Organizational leadership and ethical climate.pdf

ORGANIZATIONAL LEADERSHIP AND ETHICAL CLIMATE IN

UTAHS CERTIFIED PUBLIC ACCOUNTING PROFESSION

by

Jeffrey Nowell Barnes

UNIVERSITY OF PHOENIX

February 2013

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ii

February 2013 by Jeffrey Nowell Barnes

ALL RIGHTS RESERVED

iv

Abstract

The purpose of this quantitative study, with a correlation design, was to describe and

quantify the relationships between accounting subordinates perception of their focal

leaders full-range leadership theory (FRLT) style, ethical climate type perceptions and

whether understanding of the Federal Sentencing Guidelines for Organizations and

personal religiosity bear on the subject. Statistically significant correlative relationships

existed, with ps < .005, between transformational leadership and four of the five

empirically derived ethical climate type perceptions (i.e., caring, r = .411; lawcode, r =

.282; rules, r = .402; and instrumental, r = -.525). No statistically significant correlative

relationships existed between transactional leadership and all five ethical climate type

perceptions. Laissez-faire leadership exhibited statistically significant correlative

relationships, with ps < .016, for a weak negative correlation with the rules ethical

climate type perception (i.e., r = -.237) and a positive correlation with the instrumental

ethical climate type perception (i.e., r = .247). Respondents with SEC clients and

understanding the Federal Sentencing Guidelines for Organizations (FSGO)

recommendations had a statistically significant correlative relationship, at the p = .048

and a slightly negative correlative relationship with instrumental ethical climate type

perception (i.e., r = -.284). There were no statistically significant correlative

relationships between personal religiosity and any leadership style and ethical climate

type perception. Lastly, because of sub-sample size constraints, cross-sectional analysis

was limited. However, using SPSS univariate analysis of variance with two independent

variables, leadership style and a demographic category, all leadership styles manifested

varying correlative relationships with one or more varieties of the ethical climate type

v

perceptions, dependent upon respondents gender, primary work function, CPA licensure,

firm size, and length of service with the current CPA firm.

vi

Dedication

I dedicate this dissertation to those who encouraged and supported me throughout

my long journey. First, to my beautiful and equally capable wife, Jocelyn J. Barnes, who

said, Jeff, follow your dreams! Second to my children, Justin, Jared, Jaelyn, and

Jerika, for their constant hopefulness and who believed that, an old dog could learn new

tricks. And last, to my mother, Mary L. Cannon, who prayed for my success and upon

my completion said, Jeff, I am so proud of you, which statement still makes her son

smile. I know God answers prayers!

vii

Acknowledgements

My gratitude extends to so many who deserve acknowledgement. Most deserving

and to whom I give my sincerest thanks, is my patient, helpful and loyal Committee

Chair, Yohannes Mariam, Ph.D., of Canadas McGill University. Also, my sincerest

thanks go to my committee members David Christensen, Ph.D., of the University of

Nebraska at Lincoln, and to Frank Bearden, Ph.D., of the Our Lady of the Lake

University, who were always supportive with substantive and timely recommendations.

Next, I would like to thank my Dean, Carl Templin, of Southern Utah Universitys

School of Business, who encouraged me during a graduate student recruiting trip to

eastern Utah, saying, Jeff, you should pursue a doctorate! Also, I would like to thank

all my wonderful, capable, and competent doctoral professors of the University of

Phoenixs School of Advanced Studies who, during courses and annual residencies, made

this journey substantive, demanding, and enlightening. Last, I would like to thank the

many kind colleagues, of the doctoral research community, who were so willing to assist

when help was needed; they set the example of how this doctor will pay forward and

assist others in need.

viii

Table of Contents

List of Tables ................................................................................................................... xix

List of Tables in Appendices .......................................................................................... xxii

List of Figures ................................................................................................................ xxiv

List of Figures in Appendices ..........................................................................................xxv

List of Equations ........................................................................................................... xxvii

Chapter 1: Introduction ........................................................................................................1

Background of the Problem .................................................................................................2

Sociological Foundation and Leadership Relationships ......................................3

Psychological Foundation and Leadership Effect................................................4

Ethics, Moral Development, and Spiritualitys Correlation to Behavior.............5

Spirituality and Religiosity ..................................................................................7

Continued Fraudulent Financial Reporting ..........................................................8

Statement of the Problem .....................................................................................................9

Purpose of the Study ..........................................................................................................10

Significance of the Problem ...............................................................................................12

Significance of the Study to Policies and Practices of Public Accounting ........13

Significance of the Study to Leadership in Accounting ....................................13

Nature of the Study ............................................................................................................15

Overview of the Design Appropriateness ..........................................................................16

Research Questions ............................................................................................................17

Quantitative Hypotheses ....................................................................................................18

First null hypothesis ...........................................................................................18

ix

First alternate hypothesis ...................................................................................18

Second null hypothesis ......................................................................................18

Second alternate hypothesis ...............................................................................18

Third null hypothesis .........................................................................................19

Third alternate hypothesis ..................................................................................19

Fourth null hypothesis........................................................................................19

Fourth alternate hypothesis ................................................................................19

Fifth null hypothesis ..........................................................................................19

Fifth alternate hypothesis ...................................................................................19

Theoretical Framework and Rationale for Proposed Hypotheses......................................20

Leadership ..........................................................................................................................22

Ethical Climate...................................................................................................................22

External Regulatory Forces ................................................................................................23

Religiosity ..........................................................................................................................24

Definitions of Terms ..........................................................................................................25

Assumptions .......................................................................................................................27

Scope and Limitations........................................................................................................27

Limits to Interpretations .....................................................................................29

Generalizability ..................................................................................................29

Summary ............................................................................................................................30

Chapter 2: Review of the Literature ...................................................................................31

Documentation ...................................................................................................................31

Moral Philosophies and Ethics Theories............................................................................33

x

Maximizing Self-Interest ...................................................................................................36

Egoism, Description and Analysis .....................................................................36

Accounting Ethics Related Example, Egoism ...............................................37

Criticisms of the Egoism Theory for Accounting ..........................................38

Maximizing Joint-Interests ................................................................................................39

Utilitarianism, Description and Analysis ...........................................................40

Accounting ethics related examples, utilitarianism. ......................................41

Criticisms of the utilitarian theory for accounting. ........................................42

Corporate Social Responsibility, Description and Analysis ..............................43

Accounting ethics related examples, corporate social responsibility. ...........45

Criticisms of the corporate social responsibility theory for accounting. .......45

Standing on Moral Principles.............................................................................................47

Deontology, Description and Analysis ..............................................................47

Accounting ethics related examples, deontology...........................................48

Criticisms of the deontology theory for accounting. .....................................48

Justice and Rights, Description and Analysis ....................................................49

Accounting ethics related examples, justice and rights. ................................50

Criticisms of the rights-and-justice theory for accounting. ...........................51

Virtue Ethics, Description and Analysis ............................................................51

Accounting ethics related examples, virtue ethics. ........................................52

Criticisms of the virtue ethics theory for accounting. ....................................54

Descriptive Ethics, Description and Analysis ....................................................54

Accounting ethics related examples, descriptive ethics. ................................55

xi

Criticisms of the descriptive ethics theory for accounting.............................59

Ethics Philosophies and Linkage to Effective Leadership .................................................61

Leadership ..........................................................................................................................63

Leadership Styles ...............................................................................................................65

Full-Range Leadership Theory ..........................................................................................66

Transactional versus Transformational Leadership Styles ................................66

Leadership Style is Necessarily Flexible ...........................................................68

