The Benefits of Auditors’ Sustained Ethical Behavior: Increased Trust and Reduced Costs

Abstract

Studies demonstrating the benefits of ethical behavior at an individual level are scarce. The business ethics literature centers its analysis on unethical behaviors and their consequences, rather than ethical behaviors and their benefits. There is now considerable debate on the role of auditors in society and the function of accounting firms in the free market capitalist system. Specifically, the eminently ethical nature of the auditor’s work has been highlighted. Therefore, the aim of our paper is to show the impact of auditors’ sustained ethical behavior: the trust it generates. This trust results in considerable benefits for the firm due to a reduction in the costs of the partner’s supervision of the auditor. The methodology chosen to validate these claims is a survey of partner of the audit firm in auditing companies. The results of this research confirm the hypotheses raised in the theoretical model.

Introduction

Managerial and scholarly interest in business ethics has grown exponentially in recent decades as a result of concerns about the immoral behavior and scandals that periodically shake up the business community. In academic research, this interest is manifested in two main lines: first, in investigating the causes of individuals’ immoral behavior and second, in an effort to demonstrate the benefits for firms and society of promoting ethical strategies, attitudes and behaviors.

Studies demonstrating the benefits of ethical behavior at an individual level are scarce. The business ethics literature centers its analysis on unethical behaviors and their consequences, rather than ethical behaviors and their benefits (Kaptein 2008; Tenbrunsel and Smith-Crowe 2008; Treviño et al. 2006). Research on individuals’ immoral behavior (political scandals or business fraud) has highlighted the repercussion such behavior has for companies and the growing public concern it generates (Kish-Gephart et al. 2010; McDevitt et al. 2007; Reynolds 2006). This research stream has led to the search for systems and strategies that prevent the immoral behaviors that can damage the company, but has not promoted ethical behaviors, because there is no precise knowledge about exactly what they contribute to the organization. In our view, however, this approach to business ethics is insufficient because it does not analyze the potential benefits of ethical behaviors. The following questions therefore remain unanswered: What happens when a person behaves ethically in the organization? How are they, their colleagues and superiors affected by this behavior? What effect does this behavior have on the firm?

Therefore, the first aim of this study is to examine one of the repercussions of employees’ ethical behavior: the trust it generates. Since this trust is a consequence of ethical behavior, having employees who behave ethically can thus be considered as an organizational benefit. Our analysis of the benefits of ethical behaviors does not set out to explain or justify ethics; in other words, rather than giving reasons why people should behave ethically, we are interested in finding out the consequences of ethical behavior from the perspective of the outcomes they provide. According to Melé (2009, p. 12), “we must make clear that ethics focuses on what is good or bad from a moral perspective. Consequently, the value of ethics is not as an instrument for profits but lies in its intrinsic worth. However, business enterprises exist within a competitive system, and it is reasonable to inquire into the financial impact of good conduct.”

Ethical behavior is defined as “individual behavior that is subject to or judged according to generally accepted moral norms of behavior” (Treviño et al. 2006, p. 952). This is a very broad definition; in fact, there is a gap in the literature on the standardization of the ethical behavior concept (Tenbrunsel and Smith-Crowe 2008). First, to bridge this gap, and in order to analyze the benefits of ethical behavior, we clarified this concept. Thus, the first theoretical contribution of this work is a typology of ethical behaviors based on the frequency and magnitude criteria proposed by Fishbein and Ajzen (2010) for measuring behaviors. Moreover, with the aim of making a practical contribution, we developed a measuring scale of sustained ethical behaviors, adapting and updating the tools proposed in the literature. This measuring scale for the sustained ethical behaviors of employees, although it aims to be universal, can be adapted to the specific circumstances of each company and/or job position.

When a person behaves ethically, they generate trust in their immediate environment. That trust in employees, built up through the observation of their sustained ethical behaviors, will reduce the organization’s costs. Therefore, the second aim of this study is to examine the repercussions of the trust placed in employees: the decrease in the costs of surveillance and control on those employees in whom the company’s trust is placed.

Agency theory provides an appropriate theoretical framework to analyze the organizational benefits of trust generated by employees’ sustained ethical behavior. Of the various agency relationships that may be present in business, we examine the one between the partner in the audit firm (principal) and the auditors directly under his or her supervision (agents) who are charged with undertaking the procedures according to the work schedule and obtaining the evidence on which the auditor’s report is based. This evidence must be validated by the partner auditor. The trust generated in this relationship may derive in considerable benefits for the firm due to a reduction in the costs of the partner’s supervision of the auditor. In the specific field of accounting firms, in the current “post-Enron” era, the trust in the auditor’s behavior is crucial for the auditing system to function properly. The auditor is the person who guarantees the reliability and truthfulness of the information and, as such, is the key player in the system.

Therefore, another contribution of this work to the literature about trust is the benefits that building trust generated for the firm, that is, the decrease in the costs of surveillance and control. Although this relationship has been considered theoretically, as far as we know, very few studies demonstrate this empirically in the scope of audit firms.

The paper is structured as follows: First we analyze the problem of determining ethical behavior among individuals in organizations; we then present the benefits that developing sustained ethical behavior can have for the organization, with specific attention to trust building in audit firms. Next, we describe the research methodology and identify the data sources and measurement issues. The following section presents the results. The article ends with the study’s conclusions and implications for the science of administration and for business practice.

The Problem of Defining Ethical Behavior

Descriptive or positive ethics in business essentially analyzes ethical behaviors of people in organizations and is generally known as ethical decision making, ethical behaviors or, sometimes, behavioral ethics. Most business ethics research from the descriptive perspective neglects to define the object of study; that is, no specific definition of ethical behavior is given (Tenbrunsel and Smith-Crowe 2008). Of the theoretical articles that propose a model for ethical decision making, only Bommer et al. (1987) and Jones (1991) define the dependent variable. At the beginning of their article, Bommer et al. (1987, p. 267) state: “This paper understands ‘ethical behaviors’ to be those behaviors the correctness of which constitutes the moral intuition in business and the professions.” In turn, Jones (1991, p. 3) writes: “an ethical decision is defined as a decision that is both legal and morally acceptable to the larger community. Conversely, an unethical decision is either illegal or morally unacceptable to the larger community.” In line with Jones, Treviño et al. (2006, p. 952) define ethical behavior as “individual behavior that is subject to or judged according to generally accepted moral norms of behavior.” In their meta-analysis of the literature on ethical choice, Kish-Gephart et al. (2010) confirm that this definition is consistent across recent scholarship.

