An Investigation of The Reporting of Questionable Acts in An International Setting by Schultz 1993

Accounting Research Center, Booth School of Business, University of Chicago
An Investigation of the Reporting of Questionable Acts in an International Setting

Author(s): Joseph J. Schultz, Jr., Douglas A. Johnson, Deigan Morris and Sverre Dyrnes
Source: Journal of Accounting Research, Vol. 31, Studies on International Accounting (1993), pp.
75-103
Published by: Wiley on behalf of Accounting Research Center, Booth School of Business,
University of Chicago
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Journal of Accounting Research
Vol. 31 Supplement 1993
Printed in US.A.
An Investigation of the
Reporting of Questionable Acts
in an International Setting
JOSEPH J. SCHULTZ, JR.,* DOUGLAS A. JOHNSON,*
DEIGAN MORRISt AND SVERRE DYRNESt
1. Introduction
This study provides a framework for examining corporate managers'
and professionals' propensity to report questionable acts in both the
domestic and international contexts, and presents initial evidence on
the usefulness of the framework. A questionable act is defined in this
paper as an action which "violates a standard of justice, honesty, or
economy" (Graham [1986, p. 2]). This definition is consistent with the
external auditing literature's conceptions involving violations of inter-
nal control (SAS No. 55, AICPA [1988c]), illegal acts (SAS No. 54, AICPA
[1988b]), and intentional financial statement errors (irregularities)
(SAS No. 53, AICPA [1988a]). Because the need for auditor detection
of such acts arises only if the acts elude the corporation's internal con-
trol system, recent U.S. laws and official guidance urge strengthening
*Arizona State University; tINSEAD; +Norwegian School of Management and Ernst &
Young AS. We appreciate the assistance and counsel of Richard Burdick, Sanjay Gupta,
Karen Hooks, Steven Kaplan, Kurt Pany, Larry Ponemon, Hal Reneau, Bruce Behn,
Richard Brody, Carrie Cristea, Elizabeth Dreike, Michael Gaverick, Judith Jaffe, Carol
Johnson, Susan King, Kathleen Ramage, Lynn Rees, Wayne Wilson; the accounting work-
shops at Arizona State University, the University of Chicago, and the University of South
Florida; and an anonymous referee. We also thank the participants and their companies
for their support as well as the KPMG Peat Marwick Foundation, which underwrote
much of this project. Finally, we thank INSEAD and the Norwegian School of Manage-
ment for administrative and logistical support.
75
Copyright?, Institute of Professional Accounting, 1994
76 INTERNATIONAL ACCOUNTING: 1993
these internal systems. Hence, our focus is on the intra-organizational

reporting of questionable acts which qualify as breaches of internal
controls. Our theoretical analysis is based on the whistle-blowing liter-
ature (especially Graham [1986]) and on theories of Hofstede (e.g.,
[1980]) dealing with work-related cultural values. These provide the
framework for our study of reporting behavior conditioned on societal
and individual values.
Interconnected economic and communication systems leave little
doubt that organizations will increasingly span national boundaries
(e.g., Birnberg and Snodgrass [1988]) and that capital flows across
boundaries will increase (Peat Marwick Foundation [1988]). As these
trends continue, an external accounting system that facilitates compa-
rability among countries becomes more important (Wyatt [1989]). One
element of comparability is the reliability of the information in pub-
lished financial statements. The central purpose of our study is to ex-
plore some of the factors that influence reliability.1
The concern that managers and auditors fail to prevent misreporting
associated with questionable acts has played a major role in bringing
about changes in U.S. laws and professional guidance. In terms of ex-
pressing these concerns, the Report of the National Commission on
Fraudulent Financial Reporting (the Treadway Report) (NCFFR [1987])
has been instrumental in shaping matters directly addressed in our
study. The Treadway Report shifted emphasis away from a mechanical
conception of internal control to a more holistic perspective. In partic-
ular, the report dealt with "softer" elements of internal control as they
relate to fraudulent financial reporting. Shortly thereafter the Auditing
Standards Board adopted SAS No. 55 (AICPA [1988c]) which explicitly
incorporated "internal control environment" as its term for this
broader conception (Kinney and Felix [1992]). In discussing the term,
SAS No. 55 notes such characteristics as "management's approach to
taking and monitoring business risks" and its "attitudes and actions to-
ward financial reporting" (AICPA [1988c, appendix A]). Regarding the
second element, the SAS includes "consideration of entity policy re-
garding such matters as acceptable business practices, conflicts of inter-
est, and codes of conduct" (AICPA [1988c, appendix A]). These factors
transcend the finite procedures traditionally associated with internal ac-
counting control systems and provide a foundation for our study.
While some research (e.g., Bell, Szykowny, and Willingham [1993])
suggests that the internal control environment affects the incidence of
management fraud in financial reporting, research which links the
internal control environment's role in deterring fraud to auditing or
1With regard to reliability, our study stops prior to the external audit. If the intra-
organizational reliability of financial statements is expected to vary by country, then the
rigor of the external audit process could be adapted (just as it is to other internal con-
trol characteristics) to result in comparable "final" levels of reliability.
REPORTING QUESTIONABLE ACTS IN AN INTERNATIONAL SETTING 77
management implementation is sparse (e.g., Palmrose and Wright

[1992], Arnold and Ponemon [1991], Loeb and Cory [1989], and
Karnes et al. [1989]). Additionally, concern about the proper imple-
mentation of SAS No. 55 remains (Kinney and Felix [1992]). In part
because of this concern, COSO [1992] developed Internal Control-
IntegratedFrameworkto provide guidance. COSO [1992, pp. 26, 60-61]
expressly cites the whistle-blowing literature as relevant to the enforce-
ment of codes of conduct and addresses differences in control envi-
ronments between countries. Our study contributes to understanding
the elements of the internal control environment which are central to
COSO and to SAS No. 55.
Specifically, we designed an experimental study in which country
(France, Norway, and the United States), organizational prosperity
(prosperous or nonprosperous), and nature of the situation underlying
a questionable act (six cases) were at different levels. Each of the six
cases involved a conflict of principle between a superior and a subordi-
nate over the superior's questionable act. Three of the cases involved
traditional accounting matters; three did not. For each case, the sub-
jects were asked to judge three variables: the seriousness of the ques-
tionable act, the observer's personal responsibility to report, and the
observer's personal cost of reporting. These variables effectively en-
compass Graham's model. Subjects were also asked to express the like-
lihood the subordinate would report the act. Because this model is
represented as complete and not yet evaluated empirically, the first ob-
jective was to assess the strength of the model without consideration of
any other variables.
The second objective was to determine whether subjects from the
three countries used the three variables (seriousness, responsibility to
report, and personal cost) differently in arriving at their attitudes
about reporting. Differences among countries could signal the need to
vary training programs directed at enhancing internal control quality.
For example, if the American subjects did not treat personal responsi-
bility to report as important, then reporting could be emphasized in
their training programs.
Finally, we were interested in differences in reporting attitudes as
they depended on country, organizational prosperity, and case situa-
tion. Thus, while the first two objectives related primarily to under-
standing the perceptionsand processesindividuals use in arriving at their
attitudes about reporting, this objective related more directly to deter-
mining the effect of external circumstances on the reliability of infor-
mation contained in financial statements. For example, if Norwegians
expressed a consistently lower likelihood of reporting than Americans
or French, then one would suspect lower reliability in Norwegian state-
ments (other things being equal). This third objective differs from the
first two because of general differences in the characteristics of the vari-
ables; they are observable by auditors and they are varied systematically
78 J. J. SCHULTZ ET AL.
ex ante. Including organizational prosperity as a situational variable

provided a test of its relative influence against that of country. With re-
gard to this objective, we were also interested in how the type of ques-
tionable act portrayed in different cases might affect reporting
(discussed below).
Results of our exploratory study show that the three variables
adapted from Graham's model predict reporting tendencies and that
subjects from the three countries studied tend to emphasize different
variables within the model. Further, when both country and case are
considered interactively, the tendency to report questionable acts
differs. Americans assess the personal cost of reporting as higher than
the Europeans. Organizational prosperity does not influence the re-
porting judgments.
In section 2, we briefly review our adaptation of Graham's model and
posit related hypotheses. In section 3, we review research on national
characteristics and present hypotheses and questions about the fre-
quency of reporting and the process of making reporting judgments.
Section 4 presents the remainder of the experimental study's variables
and sets forth related hypotheses and research questions. Section 5 ex-
plains the methods, and the empirical results follow in section 6. In sec-
tion 7, we discuss the contributions and limitations of the study.
2. A Model for Reporting Questionable Acts

