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ACCWnting, Organizations and Society, Vol. 22. No. 3/4, pp 337-352, 1997
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COGNITIVE MORAL DEVELOPMENT AND AUDITOR INDEPENDENCE
JOHN T. SWEENEY
Uni versi ty of Mi ssouri -Col umbi a
and
ROBIN W. ROBERTS
I owa State Uni versi ty
Abstract
This paper examines the influence of cognitive moral development on an auditors independence judg-
ments. Over three-hundred audit professionals participated in a field experiment in which they completed
a measure of mom1 development and responded to an ethical dilemma involving auditor independence.
The most significant findings are that an auditors level of moral development affected his or her sensitivity
to ethical issues and independence judgments. Additionally, the influence of the audit firm, partitioned by
size, moderated the moral development-independence relationship. U; 1997 Elsevier Science Ltd
The independence of financial statement audi-
tors has been the focus of recent investigations
by the Securities and Exchange Commission
(1994) and the Public Oversight Board of the
American Institute of Certified Public Accoun-
tants (POB, 1993, 1994). Recognizing that many
observers of the accounting profession view
the auditor as less than objective and indepen-
dent, the POB (1994, p. 4) concluded that the
profession is at a critical juncture in main-
taining the public trust.
The primary objective of this study is
to examine the influence of cognitive moral
development on auditor independence
judgments within the framework of a widely
accepted psychological model of ethical
behavior. We hypothesize that an auditors
level of moral development affects both
sensitivity to ethical issues in work-related
dilemmas and independence judgments. We
also hypothesize that the effectiveness of
potential penalties imposed for nonindependent
behavior are dependent upon an individuals
level of moral development. Furthermore, we
investigate the effect of firm size on auditor
independence judgments.
Prior research on auditor independence has
generally focused on the audit firm as the level
of analysis (DeAngelo, 1981a,b) or developed
formal analytical models of auditor indepen-
dence (Antle, 1984; Magee & Tseng, 1990).
Underlying both streams of research is the stated
assumption that auditors always act as rational,
economic agents. Accountants, however, often
find themselves in situations where conflict
exists between their economic self-interest and
what moral principles indicate ought to be
done (Gas, 1992, 1994). In fact, the definition
of independence embodied in the Code of
Professi onal Conduct (American Institute of
Certified Public Accountants, 1988, sec. 101,102)
requires auditors to act against self-interest
The authors gratefully acknowledge the helpful comments of the research workshop participants at the University of
Missouri, Iowa State University, and the University of Kansas and also the contributions ofJere Francis, Larry Ponemon, Earl
Wilson, and two anonymous reviewers.
337
33x J. T. SWEENEY and R. W ROBERTS
and ignore the various economic and social
incentives affecting them (Ponemon & Gab-
hart, 1990, p. 221). More recently, accounting
researchers have begun to study whether or not
economic self-interest is a sufficient basis for
analyzing independence (Farmer et al ., 1987;
Ponemon & Gabhart, 1990).
Ponemon & Gabhart (1990) examined the
relationship between moral development and
ethical decision making in the context of an
auditor independence dilemma. Their results
indicated that auditors with a relatively low
level of moral development were more likely to
believe a hypothetical auditors action was in
compliance with independence rulings and
were influenced to a greater extent by the
existence of a potential penalty than auditors
with a relatively high level of moral
development. Windsor and Ashkanasy (1995)
found that when faced with strong economic
pressure from client management, an auditors
moral development may interact with personal
beliefs in affecting independence. Tsui & Gul
(1996) found that moral development moder-
ated the relationship between locus of control
and the auditors acquiescence to client
management.
We extend the prior research on moral
development and auditor independence in sev-
eral ways. First, we examine the relationship
between an auditors level of moral devel-
opment and sensitivity to contextual ethical
factors when formulating an independence
judgment. Second, the relationship between
auditor independence and moral development
is explored in a richer context devoid of any
manifest economic incentives to violate profes-
sional rules. Third, we examine the influence of
the audit firm in moderating the relationship
between an auditors level of moral devel-
opment and independence judgment.
Utilizing a field experiment, we tested the
hypotheses with a sample of 312 auditors, from
staff through partner levels, at eight different
public accounting firms representing three
distinct size classifications. Our results indicate
that an auditors level of moral development
affects (1) sensitivity to ethical issues in an
audit context, (2) independence judgments,
and (3) the effectiveness of potential penalties
for violating independence standards. Further-
more, we find that auditors incorporate
contextual information when processing ethical
judgments and that auditors from different
sized public accounting firms in the United
States may hold differing beliefs or perceptions
regarding their independence with respect to
client management.
The remainder of the paper is organized as
follows. The second section provides a brief
background for the study and a description of
cognitive moral development theory. The
research hypotheses are presented in section
three and our methodology is explained in
section four. Data analysis and results are
discussed in section five, followed by our con-
clusions in section six.
MORAL DEVELOPMENT AND AUDITORS
INDEPENDENCE JUDGMENTS
Moral development theory (Kohlberg, 1969;
Rest, 1979) attempts to explain the cognitive
framework underlying individual decision
making in the context of an ethical dilemma.
The objective of moral development theory is
not to classify a behavior as inherently right or
wrong, but rather to understand the cognitive
reasoning processes an individual follows
in resolving an ethical dilemma. Kohlbergs
stage-sequence model (Kohlberg, 1969) identi-
fies a series of three qualitatively different levels
of individual cognitive moral development:
preconventional, conventional, and principled
or postconventional. Each level is composed of
two stages, with the second stage a more
advanced form of the general perspective. Indi-
viduals progress through these hierarchically
arranged levels in a sequential, irreversible pro
gression. An individuals moral growth results
from exposure to more advanced forms of
moral judgment. The ensuing cognitive conflict
or disequilibrium produces tension, which
results in the individual attempting to reconcile
the contradiction.