In most other cases, either any definition is omitted (Dubinsky and Loken 1989; Hunt and Vitell 1986; Trevino 1986; Wotruba 1990) or the authors argue that it is insufficient to define ethical behavior from the perspective of the model developed in their studies (Ferrell and Gresham 1985). A definition of the object of study is also absent from descriptive studies designed to validate or test the constructs of theoretical models (Tenbrunsel and Smith-Crowe 2008); rather, they simply measure certain unethical behaviors (see Kish-Gephart et al. 2010 for a review of empirical studies).

However, the definition proposed by Treviño et al. (2006) may be too broad to be appropriate at a practical level. According to Tenbrunsel and Smith-Crowe (2008, pp. 550–551):

The avoidance of providing a definition of ethical behavior (and one with content), and the resulting lack of consensus when definitions are attempted to be provided is as understandable as it is unacceptable. (…) Thus, the ethics field is in a quandary. If we don’t believe it is important to define what an ethical decision is, or don’t believe that it’s our place to do so, then we are a field without meaning. If we do believe that such a definition is necessary, then we have no choice but to motivate an understanding of what the normative basis of those values should be and how “ethical” should be measured.

Therefore, in order to demonstrate the benefits of ethical behaviors we must first clarify the concept of ethical behavior and how it can be evaluated or measured: “Because our concern is with predicting and understanding human social behavior, the first and in some ways the most crucial step is to clearly define the behavior of interest, a task that is much more complex than it might at first appear. The definition of the behavior will guide not only how the behavior is assessed but also the way we conceptualize and measure all other constructs in our model of behavioral prediction” (Fishbein and Ajzen 2010, p. 29). Behavior or conduct is anything a person does, how they speak, walk, think or daydream; it is the action resulting from an attitude (Gibson et al. 2012). When we refer to ethical behavior, therefore, we are talking about conducts that manifest an attitude. This attitude is the person’s moral quality. A person’s ethical and unethical behaviors show their capacity to act in line with or against moral norms.

A wide range of behaviors are related to ethics in organizations, however. They may be behaviors that violate the moral norms of society (robbery, lying, cheating, forgery, abuse of power, etc.), or they may be considered positive or ethical (sharing, helping others, being positive or optimistic); it is therefore no easy task to measure all possible types of ethical and unethical behaviors in an organization. Melé (2009) and Fraedrich et al. (2011) list the main unethical behaviors dealt with in the field of business ethics.

As mentioned above, there is no commonly accepted way of measuring ethical or unethical behaviors among members of an organization. In order to discover the factors that affect or the benefits that derive from the numerous types of behavior, they must first be identified and classified. To this end, we draw on Fishbein and Ajzen’s (2010, p. 34) criteria for measuring behaviors: the magnitude criterion and the frequency criterion. These authors contend that when classifying behaviors, they can be expressed dichotomously (donating to a charity or not) or as a proportion. The proportion criterion, in turn, may refer to the quantity (magnitude criterion: how much is donated) or to time (frequency criterion: how often the donation is made).

In relation to the proportional criterion of quantity, different amounts of a behavior represent different behaviors (Fishbein and Ajzen 2010). In other words, donating €100 is not the same behavior as donating €12,000. By the same token, from the perspective of ethical/unethical behaviors, stealing €100 from the company is not the same as stealing €12,000. With regard to the frequency criterion, an isolated behavior by a given individual in unique circumstances that are unlikely to reoccur is not the same as a repeated or sustained behavior (Fishbein and Ajzen 2010). We therefore propose another way of classifying behaviors that takes into account the continuity or frequency of the behavior. Thus, isolated behaviors, repeated but intermittent behaviors and sustained, routinely performed behaviors may all be present in a firm. One example of an isolated behavior would be an employee making use of privileged information because, by chance, they had access to it and took advantage of it during a business trip. A repeated but intermittent behavior may be the acceptance or rejection of bribes each time an employee negotiates the conditions of a supplier’s contract. Finally, sustained, continuous behavior would be an employee routinely helping his or her colleagues over time.

The evaluation of ethical/unethical behavior in relation to the quantity and frequency criteria can be depicted graphically (Fig. 1). The horizontal axis represents the magnitude criterion, that is, the ethical evaluation of the behavior. The left side of the axis represents the least ethical behaviors; as we move toward the right, the behaviors become increasingly “less bad” until ethically neutral behaviors are reached at the midpoint. After this point, behaviors become increasing ethical or morally good, with the best (or most ethical) behaviors represented at the extreme right. The vertical axis represents the frequency of the ethical behaviors, moving from one–off isolated behaviors at the bottom to the most frequently performed behaviors at the top.

Fig. 1
figure1

Typology of behaviors according to their ethical evaluation and frequency. Source The authors, based on Fishbein and Ajzen (2010)

Taking these two dimensions together, we can categorize behaviors according to their ethical evaluation and their frequency, thereby obtaining a more precise classification of all possible types of ethical behaviors. For example, frequent ethical behaviors are found at the top right of the figure, which may include sustained behaviors related to civil conduct at work (organizational citizenship behavior, OCB) or a generous attitude to colleagues. At the other extreme, unethical and infrequent (or isolated) behaviors are found at the bottom left of the figure and may include accepting bribes or fraudulent manipulation of company accounts.

Our study examines the benefits of sustained ethically valuable behaviors by employees. Because previous scholarly attention has focused mainly on unethical behaviors (Kaptein 2008; Kish-Gephart et al. 2010), we analyze what is a relatively untouched area of study: morally or ethically valuable behaviors and the benefits they can have. Our interest also lies in behaviors that can generate a stable benefit for the individual and the organization. These benefits are analyzed in the following section.

Proposed Model and Hypotheses: Organizational Benefits of Perceived Sustained Ethical Behaviors

Trust

Although definitions of trust abound, none is commonly accepted by the scientific community. One of the most used definitions of trust, proposed by Mayer et al. (1995, p. 712), is “the willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party.”