Figure 1, adapted from Graham [1986], portrays our model of the
perceptions underlying an individual's decision to report a question-
able act.2 Graham's model takes a broader view than traditional ap-
proaches within managerial accounting and auditing; however, recent
policy statements (COSO [1992]) on internal control make this
broader view increasingly relevant to accounting. Most important to
this study is her focus on "principled organizational dissent," because
all the acts in our study consist of matters of principle. Also, Graham's
model deals primarily with individual behavior, which is often the fo-
cus of cross-national management research (Adler [1983]).
In our study, we provided each subject with six cases involving a mat-
ter of principled conflict (see left-most block of figure 1). This method
assures that all subjects were aware of the questionable act; awareness
obviously must precede any behavioral response. As Glazer and Glazer
[1987; 1989] note, once the wrongdoing is observed and confirmed,
the observer may accept the act and internalize its propriety; accept
the act but conform only behaviorally; or protest, which entails report-
2Although Graham's model synthesized research into reporting questionable acts as

of 1986, Miceli and Near [1992] acknowledge only very limited differences between their
model and Graham's (see [1986, pp. 89-90]). The theoretical structure and data gather-
ing for the study reported here were completed prior to the publication of their book.
Uncited assertions in this section are attributable to Graham [1986].
Perceived
seriousness
of irregularity
/ 9 - point scale)
Description Attributionof personal Choice of

of an issue responsibility reporting
of principle for reporting behavior
L6cases (9 - pointscale) 11 - point scale)
Perceived
personal cost
of reporting
(9 - point scale)
FIG 1.-Reporting questionable acts. Adapted from Graham [1986, p. 35]. See Appen-
dix A for cases and response scales.
ing. The model predicts that the likelihood of reporting increases with
both the seriousness of the irregularity and the observer's attribution
of personal responsibility to report. Seriousness relates to the concept
of materiality in an accounting context and needs no further justifica-
tion. We expect that perceptions of personal responsibility will depend
on the subject's organizational role and personal value system. In a
survey of internal auditors, Miceli, Near, and Schwenk [1991] con-
cluded that their subjects were less likely to report incidents "when
they did not feel compelled morally or by role prescription to do so . .
[1991, p. 113, emphasis added].
The perceived personal cost of reporting is expected to be negatively
related to the decision to report. Personal cost is more complex than
the other two variables, as it is partially conditioned on "perceived or-
ganizational response to behavior." The expected organizational re-
sponse depends on how the organization has reacted to previous
reports, as well as such factors as organizational climate (including
reporting channels) and organizational prosperity. When conditions
signal a positive outcome compared to the perceived cost to the indi-
vidual, the observer is more likely to report a questionable act (AICPA
[1988c] and COSO [1992]).
Using the alternative hypothesis form, we hypothesize that:
HI: The greater the assessed personal responsibility to report, the
greater will be the likelihood of reporting.
H2: The greater the assessed seriousness of the act, the greater will
be the likelihood of reporting.
H3: The greater the assessed personal cost of reporting, the less will
be the likelihood of reporting.
3. Country3
We believe individuals' reporting tendencies related to questionable
acts are influenced by both cultural values and individual values. Stu-
dents of organizational theory assert that much behavior within organi-
zations is attributable to external forces (e.g., Pfeffer and Salancik
[1978] and Heller [1988]). Differences in managerial accounting sys-
tems, a primary control mechanism within organizations, have been
attributed to national influences (e.g., Frucot and Shearon [1991],
Schweikart [1985; 1986], and Horovitz [1980]). Perhaps the most con-
sistent and persuasive advocate of the influence of national forces on
organizational design and behavior is Hofstede and his various co-
authors (e.g., [1979; 1980; 1983; 1984; 1985; 1989; 1990]). Several ac-
counting researchers (e.g., Frucot and Shearon [1991], Perera [1989],
Gray [1988], and Soeters and Schreuder [1988]) have adopted his
framework.
Hofstede [1980, p. 25] conceives of culture in the workplace as "a
collective programming of the mind which distinguishes one group
from another." He views these collective programs, or cultures, as con-
taining values that "direct our feelings of good and evil" (Hofstede
[1985, p. 347]). These values are likely to contribute to the tolerance
of principled dissent in the organization. In addition, value differences
mean that what may be viewed as acceptable business practice in one
country (and, hence, not perceived as reportable) may be viewed
differently elsewhere.
Hofstede [1980] identifies four dimensions of work-related cultural
values: power distance, uncertainty avoidance, individualism, and mas-
culinity.4 Hofstede [1985] posits that the two dimensions of power dis-
tance and uncertainty avoidance strongly affect the way different
countries design organizations and institutions; it is their combined
impact on organizational structure that underlies our expectations of
reporting behavior.5 We discuss each of these in turn.
3Studies dealing with the influence of national culture on external accounting sys-
tems include Perera [1989], Gray [1988], and Pratt and Behr [1988]. Studies of cultural
effects on management control systems include Frucot and Shearon [1991], Heller
[1988], Child [1981], Birnberg and Snodgrass [1988], and Alvesson [1987]. For other
examinations of culture and related dimensions, see Triandis and Lambert [1980], Hof-
stede [1980], and Roberts and Boyacigiller [1984].
4 Hofstede derived his dimensions through extensive testing and statistical analysis.
Using different data, Rieger and Wong-Rieger [1988] isolate three national dimensions
that are similar to three of Hofstede's dimensions. Also, see Alnajjar [1989], Ronen and
Shenkar [1988], and Laurent [1983] for studies that support the validity of Hofstede's
dimensions.
5We were unable to relate Hofstede's other two dimensions to anticipated reporting
behavior or the perceptions underlying it. These dimensions seemed too sensitive to the
specific situation to allow for a general statement.
PowerDistance. Power distance is the extent to which the members of a society accept
that power in institutions and organizations is distributed unequally.... People in large
power distance societies accept a hierarchical order in which everybody has a place which
needs no further justification. People in small power distance societies strive for power
equalization and demand justification for power inequalities. (Hofstede [1984, p. 83].)
Other things being equal, persons from countries high on power dis-
tance are expected to be less likely to report questionable acts by supe-
riors than those from countries low on power distance. If hierarchical
order is commonplace and unchallenged, there is the logical expecta-
tion that superiors' actions require less justification, even if they are
viewed as questionable. Baucus, Near, and Miceli [1985], Weinstein
[1979], and Miceli and Near [1992, p. 77] support the view that more
hierarchical, more authoritarian, and less participative organizations
exhibit lower internal reporting frequencies.6
Table 1 shows Hofstede's Values Survey Module (VSM) [1980; 1982]
index scores and ranks for power distance and uncertainty avoidance
for the countries in our study. It also shows our subjects' scores. Hof-
stede's scores generally range from 0 to 100, with higher scores repre-
senting greater magnitude. They represent intervally scaled data.
Although no statistical differences can be computed, differences in
scores indicate the extent to which countries differ. For example,
based on Hofstede's data, we expected the French to score high on
power distance relative to the Norwegians and Americans. Based on
this dimension alone, we would expect a lower tendency to report
questionable acts among the French subjects in our study. Because all
of our cases involve a subordinate observer facing the dilemma of re-
porting a superior's questionable act to the next level of authority,
differences in power distance seem especially relevant.
UncertaintyAvoidance. Uncertainty avoidance ... leads ... to beliefs promising certainty
and to maintaining institutions protecting conformity. Strong uncertainty avoidance so-
cieties maintain rigid codes of belief and behavior and are intolerant towards deviant
persons and ideas. Weak uncertainty avoidance societies maintain a more relaxed atmo-
sphere in which practice counts more than principles and deviance is more easily toler-
ated.... The fundamental issue addressed by this dimension is whether [society] tries to
control the future or to let it happen. (Hofstede [1984, p. 83].)
If high uncertainty avoidance implies clear rules against question-

