Do Auditing and Reporting Standards Affect Firms’ Ethical Behaviours? The Moderating Role of National Culture

Yasemin Zengin Karaibrahimoglu; Burcu Guneri Cangarli

doi:10.1007/s10551-015-2571-y

Do Auditing and Reporting Standards Affect Firms’ Ethical Behaviours? The Moderating Role of National Culture

Zengin Karaibrahimoglu, Yasemin;Guneri Cangarli, Burcu; 2015-02-22 00:00:00 J Bus Ethics (2016) 139:55–75 DOI 10.1007/s10551-015-2571-y Do Auditing and Reporting Standards Affect Firms’ Ethical Behaviours? The Moderating Role of National Culture Yasemin Zengin Karaibrahimoglu Burcu Guneri Cangarli Received: 16 April 2014 / Accepted: 5 February 2015 / Published online: 22 February 2015 The Author(s) 2015. This article is published with open access at Springerlink.com Abstract This paper aims to examine the impact of na- organized in many different jurisdictions (e.g., Global tional cultural values on the relation between auditing and Ethics Forum, European Business Ethics Forum) and reporting standards and ethical behaviours of ﬁrms. Based on ethical codes of conducts have been developed by different a regression analysis using data regarding 54 countries be- professions and corporations (e.g., IFAC for professional tween the years 2007 and 2012, we found that the impact of accountants, APA for psychologists; and Code of Conduct the perceived strength of auditing and reporting standards on or Ethics for companies such as Amazon, Apple, and Coca the perceived ethical behaviours of ﬁrms is accentuated Cola). New regulations have also been set (e.g., the use of when a society is characterized by low power distance and in- corporate governance principles for corporations, the in- group collectivism, and high institutional collectivism, fu- troduction of international auditing and reporting stan- ture orientation and uncertainty avoidance. Empirically, the dards). The ultimate aim of these efforts is to enhance EBF study addresses a gap in the literature by highlighting the through the clariﬁcation of ethical values and increasing inﬂuence of national culture on the effectiveness of legal public interest in ethics, which is considered to be an im- settings and regulations on ethical behaviours. portant driver of the economy (Garrison et al. 2008). We follow Sims (1992, p. 506) and deﬁne ethical be- Keywords Ethical behaviour Strength of auditing and haviour as behaviour ‘‘which is morally accepted as ‘good’ reporting standards Culture GLOBE and ‘right’ as opposed to ‘bad’ or ‘wrong’ in a particular setting’’. Previous research shows that in addition to company-speciﬁc (micro) factors, such as personal and Introduction organizational values, EBF are also strongly affected by country-speciﬁc (macro) factors, including social, cultural, The corporate scandals emerging during the last two dec- legal, political and institutional environments (Bartels 1967; Ekici and Onsel 2013; Vitell et al. 1993). ades have increased the amount of attention given to the ethical behaviours of ﬁrms (EBF). All around the world, As a legal and institutional determinant, corporate civic organizations, as well as public and private institu- governance is seen as a vital mechanism for the prevention tions are facing the challenge of how to improve EBF. For of unethical corporate behaviours (Carcello 2009; Felo this purpose, in recent years, forums and panels have been 2011). Corporate governance is a broad concept that sur- rounds all internal (company-speciﬁc) and external (coun- try-speciﬁc) mechanisms with a role in monitoring Y. Zengin Karaibrahimoglu (&) management to protect all stakeholders’ rights (Garcıa- Faculty of Economics and Business, Accounting, University of Osma 2006). From this point of view, all capital market Groningen, Nettelbosje 2, 9747 AE Groningen, The Netherlands e-mail: [email protected] regulations—including political, legal and institutional settings—that aim to enhance the quality of auditing and B. Guneri Cangarli ﬁnancial reporting are closely associated with strong cor- Faculty of Business, Izmir University of Economics, Sakarya porate governance (Karaibrahimoglu 2010). Stronger au- Cad. No: 156 Balcova, Izmir 35330, Turkey diting and reporting standards are assumed to provide more e-mail: [email protected] 123 56 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli reliable information (Boolaky and O’Leary 2012), and contribute to the literature by examining how this rela- consequently improve EBF. However, ethics can be af- tionship changes across cultures. Identifying the impact of fected by many contextual factors, and improving the culture in this relationship will lead to a better under- quality of legal and institutional settings alone may not be standing of the required adjustment on enforcement sufﬁcient to enhance EBF. mechanisms, allowing for customization in accordance In fact, ethical values, attitudes and behaviours evolve with cultural environment. Thus, policy makers may en- under the inﬂuence of culture (Hunt and Vitell 1992; courage managers, who are responsible to present faithful Scholtens and Dam 