What factors lead a person to place their trust in another? Or put another way, what are the antecedents of trust? The literature has identified many variables related to the generation of trust between two people: satisfaction (Ganesan 1994); communication (Anderson and Narus 1990; Das and Teng 1998; Friman et al. 2002; Geyskens et al. 1998; Morgan and Hunt 1994); shared values (Brashear et al. 2003); coercive power (in the reverse sense) (Geyskens et al. 1998; Scheer and Stern 1992); emotional bonds (Nicholson et al. 2001); and willingness to trust others (Conlon and Mayer 1994), among others. Some studies on the antecedents of trust highlight the importance of repeated behaviors in building trust. Nicholson et al. (2001), for example, show that the frequency of the interaction between the truster and the trustee increases the emotional bonds between the two. Rousseau et al. (1998) use the term relational trust to describe trust generated as a result of repeated interactions among parties. The truster has information about the other as a result of the relationship that he or she has maintained. For these authors, the trustworthiness and dependency that are present in previous interactions raise the truster’s positive expectations about the other’s intentions. Similarly, Doney et al. (1998) suggest that individuals build trust in others through a deliberate process based on repeated interactions and on shared values and goals. Trust therefore depends on the number of contacts between the person who trusts and the object of their trust (Liu and Leach 2001).

Research in the field of trust generally sets out to analyze the trust that employees have in their supervisors and managers. This way of approaching the relationship of trust is related to the power relations in the organization: The employee has less power and has to make a greater effort to trust, as he or she is at greater risk in the relationship. Risk is an essential factor in any discussion of relationships of trust. In fact, most researchers highlight the need for a certain perceived risk in the relationship in order to speak of trust (Rousseau et al. 1998). For example, Dirks and Ferrin (2001, p. 456) propose the following definition: “trust is a psychological state that provides a representation of how individuals understand their relationship with another party in situations that involve risk or vulnerability.” The worker is always the most vulnerable party in the relationship with the firm, and it is therefore logical that researchers have largely analyzed trust from the point of view of the employee. That is, previous studies have focused on the trust workers place in the firm that they depend on and are vulnerable to. However, our view is that the firm also takes a risk in offering employees a contract, since they are providing information and resources for employees to perform their job.

Agency Theory and Trust

Agency theory (AT) offers a suitable theoretical framework to analyze relationships of trust in firms. This theory holds that the firm is a nexus of contracts among parties. These contracts, termed agency contracts, regulate the order given by one party in a contractual relationship (the principal) to another party (agent) who is charged with undertaking the task entrusted to them. In Jensen and Meckling’s (1976) initial conceptualization, AT analyzes the relationship developed in an economic exchange when the principal grants the agent the authority to act in his or her name, such that the wealth of the principal benefits from the decisions taken by the agent (Cuevas-Rodríguez et al. 2012). Most AT research focuses on the contract that arises between the shareholders or the board of directors (principal) and the company’s CEO or general manager (agent).

AT can be used to analyze how agency costs may be designated to reduce possible opportunistic behavior that can arise in that situation. AT makes certain assumptions about individuals’ behavior and the organizational relationships that affect them. These assumptions about human behavior include the pursuit of self-interest. Organizational assumptions include the criteria of efficacy and efficiency, partial conflict of interests and information asymmetries among participants (Eisenhardt 1989). These assumptions lead to the possibility of opportunistic behaviors by both parties, particularly the agent, who has more and better information and access to resources. Opportunistic behaviors include, among others, distorting or holding back information, avoiding responsibilities, cheating and all manner of dishonest conduct (Atuahene-Gima and Li 2002). But what happens when instead of behaving opportunistically, an agent consistently demonstrates ethical behavior? We propose that when people behave ethically, they are perceived by those around them (colleagues, bosses, clients) as trustworthy. Therefore, in terms of the agency relationship sustained ethical behavior on the part of the agent causes the principal to trust him or her. We formulate this idea as the following research hypothesis:

Hypothesis 1

Sustained ethical behaviors of employees increase the trust placed in them by the superiors who observe this behavior.

Trust and Agency Costs

The use of control mechanisms necessary to guarantee that the agency contract does not cause harm to either party generates costs for the organization, known as agency costs. These include the cost of control systems incurred by the principal to ensure that the agent complies with the order he or she receives in accordance with the interests of the principle, not the agent. AT holds that these control mechanisms are necessary because it is presumed that the agent will behave opportunistically, based on the assumption of the pursuit of self-interest by parties to the contract and conflict of interests. Two types of control mechanism may be used: remuneration incentives based on meeting targets and mechanisms to monitor and control the agent’s work. Each type of mechanism will generate its own costs. In what follows, we explain what these mechanisms consist of, their associated costs and how trust between the principal and the agent can reduce these costs.

In relation to aligning interests through incentives, agency theory compares two possible types of contracts (Eisenhardt 1989): outcome-based contracts, in which certain targets are met that benefit the principal; and behavior-based contracts that require certain behaviors from the agent but are not linked to the achievement of specific outcomes. AT proposes outcome-based contracts as an appropriate mechanism to help the principal. However, this type of incentive can give rise to three different problems: First, outcome-based contracts are more expensive for the principal than behavior-based contracts. In outcome-based contract negotiations, agents will ask for part of the outcomes to offset the risk taken in linking their remunerations (or part of them) to the results of their work. The second problem related to outcome-based contracts is that the principal must assign responsibility for outcomes to either the agent’s action or environmental circumstances, which may be a complex task. The principal’s lack of information and the agent’s superior informational power may mean that the latter could claim outcomes that are not due (or at least not entirely) to his or her direct actions. Thirdly, some authors have suggested that outcome-based contracts might influence agents to act with a short-term horizon in order to maximize immediate benefits while potentially harming long-term benefits. In sum, the outcome-based contract is less efficient (more costly) than the behavior-based contract (Eisenhardt 1989).

The second type of mechanism to prevent agents acting against the principal’s interests consists of monitoring and control systems that the principal can implement to oversee the agent’s activity. Eisenhardt (1989) contends that the principal’s capacity to control the agent will depend on variables such as task programmability, outcome measurability and the length of the agency contract. However, these monitoring systems also have associated costs: their implementation and maintenance; time and effort needed for monitoring; and formalization of the supervisory mechanisms or task programming, among others.

