Cognitive-Contingency Theory and the Study of Ethics in Accounting

Author(s): James A. Schweikart

Source: Journal of Business Ethics, Vol. 11, No. 5/6, Behavioral Aspects of Business Ethics (May,
1992), pp. 471-478
Published by: Springer
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Cognitive-Contingency Theory and the Study
of Ethics in Accounting James A. Schweikart

ABSTRACT. Ethics research in Accounting has not pro The nature of behavioral research in
ceeded beyond the descriptive level while, at the same time, accounting
ethics is a vital part of accounting decisions to the point
where professional codes of ethics are necessary. A theo While it is not the purpose to give a complete
retical model is offered using cognitive and contingency history of behavioral research in accounting, some
(field) theories to gain insight into how ethical considera
background is important to understand how ethics
tions enter into accounting decisions. Propositions are
should fit in. Behavioral research in accounting has,
generated so that the use of ethics in accounting decisions
as in many fields, been studied in two independent
can be predicted.
tracks. These are the personal psychological level and
the social psychological level. Most of the work has
been done at the personal level.
Ethics in accounting has experienced an interesting
The personal psychological level has been largely
paradox. The interest in ethics has been fairly broad,
anchored in Lens Model studies of how accounting
due to the numerous ethical dilemmas faced by
information enters the decision process in manage
accountants today. Yet, at the same time, ethics ment which focuses on the use of information. The
theory has not been introduced in any meaningful
Lens Model approach is essentially a behaviorist
manner into accounting research. This is primarily
theory where information is available to a decision
due to a lack of reward in accounting departments
maker and induces a response. It is, therefore, a
for academic research in this area. Unfortunately,
stimulus-response model. It assumes that all infor
ethics is a very important area in accounting and
deserves close attention. mation is used in the decision process, and that there
is no cognitive screening out of information.
The purpose of this paper is to develop a theo
Lens Model research has dominated accounting
retical framework for ethics research in accounting.
(Libby and Lewis, 1982) and until the late 1980s was
The framework is within the domain of existing
the primary theory for behavioral research disserta
behavioral research in accounting and expands upon
tions in accounting. The importance of this is that
those findings. The approach is deductive rather
than inductive so that research in ethical behavior the Lens Model does not consider cognition heavily,
although some studies acknowledge it as an explana
can provide prescriptive results.
tion of results (Wright, 1982). This is perhaps one
major reason why ethics has been absent from
behavioral research, as ethics requires thought and
cognition.
In the middle 1980s, cognition began to enter the
James A. Schweikart, Ph.D. CPA, is associate professor of accounting of accounting research, but again for the pri
field
at the University of Richmond. He received his doctorate in mary purpose of explaining the selection from
available accounting information for making busi
international business and is a member of the American Institute
nessisdecisions (Dillard, 1984). Birnberg and Shields
of Certified Public Accountants. Dr. Schweikart's research focus
(1984) provided the groundwork theory noting the
primarily on cross-cultural impacts on usage of financial informa
tion.
importance of various attention, memory and prob

Journal of Business Ethics 11: 471-478,1992.

? 1992 Kluwer Academic Publishers. Printed in the Netherlands.

