Reward Systems, Moral Reasoning, and Internal Auditors Whistle-Blowing Wrongdoing Behavior

Yin Xu Department of Accounting College of Business and Public Administration Old Dominion University Norfolk, VA 23529 Tel: (757) 683-3554 E-mail: yxu@odu.edu

Douglas E. Ziegenfuss Department of Accounting College of Business and Public Administration Old Dominion University Norfolk, VA 23529 Tel: (757) 683-3514 E-mail: dziegenf@odu.edu

June 2003

Reward Systems, Moral Reasoning, and Internal Auditors Reporting Wrongdoing Behavior Abstract
This study investigates the issue of whistle-blowing arising from known company wrongdoing in the process of preparing financial information. An experiment was conducted to examine whether reward systems such as cash incentives or employment contracts have an impact on auditors whistle-blowing behavior. The results indicate that internal auditors are more likely to report wrongdoing to higher authorities when cash rewards or continuing employment contracts are provided, suggesting reward systems have a positive effect on disclosing companys wrongdoing or even fraud. In addition, the result reveals that internal auditors with lower levels of moral reasoning are more sensitive to cash reward incentives.

Reward Systems, Moral Reasoning, and Internal Auditors Reporting Wrongdoing Behavior

INTRODUCTION The purpose of this study is to investigate the issue of whistle-blowing arising from known company wrongdoing in the process of preparing financial information. The basic question to be addressed is whether certain reward systems and individual moral reasoning on the part of auditors have an impact on disclosing company wrongdoing or fraud. The reliability of financial information is always a legitimate concern in financial reporting. Highly publicized audit failures lead to close examination of the role and behavior of auditors. Previous research suggests that whistle-blowing can be used as a preventive mechanism for possible wrongdoing (Hooks, Kaplan, and Schultz 1994). Studies indicate that the nature and extent of the retaliations have a negative impact on the prospective whistle-blowers decision in the disclosure of company wrongdoing (e.g. Near and Miceli 1986; Arnold and Ponemon 1991). Issues have been raised about the effect of significant monetary rewards or long-term employment contract as an incentive for reporting organizational wrongdoing to mitigate the negative consequences of retaliation on the whistle-blower (Ponemon 1994). However, little study has attempted to empirically examine such an effect. The results in this study indicate that auditors are more likely to report wrongdoing to higher authorities when cash rewards or continuing employment contracts are provided, suggesting reward systems have a positive effect on disclosing companys wrongdoing or even fraud. In addition, the result reveals that, to some extent, auditors

with lower levels of moral reasoning are more sensitive to cash reward incentives or more willing to blow the whistle when cash incentives are provided. The remainder of this paper is organized as follows. The next section provides a brief overview of the basic research in the area and a development of hypotheses. Then the research method and the results are described. implications and limitations of the study. The final section discusses the

BACKGROUND The psychology of moral reasoning is based on Piaget theory (1932, 1966). The theory assumes that cognitive and moral development proceeds hand in hand, and that the cognitive schema and structure are innate, invariant, hierarchical and culturally universal. In his research Piaget used the clinical interview technique to top the childs underlying cognitive-structural capacities, rather than merely measure observable surface performance in behavioral terms. In contrast to emphasis on education and development as adult influence on children, Piagets cognitive-structural approach attempted to show how social-moral knowledge developed out of a background of authority and constraint and then moved in a direction of autonomous cooperation and equality. In Piagets scheme, once the child resolved some of the difficulties inherent in distinguishing his own reality from the givens in external reality, a more or less natural process of gradually unfolding moral development would occur (Rich and Devitis 1994). Kohlberg (1969) made enormously important contributions to the moral development theory by continuing what Piagets theory had left unfinished. Kohlberg not only shared Piagets assumption but was also concerned with the principle of justice

rather than simple cooperation and equity. universal stages of moral development.