Our hypothesis is that employees’ ethical behaviors will cause others to perceive them as trustworthy. This trust in the employee will lessen the manager’s fear that the agent might behave opportunistically. In turn, the perception that opportunistic behaviors will be less likely to arise implies that the mechanisms designed to prevent them—outcome-based contracts and monitoring and control systems—will also decrease. We therefore propose that trust in the agents, built up through the observation of their sustained ethical behaviors, will reduce the organization’s agency costs.

As mentioned above in relation to the costs associated with remuneration based on outcomes and/or targets, outcome-based contracts are more expensive for the firm than contracts based exclusively on behavior. Therefore, in organizations in which the principal trusts the agent, the contractual relationships will be based on behaviors, with the resulting decrease in agency costs. However, discretional contracts are becoming less common, especially in countries with a strong trade union presence. The choice between an outcome-based contract and a behavior-based contract may depend on factors beyond the control of managers, such as the firm’s sector, employment regulations in the area and the employee’s professional category.

However, in some areas managers and supervisors still have a great deal of discretion in the decisions they make about employee monitoring and control. As mentioned above, from the AT perspective the principal’s capacity to control the agent will depend on variables such as task programmability, outcome measurability and length of agency contract (Eisenhardt 1989). These three variables, however, will largely be beyond the control of a manager or supervisor, since they are related to issues such as company strategy, employment legislation, job structure and design.

As a result, we consider that these variables, which could impact employee control systems, cannot be affected by the supervisor’s trust in the employee. Within these possible control activities and systems, our study focuses on monitoring and evaluation of the employee, activities over which the agent’s supervisor has greater discretion.

Anderson and Oliver (1987) define a control system as a set of procedures in the organization to monitor, manage, evaluate and reward its employees. These four areas of the management system are grouped, on the one hand, into control systems through remuneration and, on the other, control through monitoring, managing and evaluation (Babakus et al. 1996; Cravens et al. 1993; Robertson and Anderson 1993). Remuneration-related control systems are affected by many factors that are not directly determined by the supervisor (principal) and therefore do not fall within the aim of this study. Similarly, we are not concerned here with the decrease in management-related tasks. Such functions tend to include leadership, motivation, communication, coaching and professional development (Babakus et al. 1996; Cravens et al. 1993; Robbins and Coulter 2009) and generally require managers to devote the same effort and cost to all employees. However, activities related to monitoring and assessment may demand varying levels of dedication, depending on the employees’ behavior. Monitoring employees requires spending time supervising the way they carry out their work, controlling the time and the dedication they put into their tasks, and regularly reviewing the costs they generate in performing their work (Babakus et al. 1996), among others. In turn, employee evaluation involves employee assessment, comparison with control standards and detecting deviations from these standards (Baldauf et al. 2005).

If the supervisor trusts an employee, he or she may devote less time and effort to monitoring and evaluation tasks. In other words, we might suppose that organizations in which the principal trusts the agent will have lower behavior monitoring and evaluation costs. This reasoning leads us to the following hypothesis:

Hypothesis 2

Trust in employees will reduce the costs of monitoring and controlling them.

Our research model and hypotheses are displayed in Fig. 2.

Fig. 2
figure2

Research model and hypotheses. Source the authors

Trust in Auditors

AT has already been used to study the audit process and audit firms (e.g., Watts and Zimmerman 1983; Adams 1994; Nikkinen and Sahlström 2004; Agoglia et al. 2015). In our study, we also analyze the relationship between the partner in the audit firm (principal) and the auditors he or she is directly responsible for (agents). There are two reasons why we focused our work on the ethical behaviors of the auditor. The first reason is the importance of trust in the auditor for the capitalist system. The second reason why we focused our analysis on this agency contract is that it allows us to study whether the trust generated by the auditor’s (agent) sustained ethical behavior, and directly observed by the partner (principal), has an impact on the benefits for the organization. Indeed, in the current audit systems, the first auditor (partner) must take responsibility for the tasks performed by the audits in his or her charge; however, he or she cannot supervise their work completely. Therefore, although there is a normalized surveillance and control system on the employee, this system is at the discretion of the senior auditor.

Next, we delve into the importance of the trust placed in the auditor. As was previously mentioned, the auditor is the person who guarantees the reliability and truthfulness of the information and, as such, is the key player in the system. The auditor is the linchpin in a system comprising three elements (Ardelean 2013): society in general, the audit firm and the audited organization. Trust in the auditor’s behavior benefits the three parties in the system as follows:

Society in general benefits because trust in the auditor’s ethical behavior (independence, integrity and objectivity) provides stability to the system. The trust of the market in the auditor’s behavior has been highlighted as a fundamental factor by regulators, investors and mechanisms of corporate governance, since the opinion of the auditor is a guarantee for third parties that they are using correct financial information (Lindberg 2001). Indeed, the auditor’s ethical responsibility, as set out in the AICPA’s Code of Professional Conduct, is manifested in the obligation to carry out work in a way that benefits a society that should have confidence in the members of the profession, and should believe that they are competent and that their main purpose is to help the organizations they are auditing. These are the factors that differentiate a profession from a business.

For the audited firm, the auditor’s ethical behavior prevents possible fraud in the future. An efficient audit will detect the unethical behaviors that come into conflict with the firm’s interests and that imply a direct cost, as well as the economic impact of the unethical behavior (embezzlement, misappropriation, use of the firm’s material for personal ends, among others).

Finally, the benefits of auditors’ ethical behavior for the audit firm take the form of lower control and monitoring costs that the partners of these firms incur in supervising the auditors who provide the audit evidence. The trust generated in this relationship can have significant repercussions on organizational benefits by reducing the auditor supervision costs incurred by the firm.

However, there is now considerable debate on the role of auditors in society and the function of accounting firms in the free market capitalist system (Ardelean 2013; McPhail and Walters 2009). The trust in the auditor, which is essentially their credibility, has been called into question since the Enron scandal and the demise of Arthur Andersen. Specifically, the eminently ethical nature of the auditor’s work has been highlighted (Copeland Jr. 2005; Knechel 1997). There appear to be two fundamental elements in this debate: the role of the audit firms (the Big Four, specially) and the auditor’s character. The former are now essential cogs in the auditing machine since they are the only firms that can respond to the needs of large corporations and public bodies. However, because of their business (commercial) character, the results of their work may be called into question; in other words, doubts may arise about how ethical they are. For this reason, apart from the organizational structures and the incentive systems of accounting firms, questions are raised about the auditor’s character (Khelil et al. 2016, 2018; Libby and Thorne 2004, 2007) and behavior.

