EXPERIMENTAL INSTRUMENT
(from “The Impact of Ethical Leadership and the Internal Audit Function
on Financial Reporting Decisions”)
EXHIBIT 1a Case Information and Journal Entry Decision Task—Strong Ethical Leadership/Strong Internal Audit Function Condition
EXHIBIT 1bCase Information and Journal Entry Decision Task—Strong Ethical Leadership/Weak Internal Audit Function Condition
EXHIBIT 1c Case Information and Journal Entry Decision Task—Weak Ethical Leadership/Strong Internal Audit Function Condition
EXHIBIT 1d Case Information and Journal Entry Decision Task—Weak Ethical Leadership/Weak Internal Audit Function Condition
EXHIBIT 2a Background, Demographic, and Case-related Questions—All Treatment Conditions (described in Exhibits 1a through 1d)
EXHIBIT 1a
Case Information and Journal Entry Decision Task—Strong Ethical Leadership/Strong Internal Audit Function Condition
Company Background Information
Assume that you are the assistantcontroller for Health Care Products, Inc. (hereafter HCP). HCP is a large, publiclytraded company. You have worked at the company for the past 2 years. Overall, you are quite satisfied working for HCP. The company is financially strong, stable, and strategically well-positioned. In fact, over the past 5 years, HCP has steadily increased profits and met or exceeded analysts’ expectations.
Information Related to the Senior Executive Team
The executive team at HCP consists of the chief executive officer, the chief operating officer, the chief financial officer, the senior vicepresident of product development, and the senior vice president of marketing and customer relations. You currently report to the controller of the organization, and the controller reports to the chief financial officer (CFO). Employees across the organization trustthe CFO as someone who will always treat people as fairly as possible. For example, when one of your coworkers, a highly respected accountant, had to inform the CFO that she had made an error in estimating pension expense, the CFO responded by directing the employee to record the correction to the books and records of the company. The CFO reassured the accountant that her job was not in jeopardy, that everyone makes mistakes, and that the important thing to do was get it right. In addition, the CFO is also very vocal about the importance of making ethical decisions. Most employees in the organization, including you, are aware that the CFO has terminated the employment of employees who have violated the company’s ethical code of conduct. In the past, you have discussed several technical accounting issues with the CFO and have often been impressed that the CFO ends every meeting with the same basic question: Is this accounting treatment “the right thing to do?”
Information Related to the Internal Audit Function
HCP maintains an in-house Internal Audit Department, which includes a chief audit executive who supervises the work of other internal auditors in the department. All of the staff have an accounting background and are Certified Internal Auditors. The Internal Audit Department reports directly to the Audit Committee. In conjunction with the Audit Committee, the chief executive officer establishes the internal audit budget and makes hiring and firing decisions for the unit. The Internal Audit Department has two broad, important functions within HCP: to provide oversight and monitoring of internal controls over financial reporting and to perform management consulting activities (i.e., those advisory and service activities not related to internal controls). While both functions are important, historically the Internal Audit Department has spent approximately 90% of its time on oversight and monitoring activities and 10% on management consulting activities. In addition, the internal audit department has a history of finding deficiencies in internal control over financial reporting.
The Task
It is December 17th, two weeks before the close of the calendar year end. The controller stops by your office. You provide the controller with the latest income statement projections:
Operating revenues / $900 millionOperating expenses / $695 million
Operating income / $205 million
You are both aware that the CFO has previously provided Wall Street analysts projected operating income of about $201 million. The controller asks you to record a $3 million journal entry for consulting expenses. If the entry is booked the revised projections are:
Operating revenues / $900 millionOperating expenses / $698 million
Operating income / $202 million
You notice that the controller has no invoices or other paperwork in hand. When you further inquire as to the nature of the expense accrual, the controller assures you that “we will eventually find out someone has expenses they haven’t told us about; it happens all the time.” You have a good working relationship with the controller. But if you book the journal entry, you will do so without any supporting documentation. The controller leaves your office and you are left to contemplate the request to book a journal entry.
In response to the controller’s request, you performed analytical procedures on the threemost recent quarters and prior year-end to see if there was, in fact, a trend of under-accruing for consulting expenses. You found that consulting expenses had been properly accrued at the prior year-end but the consulting expenses were under-accrued for each of the prior three quarters.