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 472 James A. Schweikart
lern solving theories found in cognitive psychology
to accounting information usage. Thus, cognitive
science is not part of state of the art behavioral
research in accounting.
Still, the emphasis has been on the study of the
selection from available accounting information for
the purpose of making business decisions. This type
of decision can have ethical considerations. For
example, one might selectively omit a piece of
information for a decision for an ulterior motive.
From an accountant's standpoint, however, the major
ethical considerations come from the decision of
what information to provide decision makers. That
is, what information should the accountant report
about the client company. Cognitive and behavioral
science in accounting, unfortunately, have left this
issue largely alone.
Some help, however, has been provided in the
social psychology arena. In accounting, contingency
theory has been the primary source of social psy
chological explanations of both information usage
and information reporting. Contingency theory has
its roots in the study of the amount and complexity
of information usage in organizations that were in
both stable and unstable environments (Sathe, 1975).
Hence, it is a rudimentary field theory. This theory
has been used on a multinational level to explain
information usage across different countries
(Schweikart, 1986), as well. Most importantly, how
ever, the theory has been used to explain the decision
to report information within a variety of field
contexts (Jones, 1985; Thomas, 1986).
To date, however, the personal and social psy
chology approaches have worked independently.
This is unfortunate, since most solutions to the
problems they pose are probably within a dynamic
framework which combines both fields. Ethics ap
pears to be such a problem. There are certainly
personal learned values which enter the decision
process, and there are external or contingent forces
which have an impact, as well. In short, the study of
ethics in accounting is rooted in a combination
cognitive-contingency model.
The state of ethics and ethics research in
accounting
Not surprisingly, ethics research in accounting has
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been descriptive and without theoretical grounding.
While there has been empirical work, largely gen
erated from survey instruments on ethical issues of
interest, this work has not been theoretically based.
The major areas within accounting are external
reporting and auditing (financial accounting), taxa
tion, and selection of information for presentation
and use of that information for internal decisions
(management accounting). All three of these areas
are served by different types of accountants often
with different certifications and have their distinct
set of ethical dilemmas.
Financial accounting
Auditors are asked to examine financial statements
and express their opinion on their fairness of pre
sentation. A typical audit report is as follows:
To: the Shareholders and Board of Directors:
We have audited the accompanying balance sheets of
XYZ Company as of December 31, 1989 and 1990 and
the related statements of income, stockholder's equity
and cash flows for each of the years ended December 31,
1989 and 1990. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with gen
erally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain
reasonable assurance about whether the financial state
ments are free of material misstatement. An audit
includes examination, on a test basis, of evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the account
ing principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of XYZ Company as of December 31, 1989 and
1990 and the results of their operations and cash flows
for each of the years ended December 31, 1989 and 1990,
in conformity with generally accepted accounting prin
ciples.
A&B Company, CPAs
date (adapted from Diamond et al, 1990)
 Cognitive-Contingency Theory and Accounting 473
Variations on the above report exist in the second
and third paragraphs when discrepancies are found.
Two ethical opportunities arise here. First, the
accountant is required to develop a sense of financial
fairness by examining company reporting and evalu
ating whether or not the accounting procedures are
reasonable. Accounting provides a lot of choices in
treatment of items. In truth, accounting is not a
science but rather an art in which no two account
ants will determine the exact same results from the
same data. There are simply too many unwritten
choices. Generally Accepted Accounting Principles
are guidelines with a few rules referred to as Finan
cial Accounting Standards Board Statements (previ
ously Accounting Principles Board Opinions). These
rules are to be adhered to unless the accountant can
legitimately justify that they do not apply. This
situation generates both a professional and personal
judgment.
Second, the auditor is selected by the client
company and paid by that company. Therefore, the
auditor often faces a conflict of interest between
client service and administering fairness within an
environment of many choices. The issue arises then
as to whom the auditor is responsible. Is the auditor
responsible to the client who is paying for the audit
or to the public who relies on financial statements
and opinions expressed about them for investment
decisions?
This situation is complicated by the fact that the
accounting profession is highly competitive. There
are firms waiting to take an auditor's client away,
and it is a well-known practice for companies to go
"audit shopping." For this reason, among others, the
American Institute of Certified Public Accountants
has established a code of ethics. This code deals with
a variety of issues, including the issue of independ
ence of the auditor from the client. The auditor is
clearly responsible to the general public over the
client. Unfortunately, the American Institute of
Certified Public Accountants does not license CPAs.
That responsibility is left up to the individual state
where the accountant practices. Thus, enforcement
of the code is limited to expulsion from a society but
not necessarily from practice.
Still, auditors try, in general, to pacify clients by
being as middle ground as possible. The idea that
the auditor is an independent reporter of financial
opinion does not always lend itself to practical
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business. Accordingly, once in a while this issue is
tested in a law suit, but each time it does, the courts
uphold that the auditor is an "independent overseer"
who is paid by the client company. The responsi
bility is without question to the general investing
public (Schroeder, 1987-8).
To augment the auditor's position, the code of
ethics covers related issues. The issue of advertising
and encroachment have come under fire. For years,
accountants could not advertise under the premise
that it alerts clients to competition and makes "audit
shopping" easier. Also, for years, competing certified
public accountants could not approach a known
client of another company and make an offer to do
business with them. Clients must only come directly
to the auditor.
As might be expected, a lot of game playing took