able behavior, persons from countries high on this feature might be
more likely to report questionable acts than persons from countries
low on uncertainty avoidance. However, organizations in countries
high on uncertainty avoidance have been found to be highly structured
and bureaucratic (Laurent [1983], Horovitz [1980], and Crozier
[1964]). Highly bureaucratic structure, intended to suppress aberrant
behavior, also seems to suppress reporting frequency. Kelman and
6 It also seems likely there would be less opportunity to report in conventional chan-
nels (e.g., internal auditors) in countries where high power distance is accepted.
TABLE 1
Hofstede [1980] Indexes and Ranks for Power Distance and Uncertainty Avoidance by County
France Norway U.S.
Power Distance
Hofstede VSM Indexa 68 31 40
(Rank out of 50 countries) (38) (7) (16)
Subject Scoresb 41 -4 13
Uncertainty Avoidance
Hofstede VSM Indexa 86 50 46
(Rank out of 50 countries) (39) (16) (1 1)
Subject Scoresb 55 22 12
aThe indexes shown are the Hofstede Values Survey Module (VSM) Index calculated from his 1980
study. The indexes and ranks were reported by Perera [1989]. A rank of 50 represents the highest
country/region score reported; a rank of 1 the lowest.
bThese index scores were computed according to the formulas in Hofstede [1980] on the basis of
the 44 French, 41 Norwegian, and 60 American responses to Hofstede's Value Survey Module (VSM).
Use of the copyrighted instrument and details about its scoring were obtained from Hofstede, who
granted permission for its use in our study.
Hamilton [1989] argue that emphasis on bureaucracy leads to routin-

ized decision making and isolates the individual from exploring the
consequences of actions or assuming responsibility for actions outside
a narrowly defined role. Miceli and Near [1992, pp. 81-82] point out
that work group pressure in such organizations leads to greater confor-
mity and the likely adopting of an "accommodation" strategy that
would operate to suppress reporting. In the context of our reporting
model, we expect that the feasibility of reporting internally would be
decreased (the potential net cost increased) under these conditions.
Miceli and Near [1992, p. 157] conclude that greater organizational
structure suppresses reporting. The relatively high scores recorded for
the French on both power distance and uncertainty avoidance can be
expected to lead to French organizations that are more authoritarian,
more bureaucratic, and less participative.
In our judgment, these arguments support the following hypotheses
with regard to frequency of reporting:
H4-1: French subjects will reflect a lower likelihood of reporting
than those in Norway.
H4-2: French subjects will reflect a lower likelihood of reporting
than those in the United States.
As discussed, uncertainty avoidance leads to highly bureaucratic or-
ganizations which in turn leads to narrowly defined roles, limiting the
individual from exploring consequences of actions or assuming re-
sponsibility beyond this role. Also, all our cases deal with a subordinate
faced with the prospect of reporting a superior. Because our French
subjects have relatively high scores on power distance and uncertainty
avoidance, we believe that they will rely heavily on their formal role
prescription in arriving at their reporting intentions. In our terminol-

ogy, role prescription is best captured by the perceived personal re-
sponsibility to report. This leads to the following hypotheses:
H5-1: With reference to likelihood of reporting, Norwegian subjects
will register a lower positive weight on personal responsibility than
French subjects.
H5-2: With reference to likelihood of reporting, U.S. subjects will
register a lower positive weight on personal responsibility than French
subjects.
If the French subjects attend to personal responsibility heavily, it
may result in their relatively reduced attention to seriousness and per-
sonal cost. This leads to the following research questions:
RQ1-1: With reference to likelihood of reporting, will the Norwe-
gian subjects register a higher positive weight on seriousness than
French subjects?
RQ1-2: With reference to likelihood of reporting, will the American
subjects register a higher positive weight on seriousness than French
subjects?
RQ2-1: With reference to likelihood of reporting, will the Norwe-
gian subjects register a negative weight of greater magnitude on per-
sonal cost than French subjects?
RQ2-2: With reference to likelihood of reporting, will the American
subjects register a negative weight of greater magnitude on personal
cost than French subjects?
4. Organizational Characteristics
Graham [1986] posits that organizational response to reports of
questionable acts influences its members' perceptions of what consti-
tutes an issue of principle and the likely "cost" of reporting an act. This
belief is common in the professional accounting literature as well
(COSO [1992, pp. 59-61]). Further, Hofstede et al. [1990] and Hof-
stede [1989] argue that values are shaped in childhood and influenced
principally by the national culture; the organization, on the other
hand, influences daily practices more than values.7 Including an orga-
nizational characteristic in our expectations about differences in re-
porting frequencies provides for a test of country versus organizational
influence.8
7Covey [1991] recommends an information system to monitor the interactions be-

tween the formal organization and its members' perceptions, values, and norms.
8 In addition, using scales containing elements from prior studies, we measured the
subjects' perceptions of their organization's culture, competitive environment, reward
system, and reporting channels for questionable acts. They are not included in the anal-
yses because we found them to have both very limited explanatory power relative to
other variables and limited reliability.
4.1 ORGANIZATIONAL PROSPERITY
We chose organizational prosperity as one of our primary experimen-

tal variables because of its theoretical support from the whistle-blowing
and organizational theory literature and because of the importance that
has attached to it in the accounting and auditing arena. Both profes-
sional auditing standards (e.g., SAS No. 53, AICPA [1988a]) and the
Treadway Commission (NCFFR [1987]) advise that lack of financial pros-
perity represents a cautionary condition for questionable acts. Organiza-
tional researchers (Finney and Lesieur [1982] and Staw and Szwajkowski
[1975]) support this view, particularly where survival is threatened.
Greenberger, Miceli, and Cohen [1987] find that peer group pressure
goes against the individual who might report wrongdoing when survival
is threatened. Near and Miceli [1985] report that the retaliation against
a reporter of a questionable act needed for organizational survival is
likely to be severe. Further, both Cressey [1980] and Merchant [1987]
indicate that most perpetrators of questionable acts did so under pres-
sure-laden conditions. Finally, organizational prosperity is also likely to
affect the resources available to deal with reports of questionable acts
(Graham [1986]). Based on these arguments we believe that:
H8: The greater the organizational prosperity, the greater will be
the expressed likelihood of reporting.
4.2 CASES
Cases were needed for two principal reasons: (1) to satisfy modeling
needs to meet objectives and (2) to motivate subjects. Our study's first
objective was to examine the strength of the relationships between re-
porting attitudes and the subjects' perceptions of seriousness, responsi-
bility, and personal cost (figure 1). As part of the objective we wanted to
determine if the strength of the model would persist across a wide array
of competing explanatory variables (discussed below). Using one case
possessing a unique set of other possible explanatory variables could not
accomplish this goal. Multiple cases were also needed to detect changes
in reporting frequencies due to situational variables that are observable
by auditors. We were interested in this relationship because of Becker
and Fritzsche's [1987] finding that different types of ethical dilemmas
resulted in differential actions among American, French, and German
managers. Also, we wanted to know if accounting and nonaccounting
cases led to differences in reporting tendencies. Multiple cases were also
needed for experimental efficiency because of the difficulty of securing
enough subjects for a completely between-subjects design.
Using realistic case scenarios was believed to be important for moti-
vating subjects who were all middle-level managers or professional
staff. All cases were drawn from incidents published in the U.S. press.
Although ethnocentric in origin, the cases were selected only after be-
ing assessed by experienced businessmen from the three countries.
The six cases appear in Appendix A. In addition to differences in the