2007). Culture, deﬁned as ‘‘the col- and reliable information to the public, to behave more lective programming of the mind’’ (Hofstede 2001, p. 9), ethical. affects various steps—from awareness to behaviour—in ethical conduct (e.g., Alas 2006; Dubinsky et al. 1991). Accordingly, in the business ethics literature, cultural dif- Theoretical Background and Hypothesis Development ferences are perceived as the main indicators explaining variation in practices in economic or entrepreneurial ac- SARSs and EBFs tivities (Alderson and Kakabadse 1994; Becker and Fritzsche 1987; Bodley 2005; Hawkins 1993; Kaptein Corporate governance is a management mechanism that aims 2004; Karnes et al. 1989; Langlois and Schlegelmilch at the efﬁcient use of organizations’ assets in the interests of all 1990; Mensah 2013; Schultz et al. 1993). Although there stakeholders, and mitigating of any opportunistic behaviour of are a small number of universally accepted ethical values, the management (Gillan 2006). La Porta et al. (2000,p.4) such as honesty or loyalty, their practical interpretations in deﬁne it as ‘‘a set of mechanisms through which outside in- business can vary across cultures (Smith and Hume 2005; vestors protect themselves against expropriation by the in- Vitell et al. 1993). Therefore, it can be argued that the siders’’. Good corporate governance improves ethical practical implementation of international auditing and re- behaviours (Ienciu 2012). According to Hoffman and Rowe porting standards, and hence their impact on EBF can be (2007), poor (weak) oversight of management by the board of affected by the cultural context. Although the recent lit- directors is a major cause of corporate scandals. This clearly erature on standards stresses the importance of cultural indicates that poor corporate governance leads management to factors (Doupnik and Richter 2004; Tsakumis 2007), it has make inappropriate or unethical decisions. Thus, strong cor- not yet been identiﬁed how culture inﬂuences the rela- porate governance that leads management to assure equality, tionship between the strength of auditing and reporting transparency, accountability and responsibility would be standards (SARS) and the EBF. Based on this gap, we aim likely to improve EBF. to examine the moderating impact of the cultural values on Reliable ﬁnancial reporting, an essential mechanism for this relationship. In this paper, data on the SARS and the improving corporate governance, reduces information EBF across countries are obtained from the World Ex- asymmetry and mitigates any possible agency problems ecutive Opinion Survey. Hence, both variables reﬂect the among stakeholders. Therefore, it is considered as one of perceptions of executives regarding the auditing and re- the major responsibilities of organizations, and it is an porting standards and ethical practices in their countries. important part of ethical business behaviour (Webley Therefore, throughout the paper, we use SARS to refer to 1999). Both in theory and practice, it is presumed that the perceived strength of auditing and reporting standards, strengthening auditing and reporting standards enhance the and EBF to perceived ethical behaviours of ﬁrms in a EBF (e.g., Ekici and Onsel 2013). country. Auditing and reporting standards deﬁne the principles to be Although there is a wide literature on auditing and re- applied in ﬁnancial reporting and assures the fair and reliable porting standards, the vast majority of studies focus on the presentation of information in ﬁnancial reports. A worldwide consequences of the application of standards on the quality movement to enhance the quality of auditing and reporting of ﬁnancial reporting and the stock market (e.g., Daske standards has existed since 2005. In line with the new et al. 2008; Liu et al. 2011). In contrast, only a limited regulations, international standards have been introduced for number of studies focus on the association of the new both auditing—International Standards on Auditing (ISAs)— standards with other issues such as EBF. To the best of our and also reporting—International Financial Reporting Stan- knowledge, Ekici and Onsel (2013) is the only recent study dards (IFRSs). New standards require organizations to make focusing on the ways in which EBF are inﬂuenced by reliable and faithful presentations, which are understandable, political and legal institutions, including the SARS. How- timely, veriﬁable, comparable and relevant to all stakeholders ever, this study did not identify the moderating impact of (IFRS Framework, pp. A33–A36), and also to assure the ac- national culture in the legal regulations and the ethical curacy of the information presented in order to enhance the behaviour relationship. Therefore, the current study aims to degree of conﬁdence (ISA 200, p. 73). 