As the assistant-controller of this company, how likely are you to book the journal entry as requested by the controller:
1 / 2 / 3 / 4 / 5 / 6Very
Unlikely / Unlikely / Somewhat
Unlikely / Somewhat
Likely / Likely / Very
Likely
EXHIBIT 1b
Case Information and Journal Entry Decision Task—Strong Ethical Leadership/Weak Internal Audit Function Condition
Company Background Information
Assume that you are the assistantcontroller for Health Care Products, Inc. (hereafter HCP). HCP is a large, publiclytraded company. You have worked at the company for the past 2 years. Overall, you are quite satisfied working for HCP. The company is financially strong, stable, and strategically well-positioned. In fact, over the past 5 years, HCP has steadily increased profits and met or exceeded analysts’ expectations.
Information Related to the Senior Executive Team
The executive team at HCP consists of the chief executive officer, the chief operating officer, the chief financial officer, the senior vicepresident of product development, and the senior vice president of marketing and customer relations. You currently report to the controller of the organization, and the controller reports to the chief financial officer (CFO). Employees across the organization trustthe CFO as someone who will always treat people as fairly as possible. For example, when one of your coworkers, a highly respected accountant, had to inform the CFO that she had made an error in estimating pension expense, the CFO responded by directing the employee to record the correction to the books and records of the company. The CFO reassured the accountant that her job was not in jeopardy, that everyone makes mistakes, and that the important thing to do was get it right. In addition, the CFO is also very vocal about the importance of making ethical decisions. Most employees in the organization, including you, are aware that the CFO has terminated the employment of employees who have violated the company’s ethical code of conduct. In the past, you have discussed several technical accounting issues with the CFO and have often been impressed that the CFO ends every meeting with the same basic question: Is this accounting treatment “the right thing to do?”
Information Related to the Internal Audit Function
HCP maintains an in-house Internal Audit Department, which includes a chief audit executive who supervises the work of other internal auditors in the department. Allof the staff have an accounting background and are Certified Internal Auditors. The Internal Audit Department reports directly to the chief financial officer who establishes the internal audit budget and makes hiring and firing decisions for the unit. The Internal Audit Department has two broad, important functions within HCP: to provide oversight and monitoring of internal controls over financial reporting and to perform management consulting activities (i.e., those advisory and service activities not related to internal controls). While both functions are important, historically the Internal Audit Department has spent approximately 30% of its time on oversight and monitoring activities and 70% on management consulting activities. In addition, the internal audit department has a history of missing deficiencies in internal control over financial reporting.
The Task
It is December 17th, two weeks before the close of the calendar year end. The controller stops by your office. You provide the controller with the latest income statement projections:
Operating revenues / $900 millionOperating expenses / $695 million
Operating income / $205 million
You are both aware that the CFO has previously provided Wall Street analysts projected operating income of about $201 million. The controller asks you to record a $3 million journal entry for consulting expenses. If the entry is booked the revised projections are:
Operating revenues / $900 millionOperating expenses / $698 million
Operating income / $202 million
You notice that the controller has no invoices or other paperwork in hand. When you further inquire as to the nature of the expense accrual, the controller assures you that “we will eventually find out someone has expenses they haven’t told us about; it happens all the time.” You have a good working relationship with the controller. But if you book the journal entry, you will do so without any supporting documentation. The controller leaves your office and you are left to contemplate the request to book a journal entry.
In response to the controller’s request, you performed analytical procedures on the threemost recent quarters and prior year-end to see if there was, in fact, a trend of under-accruing for consulting expenses. You found that consulting expenses had been properly accrued at the prior year-end but the consulting expenses were under-accrued for each of the prior three quarters.
As the assistant-controller of this company, how likely are you to book the journal entry as requested by the controller:
1 / 2 / 3 / 4 / 5 / 6Very
Unlikely / Unlikely / Somewhat
Unlikely / Somewhat
Likely / Likely / Very
Likely
EXHIBIT 1c
Case Information and Journal Entry Decision Task—Weak Ethical Leadership/Strong Internal Audit Function Condition
Company Background Information
Assume that you are the assistantcontroller for Health Care Products, Inc. (hereafter HCP). HCP is a large, publiclytraded company. You have worked at the company for the past 2 years. Overall, you are quite satisfied working for HCP. The company is financially strong, stable, and strategically well-positioned. In fact, over the past 5 years, HCP has steadily increased profits and met or exceeded analysts’ expectations.