variables shown in figure 19 the cases contain highly diverse situations
with varied levels of factors found to affect reporting judgments. Only
the nature of the issue (accounting or nonaccounting) was varied in
any systematic manner due to experimental costs. Half of the cases (1,
3, and 5) involved financial matters dealing with accounting personnel
as the observers of the questionable acts. Some of the questionable acts
involved situations that might lead to bodily harm since such acts tend
to be viewed more seriously than financial transgressions (Mathews
[1987] and Spencer and Wokutch [1984]). The short-term benefit for
the company was changed also since it might in part justify not report-
ing a questionable act, particularly if the company is not prosperous
(Miceli and Near [1992, p. 139]). Observer power and the attendant
relations among the observer, the perpetrator, and the would-be recip-
ient of any report were also varied due to differences in behavior sug-
gested by the Hofstede dimension of power distance, arguments that
tenure with a company might affect behavior (Graham [1986]), and
that persons of at least supervisor rank might report more frequently
than lower-ranking personnel (Miceli and Near [1984], Fritzsche
[1988], and Graham [1986]). Finally, the status of the perpetrator was
varied because some evidence indicates that higher-ranking personnel
are not as likely to be reported as lower-ranking ones (Harari and
McDavid [1969]).
Based on the author team's collective knowledge of accounting and
law within each country, discussion with expert accountants, press re-
ports, and pilot tests (discussed later), we believe that each case con-
tains a clear violation of accepted business practice or accounting
policy. Unambiguous evidence of a questionable act is considered an
important factor in the decision to report (Miceli and Near [1992,
p. 221] and Naj [1992]). All companies were described as public com-
panies to establish their responsibility to a wide variety of stakeholders
and to parallel our subjects' work environments.
Because of the complexity of the variables and the general lack of
systematic manipulation, we pose the following research question (in
lieu of a hypothesis):
RQ3: Will different case scenarios result in a differential expressed
likelihood of reporting?
5. Method
5.1 PROCEDURE
Instruments containing Hofstede's Value Survey Module [1980;

1982] and the six cases were administered directly by one of us, a re-
search assistant, or a company contact person. All subjects and their
r(MT1 V Ve11 A
IAT- -- .iirrl qn niimi ti
86 j. J. SCHULTZ ET AL.
Our first objective was to determine if our subjects' perceptions of

seriousness, responsibility, and personal cost would describe their at-
titudes about reporting (HI, H2, H3). The second objective was to de-
termine if the French would use their perceptions of the three variables
differently from the Norwegians and the Americans (H5-1, H5-2,
RQI-1 through 2-2). ANOVA was used to test whether country, organi-
zational prosperity, and case (all independent of subjects' perceptions)
would affect the subjects' reporting judgments (H4-1, H4-2, H6, RQ3).
Before presenting our results, we elaborate on some issues related to
case and response-scale construction, Hofstede's Value Survey Module
(VSM), and selection of countries, companies, subjects, and measures
used to classify companies as either prosperous or nonprosperous.
5.2 CASE AND RESPONSE-SCALE CONSTRUCTION
The cases are reproduced in Appendix A. Each case contains material

describing the observer of the questionable act, the perpetrator, their po-
sitions in the company, the act, and a set of complicating facts. Subjects
were asked to assess seriousness, responsibility, and cost from low to high
on a 9-point Likert scale, and to indicate on an 11-point scale, ranging
from never to always, the frequency with which the observer would report
the activity. The third-person viewpoint is common in research involving
ethical issues (e.g., Arnold and Ponemon [1991] and Rest [1986]).
The six cases were selected from among 16 original cases pilot tested
in MBA classes in the United States and Norway. Students with signifi-
cant business experience evaluated the cases on seriousness, realism
(representativeness), and clarity. In France, several personnel with
significant practical and academic experience reviewed the cases. As
discussed earlier, another criterion was diversity of settings, in order to
determine if our perpetual model of reporting a questionable act was
robust when competing with other variables. Response scales for each
variable were common to this type of study.
5.3 HOFSTEDE'S VALUE SURVEY MODULE
Hofstede's VSMs [1980; 1982] are standardized, copyrighted ques-

tionnaires. The original VSM yielded scores which were intended to
range from approximately 0 to 100 for each dimension and approxi-
mate an interval scale. One score is calculated for each dimension for
each group of subjects from a country, based on predetermined for-
mulas. Hofstede recommends that at least 50 subjects from similar po-
sitions be used but acknowledged that as few as 20 can suffice. Because
the measures are influenced by other variables such as education, gen-
der, age, position, and organizational subculture, subject groups be-
tween nations should be matched on these variables to assess national
differences. The newer instrument, VSM [1982], added questions to
determine if reliability might be improved, but did not change the rel-
evant items or formulas.
Table 1 presents our subjects' scores on power distance and uncer-

tainty avoidance. Although the absolute scores differ from those ob-
tained by Hofstede, the differences between French and U.S./
Norwegian subjects remain for both dimensions.
5.4 SELECTION OF COUNTRIES
We chose France, Norway, and the United States because of differ-

ences on the Hofstede indexes of power distance and uncertainty
avoidance and to limit the cost of this exploratory research.9 Also, cer-
tain broad cultural values (e.g., religious) appeared to be sufficiently
similar to allow for differences in work-related values to dominate
conflicts of the nature in our study. Each country has laws against brib-
ery (Goldstein [1979]); the existence of such laws (regardless of their
specific content) might be expected to have a stabilizing effect in terms
of awareness of a questionable act. Lastly, each country has an active
capital market, and at least 5% of the world product market in the two
industries from which the participating companies were selected.
5.5 COMPANIES
In part due to the topic of our study, we encountered significant

difficulty in gaining company participation. In order to gain coopera-
tion, we promised complete anonymity for the companies and all sub-
jects. Consequently, our descriptive data are limited. All companies
were selected from one of two broad industry groups, groups that
seemed pressured in terms of important competitive forces. U.S. and
Norwegian companies were publicly owned; French firms were wholly
owned subsidiaries of public U.S. companies. We constrained our se-
lection to large companies (at least 5,000 employees in the company as
a whole; subsidiaries did not have this many). Large companies are
more likely to have formal reporting channels, sound internal controls,
and other characteristics that we believed to be pertinent. All had
codes of conduct that required reporting of violations. Counting sub-
sidiaries in different countries separately, there are ten companies in
the sample-three each from Norway and the United States and four
from France.
5.6 PROSPERITY CLASSIFICATION
Companies were subjectively classified as either prosperous or non-

prosperous based on public and private information, including earn-
ings trends, earnings forecasts, and pertinent data from business
publications. Nonprosperous classification signals that a company is
9 The two American authors were visiting academic institutions in France and Norway;
preliminary inquiry of fellow academics at these institutions indicated a reasonable pos-
sibility of interaction and subject participation. Securing subjects for the study proved
very difficult. Also, costs of instrument translation and the like were quite high.
experiencing pressure which may inhibit the reporting of questionable