123 The Moderating Role of National Culture 57 The new standards enhance the quality of ﬁnancial re- language-culture and translation effect in the interpreta- porting. However, there are some aspects of the imple- tions of international accounting standards and suggest that mentation of the standards, which have been widely non-native English speakers may be less conﬁdent in their criticized. First of all, the new standards for ﬁnancial re- interpretation of uncertainty terms expressed in English porting are principle-based, which provides management than in their native language. Furthermore, it is argued by with greater ﬂexibility, and which leads to the need for Doupnik and Richter (2004) that the culture affects the judgment and estimates in the preparation of ﬁnancial re- interpretations of verbal probability terms used in interna- ports. For example, for the liabilities of uncertain timing or tional accounting standards in a systematic and predictable amount, which are called as provisions, standards require a manner. In another study, Doupnik and Riccio (2006), ar- measurement at the best estimate of the expenditure to gued that national cultural values may affect the interpre- settle the present obligation at the reporting date, taking tation of probability expressions used in IFRSs, and into account the risks and uncertainties related with op- consequently that may lead differences in the practices. erations (IAS-37). It is clear that the term ‘‘best estimate’’ Although standards have grey areas, they are based on a is ambiguous and subject to the judgment of the manage- conceptual framework that aims to direct management to ment. Another example is related with the subsequent be ﬂexible in making judgments, estimates, and choices in measurement of the property, plant and equipment. IAS-16 order to reﬂect the economic reality of each corporation. allows management to make a choice between the cost Also, it is argued that this ﬂexibility allows ﬁrms to use model and the revaluation model. This standard also allows tailor-made reporting standards, suited to the needs of en- management to use different depreciation models (e.g., tities, which facilitates the quality of the ﬁnancial report- straight line, double-declining), and to make estimates ing. Thus, it is expected that management would use the about the residual value and useful life of property, plant ﬂexibility allowed by the standards to make decisions that and equipment. Both of the examples given in the stan- consider the interests of all relevant stakeholders—i.e., dards make a signiﬁcant difference in the total assets, and ethical behaviours, rather than only the interests of ma- consequently, the size of a ﬁrm. jority shareholders, i.e., unethical behaviours. Conse- The second issue is the interpretation of the standards quently, organizations are pressured to behave more ethical due to its legal origin. The standards are from a common by this ﬂexibility, and the qualitative characteristics (reli- law legal origin, which may cause difﬁculties for entities able, faithful, understandable, timely, veriﬁable, compara- operating in different business cultures, particularly for the ble and relevant) demanded for ﬁnancial reporting. Also, code law countries, in which all rules are clearly deﬁned the new standards both for auditing and reporting assign all and documented under the law. responsibility for the presentation of misleading informa- tion to the management, thus encouraging it to become The ﬁnal issue is language boundaries. Language creates a challenge, even where all standards are fully translated more ethical in its organizational decisions. Considering into the local languages, because the meanings of terms the above beneﬁts, it is expected that a stronger auditing may vary according to the context. Some languages lack and reporting standards set will improve EBF. the vocabulary resources to express the exact meaning of certain terms, making accurate translation difﬁcult, and therefore causing potential misunderstandings. Moreover, Moderating Role of Culture in SARS-EBF Relationship there is subjectivity involved in the use of certain items in the standard, the exact meaning of which may be open to One of the main issues is whether or not the adoption of interpretation. An example is the different terms used to international auditing and reporting standards results in deﬁne the probabilities of some items in the estimates and uniformly strong governance (Boolaky and O’Leary 2011). judgments. These include terms such as most probable, Variation in the application of accounting standards can be probably, and remote. In IAS-37, it is declared that ‘‘dis- expected as consequence of differences in local business closure is not required if payment is remote’’. Another environment and in the institutional structure of a country example from IAS-18 is the statement that ‘‘it is probable (Chen et al. 2010). Furthermore, even high quality re- that any future economic beneﬁt associated with the item of porting standards may not necessarily improve the quality revenue will ﬂow to the entity’’. In these examples, the of accounting information presented (Ball et al. 2003), as terms ‘‘probable’’ and ‘‘remote’’ may refer to a likelihood the quality of ﬁnancial reporting also depends on the in- of anywhere between 5 and 30 %, depending on country centives of both the managers and auditors (Ball et al. and culture, and this discrepancy affects the recognition of 2003), their interpretation, enforcement mechanisms and revenue during a period, and, in turn, the total turnover, and litigation (Barth et al. 2008), local economic systems, and consequently, the ﬁnancial performance of ﬁrms. In their culture (Chen et al. 2010; Qu et al. 2012; Rezaee et al. study, Doupnik and Richter (2003) ﬁnd that there exists a 2010). 