Kohlbergs research showed culturally

He advanced a stage-sequence model that

defined a series of cognitive levels and stages somewhat akin to the rungs of a ladder. Within each of the three levels of ethical judgment are two developmental stages, thus producing a total of six discrete states as follows. Pre-conventional Level: Stage 1: Obedience to rules and authority, avoiding punishment, and not doing physical harm. Stage 2: Serving ones own or others needs and making fair deals in terms of concrete exchange. Conventional Level: Stage 3: Playing a good (nice) role, being concerned about the other people and their feelings, keeping loyalty and trust with partners, and being motivated to follow rules and expectations. Stage 4: Doing ones duty in society, upholding the social order, and maintaining the welfare of society or the group. Post-conventional Level: Stage 5: Upholding the basic rights, values, and legal contracts of a society, even when they conflict with the concrete rules and laws of the group. Stage 6: Assuming guidance by universal ethical principles that all humanity should follow (Kohlberg 1981). To the pre-conventional person, resolution of an ethical dilemma is simply based upon the immediate cost and/or benefit of ethical action. To the conventional person,

resolution is based upon the avoidance of harm to others belonging to ones social institution. The post-conventional person frames an ethical judgment based upon an internalized and self-chosen set of principles. What is important in Kohlbergs theory is that stages are organized system of thought and they represent invariant developmental sequences. All movement is forward and does not omit steps. The stages come one after another and in the same order, even though children move through the sages at varying speeds. The stages are hierarchical

insofar as thinking at a higher stage comprehends within it thinking at a lower stage. Based on longitudinal, cross-sectional, and cross-cultural studies carried out in Chicago area, Turkey, Britain, Canada, India, Israel, Honduras, Taiwan, and Yucatan, Kohlbergs model has been widely influential (Rich and DeVitis 1994). Ethical reasoning research in the accounting and auditing profession is important because the concept of professional ethics is more than an external measure by which the profession maintains a virtuous image (Ponemon and Gabhart 1994). For many

practitioners, it is a concept that implies a reasoning capability that permits the individual to render judgement unaltered by self-interest that could impair his or her professional responsibility. The ethical reasoning process is part of the individuals overall moral consciousness from which he or she deals with difficult conflict or dilemmas in every day practice. It is this personal dimension of the moral universe in the auditing profession that attracted attention of researchers. Since the mid-1980s, an increasing number of studies have addressed the ethical issues in accounting and auditing from the perspective of moral development theory (see Louwer, Ponemon, and Radtke 1997). One aspect of these studies that relates most closely to the present study is the relationship between moral reasoning and the whistle-blowing phenomenon. Whistleblowing is defined as the disclosure by organizational members (former and current) of illegal, immoral, or illegitimate practices under the control of their employers, to persons or organizations that may be able to effect action (Near and Miceli 1985, p.4). Research in the whistle-blowing phenomenon has been pursued in various aspects including accounting and auditing (see Hooks et. al, 1994). Many factors may influence whistle-blowing behavior, among which the factor of retaliation against whistle blowers

is perhaps the most significant determinant to behavior (Arnold and Ponemon 1991). Evidence suggests that retaliation is part of rational and planned process initiated by authority not only to eliminate the whistle blower as a witness but also to suppress future whistle-blowing decisions (e.g. Near and Miceli 1985, 1986). In retaliating against the whistle blowers, management tries to signal to others that confronting authority has high risk and can ruin ones career (Glazer and Glazer 1989). Arnold and Ponemon (1991) conduct an experiment examining the effect of moral reasoning, retaliation, and the position of individuals on internal auditors perceptions of whistle-blowing. More specifically, the study examines the internal auditors perceptions about whistle-blowing in the context of three variables: (1) the level of moral reasoning of the individuals, (2) the possible retaliation imposed by management or co-workers against the whistle-blower, and (3) the position of the whistle-blower in an organization (internal auditors, external auditors, or marketing analysts). The experiment asked 106 internal auditors to predict the likelihood of another person disclosing wrongdoing under two different manipulated conditions: (1) the nature of retaliation posed against the whistle-blower (2) the position of the individual discovering wrongdoing. Findings of this work show that internal auditors with lower levels of moral reasoning were unlikely to blow the whistle on wrongdoing, and this effect was particularly pronounced under the condition of retaliation by the organization. Findings also reveal that the position of the prospective whistle-blower has a significant influence on whistle-blowers behavior. Arnold and Ponemons (1991) study is consistent with other findings (e.g. Near and Miceli 1986) indicating that the extent of retaliation reduces the likelihood of reporting wrongdoing. Moreover, Near and Miceli (1985), applying reinforcement theory