Leadership and Subordinate Socialization .........................................................69

Leadership and Its Linkage to Ethical Climate ..................................................................71

Ethical Climate Theory ......................................................................................................72

Organizational Support for Ethical Climate ......................................................73

The Organizational Environment and Ethical Climate ......................................74

Caring .............................................................................................................77

Lawcode. ........................................................................................................77

Rules. .............................................................................................................78

Instrumental. ..................................................................................................78

Independence. ................................................................................................79

Ethical Climate Summary ..................................................................................................79

Leadership Styles in the Public Accounting Profession ....................................................80

Ethical Climate Research and the Public Accounting Profession .....................................82

External Control FactorsRegulations .............................................................................83

Federal Sentencing Guidelines for Organizations .............................................83

Sarbanes-Oxley of 2002 .....................................................................................87

xii

Religiosity in the Workplace .............................................................................................88

Conclusion .........................................................................................................................91

Summary ............................................................................................................................92

Chapter 3: Method .............................................................................................................94

Research Method and Design Appropriateness .................................................................95

Research Design to Studys Theoretical Concept ..............................................................96

Cross-sectional Analysis Opportunities .............................................................97

Theoretical Model Design..................................................................................................98

Discussion of Proposed Variables ...................................................................................100

Leadership Independent Variables ...................................................................100

Ethical Climates Dependent Variables ...........................................................100

The Studys Moderating or Intervening Variables ..........................................101

Justification for Quantitative Method, With Correlation Design.....................................101

Population ........................................................................................................................103

Target Population .............................................................................................103

Sampling Frame ...............................................................................................104

Sample Size ......................................................................................................105

Informed Consent.............................................................................................................108

Confidentiality .................................................................................................................109

Geographic Location ........................................................................................................110

Data Collection ................................................................................................................111

Survey Response Data Handling Procedures ...................................................112

Data Cleaning Procedures ................................................................................113

xiii

Coding ..............................................................................................................114

Grouping ..........................................................................................................114

Pilot Study ........................................................................................................................115

Rationale for Development of FGSO and REL Surveys .................................115

Pilot Sample Survey Validity and Reliability ..................................................116

Pilot Sample Testing Methodology .................................................................117

Pilot Samples Survey Corrections ..................................................................118

Instrumentation ................................................................................................................119

Multifactor Leadership Questionnaire (MLQ).................................................120

Ethical Climate Questionnaire (ECQ) .............................................................121

Federal Sentencing Guidelines for Organizations Questionnaire (FSGO) ......123

Religiosity Questionnaire (REL) .....................................................................124

Validity and Reliability ....................................................................................................125

Internal Validity of Survey Instruments ..........................................................126

Confounding. ...............................................................................................127

Selection bias. ..............................................................................................128

Large-scale events. .......................................................................................128

Maturity of raters. ........................................................................................129

Experimenter bias. .......................................................................................129

External Validity of MLQ and ECQ Instruments ............................................130

Validity and Reliability of MLQ......................................................................130

Company use. ...............................................................................................131

Inflated results. .............................................................................................131

xiv

Validity and Reliability of ECQ ......................................................................132

Licensing of Instruments..................................................................................................133

Data Analysis ...................................................................................................................133

Descriptive Statistics ........................................................................................134

Nominal data. ...............................................................................................134

Ordinal data. .................................................................................................135

Researcher Error with ECQ Survey Instrument...............................................136

Correlation Analysis ........................................................................................139

ANOVA Analysis ............................................................................................140

Univariate Analysis of Variance between Demographic Categories ...............141

Summary ..........................................................................................................................143

Chapter 4: Results ............................................................................................................145

Sample Demographic Descriptive Statistics ....................................................................146

Age of Sample Respondents ............................................................................146

Gender of Sample Respondents .......................................................................148

Highest Education Earned by Sample Respondents ........................................150

Primary Language Spoken of Sample Respondents ........................................152

Race of Sample Respondents ...........................................................................152

Marital Status of Sample Respondents ............................................................153

Length of Time with Current Firm of Sample Respondents ............................154

Primary Work Function of Sample Respondents .............................................155

CPA Licensure Status of Sample Respondents ...............................................155

Leadership Level of Sample Respondents .......................................................156

xv

CPA Firm Size of Sample Respondents ..........................................................157

Summary of Sample Demographic Descriptive Statistics ...............................................158

Research Questions ..........................................................................................................158

Quantitative Hypotheses ..................................................................................................159

Research Study.................................................................................................................160

Findings............................................................................................................................160

Assumptions Regarding Models Used .............................................................................160

Normality of Distributions ...............................................................................163

Homoscedasticity .............................................................................................166

Hypothesis 1Transformational Leaderships Relationships to Ethical Climate ..........167

Analysis of Hypothesis 1 .................................................................................170

Hypothesis 2Transactional Leaderships Relationships to Ethical Climate ................171


Hypothesis 3Laissez-faire Leaderships Relationships to Ethical Climate .................172


Hypothesis 4Regulatory Relationships to Leadership and Ethical Climate ................175


Hypothesis 5Religiositys Relationships to Leadership and Ethical Climate ..............177


Limited Leadership Cross-sectional Statistical Analysis .................................................179

Transformational Relationship to Caring by Gender .......................................180

Transformational Relationship to Lawcode and Rules by Service ..................182

Lawcode. ......................................................................................................182

xvi

Rules. ...........................................................................................................184

Transformational Relationship to Rules by CPA Licensure ............................186

Transformational Relationship to Lawcode by Firm Size ...............................188

Transactional Relationship to Instrumental by Firm Size................................190

Laissez-faire Relationship to Lawcode by Length of Service .........................192

Post Hoc Power and Effect Size Analysis .......................................................................194

Summary of Findings .......................................................................................................197

Conclusion .......................................................................................................................201

Chapter 5: Conclusions and Recommendations ..............................................................203

The Purpose of the Study .................................................................................................203

Description and Interpretation of the Study Results ........................................................204

Research Question 1 ........................................................................................................204

Transformational Leadership ...........................................................................................205

Transformational Relationship to Caring Ethical Climate...............................206

Transformational leadership and gender. .....................................................207

Transformational Relationship to the Lawcode Ethical Climate .....................212

Transformational Relationship to the Rules Ethical Climate ..........................214

Transformational Relationship to the Instrumental Ethical Climate ...............216

Transformational Relationship to the Independence Ethical Climate .............218

Transactional Leadership .................................................................................................219

Transactional Leadership Relationship to All Ethical Climate Perceptions ....220

Accounting Engagement Activities Encourage Transactional Leadership ......222

From Transactional to Higher Levels of Transformational Leadership ..........222

xvii

Changing the leadership mindset. ................................................................225

Laissez-faire Leadership ..................................................................................................225

Laissez-faire Leadership Relationship to All Ethical Climate Perceptions .....227

Summary of Leadership Style Relationships on Ethical Climate Perception ..................228


Regulatory Relationships to Ethical Climate Perceptions and Leadership ......230

Why Does Regulation Have So Few Correlations? .........................................232


Religiositys Relationship to Ethical Climate Perceptions and Leadership.....233

Why Are Religiosity Correlations Insignificant, Ceiling Effect? ....................235

Limitations, Improvements, and Implications for Future Research ................................237

Sample Representation and Sample Size .........................................................237

Survey Analysis of Sample Bias ......................................................................238

Statistical Inferences and Theoretical Construct Development .......................239

Religiosity construct development. ..............................................................239

Inadequacy of the Transactional Leadership for Ethical Climate Awareness .240

Implications for Future Research Opportunities ..............................................240