COGNITIVE MORAL DEVELOPMENT AND AUDITOR INDEPENDENCE 339
The conventional level of moral development
is the level attained by the majority of public
accountants (Gaa, 1992; Ponemon & Gabhart,
1993; Sweeney, 1995) and adults in the general
population of the United States and most other
societies (Colby & Kohlberg, 1987; Rest, 1979).
The moral development of public accountants
has been associated with underreporting beha-
vior (Ponemon, 1992a), hiring and promotion
decisions in public accounting firms (Ponemon,
19926), selection of recognized alternative
actions when making ethical judgments (Lampe
& Finn, 1992), perceptions of client integrity
(Ponemon, 1993; Bernardi, 1994) and bias in
litigation support judgments (Ponemon, 1995).
An auditor whose moral development is
primarily at the preconventional level will
follow independence standards only when it is
in his or her immediate interest. An auditor
whose moral development is primarily at the
conventional level has a desire to maintain rules
and authority and will always be independent if
such behavior is consistent with referent group
norms. The behavior of auditors who reason
primarily at the postconventional level will
conform with organizational and/ or indep-
endence standards when such standards are
consistent with internally held beliefs @one-
mon & Gabhart, 1990, 1993, 1994). Gaa states
that postconventional reasoning implies the
ability to move beyond the rules to decide
when rules ought to be broken, e.g., for the
welfare of society or because justice demands
it.(Gaa, 1992, p. 35)
Under the Kohlbergian paradigm, moral
action is not defined simply by the conduct
exhibited; rather, moral actions involve an
internal or cognitive component. Consistent
with moral development theory, the motivation
leading to an auditors ethical behavior will be
dependent upon the individuals level of moral
development (Ponemon, 1994).
HYPOTHESES
Ethi cal sensi ti vi ty and moral j udgment
Rest (1986) contends that in order for moral
behavior to occur, an individual must perform
at least four basic processes, which he refers to as
the Four-Component Model. In Component 1
an individual becomes aware of the existence
of an ethical issue and the possible alternative
courses of action. Component 2 occurs when
the individual then makes a judgment as to
what course of action is morally right. The next
step, Component 3, is the process whereby the
individual decides what he or she actually
intends to do by selecting among competing
values or goals. Component 4 involves imple-
menting and executing a plan of action.
Before an individual can behave morally, the
person must realize that an ethical problem
exists. Ethical sensitivity, or the awareness of an
individual to the ethical issues present in a
social context, is a prerequisite for assessing the
relationship between moral development and
action (Rest, 1986). Some research has indi-
cated that individuals with more advanced
moral development [Component 21 are more
sensitive to ethical issues [Component 11
(Bebeau et al ., 1985; Ponemon & Gabhart,
1990; Ponemon, 1993; Bernardi, 1994X
although Shaub (1989) did not find a correla-
tion between auditors moral development and
their sensitivity to ethical issues.
Rest (1986) indicates that each type of situa-
tion contributes a specific variability in ethical
sensitivity, and that professional dilemmas are
usually a combination of technical and moral
issues. Investments by the accounting profes-
sion and by individual accounting firms in
socializing auditors to behave in accordance
with professional standards (Fogarty, 1992;
Lampe & Finn, 1992) may desensitize some
auditors to ethical issues beyond the scope of
technical rules. Ponemon contends that
progression to higher stages of ethical reason-
ing fosters an individuals sensitivity to critical
events, issues, and conflicts (1993, p. 7) and
that auditors with higher ethical reasoning
capacities would have greater ethical sensitivity
to ethical conflict not well defined by the firm
or profession (1992, p. 254). Auditors who
have developed the ability to reason at the
postconventional level will be less responsive
to referent group norms and more sensitive to
340
J. T. SWEENEY and R. W. ROBERTS
imbedded ethical issues when judging an ethi-
cal dilemma. The first hypothesis predicts a
positive relationship between an auditors
moral development and his or her sensitivity to
ethical issues.
Hl: Auditors at higher levels of moral development will
be more sensitive to ethical issues.
Before the relationship between moral devel-
opment and independence judgments can be
assessed, the auditor must be aware that ethical
issues are present <Ponemon, 1994). Hypo-
thesis Hl effectively acts as a control to ensure
that subjects are sensitive to imbedded ethical
issues. Rest maintains that professional educa-
tion conditions the individual not to recognize
and deal with the moral aspects of the job
(Rest, 1986, p. 23). Auditors who respond to
only the technical issues in a dilemma, without
recognizing imbedded ethical issues, are relying
solely upon their knowledge of professional
standards in resolving the dilemma and not
upon their moral judgment. Individuals demon-
strating evidence of ethical sensitivity are utilized
in testing the relationship between moral
development and independence judgments.
moral judgment (Ponemon & Gabhart, 1990;
Arnold & Ponemon, 1991). Moral development
theory predicts that auditors at the preconven-
tional level will be independent if the perceived
potential sanctions for nonindependent
behavior exceed the potential benefits. Con-
ventional level auditors are expected to be less
responsive to potential penalties and more sen-
sitive to reference group norms and to uphold-
ing the independence standards of the firm
or profession. The independence judgment of
postconventional auditors is affected by con-
cerns relating to social welfare or principles of
justice and is uninfluenced by potential sanc-
tions. This leads to the following hypothesis:
H3: The independence judgments of auditors whose
moral development is primarily at the preconventional
level will be affected by the presence of potential
sanctions.
The influence of audit firm size on indepen-
dence
After testing hypothesis Hl and determining
which subjects are sensitive to ethical issues,
the relationship between moral development
and independence judgments is evaluated in
the context of an independence dilemma.