acts, particularly those related to transactions likely to enhance organi-
zational performance. We also considered formal indicators of organi-
zational stress (e.g., Ponemon and Schick [1991] and Cameron,
Whitten, and Kim [1987]).
To validate our classification, we interviewed our contact person at
each company (a high-ranking officer or controller) for his assessment
of the competitive position of the company. Our questionnaire results
also indicated a significant (p = .05) relationship between our classifi-
cations and our subjects' assessments of their company's competitive
position.
5.7 SUBJECTS
Table 2 summarizes the 145 subjects' backgrounds. The subjects in

our study were managers and professional staff. Graham [1986] argues
that necessary conditions for reporting include awareness of a question-
able act, an understanding of the likely organizational response to a re-
port, and a capability of personal attribution for the responsibility to
report. Managers and professional staff can reasonably be expected to
meet these conditions (Micelli and Near [1984]). We expected subjects
at these levels to have education levels and/or professional ethics orien-
tations to develop their awareness of issues of principle (Bloom [1981],
Langenderfer and Rockness [1989], and Graham [1989, p. 10]).
Even though we requested approximately half of the subjects come
from professional staff ranks and half from middle-level management,
table 2 shows that most of our participants (particularly in Norway)
come from the managerial ranks. However, both age and years of edu-
cation were quite stable across countries and nearly all the subjects
were native. Subjects from nonprosperous companies outnumbered
those from prosperous companies.
6. Results
6.1 OVERALL RESULTS
Table 3 presents the subjects' response means and standard de-

viations by country, case, and pooled categories for each variable. It
is intended to clarify the data gathered and to serve as a reference
for significant relationships throughout the rest of the paper.10 The
pooled mean for likelihood of reporting (5.9) falls just slightly above
the midpoint of the 0- to 10-point scale, indicating a tendency to re-
port barely exceeding 50%. Pooled means from the 1 to 9 scale for the
model variables are more nearly polar as evidenced by responsibility to
10 because of its
The table contains no partitions based on organizational prosperity
insignificance.
TABLE 2
Subject Information
Number of Subjects by: France Norway United States

Country 44 41 60
Organizational Prosperity:
Prosperous 23 16 20
Nonprosperous 21 25 40
Type of Job or Position:
Professional Staff 14 6 25
Managerial 30 35 33
No Response 0 0 2
National Origin:
Native Born 35 40 54
Immigrant Resident 2 0 3
No Response 7 1 3
Other Characteristics:
Mean Age in Years 45 43 44
Mean Years of Education 14 15 16
report at 7.3, seriousness of the issue at 7.2, and personal cost to report
at 5.8.
6.2 THE PERCEPTION MODEL OF REPORTING QUESTIONABLE ACTS
Our first objective is to determine if the subjects' perceptions of re-

sponsibility to report, seriousness of the act, and personal cost to re-
port can explain the variance in subjects' reporting judgments. The
top part of table 4 reports results that address this objective. The ad-
justed R2 of .26 for the model reflects a significant relationship (p =
.01). The t-statistic for each model component also indicates signifi-
cance (p = .01).11 Thus, the first three hypotheses are supported. The
country-specific models in table 4 show that the Norwegian subjects at-
tended to each element of the model in the same direction (p < .01) as
the pooled model. Americans used responsibility to report and cost of
reporting to a significant extent (p = .01), but did not attend to the se-
riousness of the act (p = .12). This result is consistent with increased
expectations in the United States to report all questionable acts. The
French used only the responsibility to report (p = .01).12
Specification tests to detect heteroscedasticity were performed on all models in

tables 4 and 5. Heteroscedasticity was present (p < .05) for the pooled model and the
U.S. model in table 4 and the model in table 5. Therefore, White's [1980] corrected co-
variance matrix was employed to calculate corrected t-statistics.
12 Each of the models in table 4 was also run with all interaction terms included. Ad-
justed R-squares increased by as much as .02 and decreased by .01 in one case, indicating
that the explanatory power of these terms is limited. Additionally, the terms had variance
inflation factors (VJFs)far greater than 10.
TABLE 3
Summary of Subjects' Responsesa
Likelihood of Reportingb
Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Pooled
France 6.3 6.9 5.8 4.5 6 5.7 5.9
N=32 (2) (1.8) (2.1) (2.2) (2.4) (2.4) (2.4)
Norway 5.9 6.6 5.6 4.9 5.1 7 5.8
N=40 (2.2) (1.7) (2.0) (2.0) (1.8) (1.6) (2.0)
United States 6.5 7.2 5.8 4 6 7 6.1
N=50 (2.4) (1.8) (2.2) (2.1) (2.1) (2.0) (2.3)
Pooled 6.2 6.9 5.7 4.4 5.7 6.6 5.9
N=122 (2.3) (1.8) (2.2) (2.1) (2.1) (2.1) (2.3)
Responsibility to Reportc
France 7.7 8.2 7.5 6.8 7 7.4 7.3
(1.3) (1.0) (1.3) (2.1) (1.8) (1.8) (1.7)
Norway 7.6 7.9 6.4 6 6.5 7.9 7
(1 .3) (1.2) (1.8) (1 .9) (1.8) (1.3) (1.8)
United States 7.7 8.6 7.4 6.8 7.2 8.1 7.6
(1.3) (0.7) (1.7) (2.1) (1.8) (1.5) (1.7)
Pooled 7.7 8.3 7.1 6.3 7 7.9 7.3
(1.4) (1 .0) (1.8) (2.1) (1.8) (1.5) (1.8)
Seriousness of Issuec
France 7.1 8.4 6.9 6.1 6.5 7.6 7.1
(2.5) (2.6) (2.1) (2.3) (2.3) (2.3) (1.9)
Norway 6.8 8.1 6.3 6.1 6.4 8.3 7
(1.3) (1.2) (1.9) (1.9) (1.8) (1.3) (1.9)
United States 7 8.6 7.1 6.9 6.6 8 7.4
(1.8) (0.8) (1.6) (1.8) (1.7) (1.5) (1.7)
Pooled 7 8.4 6.8 6.4 6.5 8 7.2
(1.9) (1.0) (1.8) (2.0) (1.8) (1.5) (1.8)
Personal Cost to Reportc

France 5.8 5.8 5.3 5.5 5.2 4.7 5.4
(2.5) (2.6) (2.1) (2.3) (2.3) (2.3) (2.3)
Norway 4.4 5.2 4.1 5.1 5 3.9 4.6
(2.1) (2.1) (2.0) (2.1) (2.0) (1.8) (2-1)
United States 7.1 7.7 7.2 7.3 6.4 6.4 7
(2.1) (1.5) (1.9) (2.0) (2.1) (2.1) (2.0)
Pooled 5.9 6.4 5.7 6.1 5.6 5.1 5.8
(2.5) (2.3) (2.4) (2.3) (2.2) (2.3) (2.4)
aMeans appear above (standard deviations).
bMeasured on 11-point scale anchored 0 = never to 10 = always.
CMeasured on 9-point scale anchored 1 = low to 9 = high.
Table 5 reports tests of whether the subjects' country affects the em-
phasis on personal responsibility, seriousness, and personal cost in ar-
riving at reporting judgments. The model uses France as the base case
since the other two countries are believed to differ from France, but
TABLE 4
Regression of Likelihood of Reporting on Perceived Responsibility to Report,
Seriousness of the Act, and Personal Cost to Report
Intercept/Coefficient
Pooled Estimate t-Statistic Significance
Variable:
Intercept 1.33 4.02 .01
Responsibility .54 9.46 .01
Seriousness .16 3.03 .01
Personal Cost -.10 -3.51 .01
(Model Adjusted R2 = .26)
France
Variable:
Intekcept 1.01 1.58 .11
Seriousness .06 .54 .58
Personal Cost -.01 -.12 .90
Norway
Variable:
Intercept 1.50 2.95 .01
United States
Variable:
Intercept 1.76 2.97 .01
For scales, means, and standard deviations for each variable, see Appendix A and table 1.
not from each other.13 Consequently, Norway and the United States
are represented by dummy variables. The terms contrasting Norway
(represented by dummy one) with France all show significance (p = .04
or .05) in the expected direction. The terms comparing the United
States (dummy two) with France show significance difference (p = .02)
in the expected direction for the personal cost variable only. These
tests support the proposition that our subjects' emphasis on personal
variables in arriving at reporting judgments varies by country.
13 T-tests comparing Norway and the United States show no significant difference.
TABLE 5
Regession of Likelihood of Reporting on Perceived Responsibility to Report, Seriousness of the Act,
Personal Cost to Report, and Country Dummy Variablesa
Mean Expected Coefficient