Conclusions ......................................................................................................................241

Transformational Leadership to Ethical Climate Perceptions .........................241

Transactional Leadership to Ethical Climate Perceptions ...............................244

Laissez-faire Leadership to Ethical Climate Perceptions ................................244

Regulatory and Religiosity to Leadership and Ethical Climate Perceptions ...245

References ........................................................................................................................246

xviii

Appendices .......................................................................................................................277

Appendix A: SOX Related to Ethical Climate ................................................................278

Appendix B: MLQ Subscales, Questions, and Definitions..............................................282

Appendix C: ECQ Scales, Questions, and Definitions ....................................................292

Appendix D: Reliability Recommendations for MLQ Administration ...........................297

Appendix E: Letter of Introduction to Target CPA Firms ...............................................301

Appendix F: Form for Permission to Contact Organizations Membership ....................303

Appendix G: Introductory Letter to Survey Participant ..................................................305

Appendix H: Confidentiality Agreements .......................................................................310

Appendix I: List of Utah CPA Firms Providing Permission ...........................................316

Appendix J: Permission to Use Surveys ..........................................................................330

Appendix K: Multifactor Leadership Questionnaire (MLQ) Sample Questions ..........333

Appendix L: Ethical Climate Questionnaire (ECQ) ........................................................335

Appendix M: Federal Sentencing Guidelines for Organizations Questionnaire (FSGO) 340

Appendix N: Religiosity Questionnaire (REL) ................................................................344

Appendix O: Survey Demographic Information Questionnaire ......................................347

Appendix P: Data Coding ................................................................................................350

Appendix Q: Creating Survey Scales ..............................................................................355

Appendix R: Process to Obtain CPA Firm Permissions ..................................................359

Appendix S: Electronic Surveys Format ........................................................................361

Appendix T: Electronic Survey Structure Logic .............................................................372

Appendix U: Distribution Histograms of Study Variables ..............................................374

Appendix V: Scatterplots of Ethical Climate Types (Dependent Variables) ..................381

xix

Appendix W: Regulatory Correlations ............................................................................387

Appendix X: Religiosity Correlations .............................................................................389

Appendix Y: Post Hoc Power Table ................................................................................391

List of Tables

Table 1 Number of Scholarly References Used in This Study ..... 33

Table 2 Kohlbergs Moral Development Stages, Orientations, and Definitions . 56

Table 3 Leadership Definitions 63

Table 4 Nine Theoretical Ethical Climate Types . 75

Table 5 Five Common Empirical Derivatives of Ethical Climate Theory ... 76

Table 6 Leadership Styles in Public Accounting . 81

Table 7 1991 Federal Sentencing Guidelines for Organizations (FSGO) .. 85

Table 8 FSGO Amendments Requiring Organizational Ethical Culture..... 86

Table 9 Survey Changes from Pilot Sample Recommendations 119

Table 10 Intercorrelations and Reliability of Scale Scores ....... 132

Table 11 Licensing Requirements of Survey Instruments .. 133

Table 12 Proper Ethical Climate Questionnaire Scale and Scale Used in This Study .. 137

Table 13 Intercorrelations and Reliability of ECQ Scale Scores with Balanced Scale. 138

Table 14 Intercorrelations and Reliability of ECQ Scale Scores with Unbalanced Scale

..... 138

Table 15 Guilford Interpretation of the Magnitude of Significant Correlations ....... 140

Table 16 Hypotheses, Statistical Analyses, Possible Relationships, and Tests ......142

Table 17 Age of Sample Respondents 147

Table 18 Gender of the Sample Respondents .... 148

xx

Table 19 Highest Education Earned of Sample Respondents ... 150

Table 20 Race of the Sample Respondents 152

Table 21 Marital Status of Sample Respondents ... 153

Table 22 Length of Time with Current Firm of Sample Respondents ... 154

Table 23 Primary Work Function of Sample Respondents .... 155

Table 24 CPA Licensure of Sample Respondents .. 156

Table 25 Responsibility Level of the Sample Respondents 156

Table 26 CPA Firm Size of Sample Respondents .. 157

Table 27 Cronbachs Alpha for Surveys Scales ... 162

Table 28 Cronbachs Alpha for Transactional Leadership Subscales .. 162

Table 29 Definitions of Skewness and Kurtosis . 164

Table 30 Normality Statistics for Each Variable .. 165

Table 31 Bivariate Correlation Analysis, Transformational Leadership to ECQ Scales

..167

Table 32 ANOVA for Transformational Leadership (MLQ) to Caring (ECQ) . 168

Table 33 ANOVA for Transformational Leadership (MLQ) to Lawcode (ECQ) .. 168

Table 34 ANOVA for Transformational Leadership (MLQ) to Rules (ECQ) ....... 169

Table 35 ANOVA for Transformational Leadership (MLQ) to Instrumental (ECQ) 169

Table 36 ANOVA for Transformational Leadership (MLQ) to Independence (ECQ) .. 169

Table 37 Bivariate Correlation Analysis, Transactional Leadership upon ECQ Scales

..172

Table 38 Bivariate Correlation Analysis, Laissez-faire Leadership to ECQ Scales

.... 173

xxi

Table 39 ANOVA for Laissez-faire Leadership (MLQ) to Rules (ECQ).... 174

Table 40 ANOVA for Laissez-faire Leadership (MLQ) to Instrumental (ECQ) .... 174

Table 41 Bivariate Correlation Analysis, FSGO Understanding Scale to ECQ Scales 176

Table 42 Bivariate Correlation Analysis, FSGO Understanding Scale to MLQ Scales 177

Table 43 Bivariate Correlation Analysis, REL Religiosity Scale to ECQ Scales .. 178

Table 44 Bivariate Correlation Analysis, REL Religiosity Scale to MLQ Scales . 179

Table 45 Between-Subjects (Gender) . 180

Table 46 Univariate Analysis of Variance between Gender (IV) and Transformational

Leadership (IV) to Caring (DV) . 180

Table 47 Between-Subject Factors (Assurance Services and Tax) 183

Table 48 Univariate Analysis of Variance between Respondents Primary Service

Function (IV) and Transformational Leadership (IV) to Lawcode (DV) .. 183

Table 49 Between-Subject Factors (Assurance Services and Tax) 185

Table 50 Univariate Analysis of Variance between Respondents Primary Service

Function (IV) and Transformational Leadership (IV) to Rules (DV) .... 185

Table 51 Between-Subject Factors (CPA Licensure) 187

Table 52 Univariate Analysis of Variance between Respondents CPA Licensure and

Transformational Leadership (IV) to Rule ((DV) .. 187

Table 53 Between-Subject Factors (Firm Size) . 189

Table 54 Univariate Analysis of Variance between Respondents Firm Size and

Transformational Leadership (IV) to Lawcode) 189

Table 55 Between-Subject Factors (CPA Licensure) 191

xxii

Table 56 Univariate Analysis of Variance between Respondents CPA Licensure and

Transactional Leadership (IV) to Rule ((DV) 191

Table 57 Between-Subject Factors (Time with Firm) 193

Table 58 Univariate Analysis of Variance between Respondents Time with the Firm and