Based on the prior discussions of cognitive
moral development theory and auditor inde-
pendence, the following hypothesis is posited
regarding the influence of moral development
on auditor independence:
HZ: An auditors Ievel of moral development affects his
or her independence judgments.
Effect of sanctions
DeAngelo (1981a) maintains that larger audit
firms will be more independent than smaller
firms because they have greater potential future
client revenues to lose from nonindependent
action. A large audit firm provides a larger bond
for its audit than a smaller firm (Watts &
Zimmerman, 1986) and would therefore have
greater incentives for ensuring a strong nor-
mative structure promoting independence.
Trevino (1986) maintains that in an organiza-
tional culture which has a strong normative
structure, there will be more agreement among
members about what is appropriate ethical
behavior. Loeb (1971) found a lower incidence
of unethical behavior in large audit firms, and
Palmrose (1988) reported that Big Eight firms,
as a group, engage in less audit litigation than
non-Big Eight firms.
The effectiveness of rules and punishments DeAngelos collateral bond argument
promoting desirable independence behavior (DeAngelo, 1981~) predicts a positive relation-
will depend upon the moral judgment pro- ship between audit firm size and independent
cesses of auditors (Ponemon & Gabhart, 1993, auditor behavior. Support for her theory would
1994). The presence of a potential penalty for be generated if audit firm size corresponds to
nonindependent behavior is more likely to increased auditor independence. The following
influence auditors with relatively less developed hypothesis tests whether auditors from larger
COGNITIVE MORAL DEVELOPMENT AND AUDITOR INDEPENDENCE 341
firms are more independent, for a given client,
than auditors from smaller firms.
H4: Auditor independence is positively related to firm
size.
METHOD
Subj ects and procedures
As a prelude to the selection of auditing sub
jects, public accounting firms were partitioned
into three size categories: Big Six international
firms (large), national firms (midsize), and
local and regional firms (small). Three large
firms, two midsize firms, and three small firms
were contacted and agreed to provide auditor
subjects. The large and midsize firms each
provided subjects from two different office
locations.
Firms participating in the study provided a
representative responsible for the coordination
and administration of the study in each office
location. Office representatives estimated the
number of available participants at each posi-
tional level. As a result, a total of 490 research
instruments were delivered to office repre-
sentatives with instructions for administration.
Shortly after delivery of the research instru-
ments, office representatives were instructed to
prompt subjects to complete and return the
materials. The completed research instruments
were returned by the subjects, intact in a sealed
envelope, to the office representative who then
returned the envelopes to the researchers.
Each research instrument contained a hypo-
thetical case (appendix A), a questionnaire
attached to the case instrument, and the six-
story Defining Issues Test (DIT). All partici-
pants were provided with written instructions
and asked not to discuss the materials with co
workers. The research instruments were equally
partitioned prior to distribution by treatment
condition. Before delivering the research instru-
ments to each office representative, the cases
(enclosed in envelopes) were randomly inter-
spersed to provide assurance that assignment of
the experimental treatment was unbiased.
A total of 34 1 envelopes (approximately 70%)
containing the research instruments were
returned by the eight firms participating in the
study. Two subjects did not indicate a response
to the case, leaving 339 completed cases and
341 completed questionnaires. One subject
failed to include the DIT. From the group of
340 subjects returning the DIT, twenty-six
subjects were purged from the sample for
failure to pass the internal reliability checks,
leaving a sample 314 usable DITs. After dele-
tion of the two subjects who did not indicate a
response to the case, the sample of participants
who submitted a completed case and ques-
tionnaire along with a valid DIT was 312.
Table 1 classifies the 312 respondents by posi-
tion and years of public accounting experience
for each firm size category. Every office con-
tributed at least one subject for each of the five
positional levels listed in Table 1.
TABLE 1. Classification of subjects by firm size, position, and average years of experience
Firm Size: Large Midsize Small
Position: n exp. n exp. n exp.
staff 56 1.5 23 2.3 7 1.7
Senior 65 3.8 10 4.9 12 5.2
Supervisor 20 6.4 8 6.8 7 6.4
Manager 40 7.9 14 10.0 9 7.8
Partner 21 21.8 9 20.0 11 14.3
Total: 202 6.2 64 7.5 46 7.5
Totals
n exp.
86 1.7
87 4.1
35 6.5
63 8.4
41 19.4
312 6.6
The dropout rate of 7.6% in this sample falls within the 5 to 15% range which Rest (1993) indicates as typical of studies
employing the DIT.
342 J. T. SWEENEY and R. W. ROBERTS
Design and measurement of variables
The design of this study is a 2 x3 x3, repre-
senting two levels of a sanction manipulation,
three levels of moral development, and three
levels of audit firm size as the independent
variables. Auditors independence judgments
served as the dependent variable. Auditors were
randomly assigned to one of the sanction con-
ditions, while the other independent variables
were measured. The moral development mea-
sure, auditor independence measure and sanc-
tion manipulation variable are discussed below.
Moral development was measured by the P
score value of the six-story version of Rests
Defining Issues Test (Rest, 1979, 1986). The
DIT is a structured, self-administered, objec-
tively scored instrument, which assesses a
persons moral development from forced-
choice responses to ethical dilemmas. The most
frequently used score from the DIT is the P
index (P for principled), which is inter-
preted as the relative importance that respon-
dents attributed to Stage 5 and 6 items. The
score is expressed in terms of a percentage and
can range from 0 to 95. While the P score is
based upon Stage 5 and 6 responses, Rest
(1979, p. 101) contends that the P score is the
appropriate indicator for locating a subject
along the underlying developmental con-
tinuum. Rest (1986) reports an average P
score of 40.0 for American adults.