Variable (Std. Dev.) Sign Estimate t-Statistic pbValueb
Likelihood of Reporting 5.95 N/A N/A N/A N/A
(2.30)
Responsibility 7.37 + .62 6.53 .01
(1.75)
Seriousness 7.20 + .06 0.52 .30
(1.81)
Personal Cost 5.89 - -.01 -0.10 .46
(2.39)
Dummy 1 (DI) 0.28 N/A .58 0.75 .45
1-Norway (0.45)
0-United States or France
Dummy 2 (D2) 0.41 N/A .74 0.91 .36
1-United States (0.49)
0-Norway or France
D1 x Responsibility 1.98 - -.22 -1.73 .04
(3.30)
D1 x Seriousness 1.97 + .25 1.81 .04
(3.30)
D1 x Cost 1.30 - -.15 -1.62 .05
(2.34)
D2 x Responsibility 3.19 - -.02 -0.15 .44
(3.94)
D2 x Seriousness 3.08 + .10 0.74 .22
(3.82)
D2 x Cost 2.95 - -.20 -2.12 .02
(3.74)
aIn this model, France represents the base case against which Norway (represented by dummy 1)
and the United States (represented by dummy 2) are compared. The interactions of the dummy vari-
ables with the independent variables measure the difference between France and the country repre-
sented by the dummy. The estimated intercept was 1.02 and adjusted R2 was .27. Scales are contained
in AppendixA.
bOne-tailed tests are performed for coefficient estimates, that have directional expectations.
We considered violations of the assumptions underlying the models

and related tests. Variance inflation factors (VIF) were calculated to
determine if the results might be affected by multicollinearity. The
critical VIF value for indicating severe collinearity is 10 (Marquandt
[1980]). The models in table 4 have VJ~s well below 10. However, the
dummy variable interaction terms for the model in table 5 have VJ~s
well above 10; this result may partially explain the lack of significant
differences between France and the United States on responsibility
and seriousness, as reflected in table 5.
Belsley, Kuh, and Welsch [1980] propose additional diagnostic tests

for observations that pose excessive influence on the parameter esti-
mates and/or the covariance matrix. Each model was reexamined after
influential observations as identified by these tests were deleted. In
most cases, the parameter estimates were qualitatively similar and the
significance levels were unchanged.14
6.3 ANALYSIS OF SITUATIONAL VARIABLES
We also test for effects of the situational (experimental) variables of

country, organizational prosperity, and case on reporting judgments
(H4-1 & 2; H6; RQ3). As discussed, these differ from the perception
variables in that they could be observed by an auditor and they are
established ex ante for this study. Table 6 shows the results of the
ANOVA conducted with two between-subjects variables (country and
prosperity) and one within-subjects variable (case). A multivariate
testing approach was used for the repeated variable (case) due to its
less stringent assumptions.15 There are no main effect differences for
either country (p = .527) or prosperity (p = .785). There is a significant
main effect for case (p = .000) and a significant interaction effect for
country and case (p = .000). These results indicate that the likelihood
of reporting questionable acts is related to national culture and the
specific facts of the case. The upper part of table 3 shows the means
pertinent to this interaction. Analysis of simple effects using Bonfer-
roni tests controlled to an experimentwise level of p < .05 revealed that
cases 5 and 6 differed by country.
Placing each of the perception variables in the dependent position,
we repeated the ANOVA. The subjects' perceptions of responsibility,
seriousness, and personal cost were affected by the case variable; only
personal cost differed among country. There were no other significant
effects related to country and none for organizational prosperity or
any interactions. These results indicate that judgments about reporting
varied among the cases as a result of differences in the three percep-
tion variables, the way subjects combined them, or both. They indicate
that differences among countries are attributable to either the assess-
ment of personal cost of reporting or the way that the three perception
variables were combined.
The reporting tendencies between cases are generally not remarkable
since they were designed to differ (discussed earlier). No pattern emerged
between those cases containing accounting wrongdoings (1, 3, 5) and
14W lhen the data from Norway and the United States were pooled and represented in a
model (not reported here) by a single dummy to be compared to France, all the interac-
tions were significant (p < .05). Thus, discarding influential outliers increased significance.
15 The multivariate test approach allows for estimation of the variance and covariance
matrices rather than assuming symmetry as with the univariate approach (see Morrison
[1976, pp. 141-53]).
TABLE 6
Aniialysis of Variance with Choice of Reportitg as Dependent Variable
Effect Df. Mean Square F-Value PR>F

Between Subjects:
Country 2 7.739 .64 .527
Prosperity 1 0.897 .07 .785
Country x Prosperity 2 17.802 1.48 .231
Error 116 12.005
Within Subjects:
Case 5,112 25.72 .000
Case x Country 10,224 3.69 .000
Case x Prosperity 5,112 1.26 .286
Case x Country x Prosperity 10,224 1.80 .062
aThe degrees of freedomn for the within-subjects effects are reported for the numerator and
denominator, respectively, because the mnutltivariate approach is used to test wvithin-subjects effects
(SAS [1992] and Jackson, Burdick, and Keith [1985]). See text for dliscussion. This results in F-values
for within-subjects effects being tested uising Wilk's criterion.
others. Understanding differential reporting tendencies attributable to

country is more interesting.
The lower part of table 3 shows that Americans (mean = 7.0) per-
ceive a higher personal cost of reporting wrongdoings than French
(mean = 5.4) and'Noi-wegian (mean = 4.6) subjects. This higher mean
indicates that Americans are more concerned about the cost of report-
ing than their European counterparts. Earlier analysis (table 5) indi-
cated that the Americans tend to weight this factor more heavily than
French subjects. This disparity is counter to the guidance from both
COSO [1992, pp. 60-61] and SAS No. 55 (AICPA [1988c]) relating to
"costless" upstream reporting of wrongdoings.
The upper part of table 3 shows that the Norwegians registered a
lower tendency to report (mean = 5.1) than did the French (mean =
6.0) and the Americans (mean = 6.0). The data indicate that the Nor-
wegians considered case 5 to be one of the two least likely to be re-
ported. By contrast, the French and the Americans rated it as typical.
Since the ANOVAs related to the perception variables indicated a
difference between countries only on personal cost, differences related
to case 5 might be explained by how the subjects from different coun-
tries used the perception variables. Inserting the appropriate means
for responsibility, seriousness, and personal costs into each country's
regression model (lower part of table 4) results in predicted values
weakly directionally consistent with the outcome.16 We used a different
country mean only for personal cost due to ANOVA results.
16We use the models in table 4 because they are easier to understand, they allow for
different country intercepts, and their coefficients indicate greater stability than those in
table 5 (see earlier discussion). The predicted means were: Norwegians, 5.57; French,
5.62; and Americans, 5.72.
Table 3 shows a different pattern of results for case 6; the French

chose to report less frequently (mean = 5.7) than the Norwegians and
Americans (means = 7.0). As with case 5, we inserted the appropriate
means for the perception variables into the countries' models. The
predicted outcomes more strongly reflected the directional reporting
tendencies.17 These results support the conclusion that subjects' judg-
ments depended on how they combined their perceptions of responsi-
bility, seriousness, and personal cost. They also support the difference
noted in personal cost.
We were surprised that organizational prosperity did not play any de-
tectable role in subjects' forming their reporting judgments. The bases
used to categorize the companies and the subjects' assessments indicate
that the classification, itself, was proper. However, the literature relied
on to derive the bases and form our beliefs dealt with companies facing
extreme pressure (e.g., survival). Further, some researchers (Graham
[1986] and Pincus [1990]) argue that there is an interrelationship
between the frequency of questionable acts and their frequency of
detection.
7. Summary and Conclusions