Laissez-faire Leadership (IV) to Lawcode ((DV) ... 193

Table 59 Post Hoc Power and Effect Size Analysis ... 196

Table 60 Frequency Means of Leadership Style Recognized 206

Table 61 Leaderships Correlation to the Caring Ethical Climate ... 207

Table 62 Transformational Leadership Building Actions or Behaviors......... 209

Table 63 Leaderships Correlation to the Lawcode Ethical Climate 213

Table 64 Leaderships Correlation to the Rules Ethical Climate ......... 215

Table 65 Leaderships Correlation to the Instrumental Ethical Climate .. 217

Table 66 Leaderships Correlation to the Independence Ethical Climate .... 218

Table 67 Transactional Leadership Correlation to All Ethical Climate Types . 221

Table 68 Laissez-faire Leadership Correlation to All Ethical Climate Types ... 227

Table 69 Regulatory Correlation to Ethical Climate Types and Leadership Styles ,. 231

Table 70 Religiosity Correlation to Ethical Climate Types and Leadership Styles .. 234

List of Tables in Appendices

Table A1 FSGO Amendments Requiring Organizational Ethical Culture 279

Table B1 MLQ Scales, Number of Questions, and Scale Definitions 283

Table C1 ECQ Scales, Number of Questions, and Scale Definitions 293

Table D1 Reliability Recommendations for MLQ Administration 298

Table I1 List of Utah CPA Firms Participating . 317

xxiii

Table P1 Coding of MLQ Survey ... 351

Table P2 Coding of ECQ Survey ... 351

Table P3 Coding of FSGO Survey . 351

Table P4 Coding of REL Survey 352

Table P5 Coding of Demographic Information . 353

Table Q1 MLQ Leadership Style Factors and Scales .... 356

Table Q2 ECQ Factors and Scales 357

Table Q3 FSGO Understanding 358

Table Q4 Religiosity or Religiousness ... 358

Table W1 Regulatory Correlations ... 388

Table X1 Religiosity Correlations 390

Table Y1 Post Hoc Power Table ...... 392

xxiv

List of Figures

Figure 1. Conceptual Integrated Leadership & Ethical Climate Framework . 21

Figure 2. Statistical Integrated Leadership & Ethical Climate Framework 99

Figure 3. Minimum Practice Structure Sought from Population ....104

Figure 4. Female by Leadership Responsibilities . 149

Figure 5. Male by Leadership Responsibilities . 150

Figure 6. Estimated Marginal Means of Caring 182

Figure 7. Estimated Marginal Means of Lawcode 184

Figure 8. Estimated Marginal Means of Rules and Service Function .. 186

Figure 9. Estimated Marginal Means of Rules and CPA Licensure .. 188

Figure 10. Estimated Marginal Means of Lawcode and Firm-size ... 190

Figure 11. Estimated Marginal Mean of Rules and CPA Licensure . 192

Figure 12. Estimated Marginal Means of Lawcode to Length of Time with Firm .. 194

Figure 13. Summary of Findings for Hypotheses H1, H2, and H3 ... 198

Figure 14. Summary of Findings for Hypotheses H4, FSGO (IV) to ECQ (DV) . 199

Figure 15. Summary of Findings for Hypotheses H4, FSGO (IV) to MLQ Leadership

Scales (DV) ........ 199

Figure 16. Summary of Findings for Hypothesis H5. REL (IV) Scale to ECQ (DVs)

Scales ..... 200

Figure 17. Summary of Findings for Hypothesis H5. REL (IV) Scale to MLQ (DVs)

Scales . 200

Figure 18. Utahs Public Accounting Professions Future Leadership Objective 223

Figure 19. Religiosity Distribution with Normal Bell Curve 236

xxv

List of Figures in Appendices

Figure R1. Process to Obtain CPA Firm Permission to Contact Organizational Members

.... 360

Figure S1. Electronic Survey Landing Pad .362

Figure S2. Electronic Survey Informed Consent ... 364

Figure S3. Electronic Survey Instructions for MLQ . 365

Figure S4. Electronic Survey, Sample of MLQ Questions 365

Figure S5. Electronic Survey Instructions for ECQ .. 366

Figure S6. Electronic Survey, Sample of ECQ Questions 366

Figure S7. Electronic Survey Instructions for REL ...... 367

Figure S8. Electronic Survey, REL Questions .. 367

Figure S9. Electronic Survey, Survey Branch Question .... 368

Figure S10. Electronic Survey, Instructions for FSGO Questions 368

Figure S11. Electronic Survey, Sample of FSGO Questions 369

Figure S12. Electronic Survey, Instructions for Demographic Questions . 368

Figure S13. Electronic Survey, Sample of Demographic Questions . 369

Figure S14. Electronic Survey, Survey Incentive .. 370

Figure S15. Electronic Survey, Survey Submission Notice .. 371

Figure T1. Electronic Survey Pathway .. 373

Figure U1. Histogram of Transformational Leadership Scale ...... 375

Figure U2. Histogram of Transactional Leadership Scale .... 376

Figure U3. Histogram of Laissez-faire Leadership Scale .... 376

Figure U4. Histogram of Caring Ethical Climate Type Scale .. 377

xxvi

Figure U5. Histogram of Lawcode Ethical Climate Type Scale ... 377

Figure U6. Histogram of Rules Ethical Climate Type Scale . 378

Figure U7. Histogram of Instrumental Ethical Climate Type ... 378

Figure U8. Histogram of Independence Ethical Climate Type Scale ....379

Figure U9. Histogram of SEC Understanding Scale ......379

Figure U10. Histogram of Religiosity Scale . 380

Figure V1. Scatterplot of Caring Ethical Climate (DV) to Leadership Styles (IVs) ..... 382

Figure V2. Scatterplot of Lawcode Ethical Climate (DV) to Leadership Styles (IVs).. 383

Figure V3. Scatterplot of Rules Ethical Climate (DV) to Leadership Styles (IVs) ... 384

Figure V4. Scatterplot of Instrumental Ethical Climate (DV) to Leadership Styles (IVs)

..385

Figure V5. Scatterplot of Independence Ethical Climate (DV) to Leadership Styles (IVs)

386

xxvii

List of Equations

Equation 1. Sample Size .107

1

Chapter 1: Introduction

Despite the increased regulation of the public accounting profession (Hart, 2009;

Holthausen, 2009), arguments for ethics reform in accounting (Cohen & Pant, 1991),

whether in the public accounting professions corporate financial reporting operations

(Staubus, 2005) or accounting education (Armstrong, 1987; Armstrong, Ketz, & Owsen,

2003; Ponemon, 1990; Thorne, 2000), appears warranted. Accountants directly and

indirectly continue to make unethical or worse accounting decisions resulting in financial

loss (KPMG, 2006). Not only do these unethical accounting decisions result in financial

loss, according to Niece and Trompeter (2004), Carpenter and Reimers (2005), Kirk

(2005), Efendi, Srivastava, and Swanson (2007), these unethical accounting decisions,

made or allowed by financial reporting employees and external auditors, respectively,

continue to erode the publics trust in the accounting profession. Public trust is a bedrock

ethical principle for the accounting profession (AICPA, 2010).

Jensen (2005) stated that financial statement fraud is an agency theory conflict

between agent and principal, when there was a lack of financial statement reporting

governance and internal controls. Albrecht, Albrecht, Albrecht, and Zimbelman (2012)

stated that financial statement fraud has the largest financial loss impact of all fraud

schemes. Overall fraud is estimated to be 5% of organizational annual earnings, which

represents approximately $2.9 trillion of the 2009 gross world product (ACFE, 2010). Of

the fraud cases voluntarily reported to the Association of Certified Fraud Examiners, to

be compiled in their biennial Report to the Nations, fraudulent financial statement

reporting represented 68% of total reported dollar losses (ACFE, 2010).