The DIT has been subject to extensive relia-
bility and validity studies (Rest, 1979, 1986, 1994;
Ponemon and Gabhart 1993). The P score of
the DIT (Rest, 1979, 1986) correlates only
weakly with gender, ethnic background, IQ,
and vocation variables. The strongest corre-
lation with moral judgments is years of formal
education, particularly with adult subjects (Rest
& Thoma, 1985).
Subjects were classified by P score into three
categories (P Groups: (1) Low=under 27.6, (2)
Medium=27.6 to 41.5, and (3) High=41.6 and
above) for hypothesis testing. These partitions
are based on the theoretical P score ranges as
suggested by Rest (1993). The P groups are used
to proxy for the subjects predominant level
of moral development: Low=preconventional,
Medium=conventional, and High=postconven-
tional. Of the 312 respondents completing both
the case and the DIT, 175 were classified into
the High group, 107 into the Medium group,
and 30 into the Low group.
A case instrument (appendix A) was utilized in
conjunction with the DIT results to develop the
measures for testing hypotheses Hl through
H4. Some accounting researchers (DeAngelo,
198la; Antle, 1984; Magee & Tseng, 1990)
characterize independence behavior as moti-
vated by economic self-interest. Cushing, for
example, insists that auditor independence
cannot be fully understood except in an eco-
nomic context (Cushing, 1990, p. 259). Thus,
in the absence of an economic motive for non-
independent behavior, auditors are always
expected to act independently. As noted
previously, this research effort takes the posi-
tion that independence is an ethical, as
opposed to an economic, concept (Gas, 1992,
p. 9; Ponemon & Gabhart, 1990, 1993). The
case, therefore, was crafted to insure that the
hypothetical auditor had no overt economic
incentives for violating professional indepen-
dence standards.
The vignette involves an independence
dilemma (acquiescence to the controllers
request to conceal an irregularity) and incor-
porates issues designed to appeal to the
perspectives of different levels of moral develop-
ment. For example: the sanction manipulation in
The P score is converted to a percentage by dividing the sum of the number of Stage 5 and 6 items by 60, the total ranking
that would occur if a subject selected only Stage 5 and 6 items for each dilemma. Because only three, not four, principled
items are present on three of the vignettes, the P percent has a maximum value of 95.
3 Independence concerns an individuals ability to act with integrity and objectivity (AICPA, 1988). Rule 102 defines
integrity and objectivity, and requires that a member shall be free of conflicts of interest, and shall not knowingly mis-
represent facts or subordinate his or her judgment to others. Furthermore, SAS 60 requires an auditor to notify higher
levels of management if an irregularity is discovered, regardless of materiality
COGNITIVE MORAL DEVELOPMENT AND AUDITOR INDEPENDENCE 343
the case (the likelihood that the auditors lack
of independence will be discovered) is expec-
ted to affect the independence response of
preconventional auditors. Conventional level
auditors are expected to base their indepen-
dence response primarily in reaction to the
hypothetical auditors violation of professional
norms for independence. Postconventional
auditors are expected to consider the following
issues related to justice concerns: the company
suffered no financial harm, the controller saved
his son from serious physical injury, and
revealing the controllers breach of company
policy will cause the controller to lose his job.
Consistent with the case construction strat-
egy emphasized by Rest (1979), the dilemma
depicts a hypothetical auditors actions. Rest
stresses that evaluation of moral judgments must
be in reference to a third person to mitigate
the potential social desirability response bias
present in self-reports concerning sensitive
issues (Randall & Fernandes, 1991). The
response scales require the subject to make a
judgment regarding what the hypothetical audi-
tor shoul d have done, as opposed to asking the
subject what action he or she would have taken
in the scenario (Ponemon SZ Gabhart, 1990).
The case required subjects to allocate 1000
points between an approval versus a
disapproval response to the hypothetical
independence behavior of the auditor in the
case. Both statements are equivalent measures
of independence, and subjects point allocation
to category A (Chris should not have disclosed
the disbursement) served as the dependent
variable (POINTS) in testing hypotheses H2
through H4. The potential number of POINTS
allocated to category A ranged from zero
(absolute independence) to 1000 (absolute
nonindependence).
Requiring subjects to assign a fixed number
of points to mutually exclusive categories is
consistent with prior research in ethics (Arnold
& Ponemon, 1991; Ponemon 8z Gabhart, 1990;
Ponemon, 1993). The advantage of this scale
over a conventional likert-type scale is that
subjects can assign zero points to the dilemma,
signifying absolute compliance with indepen-
dence standards, or a positive number of points
over the range, indicating their relative
empathy or sensitivity to factors which may
have affected the hypothetical auditor acquies-
cence to management. Assigning zero points is
indicative that the subjects were not sensitive
to the contextual factors of the case and saw
the issue in strictly black-and-white terms as an
independence violation. The assignment of ZERO
points (ZERO point group) or a positive number
of points (NONZERO point group) is used as a
dichotomous variable in testing hypothesis H 1.
A treatment manipulation was incorporated
in the case for testing hypothesis H3 and
auditors were randomly assigned to one of two
conditions. The manipulation varied the prob-
ability of detection of the hypothetical auditors
acquiescence to the client by stating either (a)
. . .Cbri s i s certai n that the di sbursement wi l l
not be subsequentl y exami ned (NOSANCTION
case) or (b) . .Cbri s i s aware that the
di sbursement may be subsequentl y exam-
i ned (SANCTION case).4
DATA ANALYSIS
Of the 312 subjects available for testing
hypotheses Hl through H4, 113 (36%) assigned
a value of zero points (ZERO point group) to
category A of the case, indicating complete
adherence to technical independence stan-
dards. The remaining 199 participants (64%)
assigned one or more points (NONZERO point
group) to category A, suggesting at least some
degree of nonindependence. The mean number
of points assigned by the 199 NONZERO auditors
was 319 (s.d.=265), with a range of 1 to 1000.
