The Impact of Guanxi on the Ethical Decision-Making Process of Auditors – An Exploratory Study on...

8/14/2019 The Impact of Guanxi on the Ethical Decision-Making Process of Auditors An Exploratory Study on Chinese CPAs i

1/7

ABSTRACT. Using professional accountants as

respondents in Hong Kong, this study strives to

develop a model to depict the effect of ethical rea-soning on the relationships between guanxi and

auditors; behaviour in an audit conflict situation. The

results of the study found that (1) there is a signifi-

cant relationship between an auditors ethical judge-

ment and ones moral cognitive development; (2)

there is a relationship between an auditors ethical

judgement and the existence of guanxi; and (3) the

impact of guanxi on an auditors judgement is

depending on the level of ethical reasoning.

Introduction

Professional ethics is more than just instrumental

to the maintenance of a moral, ethical and honestimage among the public. This is basically the

only way which professional bodies can ensurethe empowered trust from the society can be

upheld. The maintenance of high professionalethical standards relies on an understanding of the

moral reasoning process. This reasoning processforms part of the entire moral consciousness of

an individuals belief system and from which

decision is made when an individual is facingdifficult dilemmas. In this research, this moral

reasoning process of professional accountants isinvestigated by utilising the theory of ethical

development. In addition, the influence of

guanxi is included as the individual differences

variable and is hypothesised to have an interac-tion with the ethical reasoning process; hence,influencing individual behaviour in an ethical

dilemma.

Ethical reasoning research in theaccounting profession

A wide range of ethical decision making models

can be found in the literature (Dubinsky andLoken, 1989; Ferrell and Gresham, 1985; Ferrell

et al., 1989; Hunt and Vitell, 1986; Jones, 1991;and Trevino, 1986.) One common feature of

these models is the incorporation of the cogni-tive moral development process into their theo-

retical frameworks. As represented by the worksof Jones (1991) and Ferrel et al. (1989), these

models suggest that the ethical decision-makingis a four-stage process: awareness, cognition, eval-

uation and intention. Based on these models, itis argued that differences in ethical behaviours

are affected by the kind of moral thinkings

advanced through the first three stages of themoral development process.

In addition, a volume of prior research hasalso covered the underlying ethical reasoning

processes of professional accountants in practice.In general, findings of these studies suggested that

(1) professional accountants have not reachedtheir potential for higher levels of ethical rea-

soning (Armstrong, 1987, 1993; Lampe and Finn,

The Impact of Guanxi on

the Ethical Decision-Making

Process of Auditors

An Exploratory Study on

Chinese CPAs in Hong Kong1

Journal of Business Ethics 28: 8793, 2000. 2000 Kluwer Academic Publishers. Printed in the Netherlands.

Alan K. M. AuDanny S. N. Wong

Alan Au is the Strand Leader in Marketing at the Open

University of Hong Kong.

Danny Wong is the Vice President (Academic) of the Open

University of Hong Kong.


2/7

1992; Ponemon, 1990, 1992a; Shaub, 1989,

1994); and (2) ethical reasoning could be a majordeterminant of professional judgement (Arnold

and Ponemon, 1991; Peonmon, 1990, 1992a,1992b; Ponemon and Gabhart, 1990; and Tsui,

1996) as well as unethical behaviour (Ponemon,1992b).

However, some authors (Pratt, 1980; Gul,

1984; Tsui, 1996) have argued that simply byconsidering the cognitive development impact on

the ethical reasoning process may be inadequatesince ethical decision-making behaviour cannot

be just predicted by an understanding of thecognitive process and other . . . individual and

situational variables [can] interact with thecognitive components to determine how an

individual is likely to behave in response to anethical dilemma (Trevino, 1986, p. 602). Hence,

the focus of this research is to investigate the

impact of guanxi, as an individual variable, onauditors professional judgement.

What is guanxi?

