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Journal of Business Ethics

Erschienen in:

01.01.2015

The Influence of Regulatory Approach on Tone at the Top

verfasst von: Bradley Lail, Jason MacGregor, Martin Stuebs, Timothy Thomasson

Erschienen in: Journal of Business Ethics | Ausgabe 1/2015

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Abstract

We discuss how the approach taken by regulators to address financial reporting issues has a significant influence on tone at the top. While tone must ultimately be established internally, regulators are more likely to have a positive impact on the quality of financial reporting by addressing organizational tone. A strong tone at the top should ensure that the financial reports are characterized by greater transparency and complete disclosures, and a regulator’s response will depend upon their perspective as to what motivates management. A compliance-based approach, rooted in agency theory’s assumption that managers act in their own best interests, seeks to mandate desirable behavior through elevated monitoring and reduced managerial discretion. Alternatively, an empowerment-based approach rooted in stewardship theory views managers as trustworthy guardians and grants them greater discretion without burdensome external monitoring. In practice, regulations fall on a continuum between these two approaches. To illustrate the continuum between compliance and empowerment, we present three cases in financial and tax reporting and examine the outcomes of these recent regulatory responses. We then provide conclusions regarding the effectiveness of each regulation by considering how tone was influenced within organizations.

Vorheriger Artikel Discussant Comment on “Is Tone at the Top Associated with Financial Reporting Aggressiveness?” by Lorenzo Patelli, Matteo Pedrini

Nächster Artikel Discussant Comment on “The Influence of Regulatory Approach on Tone at the top” by Bradley Lail, Jason MacGregor, Marty Stuebs, Timothy Thomasson

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See McGrath et al. (2001) and Schwartz et al. (2005) for a more detailed discussion on the directors’ and executives’ roles in establishing tone within its organization.

Studies of management fraud have found that it is the CEOs and CFOs who are most involved. For example, the COSO-sponsored study found that CEOs were involved in 72 % of the financial statement fraud cases.

See http://www.journalofaccountancy.com/News/20126140 for the statement attributed to Senator Sarbanes and http://www.sec.gov/news/speech/spch586.htm for Cynthia Glassman.

J. Turner argues that while a culture of compliance is an elusive concept, organizations can take actions to move closer to this concept. For an extended discussion on this issue, see http://www.forbes.com/sites/ciocentral/2012/11/06/how-gaap-accounting-rules-may-be-damaging-to-investors/.

While arguments could be made for other regulatory “dials” besides monitoring and discretion, we rely upon the cases described later in the paper to dictate these two components. Monitoring is never low, but elevated levels exist in particular financial reporting areas more prone to manipulation or opportunistic interpretation. Discretion will vary by regulation, and while never completely absent, certain areas (e.g., SOX) severely limit it as a response to previous abuses of discretion. Yet, some regulations (e.g., segment reporting) have been successful based upon a higher level of discretion granted to managers. While we make no arguments for or against other regulatory dials, the intuitive appeal and differentiation of these components within our cases makes them an appropriate choice.

See http://blogs.reuters.com/financial-regulatory-forum/2013/04/03/sec-has-three-words-for-hedge-funds-culture-of-compliance-but-what-do-they-mean/.

While we only consider increases in discretion and monitoring as possible regulatory responses, regulators could also decrease these components. Specifically, with a compliance-based approach regulators could also decrease reporting discretion while under an empowerment-based approach they could also decrease monitoring.

The use of cases to describe a framework or theoretical approach is not unprecedented (see Bitzer and Glasbergen 2010; Fang et al. 2010; Mària and Lozano 2010 for recent examples). We believe this approach to be most appropriate to illustrate our framework.

Please refer to endnote #3 for the sources of these two quotes from Senator Sarbanes and Cynthia Glassman.

Statements were made as part of his testimony before the Senate Committee on Banking, Housing and Urban Affairs on September 9, 2003.

The increase in audit fees suggests that auditors increase testing in response to weaker internal controls; however, we are not suggesting that low audit fees are associated with lower audit quality.

See http://www.journalofaccountancy.com/News/20126140.

Most major ethical decision models include awareness of the issue as a necessary prerequisite for ethical decision making (Jones 1991; Rest 1986).

See http://www.accountingtoday.com/news/PCAOB-Finds-Problems-Audits-Internal-Controls-64952-1.html.

Due to the sensitive nature of tax positions, these sources were assured their identities would remain confidential.

The academic literature provides a number of studies to support the usefulness of segment information in a variety of contexts (e.g., Kinney 1971; Collins 1976; Baldwin 1984; Thomas 2000; Berger and Hann 2003; Ettredge et al. 2005).

Paul and Largay (2005) discuss the benefits of SFAS 131 but conclude that the regulation fails to reach its full potential because of uneven compliance among companies. They further argue that auditors fail to give segment disclosures sufficient attention, and the inability of auditors to improve segment reporting compliance should be of concern to stakeholders.

Specific auditor guidelines relating to segment reporting can be found under PCAOB AU Sect. 9326.28-.41: “Applying Auditing Procedures to Segment Disclosures in Financial Statements.”

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Titel: The Influence of Regulatory Approach on Tone at the Top
verfasst von: Bradley Lail
Jason MacGregor
Martin Stuebs
Timothy Thomasson
Publikationsdatum: 01.01.2015
Verlag: Springer Netherlands
Erschienen in: Journal of Business Ethics / Ausgabe 1/2015
Print ISSN: 0167-4544
Elektronische ISSN: 1573-0697
DOI: https://doi.org/10.1007/s10551-013-1992-8

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