4 Given the inability of the researchers to prevent subjects from altering their original responses, a manipulation check was
not incorporated into the research instrument and this represents a limitation of the study. However, auditing students
involved in a post-test assigned different probabilities to the likelihood of subsequent discovery of the hypothetical auditors
action based upon the manipulation.
344 J. T. SWEENEY and R. W. ROBERTS
The DIT P scores of the 312 participants
ranged from 8.3 to 70 with a mean of 42.8 and a
standard deviation of 11.4. The P scores of the
subjects in this study are consistent with those
reported in prior research of public accoun-
tants in the United States (Gas, 1992; Ponemon
& Gabhart, 1993).5
Hypothesis HI : ethical sensitivity
While participants were not necessarily
expected to agree with the hypothetical audi-
tors decision (pOINTS>SOO), an ethically sen-
sitive auditor would have evaluated the
decision in contemplation of all the issues
present in the case, incorporating both the
technical and ethical components. As Rest
notes, professional dilemmas are usually a
mix of technical and moral issues (Rest, 1986,
p. 23) but professional training may so strongly
highlight the technical aspects of the job that
the individual is blinded to ethical concerns
exogenous to formal rules.
Assigning at least one point is prima facie
evidence that the subject recognized the exis-
tence of one or more ethical issues which
influenced the hypothetical auditors decision
to violate the principle of independence
(acquiescence to managements request to not
report a defalcation incident). Auditors who
assigned zero points to category A responded in
strict accordance with professional indepen-
dence standards; however, their response may
indicate that they lacked sensitivity to the ethi-
cal issues present in the dilemma, a prerequisite
in the Four-Component Model (Rest, 1986) for
testing the relationships hypothesized in H2,
H3 and H4.
A comparison of the P scores of subjects who
assigned zero points (ZERO) to category A,
indicating absolute compliance with indepen-
dence standards, to those subjects who
assigned at least one point (NONZERO) pro-
vides evidence in support of hypothesis Hl. A
t-test indicated that the mean P score of 40.2
for the auditors in the ZERO group was signiti-
candy lower (p ~0.002) than the mean P score
of 44.3 for auditors in the NONZERO group.
Table 2 classifies the ZERO and NONZERO
auditors by P Group. A chi-square test indicated
that the ZERO and NONZERO groups syste-
matically differ @<O.OOl) on the proportions
classified into High, Medium, and Low P
groups. High P group and Low P group auditors
were more likely to be members of the NON-
ZERO point group (73% and 60%, respectively).
Auditors comprising the Medium P group,
however, were more likely to comply abso-
lutely with independence standards (5 1%
assigned ZERO points). Auditors who reason
predominately at a conventional level (Medium
P group) are expected to take a strong position
on independence (Ponemon & Gabhart, 1990).6
TABLE 2. Classification of ZERO and NONZERO auditors by
P group
Point Group: ZERO NONZERO Totals
n % n % n
P Group:
High 47 (27%) 128 (73%) 175
Medium 54 (51%) 53 (49%) 107
Low 12 (40%) 18 (60%) 30
Totals 113 (36%) 199 (64%) 12
Chi-square value 16.23; p <O.OOl
s In contrast to prior research which found relatively minor differences in moral development between males and females
in the general population (Thorna, 1986) gender was highly correlated (p <O.OOl) with P scores for the sample of auditor
subjects. The mean P score of 45.8 for the group of female auditors (n=llO) in the sample was significantly higher
(p <0.0007) than the mean P score of 41.2 for the male auditors (n=202). Shaub (1994) found similar gender differences in
P scores with auditing subjects.
The case manipulation had no effect on the classification of subjects into the ZERO and NONZERO point groups
(p ~0.36). Auditors who could act without threat of discovery (NOSANCTION) were as likely to assign zero points as
auditors who were acting under a high likelihood of discovery (SANCTION). This analysis is necessary only for ruling out an
alternative explanation for the results.
COGNITlVE MORAL DEVELOPMENT AND AUDITOR INDEPENDENCE 345
The lower P scores and P group classi-
fications of the auditors in the ZERO group are
consistent with the proposition that they are
more readily socialized to strictly adhere to
independence standards and less likely to attend
to ethical issues not addressed by professional
standards than auditors from the NONZERO
group. By relying solely upon professional
rules in resolving dilemmas, the ZERO group
auditors may lack the sensitivity to adequately
identify the ethical issues and the possible con-
sequences of alternative actions. A limitation
of this research design is that the assignment of
zero points by a subject only infers a lack of
sensitivity to ethical issues, and is not a direct
measure of ethical sensitivity.
Hypothesis H2: Moral Development and
Auditor I ndependence
The basic premise of this study is that varia-
tions in individual moral development will
result in differences in independence judg-
ments when confronted with an ethical
dilemma (Ponemon & Gabhart, 1990, 1993).
Our position is that auditor independence is
not linearly related to moral development or
that individuals with higher P scores will
be more or less independent. Rather, assuming
the referent group maintains expectations
for independent behavior, conventional level
auditors will always be independent. Pre- and
postconventional level auditors may deviate
from independence, but for different reasons.
Relatively minor differences in P scores may not
result in significant variations in independence
judgments; however, it is expected that over
certain thresholds or ranges of moral develop-
ment, variations in judgment can be observed.