Guanxi is closely related to the Confucian doc-trines which stress the ties of kinship and close

personal relationships. In business terms, guanxior personal connection can be seen as the man-

ifestation of group orientation through which

interpersonal associations can replace formalorganisational structure (Boisot, 1986; Coleman,

1993; Putnam, 1993; Walder, 1986). The impor-tance of guanxi over formal business relationships

can be illustrated through the conclusion ofbusiness contracts in Chinese communities. In

Chinese business communities, business contractsmay be specified in legal terms but the imple-

mentation of them can be based on trust. This

is supported by a study conducted by Kao (1996)which indicated that guanxi is the pre-requisitefor the conclusion of a contract in Taiwan. In

addition, many studies (Alston 1989; Hall and

Xu, 1990; Leung and Yeung, 1995; Nee, 1992,1989; Putnam, 1993; Redding, 1990; Xin and

Pearce, 1996; Yang, 1994) also stressed theimportance of guanxi in the Chinese business

environment. If the Chinese uses guanxi as asubstitute for formal structural support, the

influence of guanxi on the ethical reasoning

process will be a very interesting topic to study.

Since no serious research has looked into theinfluence of guanxi in the ethical decision-

making process, this study is designed to fill in

this research gap. As an exploratory study, thescope of this study is limited to only investigatethe impact of guanxi on the moral decision

making process of Chinese professional accoun-tants in Hong Kong when they are confronted

with an ethical dilemma.

Statement of hypothesis

The most important question this study strives

to answer is the effect of ethical reasoning onthe relationships between guanxi and auditorsbehaviour in an audit conflict situation. This

study hypotheses that auditors behaviour in anaudit conflict situation will be influenced by the

existence of guanxi in the Chinese culture. Inaddition, this relationship between guanxi and

auditors behaviour is also hypothesised to bedepending on the level of cognitive moral devel-

opment of the auditors. Besides, since the rela-

tionship between cognitive moral developmentand the behaviour of an auditor has been sup-

ported by previous research, as manifested in theearlier section, this study also provides further

evidence to the validity of this relationship. Themodel is depicted in Figure 1 below.

Hence, based on this model, the followingthree hypotheses are tested:

88 Alan K. M. Au and Danny S. N. Wong

Figure 1. The effect of ethical reasoning and guanxi

on ethical judgement.


3/7

H1: There is no significant relationship

between an auditors ethical judgementand ones moral cognitive development.

H2: There is no significant relationshipbetween an auditors ethical judgement

and the existence of guanxi.H3: The impact of guanxi on an auditors

judgement is depending on the level of

ethical reasoning.

Research methods

Subjects in this research are professional accoun-

tants in public practice in Hong Kong. Thesample size is 70. Since the subjects are required

to make decisions on an auditor-client conflictsituation, only experienced auditors are invited

to participate in this research. After consultation

with 3 partners of one of the Big Six professionalaccountancy firms in Hong Kong, it is established

that auditors with 3 years of audit experiencemay be required to face auditor-client conflict

situations. Hence, the selection criterion in termof audit experience is set at 3 years or more.

Convenience sampling method is adopted toselect the sample for this survey. The use of non-

probabilistic method in this research is becauseof the difficulties involve in selecting the subjects

by random sampling. The main difficulty is arisenfrom the time required to complete the ques-

tionnaire. It is estimated that the entire research

instrument required subjects to spend approxi-mately 40 minutes to finish the exercise.

Research instruments

A questionnaire is developed to collect the

required information for this study. The ques-tionnaire is divided into four parts. The first partis the introduction in which instructions to fill

out the questionnaires together with illustrations

are provided to the respondents.The second part is related to the measurement

of the level of the cognitive moral developmentof the subjects. The Defining Issues Test (DIT)

developed by Rest (1979, 1986) is adopted toprovide such a measurement.

The third part of the questionnaire is designed

to capture the respondents response on an ethicaldilemma involving guanxi and the professional

integrity of an auditor. This part of the ques-

tionnaire is developed to identify and examine

the role of guanxi in the decision-making processof auditors. The auditors response to the auditconflict situation is assessed through a scenario.