place to avoid these rules by some certified public
accountants to gain clients. Once the legal profession
permitted advertising, accountants began to question
if the above rules were a violation of restriction of
trade. Eventually, advertising was allowed by 1979
although policed by the profession for its profes
sionalism. This all but made obsolete the encroach
ment rule, as well. To this day however, certified
public accountants as a group do not favor advertis
ing (Yau and Wong, 1990).
Likewise, the code of ethics has had a long stand
against the charging of commissions and contingent
fees. It was felt by the profession that this type of fee
arrangement promoted "audit shopping" by causing
different levels of work to be performed by different
auditors to justify the varying fees. The profession is
now relaxing some rules on commissions for work
unrelated to audits but is firm on its rejection of
contingent fees based on the results of the audit
(Lowe, 1987).
Akin to the issue of independence and quality of
work, the code of ethics does not permit ownership
of a public accounting firm by non-certified public
accountants and does not permit the corporate form
of ownership in such firms. The purpose of this rule
is to make the certified public accountant more
accountable to the investing public by not limiting
potential losses to the owner through the corporate
form of ownership and making the professional
accountant the responsible manager of the business.
Unfortunately, the issue of restriction of trade again
arises. The Federal Trade Commission may shortly
 474 James A. Schweikart
force the repeal of this rule (Strickland, 1990). If so,
this will be another case where legal interests conflict
with ethics.
In spite of legal pressures to abandon certain
aspects of the code of ethics and the natural torment
between serving client needs for profit and reporting
to the general investing public, the accounting
profession has done remarkably well in preserving its
ethics. Some firms, such as KPMG Peat Marwick,
have their own internal code of ethics (Horner,
1990). This helps guide employees who compete
amongst themselves for positions in a firm by pro
viding consistency in what is expected from them.
In a survey of accountants, it was shown that
auditors, themselves, are very concerned about what
they do. For example, the survey showed a clear
belief that there is no compromise for a potential
illegal act by the client, although there are differing
views as to how best to handle the situation (CMA
Magazine, 1986). Accountants are willing to resign
from the client engagement and expect that others
will not take on the same engagement.
The public also has a high opinion of the public
accounting profession. In a Louis Harris poll, audi
tors were held in high esteem and above most other
professions 0ournal of Accountancy, 1986). This was
especially true when asked specifically about their
honesty. The accounting profession should be com
mended on the public's view of it, given the age of
legal recourse in which we live. Whenever a com
pany fails, stockholders file a class action suit, and
the auditing firm is always named. The large losses
necessitate reporting in the press of these suits.
Through all of this, the public views auditors with
high esteem.
Taxation
The area of taxation is quite different. Partially due
to the Internal Revenue Service being the only
potential injured party and partially due to the
preoccupation with audit responsibility, certified
public accountants have had a wider array of ethical
practices in the area of taxation. In the past, taxation
was considered an ancillary part of the audit. Clients
were considered solely responsible for the income
tax return, and accountants generally reported re
sults which they could "live with."
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Accountants tried to determine the lowest legal
tax owed by clients, but in the gray or questionable
areas the key to the tax return was "know your
client." Some clients are risk averse and do not wish
to be audited. For them, a higher tax liability would
result. Some clients want to pay no taxes and will go
to other accountants to get a lower tax liability. For
them, a lower tax liability results. The key in the past
was to not lose your audit client over the tax liability.
In the vast majority of cases, however, accountants
reported tax liabilities within very reasonable ranges
and well within legal limits. It is true that clients
were and are still consistently audited by the Internal
Revenue Service and penalties result. This does not,
however, imply wrong-doing, nor necessarily even
unethical behavior. This is simply the way the
complicated tax system operates. In the occasional
case where the accountant knowingly commits fraud
on a tax return, the accountant is expelled from the
American Institute of Certified Public Accountants.
Today, the burden has more and more shifted to
the accountant preparing the tax return. While the
client is still ultimately responsible for the contents
of the tax return, stiff penalties and embarrassment
can result for the accountant involved. This is
forcing more convergence in tax practice and is a
case where legal influence may positively enhance
ethical behavior.
Management accounting
The last major service of public accounting firms is
assistance to client management in a variety of
services more often done by themselves. For this
reason, these are discussed as part of selecting
information to report and making decisions with
that information. Examples are justifying rate in
creases to public utility commissions, making deci
sions to add or drop products which affect the
employment of people in a company, justifying cost
over-runs for government contracts and applying for
loans.
In this area of internal corporate reporting which
can be used for a variety of purposes, individual
careers are often at stake. Often, the accountant must
justify favorable results to either expand or save his
or her career. The recent flurry of mergers is an
example where this has taken place. Consultants are
 Cognitive-Contingency Theory and Accounting 475
usually employed to support the accountant's deci
sion and is a case where certified public accountants
are called in from the outside.
To combat ethical abuses, the National Associa
tion of Accountants, the national organization of
accountants practicing in any area of accounting
whether certified or not, has developed its own code
of ethics and case material to help spread ethical
decisions among its members. To date, however, less
than half of its membership is even aware of the
contents of this code (Mihalek etal, 1987), and there
exists a wide variance in ethical behavior depending
on level and types of managers.
Legal influences abound in the area of internal
reporting when the results are used eventually for
external purposes. In addition, some help is provided
by the Foreign Corrupt Practices Act which pro
hibits certain practices by U.S. companies, account
ing and otherwise, in spite of these practices being
widespread in other countries where ethical behavior
enjoys a more relaxed standard by virtue of cultural
influence.
Ethics in internal reporting, then, is not as
advanced as in public accounting, but it is develop
ing. The lack of specific control or enforcement by