123 58 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli According to previous empirical studies, while some 2012). Thus, in low PDI cultures, even in grey areas in the researchers argue that the quality of ﬁnancial reporting has legal system, efforts are made to achieve the best outcomes been enhanced by the introduction of IFRSs (for an ex- for all parties. On the other hand, in high PDI cultures, tensive review: Barth et al. 2008 in 21 European countries; inequality in distribution of resources can be characterized Daske et al. 2008 in 26 countries all over the world; Liu by a relatively low regard for ethics (Scholtens and Dam et al. 2011 in China), a number of others ﬁnd decreasing 2007). Accordingly, in such societies, grey areas in the accounting quality (for an extensive review: Paananen legal system are more likely to be interpreted in favour of 2008, a study that examines Sweden; Paananen and Lin powerful parties such as majority shareholders (Blodgett 2009, a study conducted in Germany; Jeanjean and et al. 2001). Therefore, we expect that the positive rela- Stolowy 2008, a study comparing companies in Australia, tionship between SARS and EBF will be negatively in- France, and the UK). ﬂuenced by PDI. Speciﬁcally, in high PDI cultures, the In many jurisdictions, the main opposition to interna- impact of SARS on EBF is weaker than in low PDI tional auditing and reporting standards concerned the in- cultures. ﬂuence of culture on their application by practitioners and Hypothesis 1 PDI weakens the relationship between auditors (Perera 1994). Variation in cultural characteristics SARS and EBF in a country. across countries results in different degrees of harmoniza- tion between local standards and the newly introduced ones FUTR_O concerns the way people perceive and treat (Ding et al. 2005). Therefore, the impact of SARS on EBF time. High FUTR_O leads people to focus on the long-term may differ across cultures. in future related activities, such as planning and investing. In order to examine the moderating role of culture on the In future oriented societies, people tend to be more ﬂexible relationship of SARS with EBF, we utilized the framework and adaptive, and saving for the future is emphasized provided by global leadership and organizational behaviour (House et al. 2004). On the other hand, in societies where effectiveness study (GLOBE), which assesses the cultural FUTR_O is low, people focus more on immediate results, characteristics of 62 societies based on the data from 951 and organizations tend to be bureaucratic and inﬂexible organizations and 17,000 managers (House et al. 2004). It (House et al. 2004; Steers et al. 2013). Alas (2006) de- is widely known that, among the many cultural frameworks scribed societies with high FUTR_O as those in which the designed to analyse national cultures (e.g., Hall 1959; requirements for well-established standards of ethical be- Hofstede 2001; Schwartz 1992; Trompenaars 1994), haviour are weaker. Moreover, the FUTR_O dimension has GLOBE is considered as the most ambitious effort (Steers many commonalities with Hofstede’s long-term orientation et al. 2013). Compared to Hofstede’s study (2001), (Steers et al. 2013), which is cited as being positively as- GLOBE is considered to be both more recent and com- sociated with ethical behaviour (Tsui 1996). Therefore, it prehensive (Shi and Wang 2011). Moreover, its method- can be claimed that in future oriented societies, individuals ology is found to have greater validity and reliability try to choose the option which is more sustainable, rather (Parboteeah et al. 2005). than the one producing short-term results which beneﬁts National cultures are assessed on nine dimensions in only few parties. Therefore, people in future oriented so- the GLOBE study, namely; power distance (PDI), future cieties are willing to interpret the legal base, including orientation (FUTR_O), human orientation, performance auditing and reporting standards, in favour of sustainable orientation, in-group collectivism (IGC), institutional outcomes, and hence the impact of SARS will be stronger collectivism (INST_C), assertiveness, uncertainty avoid- on EBF in such societies. ance (UAI) and gender egalitarianism. The current study Hypothesis 2 FUTR_O strengthens the relationship be- aims to explore the moderating role of all the dimen- tween SARS and EBF in a country. sions, with the exception of gender egalitarianism, as neither a literature review nor theoretical reasoning Human orientation is deﬁned as the degree to which suggested any relevance for this dimension to SARS– people reward fairness, altruism