2

The researcher reviewed the background of unethical or fraudulent accounting

decisions that have led to investor and creditor loss and to the growing public distrust of

financial reporting markets assurers. Psychological, sociological, and personal moral

misbehavior are at the foundation of the accounting professions failure to mitigate this

growing public distrust. A psychological, sociological, moral, and spiritual

understanding of higher ethical behavior and supporting organizational structures and

mechanisms are believed needed to reverse this growing trend of unethical and fraudulent

financial reporting and abuse.

Background of the Problem

Accountants unethical and fraudulent accounting reporting communicates false

financial information to users of financial statements. A fraudulent financial statement is

one of three major categories of occupational frauds and abuses. The three categories are

bribery and corruption, asset misappropriation, and fraudulent financial reporting (Wells,

2004). Understanding why accounting professionals breach the publics trust and

commit fraudulent financial reporting behavior, and assessing ways to mitigate future

fraudulent financial reporting behavior, can provide useful knowledge to strengthen the

accounting firms ethical climate. Understanding how to build more ethically compliant

organizations will be valuable to certified public accounting firms to minimize loss

because of fraudulent financial reporting activities. Research provides a variety of

theories about why the problem of fraudulent financial reporting persists. Albrecht,

Romney, Cherrington, Payne, and Roe (1982) indicated that business criminal behavior

has theoretical roots in psychology, sociology, and moral development.

3

The researcher extended cognitive behavior theory and attempted to provide

evidence about whether subordinates perceptions of their immediate superiors

leadership style, their understanding of regulatory compliance recommendations, and

their personal institutional religiosity and compassionate service, correlates to their

organizational ethical work climate perceptions. The interdisciplinary relationships of

sociological-, psychological-, and moral-development epistemological foundational

arguments are discussed in the ensuing pages. Much criminal behavior stems from

relationships.

Sociological Foundation and Leadership Relationships

The slogan, white-collar crime and the sociological means of perpetuating

criminal behavior through the theory of differential association, first appeared in Edwin

Sutherlands seminal book, White Collar Crime, in 1949 (Galliher & Guess, 2009).

Differential association allows the offender to perpetuate illegal behavior among

participants and learners, while isolated from unwelcome definitions about such criminal

behavior. In other words, differential association can occur in the workplace

environment, especially where a subordinate is learning from an immediate supervisor or

focal leader in which the workplace information and responsibility are fragmented and

departmentalized (Darley, 2004), such as found in the public accounting profession. In

an earlier work, Sutherland (1940) stated that white-collar crime learned by subordinates

from their superiors, was very much an accepted folkway of doing things.

Important to consider here is the socializing correlation upon the new professional

staff into an organizations folkway of doing things. Components of an organizational

ethical climate are generally . . . the perceived prescriptions, proscriptions, and

4

permissions regarding moral obligations in the organization (Victor & Cullen, 1988, p.

101). Understanding those socio-relational associations that correlate to subordinates

perception of the organizations highest ethical climate expectations could be useful in

reinforcing ethical activity. The researcher sought to understand how work relationships,

between an immediate superior and subordinate, relate to accountants at various levels of

the accounting firms hierarchal structure. Criminal psychology has produced theories

about why crime occurs.

Psychological Foundation and Leadership Effect

The psychology literature for criminal behavior is extensive. An emerged

psychological theory of business criminal behavior is the fraud triangle (Wells, 2004).

The fraud triangle suggests that fraudulent behavior occurs when three factors exist, (i) an

opportunity to commit, convert, and conceal the fraud, (ii) cognitive psychological

pressure from self or from the management environment, and (iii) cognitive

rationalizations or attitudes justifying the criminal act (Golden, Skalak, & Clayton, 2006).

Fiedler and House and Mitchell suggested that industrial psychology models link . . .

leader behavior to subordinate satisfaction and motivation (Fiedler 1967, and House &

Mitchell, 1974, as cited by Jiambalvo & Pratt, 1982, p. 734). Lou and Wang (2009)

found, from a study of 97 fraud and 467 non-fraud cases that a critical risk factor,

inclining toward fraudulent behavior, was managements lack of integrity. This

suggested connection between managements lack of integrity and unethical subordinate

behavior supports Ajzens (1980) subjective norm condition in the theory of planned

behavior (TPB).

5

In this studys context, leaders ethical leadership behavior could be related to an

organizational ethical climate and that fraudulent financial reporting emanates from the

theory that subordinates personal rationalizations, a cognitive psychological process,

allows them to justify their ethical or unethical behavior. An accounting firms

subordinates reference for ethical behavior could very well be his immediate focal

leader. For instance, for accounting staff personnel that would be their supervisor; for

accounting supervisors that would be their managers; for accounting managers that would

be their partners to whom they work closely with and report; and for accounting partners

that would be the firms managing partner. The researcher sought to better understand

the accounting firms immediate leadership correlative relationship to the subordinates

perception of the ethical work climate. Prior ethical behavior is thought to influence

future ethical behavior.

Ethics, Moral Development, and Spiritualitys Correlation to Behavior

Accounting ethics is about how accountants rationalize right behavior among

relationships. Trevino and Nelson (2007) stated, Ethics is the bedrock on which all of

our relationships are built . . . its about the quality of that connection (p. 19).

Accounting ethical relationships can be between two individuals in a give-and-take

contractual relationship. Another such relationship exists between the sole auditor

responsible for writing the financial statement audit opinion, or the accounting firm,

whose signature rests upon the audit opinion, to all financial information-reliant

stockholders and other corporate/societal stakeholders. Ethical behavior is embedded

with all these professional accounting relationships. Ethics theories principles are the

6

foundation of the ethical climate theory (ECT) (Victor & Cullen, 1987) as well as the

moral principles behind moral development and behavior (Kohlberg, 1981).

Cognitive moral development progresses through stages (Kohlberg, 1979, 1984).

Kohlberg identified six specific stages of moral development. The first and second

stages, known as the pre-conventional stages, suggest that peoples moral decisions are

based upon rewards and punishments. The third and fourth stages, known as the

conventional stages, posit that peoples moral decisions are based upon peer group

expectations and respect for standards, rules, and laws. The fifth and sixth stages, known

as the post-conventional stages, speculate that peoples moral decisions are based upon

logical application of universal moral principles, regardless of legal or societal

implications.

Persons with higher moral development are thought to less likely submit to

rationalizations and other forms of pressure to commit unethical behavior; however,

research repeatedly shows that possessing developed moral sensitivity, judgment, and

intention is not necessarily sufficient to ensure moral behavior; rather, the . . . decision

maker must have the necessary strength of character to carry out her moral intentions

(Bay & Greenberg, 2001, p. 376). Foundational to the theory of moral development is

the justice virtue theory (Kohlberg, 1981). Virtues are foundational for ethics behavior

frameworks in education (Keiser & Schulte, 2007), and in management (Arnaud, 2006;

Victor & Cullen, 1987), and thus for the accounting profession.

Personal moral courage or character, when exercised, is a virtue that enables

ethical behavior in the face of personal loss or danger (Kidder, 2005). Cheffers and

Pakaluk (2005) suggested a distinction between intellectual virtues and character virtues.

7

Intellectual virtues can be taught, such as good judgment and objectivity, whereas

character virtues are acquired through experience and practice, such as moral courage or

bravery, for instance. Aristotle (1962) remarked that persons become just by doing just

acts, temperate by doing temperate acts, brave by doing brave acts. Cheffers and Pakaluk

(2007) stated, Character . . . is formed by and tested in small things and first things (p.