We used an experimental study in which subjects were asked to
judge the likelihood of reporting a questionable act and to assess the
responsibility to report the act, the seriousness of the act, and the per-
sonal cost to report the act. Each subject completed six cases. The sub-
jects consisted of 145 managers and professional staff from public
companies in Norway and the United States and from wholly owned
U.S. subsidiaries in France. Within each country, the subjects were
drawn from companies that were prosperous or nonprosperous.
The study's first specific objective was to determine if participants' per-
ceptions of responsibility, seriousness, and personal cost would explain
variability in the assessed likelihood of reporting. The proposed model
predicted a negative relationship between likelihood of reporting and
personal cost to report; positive relationships between reporting and the
other two variables. The model explained 26% of the variation in report-
ing judgments and each independent variable was significant in the ex-
pected direction. This finding indicates that the holistic model proposed
by Graham [1986] is useful in understanding reporting tendencies.
The second purpose was to focus on differences among countries re-
garding which variables they would weight differentially in making re-
portingjudgments. Based on two of Hofstede's [1980; 1985] work-related
cultural values, power distance and uncertainty avoidance, we believed
that French subjects would stress personal responsibility more than Nor-
wegian or American subjects and, perhaps, emphasize seriousness and
17The predicted means were: French, 6.26; Americans, 6.50; and Norwegians, 6.55.
personal cost less. These beliefs were generally supported. They imply
that multinationals should emphasize different elements of the percep-
tion model in their training programs. They also suggest that internal
control systems might differ in their effectiveness in different national
settings.
The third purpose of our study was to explore the effects of national
culture, organizational prosperity, and the different case situations on
the likelihoods of reporting questionable acts. Based on cultural differ-
ences in power distance and uncertainty avoidance, the French were
expected to have lower reporting tendencies than other nationalities.
Participants from less prosperous organizations were also expected to
exhibit lower reporting tendencies. Results indicated that reporting
tendencies are a function of national and specific circumstances, but
not organizational prosperity. No systematic differences were detected
between cases containing accounting or nonaccounting acts. This study
supports the claim by Hofstede et al. [1990] and Hofstede [1989] that
national culture dominates organizational culture in matters involving
value judgments. This result suggests that multinational companies
wishing to achieve similar levels of reliability across divisions located in
different countries need to implement different control systems.
Interestingly, Americans scored significantly higher on their percep-
tions of the cost to report than the Europeans. This finding is impor-
tant apart from the hypothesized relationships underlying the study
because of the absolute magnitude of the score and because of its indi-
cation of a more hostile reporting environment in the United States
than in the other two countries. It also may signal that auditors should
exercise care in assuming that breaches of internal control will be re-
ported willingly. All of the companies in our study had codes of con-
duct that seemingly called for protection of such reporters.
Our study has several significant limitations. While we limited our
study to three countries which we believed (and believe) differ
sufficiently on Hofstede's dimensions to affect reporting behavior,
countries that varied more sharply on his dimensions might have pro-
vided even stronger results. The difficulty in gaining sufficient partici-
pation in each of these countries further limited the extent to which
our hypotheses could be tested. Assurances of confidentiality to both
the participating companies and individuals led to restrictions on the
amount of information gathered on each subject. A larger number of
subjects, more completely described and isolated in the analysis, would
likely have contributed to reducing unexplained error. In addition, us-
ing French companies rather than U.S. subsidiaries might have pro-
duced stronger results.18 Finally, had the disparity on the prosperity
dimension been greater for our companies, it might have yielded an
effect on reporting.
18Whether this is a problem is not clear. The great preponderance of the subjects in
our study were native born (table 2).
APPENDIX A
Six Case Situations Involving ProfessionalDissent
Case 1
Steve English is an internal auditor and accountant for R. J. WhitmanInc., a
large multinationaldrug and chemical companywhose stock is publicly traded.
Following two years in the U.S.A., Steve received his transfer to the European
Division. One routine part of his job was reviewing expense accounts. When
Henry Alegi's expense reimbursement request came to the top of the pile,
Steve was intrigued as he knew that as Vice President of Marketingfor Europe
Alegi had quite a reputation as a big spender. His interest quickly turned to
consternation as he found reimbursement requests for items such as a moder-
ately expensive necklace, a fur stole, and a bill for Mrs.Alegi's personal secre-
tarywith no realjustification. He knew that these items were not reimbursable
according to company policy.
He decided to ask Alegi about them as his audit supervisorwas in London.
Alegi was clearly upset about the inquiry and responded, "See R. J. Whitman
Jr.'s signature on those requests. What other documents do you need? He
knows I'm responsible for the success we have had in developing the Euro-
market.And besides I'm a V.P. here."
On the way back to his office, Steve realized that although R. J. WhitmanJr.
had the title of Vice President for Administration,he also had a reputation as
a playboy and was hardly ever at the office. What should Steve do? Should he
report the questionable activity to the next higher level of management, his
audit supervisorin London?
Consideringthis situation, please circle a number from 1 to 9 to indicate the
seriousnessof the questionable act (amount of social harm done), the responsi-
bilityfor reporting (duty or obligation), and the personal cost to report (trouble,
risk, discomfort).
SERIOUSNESSof the act LOW 1 2 3 4 5 6 7 8 9 HIGH
RESPONSIBILITYfor reporting LOW 1 2 3 4 5 6 7 8 9 HIGH
PERSONALCOST to report LOW 1 2 3 4 5 6 7 8 9 HIGH
Given this situation, please CIRCLEa number from 0-10 on the scale below
to indicate the LIKELIHOOD(percentage the event occurs) that an employee
(subordinate)who has become awareof this questionable act would report it to
the next higher level.
NEVER0 1 2 3 4 5 6 7 8 9 10 ALWAYS
[This response was used with all six cases.]
Case 2
Mike Hansen worksas a construction engineer for Bygg Inc., a large publicly
traded international construction company. After six years with the company,
Mike received overall engineering responsibilityfor Littletown'snew adminis-
tration building, an important project.
After the construction was nearly half complete, Mike discovered that one of
his subordinateshad made a computation error, which Mike failed to detect in
the initial review.This error resulted in the foundation being too weak to meet
building code requirements. Mike explained the error to the Littletown