and generosity (House EBF relationship. et al. 2004). In societies, which are characterized by high PDI refers to the degree to which less powerful members human orientation, people give importance to the interests of a society accept the unequal distribution of power. In of others. In contrasts, in low human oriented societies, high PDI cultures, powerful individuals are privileged, and individuals focus more on their own self-interests, and their violation of rules may be ignored by other members in value pleasure, comfort and self-enjoyment. A small the society (House et al. 2004). From the ethical behaviour number of studies have examined the relationship between perspective, it is known that in low PDI cultures, people are human orientation and ethical behaviour. Parboteeah et al. more sensitive to ethical issues due to a strong belief in the (2005) found that human orientation is negatively associ- protection of the rights of all people (Chan and Cheung ated with a willingness to justify ethically suspect 123 The Moderating Role of National Culture 59 behaviours, probably due to the nurturing and cooperative express pride, loyalty and cohesiveness in their immediate nature of this type of society. Moreover, Alas (2006) in- groups, such as family, circle of close friends or work team cludes human orientation as one of the characteristics of (House et al. 2004). The in-group protects the interests of societies which have low needs for well-established stan- the individual, but expects unquestioning loyalty in return. dards for ethics. Those societies emphasize concern for the Therefore, when IGC is high, people perceive themselves well-being of others, thus leading to the interpretation of as dependent on the groups they belong to, instead of the rules or standards in line with ethical behaviour. making independent judgments. INST_C, on the other Therefore, we argue that the positive relationship between hand, represents a very different type of collectivism. SARS and EBF is stronger in human oriented societies. Gelfand et al. (2004, p. 476) describe societies with high level of INST_C as ‘‘…future focused and performance Hypothesis 3 Human orientation strengthens the rela- oriented, yet they seek to accomplish such orientations tionship between SARS and EBF in a country. through practices that emphasize being concerned about Performance orientation is the degree to which high others, and not being assertive or power domineering.’’ As performance is encouraged and rewarded (House et al. the comparisons of deﬁnitions yield that these two repre- 2004). High performance orientation characterizes an en- sent totally different dimensions, not surprisingly, many vironment in which individuals believe that they can con- countries in GLOBE sample have signiﬁcantly different trol their own destiny, and value assertiveness and success. scores on IGC and INST_C (Chhokar et al. 2012). There- By deﬁnition, performance orientation overlaps with the fore, we treat these dimensions as completely separate in masculinity dimension deﬁned in Hofstede’s study (2001), the construction of the argument about their moderating in terms of the value given to success and materialism. As impact on SARS–EBF relationship. the literature on the relationship between performance By deﬁnition, IGC has more commonalities with Hof- orientation and ethical behaviour is limited, we utilized stede’s individualism/collectivism dimension compared to studies examining the association between masculinity and INST_C. Therefore, we utilized the rich literature on the ethical behaviour. Blodgett et al. (2001) argue that people relationship between individualism/collectivism and ethical in masculine societies feel great pressure to succeed in their behaviour while exploring IGC’s potential moderation im- careers, and are less concerned about others. In line with pact. Individualism/collectivism has been used in many this argument, Vitell et al. (1993) show that many business studies to explain the impact of national culture on ethical practices considered valid in masculine cultures can be behaviours (e.g., Chan and Cheung 2012; Smith and Hume perceived as unethical in feminine cultures. As a result, the 2005; Vitell et al. 1993; Zhang et al. 2013). For instance, quality of corporate governance practices signiﬁcantly de- ethical sensitivity of US managers is found to be higher than creases in masculine cultures (Chan and Cheung 2012). On that of their Turkish counterparts’ due to the effect of in- the other hand, cultures that are less oriented to perfor- dividualism (Simga-Mugan et al. 2005). Similar results are mance are more consensus-oriented, and general well-be- also found in a study which compares the ethical sensitivity ing is given more importance (House et al. 2004). of government personnel in US and Hong Kong. Accord- Accordingly, we argue that in high performance oriented ingly, compared to government personnel in US, those in societies, managers are more likely to interpret the grey Hong Kong have a greater tendency to perceive ethical areas in auditing and