Information Related to the Senior Executive Team
The executive team at HCP consists of the chief executive officer, the chief operating officer, the chief financial officer, the senior vicepresident of product development, and the senior vice president of marketing and customer relations. You currently report to the controller of the organization, and the controller reports to the chief financial officer (CFO). Employees across the organization do not trust the CFO as someone who will always treat people as fairly as possible. For example, when one of your coworkers, a highly respected accountant, had to inform the CFO that she had made an error in estimating pension expense, the CFO responded by directing the employee to delay recording the correction to the books and records of the company. The CFO indicated to the accountant that if the mistake ended up impacting the financial results of the company, the accountant’s job was in jeopardy. In addition, the CFO is seldom vocal about the importance of making ethical decisions. Most employees in the organization, including you, are aware that the CFO has never terminated the employment of employees who have violated the company’s ethical code of conduct. In the past, you have discussed several technical accounting issues with the CFO and have often been surprised that the CFO ends every meeting with the same basic question: Is this accounting treatment “getting us the financial results we want?”
Information Related to the Internal Audit Function
HCP maintains an in-house Internal Audit Department, which includes a chief audit executive who supervises the work of other internal auditors in the department. All of the staff have an accounting background and are Certified Internal Auditors. The Internal Audit Department reports directly to the Audit Committee. In conjunction with the Audit Committee, the chief executive officer establishes the internal audit budget and makes hiring and firing decisions for the unit. The Internal Audit Department has two broad, important functions within HCP: to provide oversight and monitoring of internal controls over financial reporting and to perform management consulting activities (i.e., those advisory and service activities not related to internal controls). While both functions are important, historically the Internal Audit Department has spent approximately 90% of its time on oversight and monitoring activities and 10% on management consulting activities. In addition, the internal audit department has a history of finding deficiencies in internal control over financial reporting.
The Task
It is December 17th, two weeks before the close of the calendar year end. The controller stops by your office. You provide the controller with the latest income statement projections:
Operating revenues / $900 millionOperating expenses / $695 million
Operating income / $205 million
You are both aware that the CFO has previously provided Wall Street analysts projected operating income of about $201 million. The controller asks you to record a $3 million journal entry for consulting expenses. If the entry is booked the revised projections are:
Operating revenues / $900 millionOperating expenses / $698 million
Operating income / $202 million
You notice that the controller has no invoices or other paperwork in hand. When you further inquire as to the nature of the expense accrual, the controller assures you that “we will eventually find out someone has expenses they haven’t told us about; it happens all the time.” You have a good working relationship with the controller. But if you book the journal entry, you will do so without any supporting documentation. The controller leaves your office and you are left to contemplate the request to book a journal entry.
In response to the controller’s request, you performed analytical procedures on the threemost recent quarters and prior year-end to see if there was, in fact, a trend of under-accruing for consulting expenses. You found that consulting expenses had been properly accrued at the prior year-end but the consulting expenses were under-accrued for each of the prior three quarters.
As the assistant-controller of this company, how likely are you to book the journal entry as requested by the controller:
1 / 2 / 3 / 4 / 5 / 6Very
Unlikely / Unlikely / Somewhat
Unlikely / Somewhat
Likely / Likely / Very
Likely
EXHIBIT 1d
Case Information and Journal Entry Decision Task—Weak Ethical Leadership/Weak Internal Audit Function Condition
Company Background Information
Assume that you are the assistantcontroller for Health Care Products, Inc. (hereafter HCP). HCP is a large, publiclytraded company. You have worked at the company for the past 2 years. Overall, you are quite satisfied working for HCP. The company is financially strong, stable and strategically well-positioned. In fact, over the past 5 years, HCP has steadily increased profits and met or exceeded analysts’ expectations.
Information Related to the Senior Executive Team
The executive team at HCP consists of the chief executive officer, the chief operating officer, the chief financial officer, the senior vicepresident of product development, and the senior vice president of marketing and customer relations. You currently report to the controller of the organization, and the controller reports to the chief financial officer (CFO). Employees across the organization do not trust the CFO as someone who will always treat people as fairly as possible. For example, when one of your coworkers, a highly respected accountant, had to inform the CFO that she had made an error in estimating pension expense, the CFO responded by directing the employee to delay recording the correction to the books and records of the company. The CFO indicated to the accountant that if the mistake ended up impacting the financial results of the company, the accountant’s job was in jeopardy. In addition, the CFO is seldom vocal about the importance of making ethical decisions. Most employees in the organization, including you, are aware that the CFO has never terminated the employment of employees who have violated the company’s ethical code of conduct. In the past, you have discussed several technical accounting issues with the CFO and have often been surprised that the CFO ends every meeting with the same basic question: Is this accounting treatment “getting us the financial results we want?”