Project Supervisor, Otto Rathsen: "Otto, it is a costly mistake! To meet build-
ing code requirements, the foundation will need to be torn out and redone."
Rathsen knew that the rework would result in a substantial loss instead of a
projected profit.
After a review of the computational error, Rathsen called Mike in: "Mike,
you are correct, this mistake will be extremely costly if we have to correct it.
However, after studying the calculations and comparing them to the realistic
stress levels, I feel sure that the foundation will not be too weak. After all, with
our years of experience we know the code is overly cautious. As to the building
inspector, it's times like this I'm glad he's on our payroll, and willing to over-
look a minor computation error."
Mike is concerned because he is not convinced that the error is minor, and
because he is surprised about the inspector. What should Mike do? Should he
report the questionable activity to the next higher level of management, Arnie
Berg, the Construction Division Manager? Arnie is Otto Rathsen's supervisor
and is well known by both.
Case 3
James Deacon is in his second year as an accountant for DFSCAN, the Euro-
pean sales and distribution division of DED Computers Inc., a multinational
corporation whose stock is traded on the New York Stock Exchange. DFSCAN
has been successful in penetrating the whole Euro-market through innovative
financing arrangements, including liberal return policies on leased equipment.
Following accepted accounting practice, DFSCAN has treated the long-term
leases as a sale in the initial year of the lease.
A problem has arisen, however, because a competitor has brought out a
more advanced, modern computer that has distinct cost advantages. James has
learned from a salesman that one of DED's largest clients intends to exercise
the return clause, which will affect current earnings substantially. After discus-
sion with other salesmen, James discovers that the return will be widespread
and prepares an estimate to remove the profit in accordance with accepted ac-
counting practices.
He presents this proposal to his superior, T. D. Rodgers, DED's Controller
for the past ten years. Rodgers will not even discuss the issue. After reflecting
on the problem, James recalls a company rumor, that DED needs to conclude
a critical merger within the next two months. The merger involves a stock-for-
stock exchange. He reasons that a sharp reduction in earnings will cause
DED's stock price to drop and probably stop the merger. Yet accepted ac-
counting procedures are clear about reducing profit.
What should James do? Should he report the questionable act to the next
higher level of management, Robert Trent, DED's Chief Financial Officer?
Case 4
Nathan Mikkelsen has been employed for nearly two years as a purchasing
agent for HOUR Inc., a large multinational firm whose stock is publicly traded.
Nathan accidentally overheard his supervisor, Tim Cleveland, making large pur-
chases from Largo Corporation. During the conversation, Cleveland made ar-
rangements to use Largo's hunting lodge for one week. Nathan asked Cleveland
about the deal because he recalled Largo's bid was slightly higher than the
other suppliers' bids. Cleveland explained that he had done business with
Largo for years and that they had a good business relationship. He also pointed
out that Nathan might enjoy working out a similar arrangement with Largo.
Nathan was concerned because he knew that accepting gifts or favors from
suppliers was against company policy. In fact, he knew that it was against com-
pany policy to accept even small gifts.
What should Nathan do? Should he report the questionable activity to the
next higher level of management, Jack Patrick, the manager of the Purchasing
Department?
Case 5
Blake Johnson is an accountant for the ABC GROUP, an American conglom-
erate whose stock is traded on the New York Stock Exchange. Blake enjoyed his
work and had progressed, since he graduated in 1985 with a degree in ac-
counting and finance, to the position of Sector Controller for ABC Chemical
in Houston, Texas. His opportunity for advancement with the ABC GROUP
seemed quite good.
Tom Henriksen, the plant manager of ABC Chemical in Houston, had estab-
lished a fine record with ABC GROUP after being hired away from a competi-
tor four years ago. He and Blake got along well. Near the end of the year,
Henriksen asked Blake to record a major shipment to Highvalue Chemical as a
sale. Blake objected since he knew that the shipment was a consignment (a
loan of inventory for possible future sale) and should not be treated as sales
revenue until an actual sale was made. In fact, he felt that the shipment was so
large that it would materially (significantly) overstate income.
An upset Henriksen responded: "Highvalue always ends up buying the con-
signment anyway. We need this sale to make our budget and get the bonuses
for our people. Besides, the amount is not large enough to make any differ-
ence in ABC's overall financial statements and it should assure my promotion
to division manager."
Blake wondered what his alternatives were. Should he report this question-
able activity to the next higher level of management (his supervisor at the
home office), the ABC Chemical Corporate Controller? Blake had been in sev-
eral ABC GROUP training courses with the Corporate Controller, and re-
spected his judgment. What should he do?
Case 6
Steve Eriksen is a Senior Engineer for the Fastener Division of PG Corpora-
tion, a large successful conglomerate. PG's activities range from manufacturing
to electrical power generation. PG's stock is traded on the American Stock Ex-
change. High-quality metal fasteners are one of PG's important products. They
are sold to aircraft manufacturers and other critical use industries around the
world. Over the past several years, competition in the fastener business had in-
tensified due to the aggressive marketing by low-cost, high-quality producers in
West Germany and Japan.
One day while talking with the head of quality control, Steve remarked how
well the new, less costly fasteners had performed in inspection. Steve was sur-
prised to learn that they had not been tested at all. He decided to confront
Ralph Richardson, the product manager with the matter, since Steve had seen
signed reports from Ralph attesting to successful test results.
Richardson responded: "Steve, I admit that I falsified the quality inspection
reports, but you have to understand that we made an absolute promise to de-
liver those screws by the end of last month. With this increased competition,
we just had to deliver on time. Besides, the design was 'brilliant' and our best
engineers reviewed the process at every step of production."
What should Steve do? What are his alternatives? Should he report the ques-
tionable activity to the next higher level of management, the plant manager
Robert Bergstrum?
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Accounting Research Center, Booth School of Business, University of Chicago

An Investigation of the Reporting of Questionable Acts in an International Setting

these internal systems. Hence, our focus is on the intra-organizational

management implementation is sparse (e.g., Palmrose and Wright

ex ante. Including organizational prosperity as a situational variable

2. A Model for Reporting Questionable Acts

2Although Graham's model synthesized research into reporting questionable acts as

Description Attributionof personal Choice of

If high uncertainty avoidance implies clear rules against question-

Hamilton [1989] argue that emphasis on bureaucracy leads to routin-

prescription in arriving at their reporting intentions. In our terminol-

7Covey [1991] recommends an information system to monitor the interactions be-

4.1 ORGANIZATIONAL PROSPERITY

We chose organizational prosperity as one of our primary experimen-

The six cases appear in Appendix A. In addition to differences in the

Instruments containing Hofstede's Value Survey Module [1980;

Our first objective was to determine if our subjects' perceptions of

5.2 CASE AND RESPONSE-SCALE CONSTRUCTION

The cases are reproduced in Appendix A. Each case contains material

5.3 HOFSTEDE'S VALUE SURVEY MODULE

Hofstede's VSMs [1980; 1982] are standardized, copyrighted ques-

Table 1 presents our subjects' scores on power distance and uncer-

We chose France, Norway, and the United States because of differ-

In part due to the topic of our study, we encountered significant

Companies were subjectively classified as either prosperous or non-

experiencing pressure which may inhibit the reporting of questionable

Table 2 summarizes the 145 subjects' backgrounds. The subjects in

Table 3 presents the subjects' response means and standard de-

Number of Subjects by: France Norway United States

6.2 THE PERCEPTION MODEL OF REPORTING QUESTIONABLE ACTS

Our first objective is to determine if the subjects' perceptions of re-

Specification tests to detect heteroscedasticity were performed on all models in

Personal Cost to Reportc

Mean Expected Coefficient

We considered violations of the assumptions underlying the models

Belsley, Kuh, and Welsch [1980] propose additional diagnostic tests

6.3 ANALYSIS OF SITUATIONAL VARIABLES

We also test for effects of the situational (experimental) variables of

Effect Df. Mean Square F-Value PR>F

others. Understanding differential reporting tendencies attributable to

Table 3 shows a different pattern of results for case 6; the French

7. Summary and Conclusions

building code requirements. Mike explained the error to the Littletown

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