Method

Sample and Data Collection

To obtain the information needed to test our hypotheses, we developed a questionnaire based on the literature review. The validity of the questionnaire was determined following several pretests with academics and employees from various companies. This stage aimed to test the reliability and content validity of some of the questionnaire items as well as the translation and phrasing, as some of them had been translated from their original English and others adapted or designed specifically for the study. A second aim was also to validate some of the questions related to monitoring and control systems used in audit firms, and to ensure that the questions were clear and unambiguous. The suggestions arising from the pretests were incorporated into the final version of the questionnaire.

The sample was selected through a non-probabilistic convenience sampling process using the snowball technique. This sampling procedure was selected because, as the population for the field work is generic and abstract, the probability of selecting a specific element for inclusion in the sample cannot be precisely established, nor can a sampling frame be defined. However, because of these factors it is frequently used in social science research (Merino Sanz et al. 2015).

A total of 149 auditors with responsibility in the management and supervision of teams (senior) from Spanish companies were interviewed, and they were asked questions about themselves and their employees. With respect to the general characteristics of the study sample, over half of the interviewees were men (53%), with an average age of 32 years, and an average experience of 9 years in their job position. Likewise, the interviewees had, in average, six workers in their charge and had supervised the employees they were asked about in the questionnaire for an average of 4 years. Lastly, regarding the companies which the interviewed individuals belonged to, these had an average of 260 employees; 12 of the interviewees belonged to Big Four.

Measures

Ethical Behaviors

The 17-item scale proposed by Newstrom and Ruch (1975) has frequently been applied to measure ethical behavior in business ethics research (Akaah 1996; Jackson and Artola 1997; Treviño et al. 1998; Zey-Ferrell and Ferrell 1982), although its validity has been questioned (Kaptein 2008). The scale’s authors explain that it focuses on intra-organizational issues, particularly deceit within the organization, but does not include more serious offenses and other moral questions that are usually found in the upper echelons of the organization (Newstrom and Ruch 1975). To avoid these problems, scholars have adapted and updated Newstrom and Ruch’s (1975) scale to align it with the kind of behaviors that may occur in diverse business sectors and firm types. For example, Cardy and Selvarajan (2006) designed a scale with ethical and unethical vignettes (each with 10 items) to assess the behavior of sales personnel, based on the scales of Newstrom and Ruch (1975) and Akaah and Lund (1994). In turn, Luna-Arocas (2004) created a 15-item scale of ethical and unethical behaviors that include activities such as using company materials for personal ends, borrowing cash from the firm or wasting company time browsing the Internet or playing computer games. These examples illustrate that ethical behaviors tend to be measured in relation to the specific work environment and period in which the research is conducted. For this reason, we designed our own scale to measure ethical behavior. According to the argumentation on behavior typology outlined in the previous section, the factors that influence individuals to make an ethical decision can vary depending on the type of behavior. Because our interest in this study lies in sustained behaviors, our questionnaire asked about behaviors that are routinely carried out in the organization.

We classified possible types of routine ethical behavior into three groups: ethical behaviors related to the job (EBJ), behaviors related to the organization (OCB-O) and behaviors related to colleagues (BC).

In the first group—ethical behaviors related to the job (EBJ)—we aim to measure the ethical quality of the behavior in relation to job tasks. According to the National Business Ethics Survey (Ethics Resource Center 2012), the most frequently observed improper behaviors in organizations are misuse of company time and abuse of the organization’s resources. These questions are also covered in similar forms in the scales of Cardy and Selvarajan (2006) and Luna-Arocas (2004). We included them as separate items in the questionnaire, together with another indicator of effort in the job designed to reflect the intensity and effort with which the employee performs his or her tasks. This item may be considered to measure, to some extent, the employee’s intra-role performance. The organizational behavior literature understands intra-role performance as the aspects of the job that imply employees’ fulfillment of all duties inherent to the activities that form part of their work (Bycio et al. 1995; Leong et al. 1994; Williams and Anderson 1991).

Regarding behaviors related to the organization, when employees go beyond the requirements of their job or task, they are said to be performing an extra-role behavior, namely one that is not stipulated in the inherent contractual obligations required to perform their activity (Organ and Ryan 1995). This type of behavior is known as organizational citizenship behavior (OCB). Williams and Anderson (1991) divide OCB into two dimensions: OCB-I, behaviors that specifically benefit certain individuals and through them, the organization as a whole, and OCB-O, behaviors that benefit the organization in general (Huang et al. 2012). To measure ethical behaviors related to the organization (OCB-O), we used four items, two of which were selected from the scales designed by Williams and Anderson (1991) and Huang et al. (2012). The third category, ethical behaviors related to colleagues (BC), was measured by some items adapted from Huang et al.’s (2012) scale.

In the introduction to the questionnaire, respondents were told that they would be asked to evaluate the behavior of one of their employees; the confidentiality of the survey was also emphasized. To avoid conditioning the selection of the employee to be evaluated, they were informed that “it should be an employee who has worked for at least one year under your direct supervision in a position where there are other employees he or she can be compared with.” All the items are measured on a seven-point Likert scale (1 = completely disagree; 7 = completely agree). All the items are given in Table 2.

Trust

To measure trust, we adapted the scale of Mayer and Davis (1999), which has been widely used in the literature on trust (cf. Mayer and Gavin 2005). This scale is designed to measure the employee’s trust in their immediate superior, and we therefore adapted it to ask the senior auditor about the behavior of the auditor under their supervision. In this process, some of the original items were modified to reflect the situation measured in this study.

Control Costs

As we noted in the explanation of our hypothesis about control, we focus exclusively on the dimensions of monitoring and evaluation. To measure these dimensions, we adapted Babakus et al.’s (1996) questionnaire, designed for a commercial environment, to audit firms. The items used to measure monitoring and control were:

  • How many hours per week do you spend supervising this employee’s activities?

  • How many hours per week do you spend supervising this employee’s expense claims?