(Skinner 1953), point out that when similar wrongdoing is consistently tolerated or encouraged while whistle-blowing act is followed by retaliation, the wrong doing setting serves to signal dont act (Near and Miceli 1985, p.6). At the same time, they have argued that when similar wrongdoing is consistently followed by successful opposition and by positive management reaction, the wrongdoing serves as a stimulus for action. This point has important implications, but little empirical research has been done to test how the wrongdoing setting may become stimulus for whistle-blowing act. An obvious issue raised here is whether offers of significant incentives can result in an increase in disclosing wrongdoing. Based on the same framework of reinforcement theory, this study suggests that people are motivated to engage in certain behavior because of past rewards associated with those behaviors. If wrongdoing is reported by an individual, and if the individual who blew the whistle has been rewarded, the wrongdoing setting serves to send the signal that whistle-blowing behavior will be encouraged. While an organization may provide different types of incentives, monetary rewards may be considered one of the most salient economic resources. As evidenced by the previous studies, job termination is one of the most common forms of retaliation against whistle blowers (e.g. Glazer and Glazer 1989). It seems that individuals often put themselves at very substantial risk of losing their jobs eventually if they blow the whistle on organizations wrongdoing, the situation is probably more notable in private organizations than in public organizations (Alford 2001). One way to offset these negative consequences of retaliation and to curb management power in the

event of whistle blowing situations is to develop some control structure by offering longterm employment contracts to individuals who disclose wrongdoing (Ponemon 1994). Based on the previous studies and the above discussion, it is expected that individuals will be less likely to disclose and report wrongdoing even when they think they should. However, individuals will tend to disclose and report wrongdoing when a substantial amount of cash reward is offered after whistle blowing acts. Similarly,

individuals will be likely to blow the whistle when continuing employment contract is guaranteed after whistle blowing acts. expectations. H1: Internal auditors are more likely to feel they should report wrongdoing than they would report. H2a: It is more likely that auditors will report or disclose wrongdoing when a substantial amount of cash reward is offered. H2b: It is more likely that auditors will report or disclose wrongdoing when a continuing employment contract is guaranteed. As discussed earlier, the experiment conducted by Arnold and Ponemon (1991) demonstrates that internal auditors with relatively low levels of moral reasoning are less likely to blow the whistle, and this is especially true when the potential retaliation exists. This finding is supported by Kohlberg stage theory (1969, 1981) that individuals with lower levels of moral reasoning will make the decision to do right to avoid punishment (stage 1) or to serve ones own interest (stage 2). By the same token, it is expected that individuals with lower levels of moral reasoning will be more sensitive to incentives such as cash rewards and continuing employment contracts. Accordingly, H3 summarizes this expectation. Accordingly, H1 and H2 summarize these

H3a: Individual levels of moral reasoning will influence the likelihood of reporting or disclosing wrongdoing when cash rewards are offered. H3b: Individual levels of moral reasoning will influence the likelihood of reporting or disclosing wrongdoing when a continuing employment contract is guaranteed.

METHOD General Design A mixed ANOVA research design with repeated measures and between-group independent variables is used in the study. The primary reason of using the repeated measure design is that it provides good precision for comparing manipulations because all sources of variability between participants are excluded from the experimental error. Only variation within subjects enters the experimental error, since any two manipulations can be compared directly for each subject (Neter, Kutner, Nachtsheim, and Wasserman 1996).

Participants A list of members of two regional internal auditor chapters was obtained and the decision cases and questionnaire were mailed with a cover letter to each auditor. Due to institutional constraints and the relatively high response rate, a single mailing was used. Of the 570 surveys mailed, 26 were returned as undeliverable, leaving 544 available to participants. 201 internal auditors returned the questionnaire. The response rate was 37%.