The purpose of the scenario is to investigate theability of the respondents to resist the temptation

to help a good friend when it requires a viola-tion of the professions code of conducts. In

particular, the respondents are presented with amoral dilemma relating to their professional

integrity in maintaining client confidentiality and

their personal responsibility to a close friend. In

this case, the auditors close and long-time friendwho has help the auditor and the auditors familytremendously for many years asks the auditor for

a professional advice on a major investment ona company which the auditor has just completed

a statutory audit. This close friend has themajority of his personal wealth invested in this

company and does not have a healthy financialposition. In addition, the auditor also knows

that the company is, in fact, in deep financialtroubles.

The fourth part of the questionnaire is devised

to capture the respondents response on anauditor-client conflict situation. The authors

response to the audit conflict situation is, again,assessed through a scenario. The purpose of the

scenario is to investigate the ability of the respon-dents to resist pressure from the client in these

conflicts situations. In this case, the respondentsare presented with a moral dilemma relating to

their professional integrity in maintaining clientconfidentiality and their social responsibility as a

citizen. In this case, the auditor overheard a con-

versation between the senior management ofa construction equipment company that their

equipment, though complied with the govern-ments safety standards, has a defect in it.

However, no hard evidence is detected duringthe normal course of audit. This auditor is also

auditing another company which has concludeda substantial contract with this construction

equipment company. The auditor is faced witha dilemma in whether such information obtained

Ethical Decision-Making Process of Auditors 89


4/7

from the first client should be disclosed to the

second client.In both scenarios, the respondents are required

to role play as the auditor of the companydescribed in the case and are asked to explicate

their perceptions on a range of issues whichthey could have faced in discharging their dailyresponsibilities as auditors. Their perception is

measured along a eight point semantic scale.

Research procedures

After conducting the procedure for checking the

internal consistency of the DIT instrument, 12questionnaires are discarded; thereby leaving only

58 usable questionnaires. Multiple regression isused to analyse the data. Because of the need

to investigate the two-way interaction effects

between the ethical reasoning and guanxi vari-ables, a multiplicative model is adopted. The fol-

lowing multiple regression equation is employedto analyse the data:

Y = + 1X1 + 2X2 + 3X1X2 (1)

Where Y = auditors judgement in ethical

dilemma

X1 = ethical reasoningX2 = effects of guanxi

X1X2 = interaction term (ethical rea-soning X effect of guanxi)

The interaction variable in the regression

equation is created to determine the cross-product effect occurring between the indepen-

dent variables on the dependent variable.However, in order to ascertain the nature and

direction of the interaction, the partial derivative

of the multiple regression equation is obtained,

with the following equation depicting the rela-tionship:

Y/X2 = 2 + 3X1 (2)

In solving this partial derivative equation, the

ethical reasoning variable is treated as the mod-erator in the relationships between guanxi and

the auditors ethical judgement. In addition, the

point of inflection is calculated to determine atwhich point in the scale of ethical reasoning, as

measured by the P score in the DIT, does a

change occurs between the guanxi variable andthe ethical judgement of auditors. The point of

reflection is obtained by solving Equation 2.

Findings and discussions

The results of the multiple regression analysis areshown in Table I below.

The results, as depicted in Table I, suggest thatthe equation is significant and all the coefficients

are significant at the 1% level. Hence, the resultsindicate that the three hypotheses tested in this

study can be rejected at the 1% level.In this respect, the results seem to have sug-

gested that there is a significant relationshipbetween an auditors ethical judgement and ones

moral cognitive development. The sign of the

regression is negative. A further investigation intothe design of the questionnaire reveals that this

direction is correct since a higher score in thescenario investigating the auditors ethical judge-

ment implies that the auditor is making a lessethical decision. On the other hand, a higher P

score suggests in higher level of cognitive moraldevelopment. Hence, a negative relationship

insinuates that the higher the level of cognitivemoral development of the respondent, the more

ethical decision one will made when confrontingwith an ethical dilemma.