  • How many hours per week do you spend supervising this employee’s work outcomes?

As the hours the senior auditor spends supervising the junior auditor’s work represent an expense for the organization, this is a direct scale; therefore, the higher the score on the items, the greater the control costs, measured in time.

Control Variables

As was explained in the section about trust, some authors have proposed different antecedents of it. To analyze whether our hypotheses are affected by these variables, we included them in the model as control variables. Specifically, we considered: disposition to trust, shared values and the relationship between the agent and the principal.

Consistent with Mayer et al.’s (1995) model of trust, we distinguish between trust and the disposition to trust, which refers to the general willingness to trust others. Disposition to trust refers to a general inclination in which people show faith or belief in humanity and adopt a trusting stance toward others (McKnight et al. 2002), and “can be considered one type of personal trait” (Wang et al. 2015, p. 561). Gefen (2000), Mayer et al. (1995) and McKnight et al. (2004) have confirmed that disposition to trust has a direct effect on the formation of trust. Disposition to trust is especially important in the initial stages of a trust relationship because this initial trust is not based on the specific trusted person or organization. It is based on the individual beliefs that people, in general, can be trusted (Wang et al. 2015). Later, as the relationship progresses, the initial disposition to trust becomes less important because actors are more influenced by the nature of the interaction itself (Zahedi and Song 2008). We asked the principal to select an employee who had been in his or her charge for over a year; thus, we predict that the disposition of the principal to trust does not affect his or her trust in the agent, but exclusively the observation of their ethical behaviors, as described in Hypothesis 1. The disposition to trust construct was made up of four items adapted from Zeffane and Al Zarooni (2012). Similarly, the literature has shown a positive relationship between shared values and trust (Morgan and Hunt 1994; Yilmaz and Hunt 2001). Shared values were measured using multi-item scales adapted from Brashear, et al. (2003). Lastly, the relationship between the principal and the agent was controlled through two items, which asked about the existence of a family or friendship link between them.

In addition, considering that the relationship between the supervisor and the supervised can be affected by other factors, we used, as control variables, the gender of the supervised, principal’s age, principal’s years of experience, the number of employees in his or her charge and the time that the principal had been supervising the same agent.

Having described the measurement scales, we now turn to the measurement model, which represents the relationship between constructs and indicators. The variables used in the study were modeled as composite variables. These variables can be described as design constructs consisting of more elemental components and may be either dimensions or facets (Henseler 2017). Henseler et al. (2015) propose modeling this type of construct as composites formed through linear combinations of their indicators or dimensions (Henseler et al. 2014), and therefore, leaving out an indicator (or dimension) can alter the meaning of the composite construct (Henseler et al. 2016). In some cases, as in this study, these composites can be formed by more elementary components such as dimensions or facts, and both the indicators and the possible dimensions represent different facets or ingredients that form a new entity (Henseler 2017).

Data Analysis

To test our model, we used partial least squares (PLS), a variance-based structural equation modeling approach (Roldán and Sánchez-Franco 2012). The reasons for selecting this technique are, firstly, due to the constructs included in our model, which correspond to a composite measurement model, as described above. The literature reports both theoretical contributions (Henseler et al. 2014; Rigdon 2012) and empirical simulation studies (Becker et al. 2013; Sarstedt et al. 2016) that recommend the use of PLS for composite measurement models because this technique allows estimations to be consistent (Rigdon 2016) and unbiased (Sarstedt et al. 2016). The second reason is that the PLS technique is recommended when, according to Felipe et al. (2017, p. 9), “component scores are used in a subsequent analysis for modeling a multidimensional construct applying the two-stage approach” (Chin 2010; Wright et al. 2012).

The Ethical behaviors construct and two of its dimensions (those relating to work and to the organization), the control costs construct and the Type of relationship construct were estimated in Mode B (regression weights), since the purpose is to perform an additive operation in order to generate scores by each type of resource, and neither correlated items nor internal consistency is assumed. However, for the first-order indicators of the colleagues dimension corresponding to the ethical behaviors, variable and for the variables trust, disposition to trust and shared values we used Mode A (correlation weights), which is advisable when the indicators are correlated (Becker et al. 2013).

The model was estimated with SmartPLS 3.2.7 (Ringle et al. 2015).

Common Method Bias

Common method bias (CMB) must be taken into account when the data for the independent and dependent variables come from the same source, as in our study (Podsakoff et al. 2003). According to (Schwarz et al. 2017), CMB can jeopardize findings due to systematic errors. To detect potential CMB, we performed a full collinearity test based on variance inflation factors (VIFs) (Kock 2015; Kock and Lynn 2012) designed to evaluate both vertical and lateral collinearity. If the VIF presents values above 3.3, it may be an indicator of pathological collinearity and CMB could be affecting the model (Kock 2015). Table 1 shows that our model is free of CMB, as the VIF for each construct is lower than the 3.3 threshold.

Table 1 Full collinearity VIFs

Results

Assessment of Overall Model Fit

To evaluate the overall model, Hu and Bentler (1998) proposed using the standardized root mean square residual (SRMR) as an approximate model fit criteria to analyze substantial discrepancies between the model-implied correlation matrix and the empirical correlation matrix. Later, Henseler et al. (2016) and Williams et al. (2009) recommended its use in PLS-SEM. Our hypothesized model presents a value of 0.073, below the threshold of 0.08 established by Hu and Bentler (1998), and the maximum of 0.10 suggested by Williams et al. (2009).

Measurement Model

When evaluating the measurement model, we must distinguish between the composite constructs estimated in Mode A and in Mode B. Thus, for one of the dimensions of the ethical behavior construct, the colleagues dimension, and for the constructs trust, disposition to trust and shared values, the estimation was made in Mode A, as the indicators of the composites were expected to correlate (Henseler 2017). According to Henseler et al. (2016), the traditional methods of internal consistency, reliability and validity can be applied with this type of composite. Table 2 shows that all the indicators have loadings above 0.7, indicating that the individual reliability of each item is satisfactory. Similarly, both dimensions show composite reliability (CR) and Cronbach’s alpha above 0.7, confirming the reliability of the construct. Convergent validity is also confirmed as the average variance extracted (AVE) is above the 0.5 threshold in all cases. Finally, all the constructs present discriminant validity, shown in Tables 2, 3 and 4, as they differ from the rest of the constructs under the heterotrait–monotrait (HTMT) ratio criteria (Henseler et al. 2015). However, according to the Fornell–Larcker criterion and also to the cross-loading criterion, there are some discriminant validity issues with the “trust” and “shared values” constructs. Nevertheless, Henseler et al. (2015) demonstrated that these two criteria have deficiencies and highlighted the use of the HTMT criterion, in which, as was mentioned above, the results confirm discriminant validity in these two constructs.