Procedures All participating subjects are provided with five pages of a research instrument. The first page consists of a case involving a situation of an internal auditor discovering wrongdoing in an organization. It provides descriptive information about the wrongdoing setting. The internal auditor recently completed an audit of the companys billing

system. The billings had been audited before and no major problems were identified. During the present audit, however, the internal auditor discovered a series of inflated or falsified invoices to customer that had already been paid. He reported this finding to the director of internal audit. The director said that he would report it to authorities within the company. But a few days later, the director changed his mind. The scenario is adapted from the previous work of Arnold and Ponemon (1991). After reading the case, subjects are asked to indicate that the internal auditor described in the case should report wrongdoing to higher authorities on a 9-point scale (1 = definitely shouldn't, 9 = definitely should). Subjects are then required to give a prediction that the internal auditor would report wrongdoing to higher authorities on a 9-point scale (1 = very unlikely, 9 = very likely). The task is presented in the third-person to reduce potential self-reporting bias that frequently go with studies of moral issues (see Arnold and Ponemon 1991). Then subjects are given two manipulated situations assuming that the reward systems are provided by the organization and asked to provide a prediction again about the auditors whistle-blowing act after each manipulation. The two manipulated situations are as follows: Assume that the company has a policy that encourages the communication of organizational wrongdoing by guaranteeing continuing employment to the employee for truthful disclosure.

Assume that the company rewards a substantial amount of cash (instead of guaranteeing continuing employment) to the employee for such reporting. The procedure is taken to minimize the potential order effect, which is connected with the position in the manipulation order. The order of manipulation presentations are balanced by using a half of the instruments in the order of (1) employment and (2) cash, and the other half in the order of (1) cash and (2) employment. The next three pages of instruments consist of the measure of moral reasoning via a three-story version of the Defining Issues Test (Rest 1979). The final page contains questions regarding subject demographic information. The DIT is a well-known and widely utilized measurement instrument. It provides a surrogate measure of an individuals ethical reasoning and judgement. The DIT is basically a self-administered questionnaire that contains a series of hypothetical moral conflicts. For each dilemma, the subjects are asked to select and rank order those issues or items which they consider have most significant influence on the resolution of each conflict. The issues represent the most typical mode of thinking in terms of the underlying cognitive-developmental theory. The various stages of moral judgment are exemplified in the issues, and the

assumption is that a subjects developmental level will influence how he or she rates and ranks the issues. The P score is calculated from the sum of the weighted total of four

most important ranked issues. The score is expressed in term of a percentage ranging from 0 to 100%.

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RESULTS Sixteen responses were dropped from the analysis due to incompleteness or failure to satisfy the consistency check in the DIT. Thus the final useable responses were 185. Table 1 presents participants demographic information. On average they have 21 years of work experience and 12 years of audit experience. They supervise an average of 12 individuals. It appears that the sample meets the experience characteristics desired for the study. Insert Table 1 about here

The results show that the mean and the median DIT P scores are 32.67 and 33.33, respectively. The DIT P scores were then post-stratified into high (n = 58, mean = 51.15), mid (n = 56, mean = 33.51), and low (n = 71, mean = 16.90) DIT P score groups, corresponding to Kohlbergs (1969) post-conventional, conventional, and preconventional levels of moral reasoning development discussed earlier. We used P scores of 27 and 41 cut-off value, based on the previous studies (Rest 1979; Windsor and Ashkanasy 1995), to define these three groups. Mean dependent variable scores (the perceptions regarding the likelihood of the whistle-blowing behavior) for the three groups are displayed in Table 2. Table 3 presents the descriptive statistics of mean scores and standard deviations for variables in the study. Insert Table 2 about here

H1 predicates that, when an observed wrongdoing occurs, internal auditors are more likely to feel they should report wrongdoing than they would report. A two-way