227). By extension some may surmise that accountants would better able exhibit moral

courage, and not wilt under pressure to commit fraudulent financial reporting, by having

only exhibited prior morally courageous behaviors. Some authors believe that the resolve

to have moral courage can be taught (Bebeau, 2002; Bergman, 2002; Blasi, 1983; Comer

& Vega, 2006). Consistent ethical behavior, at all levels of leadership and management,

bring to bear and may influence the perception of the organizations ethical work climate

expectations (Neubert, Carlson, Kacmar, Roberts, & Chonko, 2009). Other factors are

suspected to affect ethical behavior: spirituality and religiosity.

Spirituality and Religiosity

Spirituality and virtue ethics are emerging, in management literature, as possibly

related factors for employee affective commitment, satisfaction, and productivity

(Corner, 2009). Ashar and Lane-Maher (2004) suggested that there exists a growing

need to allow employees experience a sense of spirituality at the workplace. Spirituality

can be achieved through more meaningful accomplishment, wholeness, and integration

with the workplace through the use of organizational values of consciousness,

collaboration, and inner orientation to express their integrity (Steingard, 2005). Wilber

(1998) stated . . . that knowledge come in three epistemological eyes: the eye of flesh

(empirical), the eye of mind (reason), and eye of contemplation (spiritual) (as cited in

8

Steingard, 2005, p. 237). Spirituality in the workplace is also the connection between

individuals sense of personal religiosity influencing organizational work behavior

(Kutcher, Bragger, Rodriquez-Srednicki, & Masco, 2010). Community with religious

institutions, in which a higher discourse of spiritual values is taught and ritually and

personally practiced, nurtures spirituality. Spirituality, in a form of religious and

community service orientation, enhance ethical behavior intention (Christensen, Barnes,

& Rees, 2005).

A growing sense of urgency is developing for the accounting profession to

possess a greater ethical awareness and practice of obligatory ethical behavior. In

December 2006, The International Federation of Accountants (IFAC) released an

exposure draft on developing and maintaining professional values, ethics, and attitudes

for individuals within accounting firms (IFAC, 2006). The researcher sought to

understand the ethical workplace climates among the various hierarchal levels within

accounting firms, how leadership correlates to ethical climate perceptions, and whether

regulatory requirements and religiosity may correlate to the perceptions of leadership and

ethical workplace climate types.

Continued Fraudulent Financial Reporting

Despite decades of increased regulatory and professional organizations efforts,

and after the Report of the National Commission on Fraudulent Financial Reporting

(NCFFR, 1987), many global and Fortune 500 large companies continue to be convicted

of fraudulent financial reporting (Engelbracht, van Aswegan, & Theron, 2005; Grojean,

Resick, Dickson, & Smith, 2004). Mulki, Jaramillo, and Locander (2009) stated, in the

Economist, . . . that in the United States alone, there are 165 business organizations and

9

65 executives currently under investigation for violation of ethical behavior (2007, p.

125). In support, the Committee of Sponsoring Organizations (COSO, 2010) stipulated,

from information from the Securities Exchange Commission (SEC), that an increase of .

. . 347 alleged cases of public company fraudulent financial reporting from 1998 to 2007,

up from 294 cases from 1987 to 1997 (p. III), wherein 89% of the chief executive

officers (CEOs) and chief financial officers (CFOs) were found to be part of reporting

corruption. The committee also called for further research to identify how to prevent,

deter, and detect fraudulent financial reporting (COSO, 2010). Continued research of

accounting firms leadership, ethical climate, and other contributing factors is necessary

for formulating solutions for this problem.

Statement of the Problem

Responsible public accounting leaders, who audit corporate financial reporting

activity, may very well be negatively affected by factors influencing their financial-

statement-auditing-opinion decision. Arens, Elder, and Beasley (2012) stated, Despite

efforts by the profession to address legal liability of CPAs, both the number of lawsuits

and sizes of awards to plaintiffs remain high . . . (p. 114). In China, Firth, Mo, and

Wong (2005) reported on Chinese increased sanctioning against public accounting

auditors involved with fraudulent financial reporting. In 2006, the SEC reported that

1,420 financial statement restatements occurred (Apostolou & Crumbley, 2007). This

2006 increased financial-statement-restatement frequency, caused by error or irregularity,

is . . . 12 times higher than in 1997 (Apostolou & Crumbley, 2007, p. 320).

Continuing, Apostolou and Crumbley reported that the restatements were more often

caused by . . . managements maintenance of an expensive lifestyle or pressure to meet

10

goals (incentive), and the perpetrators lack of awareness that their actions are wrong

(self-rationalization) or simple lack of integrity (p. 3). Public accounting auditor

involvement in fraudulent financial reporting was not totally excluded from these

restatement actions and could be attributed to the lack of a positive ethical work climate.

Corporations and especially the public accounting firms must conceive of and

implement organizational solutions to lessen the likelihood of future unethical and

fraudulent financial reporting behavior. Some of these organizational solutions may

involve appropriate ethical leadership within the public accounting organizations;

organizational structures, policies, and procedures that support a preferred organizational

ethical climate type; and of hiring and retaining employees who are ethically and

spiritually sensitive, aware, and possess the ability to exhibit moral courage when under

professional duress.

Through the use of a quantitative research study with a correlation design the

researcher attempted to understand better the leadership, ethical climate, and other

moderating factors that are hypothesized to contribute to fraudulent financial reporting

and abuse, by having (i) gathered evidence of the leadership factors positively related to

the accountants ethical awareness, (ii) analyzed what employees perceived to be the

discernible ethical climate, and (iii) evaluated whether the subordinates cognizance of

exogenous regulatory requirements and his or her measured religiosity may have

influenced leadership and ethical climate type perceptions.

Purpose of the Study

The purpose of this quantitative doctoral research study, with a correlation design,

is to describe and quantify the relationships between accounting subordinates perception

11

of their immediate leaders full-range leadership theory (FRLT) style, ethical climate

factors (Antonakis & House, 2002; Victor & Cullen, 1988), and whether understanding

of the Federal Sentencing Guidelines for Organizations and personal religiosity bear on

the subject. The proposed research study used four survey instruments. The first two

surveys are the standard Multifactor Leadership Questionnaire (MLQ) by Bass & Avolio

(2007) and the Ethical Climate Questionnaire (ECQ) by Victor and Cullen (1988)

surveys. The second two surveys were two self-constructed questionnaires obtaining

information about the respondents familiarity with the Federal Sentencing Guidelines for

Organizations (FSGO) recommendations and the respondents salience with his or her

religiosity (REL) or personal compassionate service commitment. The immediate

supervisors leadership style was an independent variable. The subordinate accountants

perceptions of the five empirically derived ethical climate types (Victor & Cullen, 1988)

were the dependent variables. The subordinates knowledge of regulatory requirements

and the subordinate accountants religiosity or compassionate service practices were the

moderating (intervening) variables. The data collected in this study was quantitative.

All these surveys are believed useful in presenting a more comprehensive

exploration of subordinates perception of positive ethical climate awareness or how to

improve future research. For instance, the use of the MLQ and ECQ surveys confirmed

prior theoretical research assumptions that as leadership style tends toward ethical

transformational leadership, the more aware subordinates are of a positive ethical work

climate (Aronson, 2001). Neubert, Carlson, Kacmar, and Chonko (2009), as well as this

researcher, suggested that ethical leadership styles correlate to the subordinates

perception of ethical climate. As a consequence of having found confirmatory correlative

12

evidence, in the public accounting profession, promoting, training, and exercise of

transformation leadership style should follow. Additionally, this research studys

proposed possible antecedent intervening variables, the degree of religiousness or

compassionate service effort behavior integration and regulatory compliance awareness,

were sought to be measured by the REL and FSGO surveys, respectively. The data

collected for these two variables provided useful information and precipitated better

research recommendations for the future.