the National Association of Accountants will slow its
development. The different and varying types of
internal reporting dilemmas that can arise also will
impede development of ethics, as no code will ever
be able to cover all possible issues. Nevertheless,
ethical decision making is far more advanced in
internal reporting from its state just a few years ago.
This discussion has highlighted the ethical envi
ronment of accounting today. It also demonstrates
that research in accounting ethics has been limited
to surveys and descriptive measures. This provides
the groundwork to inquire into two critical areas: (l)
what is the level of accounting ethics toady? and (2)
how can we determine prescriptively accounting
ethical behavior? The first issue is briefly discussed
within typical ethics analysis. Given the level or state
of ethics today, a cognitive-contingency model to
predict ethical behavior is offered for the second
issue.
The level of ethics in accounting today
Ethics can be viewed in a hierarchical pyramid. The
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lowest level of ethics is that where all decisions are
governed by legally binding rules or statues. The
next level is where decisions are made within a
professional code of conduct but not necessarily
either binding or all encompassing. The highest level
of ethics is that where decisions are made within a
highly defined sense of right and wrong developed
through moral and philosophical deduction.
The above discussion clearly places accounting,
particularly in the area of auditing, in the middle
level. The code of ethics, however, is influenced by
legal rules in some cases and augmented by inter
pretations of right and wrong. On balance, however,
the area of auditing is in the middle tier, while the
area taxation borders legal rules interpreted through
the spirit of those rules.
In internal accounting, ethics is still primarily
governed by legal rules, although the National
Association of Accountants' code of ethics can be
expected to make more influence over time. The
development of a sense of right and wrong and use
of that sense in decisions is constrained by the profit
motive and it will probably be a while before it can
be the dominant factor in ethical decisions. Perhaps,
a true change in corporate rewards is necessary.
More than likely change will emanate from an
impending disaster, such as that now developing in
the thrift industry.
The proof of this assertion lies in the very need to
have a professional code of ethics. The potential for a
wide array of ethical behavior exists, even if the sense
of right and wrong is in place. This suggests two
types of influences on ethical decisions which need
to be governed, (l) the personal ethics of the
accountant and (2) the external influences which
alter or intercede in the ethical process. At present,
the professional code with occasional legal constraint
appears to be the effective and necessary form of
governance. The two influences provide the basis for
the cognitive-contingency model.
Cognitive-contingency theory and
accounting ethics
Borrowing Lewin's field theory, the forerunner to
contingency theory, the accountant's life space can
be presented with two levels of external forces of
ethical conflict (Shaw and Costanzo, 1970). The
 476 James A. Schweikart
outer level or "sphere of influence" which affects
behavior is that defined by one's national environ
ment. Evidence for the existence of this effect is the
necessity of the Foreign Corrupt Practices Act. Thus
the ethical decision is bounded.
What is not known, however, are the causes for
different national ethics. Several in the field of
international business maintain that the primary
causes of differing managerial styles are economic
development, political systems, educational levels
and cultural values of societies. These are often
referenced as the Farmer-Richman (1964) con
straints. Some evidence of their influence has indeed,
been shown (Schweikart, 1986). Thus, this may be a
starting point in understanding prescriptive ethics in
accounting.
PROPOSITION 1.
There is no difference in accounting
decisions with the same data from
country to country.
The second sphere of external influence on the
accountant is within his/her own national environ
ment, an environment partially determined by its
own culture, values, economic and political systems.
This externality consists of professional codes of
ethics (AICPA Code of Professional Ethics as an
example), influences of government and law, client
company and the public, and company culture.
The professional codes of ethics can be that for
the auditor, in the case of auditing, or that from the
National Association of Accountants for other cases.
It has already been demonstrated that the influence
or force of the auditor's code will be more than
likely greater. The type of situation, however, will
determine which code will apply. If the problem
presented is not that of public accounting, then only
the NAA code applies.
Government influence comes in the form of
scrutiny by the Securities and Exchange Commission
for auditors, Internal Revenue Service for tax ac
countants, the Cost Accounting Standards Board for
federal contracts and internal reporting, the Federal
Trade Commission. It is important to understand
that these influences are within the national envi
ronment field, as they are a result of the national
environment.
The client company and the public are also forces
resulting from the national environment. The client
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company is the source of the fee in the U.S. environ
ment, a concept which has been on occasion ques
tioned. The public is the primary investor and has
significant legal recourse, a characteristic not perva
sive in all societies. It has already been demonstrated
that the public's influence is large in the case of
auditing, but client influence is more important in
taxation.
Company culture and values also bound the
ethical decision. Some companies ignore ethics
altogether (Carroll etal, 1987). Still, some more than
likely inadvertently encourage unethical behavior
through their reward process. Some, on the other
hand, remove that uncertainty and take the lead in
making sure that ethical decisions are made con
sistently. In the field of public accounting, the Peat
Marwick code is such an example.
PROPOSITION 2. There is no institutional effect on
ethical decisions.
Figure 1 summarizes the external environment or
contingency effect on ethical decision making. As in
the case of Lewin's field theory and subsequent
contingency theories, cognition is presumed. That is,
individual perceives some or all of these influences
as part of the decision process.
The cognitive aspects of ethical decision making
in accounting can be examined within the standard
cognitive psychology theories of perception and
attention, memory, and problem solving (Anderson,
1980) as applied in accounting (Birnberg and Shields,
1984). The perception and attention aspects deter
mine which of the external influences get into
National Socio-Cultural Values_
^F
h* Laws Codes of Ethics <H
T
II
individual
accountant Decision
1
Company, Firm Culture
? ?
Level of Economic Development
Fig. 1. Contingency effects on decisions.
 Cognitive-Contingency Theory and Accounting 477

