically or the status quo is inher- ently corrupt.

The sample of auditors here in this study comprised 34 percent of auditors with the pre- disposition to provide fair and just judgements. Rest (1979a) argues that although a person may have post-conventional moral reasoning, they may not necessarily act more ethically because other personal, social and cultural factors influence decision-making. In fact, Gul and Tsui (1996) as well as Windsor and Ashkanasy (1995) found that socially learnt factors affected levels of moral reasoning of auditors when auditors were faced with a hypothetical independence dilemma. Hence, those auditors with post-conventional thinking may require the appropriate social learning and ethical influences to apply their moral reasoning. Ways to encourage the appH- cation of higher moral reasoning are through education and an ethical organisational context.

A pohcy implication from this study for the profession is that ethics education is critical. Moreover, ethics education should be a long term learning process throughout an auditor's professional life to promote appropriate fairness or moral judgements to ensure professional obUgations and social responsibility. Auditors' professional judgements fit with Kohlberg's propositions that basic categories of morality such as justice, duty, rights and social order, are self- constructed by the individual, not viewing the individual as simply passively absorbing the ideology of a person's culture (Rest et al., 1999). Auditors' professional judgements are not passive but require individual integrity, objectivity, fairness, honesty and technical competence LSR § 1-17, see Hasselager (1997, p. 515). This suggests that auditors should be predisposed to

84 Bent Warming-Rasmussen and Carolyn A. Windsor

having the highest level of moral reasoning or post-conventional level to perfortn their profes- sional duties for the greater good of society and for a healthy macro moral system of corporate governance.

For most people, moral judgement develop- ment can be described as evolving from simpler to more complex ideas. Kohlberg argues that people are able to shift from conventional thinking based on society's norms to post-con- ventional thinking. Post-conventional thinking develops a concern for the social system's morality that must serve some shareable ideal of cooperation. Moreover, Rest et al. (1999) provide evidence that well-planned and thought out educational interventions can increase a person's level of moral judgement. Research discussed by Rest et al. (1999) indicates that short term ethics educational interventions of two to three weeks tend not change the level of moral judgement, however, longer term interventions of six or more weeks do make a difference. Further, ethics education tagged onto a course or introduced intermittently does not provide the impetus for change to a higher level of moral reasoning. From Rest et al.'s (1999) meta-analysis of educational interventions, a focused and dedicated ethics course of long term duration of more than six weeks appears to the most suc- cessful at increasing levels of moral judgements.

Ethics education in accounting has also been examined. For example, Thorne (2001) found that her sample of accounting students did not always resolve accounting specific moral dilemmas using their most principled reasoning measured by Rest's DIT. Thorne (2001) suggests that educational practices may be modified to encourage accounting students to increase their predisposition to resolve accounting-specific moral dilemmas at their cognitive moral capa- bihty. Welton et al. (1994) also showed that moral development of accounting students can be increased by changing the traditional approach to accounting ethics teaching. In their study, accounting students increased their moral rea- soning when exposed to various seminar tech- niques that compared, discussed and applied ethics concepts to case analysis. The control group of accounting students not exposed to the

ethics module failed to demonstrate an improve- ment.

Interestingly, Welton et al. (1994) used a modified version of Rest's defining issues test by introducing ethical dilemmas in an accounting context. This can be achieved despite age and education (Shaub, 1994). Further, Shaub (1994) revealed that ethics education makes some dif- ference in the moral reasoning of auditors and auditing students. Additionally Shaub (1994) found that moral reasoning of auditing students and auditors is associated with academic success, gender and ethics education. Further, more females were found to have higher ethical rea- soning scores. This is supported by Thoma's meta-analysis (1986 cited Rest et al., 1999, p. 117) that showed females had higher mean average P scores in all groups fiom Junior High school to adult; for example, the male adult P score is 42.8 and the female P score is 46.0. Shaub (1994) suggests that women should be encouraged in accounting education and the profession generally. Thorne (2001) however, found different results indicated female accoun- tants in her sample. Future research will investi- gate gender differences in moral reasoning of Danish auditors.

Another policy imphcation is for audit firms specifically to engender an ethical culture to promote employee auditors' predisposition to provide fair judgements in the pubUc interest. Burke (1999) suggests shaping a social vision as well as a business vision for the modern company. A social vision is intuitively similar to the macro moral systems described by Rest et al. (1999) and could also apply to the modern auditing organ- isation. As argued previously, the ethical and social perfortnance of audit firms is vital for good corporate governance, the pubhc trust and respect for the profession. According to Burke (1999), a social vision is more than corporate philanthropy or a community relations program but a genuine acknowledgement that the com- munity is the definer of the license to viably operate for the long-term. Leadership at the highest level within the audit firms is required to support and engender a social vision on an ethical basis.