As indicated in the tests of hypothesis H 1, the
ZERO point group auditors, who responded in
strict accordance with technical rules, may
have lacked sensitivity to the imbedded ethical
issues in the case as required for testing the
relationship between moral development and
independence judgments. Therefore, only
those auditors who indicated sensitivity to the
ethical issues (NONZERO point group) will be
included in the ANOVA model for testing
hypotheses H2, H3, and H4. The ANOVA model
for the NONZERO point group is presented in
Table 3.
The results of the ANOVA model provide
support for the hypothesized relationship
between moral development and auditor inde-
pendence judgments. The significance of the P
Group variable indicates that level of moral
development is an important factor affecting
the independence judgment of the NONZERO
point group. Furthermore, the results of
hypothesis Hl could also be interpreted as
providing support for the moral development-
auditor independence relationship in that
conventional level auditors were more likely to
be absolutely independent (ZERO point group).
A discussion of the interaction of the moral
development variable (P Group) with audit firm
size (SIZE) is undertaken in the discussion of
hypothesis H4.
Hypothesis H3: effect of sanction
Hypotheses H3 posits that the independence
judgments of auditors whose level of moral
development is predominately preconventional
(Low P Group) will be affected by the presence
of potential sanctions, because their judgments
are conditional upon perceived penalties
resulting from misconduct (Ponemon & Gab
hart, 1990). Table 4 presents mean Points
assigned for the NONZERO subjects by case
manipulation for each P Group.
_ Auditors at higher positional levels are signilicantly more likely to have lower DIT P scores and to be members of the
ZERO point group (p <tl.OOl). However, position is not significantly related to the Points assigned by the NONZERO auditors
(p <0.573), indicating that point group membership is driven by an auditors moral development, and not position.
It is possible that some ZERO point group auditors may have been sensitive to the nonprofessional ethical issues in the
case vignette. However, it is not possible due to data limitations to differentiate between those ZERO group subjects who
were sensitive to both professional and nonprofessional ethical issues from those who were affectively socialized to recog-
nize only technical issues.
A chi-square test indicated that auditors who received a SANCTION case were no more likely to be members of the ZERO
point group than auditors who received a NOSANCTION case.
346 J. T. SWEENEY and R. W. ROBERTS
Although the P Group by Sanction inter- dence judgments of Low P Group (preconven-
action term in the ANOVA model (Table 3) is tional) auditors, a t-test indicated that the mean
moderately significant @ <0.095), the mean POINTS (Table 5) for the Medium P Group
POINTS for the Low P Group receiving the members responding to the SANCTION case
SANCTION case is higher than the mean for the was significantly lower (p ~0.025) than the
NOSANCTION case, which is inconsistent with mean POINTS for those receiving the
the direction hypothesized in H3. A Mann- NOSANCTION case. A possible explanation for
Whitney U-test indicated that the difference in this result is that the moral development of
means is not statistically significant (p cO.557). individuals in the Medium P Group may have
Given the small number of Low P Group auditors, overlapped with characteristically preconven-
the higher POINTS for the SANCTION group tional reasoning processes to the extent that
(n=g> may be driven by the effect of a few the specific case context and stimuli elicited
extreme observations. While the results of the self-interested behavior. Research indicates that
sanction manipulation for the Low P Group are individuals often utilize lower level moral judg-
inconsistent with theoretical expectations, the ment in resolving work-related ethical dilem-
small sample sizes prohibit any inference beyond mas than in resolving non-work related ethical
a failure to reject the null hypothesis under H3. dilemmas (Trevino, 1992).
Although H3 hypothesized that the sanction
manipulation would only affect the indepen-
Auditors whose level of moral development
was primarily postconventional (High P Group)
TABLE 3. NONZERO point group auditors independence judgments
Results of analysis of variance
Source
Main effects
P Group
Sanction
Size
Interactions
P GroupSanction
P GroupSize
SanctionStie
P Group*Sanc.*Size
ElKX
Total
ss d.f.
376 584 2
33 745 1
74 697 2
307 255 2
953 227 4
214924 2
195 214 2
11782148 183
13 937 794 iG
MS
188 292
33 745
37 348
153628
238 307
107462
97 607
64 383
F-stat Signif
2.92 0.056
0.52 0.470
0.58 0 561
2.39 0.095
3.70 0.006
1.67 0.191
1.52 0.222
Model F: 2.23; p&007.
TABLE 4. Points assigned to case manipulation by P Group
Manipulation: NOSANCTION SANCTION
P Group
Low
Medium
High
n mean s.d. n mean s.d.
10 242 205 8 381 340
31 453 295 22 304 222
65 292 255 63 292 260
COGNITIVE MORAL DEVELOPMENT AND AUDITOR INDEPENDENCE 347
were unaffected by the potential penalty.
Consistent with theoretical expectations, the
mean POINTS of the NOSANCTION and SANC-
TION groups were equal for the High P Group
members, indicating that the presence or
absence of adverse personal consequences in
the case dilemma did not affect their indepen-
dence judgments. This result is consistent with
Windsor and Ashkanasy (1995), who found that
postconventional auditors were indifferent
to client economic pressure when forming
independence judgments.
Hypothesis H4: the in.uence of auditJ irm size
on independence judgment
Hypothesis H4, which tests DeAngelos col-
lateral bond argument (DeAngelo, 1981a),
was not supported by the data. The SIZE variable
in the ANOVA (Table 3) model was not signi-
ficantly related to the independence judgments
of the NONZERO auditors. Additionally, audit
firm size was not systematically different
between the ZERO and NONZERO point groups
Cp <0.58), indicating that auditors from larger
firms were no more likely to comply absolutely
with independence standards than auditors
from midsize and small firms.
While a main effect for the SIZE variable was
insignificant, the interaction of the moral
development variable (P group) with firm SIZE
was significant (p <0.006) in the ANOVA
model. Table 5 presents a breakdown of
mean POINTS by P group for each audit firm
SIZE level.