memory and then the decision process and under National Socio-Cultural Values

what conditions. T Laws Codes of Ethics

The problem, audit, tax or otherwise, will more
than likely affect which cues are more closely at
Percept./ Memory/ Decision
tended to. Reporting audit findings about a company Attent.
Heur/Alg
registered on a stock exchange generates direct re
porting to the Securities and Exchange Commission
1
and accesses the government and legal influence.
This is a relative emphasis on this influence, as all
Coropnny, Firm Culture
the other influences are already in place in the
model to some affect.
Level of Economic Development

PROPOSITION 3. There is no difference in attention

to external influences regardless of Fig. 3. Cognitive-contingency model for the study of ethics
type of accounting problem. in accounting

The ethical decision is made within this frame

work with the addition of accessing from memory
previous experiences and values. These stored values
come from the accountant's learned past. Some of
these are due to social class, some due to religion and
some due to family, as well as acquired experiences.
If the accounting profession is populated with a
variety of individual backgrounds, and these back
grounds do affect decisions, then this would further
support the need for a code of ethics. Figure 2
demonstrates the cognitive aspect of the theory.
PROPOSITION 4. Value systems among accountants
do not vary.
PROPOSITION 5. There is no affect on accounting
decisions from personal values.
PROPOSITION 6. The personal values of accountants
are not congruent with ethical deci
sions.
Finally, the external contingency and cognitive
models can be put together as in Figure 3 to form
the framework for understanding ethical influences
on decisions in accounting. The decision is made
within these influences, using some consistent heu
ristic of algorithm as in any other rational personal
or professional decision.
Perception/ Memory/
Attention Stored Decision Heuristic
Values or Algorithm
Externalities
Decision
Fig. 2. The cognitive decision process.
Implications for methodology
The key to understanding the ethical decision
making process is to hold as many of the influences
as possible constant while studying the others. This
will be difficult, as all of these factors are inter
twined. Yet, with enough iterations in problem
situations, insight can be gained into how value
systems and outside influences affect eventual deci
sions in accounting.
The above model implies the use of case studies
and laboratory experiments to control situation
environments and to accurately assess personal
values through interviews and case analysis. This
means that several types of experiments in different
settings will be necessary to determine the variables
having the greatest impact on decisions either by
encouraging or suppressing ethics from the personal
value system.
Conclusion
Behavioral research in accounting has not seriously
included ethics in the accounting decision making
process. At the same time, ethical considerations in
accounting are extremely important, as accounting
information develops under ethical conflict. The
existence of a professional code of ethics demon
strates this importance.
This paper has presented some of the ethical
dilemmas accountants face as well as the environ

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 478 James A. Schweikart
ment in which accounting decisions are made. A
cognitive-contingency theory approach may be used
to explain and predict ethical behavior in account
ants. Once the factors affecting behavior are known,
then work can begin to change these factors so that
the fairest and most ethical decisions are augmented.
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University ofRichmond,
E. Clairborne Robins School of Business
VA 23173,
U.S.A.