Regarding the second hypothesis, the results

of the regression analysis also find that thehypothesis can be rejected (p = 0.000). Hence,

the results suggest that there is a relationship


TABLE I

Results of the regression analysis

Variable Beta Sig. t-value

X1 (ethical reasoning) 0.7870 0.000

X2 (effects of guanxi) 3.7050 0.000

X1X2 (ethical reasoning

effects of guanxi) 0.0577 0.001

R2 0.400

Multiple R 0.630

Sig. F-value 0.000


5/7

between an auditors ethical judgement and the

existence of guanxi. Again, the sign of the coef-ficient is negative. A further detailed analysis into

the responses indicated that the negative direc-tion only implies the existence of a one-way

relationship between guanxi and auditors judge-ment. As mentioned earlier, a higher score onthe auditors judgement means a less profession-

ally accepted (that is, ethical) judgement. In theguanxi scenario, a higher score implies the exis-

tence of a guanxi effect on the respondents inmaking a less ethical decision. A negative rela-

tionship in this case suggests that even respon-dents who have behaved in a professionally

ethical manner (that is, those with a lower score)will act in a professionally less acceptable behav-

iour under the influence of guanxi. After inves-tigating the responses provided by the auditors,

it reveals that this negative relationship only exists

in this direction and not the other way round asthere is not a single case which shows a low score

on the guanxi scenario and a high score on theother scenario. Hence, it can be concluded that

auditors professional judgement could be affectby the existence of guanxi.

In order to test the third hypothesis, the inter-action effects between guanxi and the level of

cognitive moral development on an auditors judgement is investigated. Again, the regression

results confirmed that the hypothesis can be

rejected (p = 0.001). Hence, it can be concludedthat the impact of guanxi on an auditors judge-

ment is depending on the level of ethical rea-soning. Since a significant interaction between

guanxi and ethical reasoning on auditors pro-fessional judgement is found, the partial deriva-

tive equation, as exhibited in Equation 2, isstudied. The point of reflection calculated from

Equation 2 is 64.21. After conducting the regres-

sion analysis, Equation 2 can be written as:

Y/X2 = 0.37 + 0.0577X1 (3)

Therefore, the point of reflection calculated is64.21 which means that at lower levels of ethical

reasoning, the relationship between guanxi andthe auditors professional behaviour is negative.

In other words, guanxi can affect the professional

judgement of an auditor under lower level ofethical reasoning. However, this relationship

begins to change when the level of ethical rea-

soning, as measured by the P score of the DIT,surpasses 64.21. At a higher level of ethical rea-

soning, the relationship between guanxi and theauditors professional behaviour is positive, which

implies that the impact of guanxi on auditorsprofessional behaviour may be minimal.

Conclusion

The findings of this research support the three

hypotheses of this study. The results confirm that(1) there is a relationship between ethical judge-

ments and level of moral reasoning for auditors;(2) there is a relationship between an auditors

ethical judgement and the existence of guanxi;and (3) the impact of guanxi on an auditors

judgement is depending on the level of ethical

reasoning.These findings have important implications for

the accounting profession as a whole. Since boththe existence of guanxi and the level of ethical

reasoning can influence an auditors professional judgement, it is important that the profession

needs to investigate effective ethical interventionsfor accountants with relatively low level of cog-

nitive moral development.One possible area for future research is to

study the effects of an effective self-regulatorysystem in the accounting profession through the

incorporation of the Code of Conduct to restrain

the behaviour of professional accountants with alower level of ethical reasoning.

Finally, just a note of caution that sincerandom sampling is not employed in the data col-

lection process, generalising of the results toother subjects as well as other environments may

not be appropriate.

Note

1 The research is funded by the Presidents Advisory

Committee on Research and Development.



6/7

References

Abratt, R., D. Nel and N. S. Higgs: 1992, An

Examination of the Ethical Beliefs of Managers

Using Selected Scenarios in a Cross-cultural

Environment, Journal of Business Ethics 11, pp.2935.

Alston, J. P.: 1989, Wa, Guanxi, and Inhwa:

Managerial Principles in Japan, China, and Korea,

Business Horizons 32(2), pp. 2631.

Armstrong, M.: 1987, Moral Development and

Accounting Education, Journal of Accounting

Education (Spring), pp. 2743.

Armstrong, M.: 1993, Ethics and Professionalism

in Accounting Education, Journal of Accounting

Education (Spring), pp. 114.

Arnold, D. and L. Ponemon: 1991, Internal Auditors

Perceptions of Whistle-Blowing and the Influence

of Moral Reasoning: An Experiment,Auditing: A

Journal of Practice and Theory (Fall), pp. 115.