These four survey instruments were used to study a variety of accounting firm

personnel (e.g., accounting staff, supervisors, managers, and partners) with firms that

typify the accounting profession (e.g., local, small-; local, large-; and regionally-sized

firms) in the State of Utah, across a variety of service disciplines (e.g., assurance

services, tax, and consulting, and other services). These four instruments, along with the

collected demographic data provided some valuable information about improving the

ethical climate of accounting firms.

Significance of the Problem

The accounting profession is expected to benefit from the examination of

relationships between leadership styles and organizational ethical climate types by

illuminating the current state of organizational leadership and follower perceptions. The

result of this leadership and ethical climate study will add to the sparse research and body

of knowledge related to the public accounting profession. Also, this research model can

be used repeatedly in other geographic jurisdictions, eventually aggregating to a robust

understanding of the national or global public accounting professions effective

leadership styles, perceived ethical climates, and subordinate accountants personal

13

understanding of regulatory requirements, and religiositys effect. The discoveries, of

this study, have implications for all accounting firms servicing financial banking, trading,

and other business markets.

Specifically, the research findings provided insight into how various levels of

public accounting organizational ethical leadership values and leadership styles may help

shape a positive ethical climate for subordinates. The discoveries, of this research study,

should inspire accounting firms to receive ongoing interventional training for the

development of firm personnels ethical values, leadership practices, and community

citizenship. Also, those reading and understanding the findings of this study, should be

motivated to possess a heightened and sustained cognition and compliance desire to

ethical behavioral expectations regarding prescriptions, proscriptions, and permissions of

the moral obligations of the public accounting organization and society.

Significance of the Study to Policies and Practices of Public Accounting

Public accounting firms that have strong ethical transformational leadership and

demonstrate an organizational ethical climate possess an organizational sustainability not

experienced by the ethics-failed Arthur Andersen firm (Boyd, 2004). Brennan (2003)

stated that when organizations put their stakeholders and employees first, through leaders

with integrity and an organizational ethical work climate, such organizations . . . will

gain market share, build loyalty, and outperform and outlast their competitors (p. 20).

Significance of the Study to Leadership in Accounting

The accounting profession continually needs to assess its ethical leadership and

their organizational ethical work climate as well as become champions of ethical and

morally courageous conduct. Wilson (1970) stated, about the continued lapses in

14

corporate ethical conduct, that . . . the slow anger [of society] at immoral ones

[corporations and its leaders] threatens capitalismand thus freedomitself (p. 60).

For instance, Gunz, Gunz, and McCutcheon (2002) found that whether the accounting

firm was large, medium, or small, organizational ethical climate and available

organizational ethical mechanisms affected how ethical decisions were made. Hood

(2003) found corroboration that transformational chief executive officer (CEO)

leadership . . . tends to foster ethical practices in organizations (p. 270). Mendoca

(2001) stated that true and effective leadership resonated throughout an organization

when leadership processes were consistent with ethical and moral values.

Leadership that exhibit constant ethical conduct and demonstrate transformational

leadership style may encourage followers also to conduct themselves ethically. Bass and

Steidlmeier (1999) stated that transformational leadership has strong philosophical

underpinnings and ethical components (Ethical issues and transformational leadership

section, para. 1). Leaders who exhibit ethical and moral behavior and function in an

organizational effective ethical climate may increase the likelihood of organizational

followers to behave ethically (Zhu, 2006).

Also, leaders significantly contribute to affecting the sustainability of an ethical

work climate (Ireland & Hitt, 2005; Neubert et al., 2009; Sama & Shoaf, 2008) and

transformational leadership may create and perpetuate the ethical climate of organizations

(Van Aswegen & Engelbrecht, 2009). Accounting organizational leaders must

effectively communicate, promote, and sustain a heightened organizational cognition of

the organizations ethical climate policies, procedures, and performance expectations.

Ethical leadership behaviors congruent with the firms ethical climate behavioral

15

mechanism expectations could better safeguard accounting firms from ethical failures,

which can and have led to consequential and catastrophic loss (Boyd, 2004; Zandstra,

2002).

Understanding the relationship between the leadership styles exhibited by public

accounting leaders and the effect on immediate subordinate followers perceptions of the

firms ethical climate can provide a benchmark understanding of the status of the firms

appropriateness of leadership styles and the sufficiency of the firms ethical climate

components. A growing body of literature, although small in scope, provides some

information about public accounting firms leadership, ethical climate, and firm

personnels cognition of its importance (Bobek, Hageman, & Radtke, 2010; Gunz, Gunz,

& McCutcheon, 2002; Jiambalvo & Pratt, 1982). This researchers interpretation of the

research findings suggests that leadership development fostering the transformational

leadership style is desirable for sustaining an organizational ethical awareness; that ethics

training, for all levels of the CPA organization, should be continuous and ongoing, and

that employees understanding of professional standards and relevant governmental

regulations can minimize poor leaderships influence and subordinate ethical perceptions.

Nature of the Study

The purpose of this quantitative research study, with a correlation design, was to

examine the degree to which public accounting firms leadership styles, and other

antecedent leadership and subordinate behaviors, are associated with creating and

sustaining subordinates perception of the organizations ethical climate. Web-based

surveys were administered to accounting firm employees, of an acceptable sample size,

for several cross sectional analyses between firm sizes of Utahs public accounting firms.

16

The study describes the relationship between accounting subordinates perception

of their immediate leaders full-range leadership theory (FRLT) style (Antonakis &

House, 2002; Bass, 1985) to the subordinates perception of their own ethical climate

(Neubert et al., 2009; Sagnak, M, 2010), as moderated by the subordinates

understanding of the Federal Sentencing Guidelines for Organizations (FSGO), and the

subordinates religiosity. The study used the Multifactor Leadership Questionnaire

(MLQ) for Research Web Data Collection (Bass & Avolio, 2010), and the Ethical

Climate Questionnaire (ECQ) surveys (Victor & Cullen, 1988). The study also used two

self-constructed surveys relating to the FSGO and religiosity. Respectively, these

instruments were used to study a variety of accounting firms, with sizes that populate the

accounting profession (e.g., local, small-; local, large-; and regionally-sized firms),

between subordinates work-task relationship with the leader (e.g., assurance and tax

services), and length of work-life experience (e.g., staff, supervisor, and manager levels).

To understand better the relationships between leadership styles and subordinates ethical

climate perception in public accounting firms, a sample of professional accounting

personnel, who work for public accounting firms in the State of Utah, was selected for

this study.

Overview of the Design Appropriateness

This quantitative research study, with a correlation design, investigated the

relationships between independent, dependent, and moderating (intervening) variables

(Creswell, 2005). To answer this studys research questions, survey respondents selected

discrete Likert scale choices, thus providing quantifiable data to measure the degree of

their perceptions and correlative associations among the variables. The public accounting

17

subordinate quantified his immediate focal leaders full-range leadership style, which

could be transformational (IV), transactional (IV), or laissez-faire (IV) (Antonakis &

House, 2002). The subordinates perception of the accounting firms ethical climate

factors have been identified as the dependent variables (DV). The proposed public

accountings conceptual ethical framework (see Figure 1, below) presented is the

relationship of exogenous compliance/punishment recommendations (MV) to the

subordinates perception of the firms ethical climate (DV). Last, and somewhat unique,

a moderating (intervening) variable (MV), measuring church attendance and extent of

compassionate personal service may. Both these moderating variables were thought to

relate both to the subordinate leaders perceived leadership style and the workplace

ethical climate type. The following research questions emanate from the researchs

proposed conceptual leadership and ethical climate framework.