A chi-square test (p <0.320) indicated no
systematic difference in P Group classifications
among different size firms. The lack of a
systematic difference in P Group classifications
among the three firm size categories suggests
the possibility that the significant interaction
term (P Group*SIZE) in the ANOVA model may
be attributable to differing ethical proclivities,
cultures, or environments among different sized
firms. 1
Ponemon and Gabhart (1993) and Ponemon
(1994) contend that an auditors moral devel-
opment is enhanced or repressed by the moral
atmosphere of the referent firm. The moral
atmosphere can be viewed as the firms collec-
tive organizational norms or ethical culture.
Variations in the ethical behavior of auditors
can be partially attributable to differences in
organizational culture (Ponemon, 1990, 1992a,
1994). Farmer et al. (1987) found that orga-
nizational acculturation affected auditors
independence judgments. Research has indicated
that organizational culture can be differentiated
by firm size (Pratt & Belieau, 1992).
TABLE 5. Mean points by P Group by firm size for NONZERO Point group
Firm Size:
P Group:
Low
Medium
Small Midsize Large
Totals
n mean n mean n mean n mean
3 617 I 120 14 250 18 304
11 266 13 477 29 401 53 391
High 18 361 28 210 82 305 128 292
Totals: 32 352 42 290 125 z? 1s)9 319
Audit firm size was not systematically different between the ZERO and NONZERO point groups (p ~0.58). The SIZE
variable in a one-way ANOVA model with POINTS as the dependent variable was also insignificant.
i Substitution of the Firm variable for SIZE in the ANOVA model results in a nonsignificant (p ~0.267) interaction term
(P Group l Firm). For the Nonzero point group, variations in moral atmosphere among different size firms is apparently a
more influential moderator of independence behavior than variations in the moral atmosphere at the firm level of analysis.
348 J. T. SWEENEY and R. W. ROBERTS
Figure 1 contains a graphical representation
of the P Group by SIZE interaction. The small
number of NONZERO subjects in the Low P
Group for the Small and Midsize audit firms
(Table 5) however, narrows any potential
interpretation of the interaction to the Medium
(conventional orientation) and High (postcon-
ventional orientation) NONZERO P Groups.
While conventional reasoning auditors
(Medium P Group) were more likely to be
represented in the ZERO point group than pre-
or postconventional auditors (Table 2) they
also assigned the highest mean number of
points in the NONZERO point group (Table 5).
In the midsize and large firms, which are often
heavily dependent upon audit revenues, the
mean response of the conventional reasoning
auditors nearly approaches nonindependence
(points > 500) despite any explicit economic
incentive in the case dilemma which would
motivate acquiescence to the client manager.
L
150,
i
Firm Size
~ - Small
- MIdsize
* Large
Medium
P GrouD
High
Fig. 1. Interaction of P Group with audit firm size.
This apparent inconsistency can be
explained by the propensity of conventional
auditors to follow group norms. If the norms of
the referent firm emphasize strict adherence to
professional independence standards, then
conventional reasoning members are likely to
assign zero points. However, if the norms
emphasize the maintenance of client relations,
then the conventional reasoning auditor is more
likely to acquiesce to the demands of client
management (Ponemon & Gabhart, 1993, p. 27).
These results suggest that the relationship
between independence and firm size is not
linear or necessarily driven by economic factors.
Rather, the ethical culture of the firm, which
may be differentiated by firm size, interacts
with the moral development of the auditor in
enhancing or diminishing the client indepen-
dence relationship.
RESEARCH IMPLICATIONS AND DISCUSSION
The results of this study indicate that the inde-
pendence behavior of auditors is affected by
their level of cognitive moral development.
Consistent with moral development theory, the
higher an auditors level of development, the
less likely he or she is to resolve an indepen-
dence dilemma by referring solely to technical
standards. Despite the absence of any overt
economic incentive, a high percentage (64%) of
subjects responses to the case dilemma exhib-
ited at least some degree of nonindependence
(NONZERO point group).i2
The significantly lower mean P score of the
ZERO point group versus the NONZERO point
group provided evidence consistent with the
notion that an auditors level of moral develop-
ment influences his or her sensitivity to the
contextual ethical issues present in work-
related ethical dilemmas. This finding is also
consistent with our hypothesis that moral
development affects auditor independence
judgments. Primary support, however, for the
a Of the 312 subjects in the NONZERO point group, 45 (14%) assigned more than 500 Points to category A, indicating that
they approved of the hypothetical auditors lack of independence and infidelity to professional auditing standards.
COGNITIVE MORAL DEVELOPMENT AND AUDITOR INDEPENDENCE 349
moral development-independence relationship
was supplied by our ANOVA tests.
Audit firm size interacted with moral
development level in affecting subjects inde-
pendence judgment, although the direction of
the relationship is unclear. This result provides
evidence consistent with the proposition
(Ponemon, 1990, 1992a, 1994) that the moral
atmosphere of an audit firm influences an audi-
tors consideration of client issues.
Perhaps as a partial response to spiraling
litigation costs, audit firms have invested
increasingly greater resources in programs
designed to foster ethical auditor behavior. The
results of this study and those of other
researchers (Ponemon, 1992b, 1994; Windsor
& Ashkanasy, 1995) strongly suggest that the
moral reasoning ability of auditors and accoun-
tants affects their resolution of work-related
ethical dilemmas. Furthermore, whether conven-
tional or postconventional auditors are more
likely to comply with professional standards
may be context specific and at least partially
dependent upon the ethical values promoted
by the referent audit firm.
