Kansas State University


K-State Business Insights Newsletter

Ethical environments of CPAs – public accounting versus industry


Who perceives the ethical environment of their firm/company as stronger – CPAs employed at public accounting firms or those employed in industry?

Research By: Amy Hageman, associate professor of accounting

At the turn of the 21st century, a number of accounting scandals occurred at a wide range of businesses, such as AOL, Conseco, HealthSouth, Qwest, Sunbeam, WorldCom, and, perhaps most notably, Enron. These ethical lapses led to the conviction of over 1,000 executives, litigation awards against auditors, regulators, banking institutions, and corporate organizations, the demise of Arthur Andersen, and the passage of the Sarbanes-Oxley Act of 2002 (SOX). Many argue that a pervasive decline in ethical values and ethical environments across the accounting profession was largely responsible for these scandals.

New research co-authored by Amy Hageman, associate professor of accounting in the K-State College of Business (along with Donna Bobek Schmitt at the University of South Carolina; Derek Dalton and Robin Radtke at Clemson University; and Brian Daugherty at the University of Wisconsin-Milwaukee) investigates ethical environments of CPAs across the public accounting profession. Hageman and her co-authors are particularly interested in the ethical environment because a sharpened focus on the ethical implications of decisions should help deter the lapses in judgment that have led to so many scandals. The “ethical environment” refers to the pervasive ethical climate or culture regarding what constitutes ethical behavior within an organization. To study this issue, Hageman and her colleagues studied the responses of 904 CPAs across four states.

Results of their research show that CPAs working at public accounting firms perceive significantly stronger ethical environments than CPAs working in industry. These findings were suggested to be due to the greater emphasis on commercialism in industry than at public accounting firms, as well as public accounting firms’ greater emphasis on professionalism and maintaining a public interest orientation. Furthermore, results indicate that CPAs at Big 4 public accounting firms perceive significantly stronger ethical environments than CPAs at other international/national, regional, and local public accounting firms. This finding may reflect the increased emphasis on Big 4 firms on ethics training and ethical behavior that has occurred since the scandals of the early 2000s that results in the demise of Arthur Andersen.

“The results are important for several reasons,” Hageman said. “First, we provide a useful benchmark regarding the relative strength of ethical environments at large accounting firms, small accounting firms, and organizations outside of accounting, which frequently employee CPAs. Second, given that CPAs in industry (and other non-public accounting work settings, such as governmental or not-for-profit venues) perceive significantly weaker ethical environments than CPAs in public accounting firms, our results suggest that these organizations may need to place more emphasis on developing and strengthening their ethical environments.”

Finally, Hageman indicates that their results may have important implications for audit and tax professionals working in CPA firms.

“Audit and tax professionals may need to be cognizant of the fact that the ethical environments their clients work in are perceived as significantly weaker than what is experienced within public accounting, which may have important implications for public accounting CPAs when assessing the relative risk of an engagement.”

In all, CPA firms and companies in industry alike who wish to strengthen their organizations’ ethical environment can begin by understanding these benchmarks.

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