Research Questions

Research questions naturally arise from the accounting profession ethical failings.

Regulators, industry leaders, and society in general, seek to understand about how to best

improve the accounting firms ethical climate awareness and reduce possible future

instances of participation in fraudulent financial reporting. The research sought to

explore answers to the following questions:

1. To what degree do partners, managers, and supervisors various leadership

styles relate to the subordinates perception of what are ethical expectations and

behaviors to be followed?

18

2. To what degree does the subordinates knowledge of regulatory influence

relate to the subordinates perception of the ethical climate and the focal leaders

leadership?

3. To what degree does the subordinates religiosity or compassionate service

relate to the subordinates perception of the ethical climate and the focal leaders

leadership?

A variety of hypotheses naturally derive from these research questions.

Quantitative Hypotheses

The following five hypotheses tested the relationships between the components of

the theorized conceptual integrated leadership and ethical climate framework (see Figure

1 below).

First null hypothesis

H10: A leaders transformational leadership style does not correlate to the

subordinates perception of the firms ethical climate in Utah.

First alternate hypothesis

H1A: A leaders transformational leadership style correlates to the subordinates

perception of the firms ethical climate in Utah.

Second null hypothesis

H20: A leaders transactional leadership style does not correlate to the


Second alternate hypothesis

H2A: A leaders transactional leadership style does correlate to the subordinates


19

Third null hypothesis

H30: A leaders laissez-faire leadership style does not correlate to the


Third alternate hypothesis

H3A: A leaders laissez-faire leadership style does correlate to the subordinates


Fourth null hypothesis

H40: Known exogenous regulatory/punishment factors, as perceived by

subordinates, do not correlate to the subordinates perception of the firms ethical

climate and immediate leadership in Utah.

Fourth alternate hypothesis

H4A: Known exogenous regulatory/punishment factors, as perceived by

subordinates, does correlate to the subordinates perception of the firms ethical

climate and immediate leadership in Utah.

Fifth null hypothesis

H50: The degree of service or church attendance does not correlate to the

subordinates perception of the firms ethical climate and immediate leadership in

Utah.

Fifth alternate hypothesis

H5A: The degree of service or church attendance does correlate to the

subordinates perception of the firms ethical climate and immediate leadership in

Utah.

20

Analysis of the data collected and testing of these five hypotheses added to the

understanding of leadership and ethical climate awareness for public accounting firms in

Utah and whether regulatory recommendations and personal religiosity also relate.

Theoretical Framework and Rationale for Proposed Hypotheses

The current study was developed to quantify data needed for better understanding

the relationships between the organizations leadership styles and the subordinates

awareness of the accounting firms ethical climate factors. The variables and analytical

tools chosen generally allowed the researcher to answer the research questions. The

research questions required obtaining empirical or quantitative evidence about relational

associations between the variables. The core research questions were intended to

quantity relationships of variables and the extent to which they are statistically correlated,

and whether or not those correlations are significant. The choice of quantitative methods

allowed the researcher to obtain these empirical evidences.

The present researchers discoveries provided greater knowledge about whether

subordinates understanding of external regulatory recommendations and whether their

personal religiosity has any correlative relationship to leadership perception and ethical

climate awareness. Each of these factors and rationale for inclusion in the research

model are discussed in the following pages.

21

Known Exogenous

Regulatory/Punishment

Federal Sentencing

Guidelines (FSG) & Sarbanes

-Oxley Regulations

Subordinates'

Perception of

Ethical Climate

Extent of

Religiosity/Compassionate

Service

Subordinates'

Immediate Superior's

Leadership Style

Figure 1. Conceptual Integrated Leadership and Ethical Climate Framework

22

Leadership

Leadership without ethical conduct can be dangerous, destructive, and even toxic.

(Toor & Ofori, 2009, p. 533)

Research, covering a variety of companies in South Africa, demonstrated that

ethical transformational leadership has a positive correlative relationship to fostering an

organizational ethical climate (Englebrecht, Van Aswegen, & Theron, 2005). An ethical

climate possesses perceived prescriptions, proscriptions, and permissions regarding moral

obligations and thus, ethical conduct. Professional accounting firms leadership influence

is thought to be responsible for the ethical climate and ethical actions of the

organizations personnel (Reidenback & Robin, 1991). Two major leadership styles are

the transformational and transactional (Antonakis & House, 2005; Bass, 1985). Within

the transformation leadership style, traits of ethical behavior are present (Bass &

Steidlmeier, 1999). Trevino and Brown (2004) recommend that leaders exhibit ethical

conduct and consciously manage the organizations ethical culture.

Ethical Climate

Ethical climate is a subcomponent of an organizations culture. Cullen,

Parboteeah, and Victor (2003) defined ethical climate as . . . components of the

individuals environment as perceived by the members (p. 129). Also, ethical climate is

the psychological environment in which individual behavior takes place (Buchan, 2006).

The ethical climate gestures to employees what is acceptable behavior (Trevino,

Butterfield, & McCabe, 1998). A view of how ethical climate and an organizations

culture relate is important. Verbos, Gerard, Forshey, Harding, and Miller (2007)

suggested that positive ethical organizations emerge because the presence of certain

23

organizational elements. Those organizational elements or practices are authentic

leadership, formal and informal ethical organizational structures, processes and systems

that are aligned with ethical practices, and an ethical culture supported by salient ethical

identities among members who create a strong ethical climate.

Professional accounting firms should possess policies, procedures, and training

mechanisms that encourage compliance with regulatory requirements, regulatory

recommendations, ethical expectations, and good leadership. Professional accounting

firms prominent ethical identities could be those individuals who practice ethical

behavior reinforced by their own personal religiosity. The ethical climate context,

defined as identifiable ethical components, perceptions, and permissions for what is

acceptable and appropriate behavior at a given point of time, is an organizational context

providing opportunities to measure and assess effectiveness. Next, regulations are

established to direct appropriate and expected behavior.

External Regulatory Forces

Employees, for a variety of positive and negative reasons, behave the way they

do. Positive reasons may be related to rewards. Negative reasons might be the avoidance

of punishments (Kaler, 2000). Professional accountants play a role in sustaining ethical

behavior in financial reporting (Verschoor, 1992). Some posit that positive awards and

negative punishments tend to motivate persons to operate at the lower levels of

Kohlbergs stages of moral reasoning (Baucus, Beck, & Dudley, 2005) and propose ans

ethical communities approach to heighten ethical reasoning to higher levels. Research

has found that organization can rise above the punitive sanctions-based punishment

approach for motivating ethical behavior. The organization that promotes a values-based

24

or principles approach can influence employees to develop and act on ethical values,

which appears more successful for ethical compliance (Tyler, Dienhart, & Thomas,

2008). However, the regulatory punishments pathway for non-compliance also has a

measureable positive correlation to the ethical decision-making (Gurley, Wood, &

Nijhawan, 2007). An organizations policies and procedures carrot-and-stick approach

for creating an organizational ethical village, of sorts, may be best for persuading

employee ethical behavior. Last, religiosity is too beginning to show possible

relationship to ethical behavior.

Religiosity

In several marketing studies, religion was a factor research suggested influenced

ethical decision-making (Hunt & Vitell, 1986; Hunt & Vitell, 1993; Singapakdi,

Salyachivin, Virakul, & Veerayangkur, 2000). Oumlil and Balloun (2009) found strong

positive correlations between religiosity and idealism; however, there wer

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