A social vision also means building a relation-

Danish Evidence of Auditors' Level of Moral Reasoning 85

ship of trust with society that is reinforced by mission statements, annual reports, annual social responsibility reports and internal and external communications throughout the organisation. Audit firms should promote public accountability instigated by the profession. The profession should proactively encourage audit firms to be more transparent about their business operations and their social responsibility by reporting to the public that public cotnpanies and government are required to do. Moreover, the social vision should become part of organisational culture of audit firms so that the responsibUities entailed in instigating a social vision are valued throughout a professionally oriented organisation. Whether the profession has the resolve to encourage accounting firm organisational culture that engenders a transparent social vision will depend on the efficacy of self-regulation. If self-regula- tion fails, then governnietit legislation may be enacted to provide a prescriptive framework for ethical behaviour. An example is the introduc- tion in the U.S. of the Sarbanes Oxley-Act that sets out explicitly what auditors can and cannot do.

Suggestions for future research for auditors' professional judgements from data in this study include a investigation of audit firm culture influ- ence on Danish auditors' predisposition to provide fair judgements. Further, an examination of ethical education in Datiish universities and its effect on the moral reasotiing levels of auditing and accounting students should also be per- formed. The impact of ongoing ethical educa- tion in the audit firms might be investigated to provide evidence for strategic planning for improving professional judgement in the long term. Gender differences in auditors' level of moral reasoning are also another issue for future investigation.

There are limitations to the study. The results cannot be extrapolated to the wider population, as the sample comprised of auditors from one location. Moreover, the sample was not random, although random selection was attempted in finding suitable auditor respondents prepared to provide their time and effort to participate freely. Another limitation is that there are other measures of moral reasoning other than Rest's

DIT (1979b) and these other measures should also be used in investigating professional judge-

ment issues.

Acknowledgements

We acknowledge with thanks invaluable comments from Associate Professor Linda Thorne from York University, Toronto as well as the constructive comments from two anony- mous reviewers.

Notes

' The author gratefully acknowledges the invaluable assistance provided by the participating auditors from the multinational audit firms in Denmark. ^ To the authors' knowledge, this is the first CMD study of auditors' moral reasoning using Rest's (1979) traditional DIT in a European country to be pub- lished. ^ The Danish Institute of State Authorized Public Accountants has recently affiliated with the International Federation of Accountants at their general meeting in Copenhagen on May 2000. ^ Windsor and Ashkanasy (1995) divided samples into three groups in two replicated studies. They found three types of auditor decision-making, autonomous (post-conventional), accommodating (conventional) and pragmatic (pre-conventional). ^ Estimated by the percentage of clients with more than lOO employees, Borsens Nyhedsmagasin (2001). ^ Rest et al. (1999) argue that the post-conventional level can be achieved through other philosophical routes such as utilitarianism although they make exceptions (see pp. 4 1 ^ 2 ) . ^ Windsor and Ashkanasy (1995) found that moral reasoning (DIT P score) interacted with a social learning factor, demonstrating that social factors affected moral reasoning, and ethical decision-making. " A second score, termed the M-score (for mean- ingless) is calculated as a means of identifying unre- liable respondents. Rest (1979a) recommends that respondents whose M-score is 4 or more, be elimi- nated fr-om the sample. In the present study, however, no respondents were eliminated in this fashion. '* Ponemon and Gahhart ( 1990) used a simple median split, and therefore did not tap into the three- level definition of moral reasoning development given by Kohlberg.

86 Bent Warming-Rasmussen and Carolyn A. Windsor

'" For example, at the Nuremberg Trials, Nazi officers convicted for perpetrating the Jewish Holocaust gave the reason that they "were just fol- lowing orders" (Kohlberg, 1969).

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Bent Warmitig-Rasmussen Department of Accounting, Finance and Law,

University of Southern Denmark, Engstien Í, DK-6000 Kolding,

Denmark, E-mail: [email protected]

Carolyn A. Windsor Faculty of Commerce and Administration.

Griffith University (Nathan Campus), Queensland 4111,

Australia E-mail: C. [email protected]

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