Research

Making ethical decisions: Mood matters

Do the executives running big public accounting firms really know how the CPAs who work for them would respond when faced with ethical dilemmas? New research suggests they may not.

2015-11-14

Do the executives running big public accounting firms really know how the CPAs who work for them would respond when faced with ethical dilemmas? New research suggests they may not.

W. P. Carey Professors D. Jordan Lowe, Philip Reckers and a colleague from the University of Wyoming conducted an experiment to assess how “audit seniors” (mid-level auditors) might respond to unethical directives and, critically, how accountants’ moods influence these kinds of responses.

The researchers, in a paper forthcoming in the journal, Contemporary Accounting Research, found that auditors said peers would be much more likely to acquiesce to unethical directives than top executives typically predict, and that the moods of fear and insignificance strongly influence the likelihood of acquiescence. In contrast, arousal — defined as a positive mood that can be likened to optimistic engagement — made it more likely that auditors would resist pressures to do wrong.

“A lot of past research would say that people relied just on cognition to sort through these problems — that there’s an ethical dilemma and they think through it,” Lowe says. “We’re showing that we’ve been ignoring people’s moods. There’s always a context — a boss, a client and other pressures — that will affect your mood, and that’s going to affect whether you make an ethical or unethical decision.”

Many people use the terms “mood” and “emotion” interchangeably in everyday conversation, but social scientists and psychologists distinguish them. For professionals, a mood is a longer-term state of mind than an emotion, which is felt intensely but fleetingly. Thus, someone might experience the emotion of happiness at the time of a promotion or a raise and then remain in an aroused mood for several days or weeks afterward.

Pressure of obedience

The three researchers specifically investigated how auditors’ moods influenced their response to ethical dilemmas they might face when working at a client’s office. “Teams spend two to three months at a stretch working at the client’s office,” Professor Lowe says. “They’re interacting the whole time, absorbing the client’s atmosphere and the client CEO’s management style, whether it’s aggressive, dominant or charismatic.”

That environment can influence the auditors’ moods, as can obedience pressure coming from their immediate supervisors, who work alongside them in the field.

“Obedience pressure is a form of coercive power wielded by superiors in which subordinates comply with superiors’ directives in response to threats of overt or implied punishment, such as reduced career prospects,” the three scholars write in their paper.

Local obedience pressures may dilute the ethics messages coming from headquarters and from continuing professional education. Think of it this way: Accountants might receive ethics training once a year, but, while working in the client’s office, they’ll interact with their client’s staffers and their manager nearly every day.

The system and the clan

The researchers use the terms “bureaucratic control” and “clan control” to distinguish the kinds of ethical pressures auditors face. “Bureaucratic control consists of a combination of rules, policies and supervision to guide audit work and ensure compliance with formal firm policies,” they write. “Clan control, in contrast, emphasizes socialization processes in which shared norms and values, as expressed by office leadership, are inculcated into firm employees as part of their informal training, work experience and organizational socialization processes.”

An auditor experiences bureaucratic control when she logs onto an accounting firm website and takes a required quiz that asks her to parse various ethical problems. She feels clan control when she goes to happy hour with her colleagues, and her supervisor starts teasing her about how she’s priggish in her interpretation of accounting rules for recognizing revenue. Ethics instruction may work, but it can be trumped by peer pressure; Socrates can only take you so far.

Ideally, bureaucratic and clan norms pull in the same direction, but the three researchers argue that’s not always true.

Partners and managers confidentially predicted that audit seniors from their firm would generally not be susceptible to obedience pressure from a superior to perform or permit unethical acts, consistent with auditor ethical standards established by large audit firms’ centralized, bureaucratic controls, the researchers write.

“This prediction is clearly contradicted by our results, suggesting that the firms’ official ‘tone at the top’ regarding ethical conduct is not uniformly reflected in subordinate auditors’ ethical choices at the local practice office level.”

Eating time

A common dilemma faced by auditors is pressure to not record all of the time they’ve worked. Accountants call this “eating time.” Careful recording matters because firms bill by the hour.

“What if a task takes 15 hours instead of 10?” Professor Lowe asks. “The client might say, ‘You charged me more hours than you said you would.’ So maybe you’ll just report 10. This is somewhat pervasive in public accounting. It makes the subordinate look good, and the client is happy. The firms tell employees to report their actual time, but this still goes on.”

Eating time is common enough, and seemingly innocuous enough that many people don’t even consider it unethical. “Many people think it’s a gray area,” Lowe says. “One could argue on either side of this debate.”

On one side, accountants are typically asked to sign documents attesting to the number of hours they spent on a task, and fudging those hours is lying. On the other, an auditor might feel he has spent more time than he should’ve on a task and not want to penalize the client. He may see himself as serving the client by not logging all of his hours.

In their experiment, the three scholars asked the 170 audit seniors who participated about whether peers would be willing to eat time or overlook others doing so. They found that eating time ended up being a bellwether of other kinds of misdeeds. Their results, they write, “suggest that audit seniors who are more likely to comply with a request to underreport time may also be more willing to acquiesce to pressure to commit or overlook more serious ethical violations.”

How we decide

A critical context for the three scholars’ work is evolving thinking in psychology on how people make decisions about ethics, or anything else. A generation ago, many researchers were committed to the idea that reason and emotion were separate and that prudent decision-making kept them apart, Lowe says. Now scholars recognize that “cognition and moods operate together and interact.”

“In the last few years, we’ve changed to the idea that you can’t factor out emotions and moods. They can just be negative or positive,” he says. Now the view is that thinking and feelings feed off of and reinforce each other.

What does this mean for a public accounting firm that’s trying to ensure that its employees act ethically?

For one thing, firms can’t just assume that teaching rules will be enough. They must also consider how people’s moods might influence their interpretation of the rules and try to understand what’s affecting those moods. They might even take steps to increase arousal and reduce feelings of fear and insignificance.

“For instance, audit firms could enhance levels of arousal among staff through training that emphasizes empowerment in dealings with client personnel and firm superiors, and by explicitly rewarding good performance through personnel evaluations, raises and public recognition,” the scholars write. “Firms can also remediate fear among audit staff through partner/manager training that emphasizes being professional in their own interactions with subordinates and by providing support to subordinates when they encounter intimidation from client management or firm supervisors.”

The starting point, Lowe says, is simply trying to understand employees’ moods better. Firms might try to monitor moods via surveys just as they assess employee satisfaction with benefits and career opportunities. If they then find that the level of arousal is low and those of fear and insignificance are high, they’d at least have a warning their people might be susceptible to committing or overlooking misdeeds.

Accounting