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ANOVA with repeated measures was used to examine the hypothesis. No significant interaction exists between the levels of moral reasoning and reporting behaviors, F (1, 183) = 0.09, p = 0.769; but the main effect on the likelihood of reporting wrongdoing behavior was significant F (1, 183) = 147.03, p < 0.0001. The means are displayed in Table 3, which show that the mean likelihood scores of the whistle-blowing behavior were significantly higher when auditors believe that they should report wrongdoing (mean = 7.87) than when they believe that they would (mean = 4.65). Thus, H1 is supported. This result suggests that individuals will be, regardless of their levels of moral reasoning, less likely to report wrongdoing even when they think they should. Insert Table 3 about here

As expected, when the reward systems are present (under both guaranteed employment and cash reward conditions), the likelihood of reporting wrongdoing behavior is higher than that when no reward systems exist. A one-way analysis of variance (ANOVA), repeated-measure design, was used in the analysis of subject predictions of the whistle-blowing behavior. This analysis revealed a significant effect for the manipulation, F (2, 368) = 145.36; p < 0.0001. H2 predict that the auditors will be more likely to blow the whistle on wrongdoing under the conditions of cash rewards and employment contracts, respectively. The

contrast analysis was performed to examine the mean differences between the control group (would report) and each of the two manipulated groups, which directly tests the two hypotheses (H2a and H2b). The results of contrast analysis indicate that the mean likelihood of the whistle-blowing behavior in the control group (would report) (mean =

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4.65) is significantly lower than the mean likelihood in the continuing employment group (mean = 6.79), F (1, 184) = 220.81; p < 0.0001. As predicted, the mean likelihood of the whistle-blowing behavior in the control group (mean = 4.65) is also significantly lower than the mean likelihood in the cash reward group (mean = 6.78), F (1, 184) = 182.74; p < 0.0001. The results demonstrate that the auditors are more likely to communicate or report wrongdoing to higher authorities when the reward systems in the form of either guaranteed employment or cash reward are implemented in the organization. Therefore, both H2a and H2b are supported. The evidence suggests that providing some types of incentives may in fact increase reporting wrongdoing behavior in an organization. H3 predicts that individual levels of moral reasoning will influence the likelihood of whistle-blowing behavior when cash rewards and employment contracts are offered. A two-way ANOVA with repeated measures on one factor was used to test the hypotheses. Table 4 presents the ANOVA summary table. As shown in Table 4, the interaction of incentive manipulations and levels of moral reasoning on the likelihood of the whistle-blowing behavior was significant, F (2, 366) = 4.74, p < 0.01, indicating that the auditors prediction of whistle-blowing behavior was influenced by their levels of moral reasoning. Insert Table 4 about here

Tests for simple effects were then used to compare the mean differences for guaranteed employment and cash reward manipulations among the three DIT P score groups. The results showed that the mean likelihood of whistle-blowing behavior under the guaranteed employment condition displayed no significant differences among the

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three levels of moral reasoning groups, F (2, 182) = 0.86, p < 0.42. The findings suggest that the auditors with low, mid or high levels of moral reasoning measured by the DIT P scores do not influence their perceptions regarding the likelihood of the whistle-blowing behavior under the condition of guaranteed employment incentives. Thus H3b is not supported. However, the mean likelihood of whistle-blowing behavior under the cash reward condition did indicate a marginally significant difference among the three levels of moral reasoning groups, F (2, 182) = 2.65, p < 0.07. The findings indicate that the auditors with different levels of moral reasoning measured by DIT scores influence auditors perceptions regarding the likelihood of the whistle-blowing behavior under the condition of cash rewards. A post hoc test shows that the auditors in the low DIT group (mean = 7.17) are more likely to report wrongdoing under the incentive of cash rewards than the auditors in the high DIT group (mean = 6.36), p > 0.02. Therefore, H3a is supported. The results suggest that internal auditors with relatively low levels of moral reasoning will be more sensitive to incentives of cash rewards and more willing to blow the whistle as a means for disclosing wrongdoing when monetary incentives are provided.