Beets, S. D. and L. N. Killough: 1990, The

Effectiveness of a Complaint-Based Ethics Enforce-

ment System: Evidence from the Accounting

Profession, Journal of Business Ethics 9, pp. 115

126.

Boisot, M. H.: 1986, Markets and Hierarchies in

a Cultural Perspective, Organisation Studies 7, pp.

135158.

Callan, V. J.: 1992, Predicting Ethical Values and

Training Needs in Ethics,Journal of Business Ethics

11, pp. 761769.Coleman, J. S.: 1993, The Rational Reconstruction

of Aociety, American Sociological Review58, pp.

115.

Delaney, J. T. and D. Sockell: 1992, Do Company

Ethics Training Programs Make a Difference? An

Empirical Analysis, Journal of Business Ethics 11,

pp. 719727.

Ferrell, O. C. and J. Fraedrich: 1994, Business Ethics:

Ethical Decision Making and Cases (Houghton

Mifflin Company, Boston).

Ferrell, O. C. and L. G. Gresham: 1985, A

Contingency Framework for UnderstandingEthical Decision Making in Marketing, Journal of

Marketing49(2), pp. 8796.

Ferrell, O. C., L. G. Gresham and J. Fraedrich: 1989,

A Synthesis of Ethical Decision Models for

Marketing,Journal of Macromarketing9(2), pp. 55

64.

Ferrell, O. C. and S. Skinner: 1988, Ethical Behavior

and Bureaucratic Structure in Marketing Research

Organizations,Journal of Marketing Research 25(1),

pp. 103109.

Fraedrich, J., D. M. Thorne and O. C. Ferrell: 1994,

Assessing the Application of Cognitive Moral

Development Theory to Business Ethics, Jornal of

Business Ethics 13(10), pp. 829838.

Ford, R. C. and W. D. Richardson: 1994, Ethical

Decision Making: A Review of the EmpiricalLiterature, Journal of Business Ethics 13, pp.

205221.

Ford, R. C. and R. S. Hansen: 1991, Intent and

Opportunity as Predictors of a Comprehensive

Ethical Decision Making Model, Paper presented

at Association of Business Ethics, Miami, FL.

Frankel, M. S.: 1989, Professional Codes: Why, How

and with What Impact,Journal of Business Ethics 8,

pp. 109115.

Gul, F. A.: 1984, The Joint and Moderating Role of

Personality and Congitive Style on Decision

Making, The Accounting Review (April), pp.

264277.

Hall, R. H. and W. Xu: 1990, Run Silent, Run

Deep Cultural Influences on Organisations in the

Far East, Organisation Studies 11, pp. 569576.

Hunt, S. D. and S. J. Vitell: 1986, A General Theory

of Marketing Ethics,Journal of Macromarketing6(1),

pp. 516.

Jones, T. M.: 1991, Ethical Decision Making by

Individuals in Organizations: An Issue-Contingent

Model, Academy of Management Review16(2), pp.

366395.

Kao, S.: 1996, Personal Trust in the Large Business

in Taiwan, in R. A. Brown (ed.), Chinese BusinessEnterprise, Vol. II (Routledge, London), pp. 399

408.

Kavathatzopoulos, I.: 1993, Development of a

Cognitive Skill in Solving Business Ethic Problems:

The Effort Of Instruction,Journal of Business Ethics

12, pp. 379386.

Kohlberg, L.: 1981, The Philosophy of Moral

Development (Harper & Row Publishers, San

Francisco).

Kohlberg, L., C. Levine and A. Hewer: 1983, Moral

Stages: A Current Formulation and a Response to

Critics (Harper, New York).Lampe, J. and D. Finn: 1992, A Model of Auditors

Ethical Decision Process, Auditing: A Journal of

Practice and Theory (Supplement), pp. 121.

Leung, T. and L. L. Yeung: 1995, Negotiation in

the Peoples Republic of China: Results of a

Survey of Small Business in Hong Kong, Journal

of Small Business Management33(1), pp. 7077.