If the auditing profession equates ethical
behavior with strict adherence to professional
standards, then the results of this research
have important implications for audit firms in
understanding the relationship between moral
development and ethical behavior. Auditors
whose moral development was primarily
conventional in nature were more likely to
comply absolutely with professional indepen-
dence standards and were more affected by
potential penalties for noncompliance than
postconventional auditors. For those subjects
who did not comply absolutely, however, the
response of conventional auditors deviated the
most from independence standards, particularly
in midsize and large firms. These results suggest
that for conventional reasoning auditors, strong
firm norms for independence and the presence
of penalties for nonindependent behavior are
effective mechanisms for promoting behavior
consistent with professional standards.
Postconventional auditors were more likely
to consider contextual factors beyond the
scope of professional standards when forming
their independence judgments and were unaf-
fected by the presence of potential penalties
for nonindependence. These results, combined
with the finding of Windsor and Ashkanasy
(1995) that high moral reasoning auditors
are unaffected by client economic pressure,
suggest that the independence behavior
of postconventional auditors is motivated by
concerns other than self-interest.
Given the increasing competition and declin-
ing margins in the audit industry, firms which
are heavily dependent upon audit revenues may
incorporate into their culture or value systems
an emphasis on client relations and retention.
These values may then be consciously or
unconsciously inculcated in the ethical schema
of the firm members, particularly those who
reason at a conventional level, and subsequently
influence their responses to ethical dilemmas.
Audit firms can promote ethical behavior by
emphasizing adherence to professional codes of
conduct and high ethical standards above all
other competing values.
The results of this study suggest several areas
for future research. First, research on factors
which enhance or repress the ethical sensitivity
of auditors will contribute to our understanding
of this component of ethical behavior. Secondly,
the connection between ethical sensitivity and
moral development in affecting ethical behavior
presents opportunities for future exploration.
Finally, the influence of moral atmosphere in
affecting ethical behavior is an area of research
which presents an excellent opportunity for
furthering our understanding of the socializing
influence of the audit firm.
There are some limitations to the study that
should be discussed. First, the auditors in our
sample came only from public accounting firm
offices in the Midwest and were not randomly
selected. Generalization of the results of this
study are valid only to the extent that public
accountants in the Midwest are similar to their
counterparts in other regions of the country.
The inclusion of auditors at all positional ranks
from thirteen different office locations, repre-
senting eight different public accounting firms
350 J. T. SWEENEY and R. W. ROBERTS
and three different firm size categories mitigates this type of research: (1) cases may lack realism
potential biases due to nonrandom selection. and the richness found in an actual audit set-
Finally, auditor independence is a state of ting, (2) participants may not answer truthfully,
mind and therefore unobservable. The use of and (3) the auditors actual independence
hypothetical cases to measure auditor indepen- behavior may be affected by variables not
dence is subject to several criticisms inherent in represented in the case.
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352 J. T. SWEENEY and R. W. ROBERTS
APPENDIX
Instructions:
1. Please read the case very carefully.
2. Using your judgment, please allocate 1000
points to the following two categories:
(a) You agree with the decision of the
auditor.
(b) You do not agree with the decision of
the auditor.
Unless you are in absolute agreement with
the auditors decision, do not allocate 1000
points to any single category. For example, if
you are about 80% in agreement with the audi-
tors decision, allocate 800 points to category A
and 200 points to category B.
Case Study I :
Chris Gibson has been employed by the public
accounting firm of RS and T for the past
four years and is the senior in-charge of the
Greenwood Manufacturing Company audit.
Greenwood is a manufacturer of household
furniture and a division of a large, publicly traded
corporation. With annual sales of approximately
$40 million, Greenwood is in good financial
health and the corporation has received unquali-
fied audit opinions in recent years.
$25,000 disbursement. Mr. Johnson asked Chris
to close the door, pulled a file from his desk,
and then began the following conversation:
I expected you might be dropping by to
discuss that withdrawal. The disbursement is
my personal responsibility, and I repaid it the
next day. You can verify the receipt by exam-
ining the bank statement. I have copies of all
supporting documents in this file.
I withdrew those funds from the company
account after receiving a phone call that after-
noon from my son, a student at the university.
At the time, I was unaware he had developed a
severe gambling problem. He told me that he
had substantial losses which he was unable to
pay. Furthermore, he had been threatened with
bodily harm if he didnt pay $25,000 in gam-
bling debts by that night. The only way I could
obtain that much cash in a matter of hours was
to access company funds. I repaid the amount
the following day with personal funds. My son
has since obtained counseling and treatment for
his gambling problem.
Youre the only person Ive confided in: you
must realize I will lose my job if this matter
becomes public.
While visually inspecting the accounting
records of Greenwood in a search for unusual
appearing transactions, Chris discovered an
uncoded cash disbursement of $25,000. Chris
decided to discuss the situation with the
controller, Ed Johnson.
Ed Johnson first worked for Greenwood
Manufacturing when it began operations in
1970. Mr. Johnson has held the controllers
position for eight years and is generally regar-
ded as one of the most competent and highly
respected executives at Greenwood. Mr.
Johnson has always been cooperative and
professional during the course of the audit.
Chris confirmed that the support from Mr.
Johnsons file was consistent with his explana-
tion. As the corporate internal audit staff has yet
to complete its annual audit of the Greenwood
Manufacturing division, Chris is aware that the
disbursement may be subsequently examined.
Chris decides not to disclose the information
obtained concerning the disbursement.
A: Chris should not have disclosed the disbursement.
Points:------ (not to exceed 1000)
B: Chris should have disclosed the disbursement.
Points:------ (not to exceed 1000)
Ed Johnson was alone in his office when (Remember, the combined points assigned to
Chris Gibson entered and referred to the category A and B must equal 1000.)