DISCUSSION This study attempts to explore the impact of reward systems and individual moral reasoning on the prediction of whistle-blowing behavior. Findings support the notion that reward systems such as cash incentives or guaranteed employment contracts have a significant influence on the likelihood of whistle-blowing behavior. Although we

designed this study to integrate findings from previous research, our work is different

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from previous efforts in some ways. One aspect in which this study differs most from prior research is that we directly examined what motivate auditors to report or disclose wrongdoing or fraud. The whistle-blowing decision on any types of organizational wrongdoing or fraud is never a casual matter. This study shows that, under the

experimental condition, the availability of monetary incentives and employment protections will encourage people to do a right thing. Such an effect may not only

offset the negative effects of observable or unobservable retaliations imposed by the organization on the whistle-blower but also help foster a positive moral environment that increases the probability of the whistle-blowing behavior in organizations. Further, findings also demonstrate that individuals with relatively low levels of moral reasoning are more likely affected by the cash incentive than individuals with relatively high levels of moral reasoning. This result is consistent with the findings that auditors with lower moral reasoning are more sensitive to retaliation (Arnold and Ponemon 1991). While the previous research shows that highly moral individuals are more likely to blow the whistle because their moral disposition does not permit inaction, the current study indicates that low moral individuals are more likely to blow the whistle because the reward of a substantial amount of cash is provided. The findings can be readily explained by Kohlbergs stage theory (1969,1981). Individuals with lower levels of moral reasoning (at the pre-conventional or at the conventional levels) will focus more on self-interest and relationships with others in organizations. Accordingly, they would blow the whistle only when the perceived personal benefits such as monetary rewards prevail.

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Many issues and concerns have been raised regarding how to prevent future financial fraud and misconduct. One of the issues is the responsibility of corporate leaders. Practitioners and academics have called corporate leaders to take steps to decrease the probability that managers will become either victimized or otherwise involved in such frauds (Gangossy and Kanter 2002). It is not entirely clear how and why corporate leaders may be motivated to make efforts to reduce or eliminate wrongdoing or fraud in their own organizations, since they are often implicated directly or indirectly in, and financially gained from, such behavior. Assuming the top corporate leaders are willing to run their organizations with highest ethical standards, there is an important issue of the role and behavior of accountants, auditors, and other members of organizations who are involved in preparing and disclosing financial information. That is, how and why employees may be motivated to report wrongdoing or fraud within organizations when retaliation against whistle blowers is often a lived reality. The implications of this study suggest that economic incentives are one of the crucial factors to motivate individuals to blow the whistle on wrongdoing in organizations. This is true regardless of individual levels of moral reasoning. The issue may be raised regarding motivated versus unmotivated whistle blowers (Ponemon,1994). It is argued that the motivated communication of wrongdoing may provide or report less reliable information of wrongdoing than the unmotivated communication because the motivated whistle blower chooses to act for the purpose of personal welfare. The

scenario presented in this study, however, assumes that all the information reported regarding financial wrongdoing or fraud would be true and verifiable. Moreover, the critical issue in the present business world and in the financial reporting aspect in

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particular is that people simply fear of blowing the whistle on any wrongdoing or fraud as few whistle blowers stories end happily (Glazer and Glazer 1989; Alford 2001). Some limitations exist in the current study. The data were collected using a short hypothetical case and with a sample of convenience. The study was conducted under the experimental condition, which may limit the ability to generalize to the population. Therefore, care should be exercised when extrapolating the results to other situations and contexts. Nevertheless, the findings of this study provide initial evidence that

organizations can develop some internal control structure to encourage employees to report or dislose wrongdoing. Further research may investigate whether organizational management tends to implement economic incentives and what would motivate them to do so. We hope that the present study will stimulate other researchers to pursue these issues.