Table 2 Measurement model results
Table 3 Measurement model: discriminant validity—cross-loading criterion
Table 4 Measurement model: discriminant validity—Fornell–Larcker criterion

In turn, the two dimensions of the ethical behavior construct (related to the job and the organization), together with the three dimensions of this construct in the second stage, the control costs and the Type of relationship constructs, were estimated in Mode B. These composites were evaluated at two levels: At the construct level, discriminant validity was analyzed, and at the indicator level, multicollinearity and weights were evaluated. In the first case, Urbach and Ahlemann (2010) propose measuring the discriminant validity using inter-construct correlations. Tables 4 and 5 show that the correlations between the composites and the rest of the constructs are below 0.7; additionally, if we take into account the HTMT90 criterion (Gold et al. 2001), we can conclude that the constructs differ sufficiently from one another, thus ensuring discriminant validity. At the indicator level, Petter et al. (2007) suggest that a variance inflation factor (VIF) above 3.3 indicates high collinearity. These problems are not present in our model as the VIF values range between 1.179 and 2.826. Finally, Table 2 displays both the magnitude and the importance of the weights. These values provide information on how each indicator contributes to its respective composite (Chin 1998), thus allowing indicators to be classified according to their contribution. Similarly, a significance of at least 5% suggests that the measure is relevant for constructing the composite (Roldán and Sánchez-Franco 2012).

Table 5 Measurement model: discriminant validity—heterotrait–monotrait (HTMT) ratio

Structural Model

Table 6 displays the variance explained (R2) in the endogenous variables and the direct effects included in our model. A bootstrap analysis (5000 samples) yielded t-values and confidence intervals that determined the statistical significance of the relationships. Table 6 and Fig. 3 show that the two hypotheses (H1 and H2) were supported, as the coefficients are significant and present the expected sign. In addition, following Chin (2010), we examined the coefficient of determination (R2) to evaluate the predictive power (in-sample prediction) in each endogenous construct. The results show that 80.9% was explained for the variable trust, of which ethical behaviors explained 48.84% and the control variables 32.06%. According to Chin (1998) and Hair et al. (2014), this is considered a substantial value. Regarding the control costs, the variance explained was 18.6%, which, although low, is in excess of the 10% established by Falk and Miller (1992). Of this 18.6%, 8.34% is due to the trust construct and the remaining 9.96% to the control variables. We also evaluated the cross-validated redundancy index (Q2) for the two dependent variables. In both cases, the Q2 is greater than zero, confirming that our model shows predictive relevance in both trust and control costs.

Table 6 Effects on endogenous variables
Fig. 3
figure3

Structural model results. ***p < 0.001, **p < 0.01, *p < 0.05, ns nonsignificant (based on t 4999), one-tailed test

Then we have shown that sustained ethical behaviors cause others to perceive a person as trustworthy (Hypothesis 1). In addition, we have demonstrated the benefits of such behavior to the organization by reducing control costs (Hypothesis 2) through reduced outcome-based contracts and lower direct costs of unethical behaviors.

Mediation Analysis

In a complementary way, we performed a mediation analysis based on the approach of Zhao et al. (2010), in order to analyze the direct effect on control costs and indirect effect through trust. To do so, a bootstrapping of 5000 subsamples was performed, which determined the level of significance of an indirect effect of that sort. As given in Table 7, the direct effect was no significant and the indirect effect was significant (with a magnitude of 40%), which implies that a total mediation took place.

Table 7 Summary of the mediating effect test

Conclusions

Our study has showed how auditors’ ethical actions make others in their immediate environment (their colleagues, bosses, clients and society in general) perceive them as trustworthy, that is, as people in whom they can trust because they consistently behave in an ethical way. In addition, we have demonstrated the benefits of such behavior to the organization by reducing control costs through reduced outcome-based contracts and lower direct costs of unethical behaviors. It is important to explain at this point that the building of trust and, therefore, the reduction in the surveillance and control costs do not take place due to the fact that the observed individuals behave ethically because they are being observed or because the coercive systems of the company impel them to behave that way. Employees behave ethically in a constant manner because they believe that it is what they must do, regardless of the control or reward systems of the company; that is, employees will keep on behaving ethically when the control mechanisms disappear. To verify this, some of the observed behaviors are not related to the behaviors controlled by the principal, such as the behaviors of helping coworkers (BC) or some of the behaviors related to giving their best in the work place. Moreover, trust, as it is adapted according to the scale proposed by Mayer and Davis (1999), measures the predisposition of the principal to delegate to the agent tasks that are relevant to the organization, although he or she cannot supervise their work. Some items of the scale are the following: “I would be happy to give this employee a task or a problem that is crucial to the organization, even if I were not able to control his/her actions”; “I think this employee needs to be monitored”; “I do not have to check the information on his/her work because I trust what he/she tells me.”

This analysis has interesting implications for both business management and academic research. For the former, presenting firms with the outcomes of ethical behaviors may motivate them to design a business strategy that seeks not only to reduce unethical behaviors in the organization but also to develop sustained ethical behaviors. Managers will have grounds to incorporate ethical behaviors into human resource management and to design evaluation tools, systems of rewards and promotion based on these behaviors, as well as training and development programs that help to implement and consolidate them in the organization. By doing this, the company fosters trust building mechanisms based on the sustained ethical behaviors of the employees. The workers will not behave ethically because they are observed or controlled, but because those are the behaviors promoted in the organization. By having honest workers (who behave ethically), the company will be able to trust them and, therefore, reduce their surveillance and control costs.