Ma, H. K.: 1988, Objective Moral Judgement in

Hong Kong, Mainland China, and England,

Journal of Corss-Cultural Psychology 19(1), pp. 7895.



7/7

Nee, V.: 1989, A Theory of Market Transition: From

Redistribution to Markets in State Socialism,

American Sociological Review54, pp. 669681.

Nee, V.: 1992, Organisational Dynamics of Market

Transition: Hybrid Firms, Property Rights, and

Mixed Economy in China, Administrative ScienceQuarterly 31, pp. 127.

Ponemon, L.: 1990, Ethical Judgements in

Accounting: A Cognitive-Development Perspec-

tive, Critical Perspectives on Accounting, pp. 191215.

Ponemon, L.: 1992a, Ethical Reasoning and

Selection-Socialisation in Accounting,Accounting,

Organisations and Society (April/May), pp. 239258.

Ponemon, L.: 1992b, Auditor Underreporting of

Time and Moral Reasoning: An Experimental-Lab

Study, Contemporary Accounting Research, pp.

171189.

Ponemon, L. and D. Gabhart: 1990, Auditor

Independence Judgements: A Cognitive Develop-

mental Model and Experimental Evidence,

Contemporary Accounting Research, pp. 227251.

Pratt, J.: 1980, The Effects of Personality on Subjects

Information Processing: A Comment, The

Accounting Review(July), pp. 501506.

Putnam, R. D.: 1993, Making Democracy Work

(Princeton University Press, Princeton).

Randell, D. M. and A. M. Gilson: 1990,

Methodology in Business Ethics Research: A

Review and Critical Assessment,Journal of Business

Ethics 9, pp. 457471.

Reddings, S. G: 1990, The Spirit of Chinese Capitalism(McGraw-Hill, New York).

Rest, J. R.: 1979, Development in Judging Moral Issues

(University of Minnesota Press, Minneapolis).

Rest, J. R.: 1986, Moral Development: Advances In

Research and Theory (Praeger, New York).

Rest, J. R.: 1995, Guide for the Defining Issues Tests

(Centre for the Study of Ethical Development,

University of Minnesota).

Rest, J. R. and D. Narvaez: 1994, Moral Development

in the Professions: Psychology and Applied Ethics

(Lawrence Erlbaum Associates, Publishers, New

Jersey).

Stevenson, J. T.: 1985, Regulation, Deregulation,

Self-Regulation: The Case of Engineers in

Ontario, Journal of Business Ethics 4, pp. 253

267.Thomspson, J. H. and K. T. Jones: 1990, The

Development of Public Opinion of the Accounting

Profession, Business and Society (Spring), pp. 19.

Trevino, K. L.: 1986, Ethical Decision Making in

Organisations: A Person-Situation Interactionist

Model, Academy of Management Review, pp. 601

617.

Tsui, Judy S. L. and F. Gul: 1996, Auditors

Behaviour in an Audit Conflict Situation: A

Research Note on the Role of Locus of Control

and Ethical Reasoning,Accounting, Organisations &

Society 21(1), pp. 4151.

Walder, A. G.: 1986, Communist Neo-traditionalism

(University of California Press, Berkeley).

Webber, J.: 1990, Managers Moral Reasoning:

Assessing their Responses in Three Moral

Dilemmas, Human Relationships 43(7), pp.

687702.

Xin, K. R. and J. L. Pearce: 1996, Guanxi:

Connections as Aubstitutes for Formal Institutional

Support, Acdemy of Management Journal36(6), pp.

16411658.

Yang, M. M: 1994, Gifts, Favour and Banquets: The Art

of Social Relationships in China (Cornell University

Press, Ithaca, NY).Zey-Ferrell, M. K. and O. C. Ferrell: 1982, Role-

set Configuration and Opportunity as Predictors of

Unethical Behaviour in Organisations, Human

Relations 35(7), pp. 587604.

School of Business and Administration,

The Open University of Hong Kong,Homantin, Kowloon,

Hong Kong


The Impact of Guanxi on the Ethical Decision-Making Process of Auditors – An Exploratory Study on...

Documents

Transcript of The Impact of Guanxi on the Ethical Decision-Making Process of Auditors – An Exploratory Study on...