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Reference Alford, C. 2001. Whistleblowers: Broken Lives and Organizational Power. Ithaca, NY: Cornell University. Arnold, D., and L. Ponemon. 1991. Internal auditors perceptions of whistle-blowing and the influence of moral reasoning: an experiment. Auditing: A Journal of Practice & Theory, Vol. 10, No. 2: 1-15. Gandossy, B., and R. Kanter. 2002. "See no evil, hear no evil, speak no evil" -- Leaders must respond to employee concerns about wrongdoing. Business and Society Review, Vol. 107, No. 4: 415-422. Glazer, M., and P. Glazer. 1989. The Whistleblowers: Exposing Corruption in Government and Industry. New York: Basic Books. Hooks, K., S. Kaplan, and J. Schultz. 1994. Enhancing communication to assist in fraud prevention and detection. Auditing: A Journal of Practice & Theory, Vol. 13, No.2: 86-117. Kohlberg, L. 1969. Stage and sequences: the cognitive developmental approach to socialization in D. Goslin (ed), Handbook of socialization theory and Research (pp. 347-480). Chicago: Rand McNally. _________. 1981. Essays on Moral Development. Volume I. The Philosophy of Moral Development: Moral Stages and the Idea of Justice. New York: Harper and Row. Louwers, T., L. Ponemon, and R. Radtke. 1997. Examining accountants ethical behavior: A review and implications for future research in V. Arnold and S. Sutton (eds), Behavioral Accounting Research: Foundations and Frontiers (pp188-221). Sarasota, FL: American Accounting Association. Near, J., and M. Miceli. 1985. Organizational dissidence: The case of whistle-blowing. Journal of Business Ethics, Vol. 4: 1-16. and . 1986. Retaliation against whistle blowers: Predictor and effects. Journal of Applied Psychology, Vol.71: 137-145. Neter, J., M. Kutner, C. Nachtsheim, and W. Wasserman. Statistical Models. Boston, MA: McGraw-Hill. 1996. Applied Linear

Piaget, J. 1932, reprint 1966. The Moral Judgment of the Child. New York: Free Press. Ponemon, L. 1994. Whistle-blowing as an internal control mechanism: individual and organizational considerations. Auditing: A Journal of Practice & Theory, Vol. 13, No. 2: 118-130.

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., and D. Gabhart. 1994. Ethical reasoning research in the accounting and auditing professions in J. R. Rest and D. Narvez (eds), Moral development in the professions: Psychology and applied ethics (pp101-119). Hillsdale, NJ: Laurence Erlbaum Associates. Rest, J. 1979. Revised manual for the defining issues test. MMRP Technical Report. Minneapolis, MN: University of Minnesota. Rich, J., and J. DeVits. 1994. Theories of Moral Development. Springfield, IL: Charles Thomas Publisher. Skinner, P. 1953. Science and human Behavior. New York: MacMillan. Windsor, C., and N. Ashkanasy. 1995. The effect of client management bargaining power, moral reasoning development, and belief in a just world on auditor independence. Accounting, Organizations and Society, Vol. 20, No. 7/8: 701720.

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Table 1: Participant Demographics

Demographic Variable Male Female

Number of Participants 108 77 Mean

Years of work experience Years of work experience as auditor Number of individuals supervised

21 12 12

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Table 2: Mean Scores on Prediction of Whistle-Blowing behavior by Experimental and DIT Groups

DIT Groups Low DIT Mid DIT High DIT

Should report / No Reward 7.69 7.92 8.05

Would report / No Reward 4.46 4.85 4.69

Cash 7.17 6.73 6.36

Employment 6.76 7.07 6.57

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Table 3: Mean Scores and Standard Deviations on Prediction of Whistle-Blowing behavior

Variables Should report / no reward Would report / no reward Continuing employment Cash reward

Mean 7.88 4.65 6.79 7.78

Standard deviation 1.97 2.24 2.05 2.06

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Table 4: Analysis of Variance on Prediction of Whistle-Blowing behavior by Incentive Manipulation and DIT Groups

Source Between-subjects Level of DIT (A) Error between Within-subjects Incentives (B) A x B Interaction Error within Total

df

SS

F-value

p-value

1 183

5.74 1729.93

0.61

0.437

2 2 366 554

339.25 17.98 693.76 2786.66

89.49 4.74

0.0001 0.0093

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