Furthermore, the promotion of sustained ethical behaviors in the organization (helping coworkers, to volunteer for tasks even though they are not part of his/her job, etc.) must improve the quality of the audit. DeAngelo (1981, p. 186) defines audit quality as “the market-assessed joint probability that a given auditor will both (a) discover a breach in the client’s accounting system and (b) report the breach.” The probability that the auditor finds misstatements depends on the quality of the auditor’s understanding (competence), whereas reporting misstatements depends on auditor independence (Watts and Zimmerman 1986). In addition, the probability of reporting is also a function of integrity (Johnson and Lys 1990) and honesty (Watts and Zimmerman 1986). Ethics codes and references in technical audit quality standards are available to auditors, with some of the most notable being those of the AICPA, the IFAC and the FEE. However, since membership of professional bodies is voluntary, compliance with these standards can only be required of professionals who belong to them. Therefore, the only common benchmark for auditors is the International Standards on Auditing. These standards cover the development of ethical standards similar to those promoted by the above-mentioned international bodies. The most important points to highlight are: independence, integrity and objectivity, incompatibilities, professional secrecy, technical training and professional capability, professional diligence, responsibility, fees and commissions, and advertising. All these elements should guide auditors in their behavior and in the decisions they take when planning and carrying out an audit. Promoting the ethical behaviors of auditors is a specific way of improving both the real and perceived qualities of the audit. The real quality of the audit is improved because the ethical behavior of the auditor is favoured, which is necessary, as pointed out previously, to report the material misstatements and guarantee his/her independence, integrity, objectivity, professional secrecy, professional diligence and responsibility. Placing trust in the auditor and, therefore, dedicating less effort and resources to control and supervise him/her reinforce his/her independence and reduce the audit costs. This results in a lower cost for the audited company and an improvement in the general system.

However, the building of trust generated by the auditor that behaves ethically in a constant manner is also reflected in the good reputation of his/her work and, thus, in the reputation of the firm in which he/she works. This point is crucial to the audit system, since, as was previously mentioned, the opinion of the auditor is a guarantee for third parties that they are using correct financial information (Lindberg, 2001), because a “high-quality audit sends a signal to the market that the financial statements are more credible than those audited by lower quality auditors” (Nazatul Faiza Syed Mustapha Nazri et al. 2012, p. 199).

This study also makes several contributions to the academic literature. First, we propose a typology based on the ethical evaluation and frequency of behaviors, which is designed to facilitate their measurement and comparison, thus advancing inquiry into the factors that affect ethical decision making. For example, this typology can be applied to study the factors that affect behavior with greater accuracy, by distinguishing factors that influence sustained ethical behaviors from others that are more pertinent to one–off isolated situations; or factors that largely determine highly unethical behaviors (such as fraud) from others with a greater influence on less serious unethical behaviors (such as taking company material for personal uses). If firms are familiar with this disaggregated information, they will be in a better position to take the appropriate measures to deal with the type of unethical behavior that directly affects them and promote ethical behaviors they consider to be beneficial.

Second, we propose an antecedent of trust that has not previously been considered in the literature: perceived sustained ethical behavior. This new variable can advance understanding on how trust is built in human relationships, and aligns with the consideration that a moral component is present in all relationships in which one party decides to trust the other, namely the responsibility of the person in whom trust is placed to behave as others expect them to (García-Marzá 2005). Although the theory of trust has previously been incorporated into AT (Becerra and Gupta 1999), including perceived sustained ethical behaviors as antecedents of trust can cohesively combine the two theoretical frameworks, strengthening an AT model in which principal–agent relationships based not only on the assumption of self-interest and opportunistic behavior. This therefore enhances both the explanatory and predictive powers of AT.

Our study has several limitations. The initial non-probabilistic convenience sampling process implies that the estimations cannot easily be extrapolated to all populations of interest. In addition, questionnaires asking respondents about their own behavior tend to be affected by social desirability bias (Holden 1994; Rudmin 1999). Although we attempted to avoid this bias by stressing the importance of sincerity in responses and the confidentiality of the questionnaire (Podsakoff et al. 2003; Randall and Fernandes 1991), we cannot guarantee the absence of this bias in the results. Future research could specifically help to control social desirability bias by including Deshpande et al.’s (2006) four-item scale.

Also regarding the sample, although the audit firms were average in size, 8% of the interviewees (12 out of 149 head auditors) belonged to Big Four companies. The behaviors of the auditors who work in these companies could require a more thorough study, since there is evidence in the literature of differentiated behaviors of auditors who belong to Big Four companies with respect to those who work in small companies (DeAngelo 1981; Baïada-Hirèche and Garmilis 2016).

The context of the sample is also important, since pervious works have highlighted the influence of organizational factors, such as those relating to the accounting firm’s ethical environment (Martinov-Bennie and Pflugrath 2009). In fact, organizational factors are considered one of the key factors that affect the ethical behavior in general (Kish-Gephart et al. 2010; Tenbrunsel and Smith-Crowe 2008; Treviño et al. 2006) and the behavior of auditors in particular. Thus, for instance, Baïada-Hirèche and Garmilis (2016) found that institutional factors, in particular the disciplinary system, may also account for the differences between French and American accounting professionals’ ethical perceptions. Other works (Nolder and Riley 2014; Sweeney et al. 2010; Smith and Hume 2005; Cohen et al. 1995) showed the likely significance of environmental factors on differences in auditors’ ethical judgment.

Regarding ethical behaviors, the proposed classification is only the beginning of a necessary deepening in the categorization of behaviors. This classification must help to distinguish, more accurately, the effects of the factors that affect behaviors. Likewise, the analysis of the proposed dimensions of the ethical behaviors must be completed. These dimensions may not be adequate to other circumstances and other environments. Also, the surveillance and control costs may vary depending on the task, the structure of the company, the type of contract, etc. Our proposal may be valid for audit firms, but not for other circumstances; therefore, the results must be generalized with caution.

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Acknowledgements

This paper is part of research project SEJ-180 “Accounting Research Group,” developed with the financial support of the Regional Government of Andalusia (Spain).

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Morales-Sánchez, R., Orta-Pérez, M. & Rodríguez-Serrano, M.Á. The Benefits of Auditors’ Sustained Ethical Behavior: Increased Trust and Reduced Costs. J Bus Ethics 166, 441–459 (2020). https://doi.org/10.1007/s10551-019-04298-2

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Keywords

  • Agency theory
  • Auditors' behavior
  • Benefits of ethical behavior
  • Control costs
  • Trust