reporting standards in such a way as behaviours as existing purely within the limits of written to present a higher level of performance, based on the rules (Dolecheck and Dolecheck 1987). A further indication ﬂexibility allowed. Therefore, the likelihood of those of this tendency is the lower crime levels found in Scan- standards leading to more ethical decision-making will dinavian countries, due to lower PDI and higher indi- decline in high performance oriented societies. vidualism, factors which outweigh the strength of the legal system (Coffee 2001). This result is interpreted as revealing Hypothesis 4 Performance orientation weakens the re- that in individualistic cultures, people are expected to show lationship between SARS and EBF in a country. respect for the rights of the individuals, rather than pro- Individuals’ relations to social organizations and per- tecting the interests of their in-group at the expense of out- ceptions of self-identity have been used in many studies to groups (Franke and Nadler 2008). Therefore, at the stages of differentiate between cultures (e.g., Chan and Cheung ethical decisions, they are less likely to be inﬂuenced by 2012; Smith and Hume 2005; Steers et al. 2013; Vitell et al. groups or group leaders (Vitell et al. 1993). Based on these 1993; Zhang et al. 2013). While Hofstede (2001) conceives arguments, we claim that those in individualistic societies of the relationship as having a single dimension, i.e., col- are more prone to interpret the legal system in an unbiased lectivism–individualism, the GLOBE project recognizes way when making ethical decisions. Hence, there is an in- two independent dimensions: IGC and INST_C (Chhokar creased likelihood of making decisions which are more et al. 2012). IGC refers to the degree to which individuals ethical because of the importance of the individual’s own 123 60 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli judgments relative to the need to protect the interests of risk. Moreover, they have a signiﬁcantly greater need to their in-groups when interpreting the auditing and reporting be guided by rules, principals and traditions, due to standards. Correspondingly, we expect that IGC has greater levels of uncertainty about the future and the weakening impact in SARS–EBF relationship. appropriate conduct (House et al. 2004). They expect In contrast to IGC, INST_C has been characterized as conduct to be guided by well-deﬁned regulations, and having a future focus, and being opposed to assertiveness therefore they have a lower degree of ethical sensitivity or power-domineering (Gelfand et al. 2004). From the than in low UAI societies (Weaver 2001). Accordingly, ﬁrms’ perspective, INST_C leads to decisions which are their ethical judgment abilities have not been well de- the most beneﬁcial for the long-term sustainability of the veloped (Vitell et al. 1993). Thus, where issues are not whole institution, including all the relevant parties. clearly identiﬁed by written rules, they may feel lost and Therefore, we can argue that managers are more willing anxious, and tend to make less appropriate decisions. In to use the auditing and reporting standards to make sus- line with this claim, Chan and Cheung (2012) identify a tainable decisions in institutionally collectivist societies as lower quality of corporate governance practices in high they are motivated to maximize the beneﬁt to their or- UAI cultures. Due to the dynamic nature of business ganizations. For this reason, we hypothesize that INST_C practices, there is a need for frequent reappraisal and and IGC have opposite impacts on SARS–EBF reconsideration of appropriate conduct, especially for the relationship. issues regulated by principles that allow for ﬂexibility. We argue that this need for ﬂexibility and adaptation Hypothesis 5a IGC weakens the relationship between means that, compared to low UAI societies, high UAI SARS and EBF in a country. societies perform less effectively in the grey areas of the Hypothesis 5b INST_C strengthens the relationship be- auditing and reporting standards. Accordingly, we hy- tween SARS and EBF in a country. pothesize that UAI weakens the positive relationship be- tween SARS and EBF. Assertiveness is the degree to which people are asser- tive, confrontational and aggressive in their relationships. Hypothesis 7 UAI weakens the relationship between In societies characterized by high levels of assertiveness, SARS and EBF in a country. the stronger members are admired, competition is valued, and people are direct and aggressive in their relationships (House et al. 2004). In some aspects, assertiveness has Methodology commonalities with performance orientation. However, performance orientation concerns results, while assertive- Data and Measures ness mainly concerns social relationships (Parboteeah et al. 2005). In assertive societies, people tend to think of others The data cover 62 societies between the years 2007 and as being opportunistic, and are concerned to protect their 2012. The initial sample was 372 society–year observa- own interest (House et al. 2004). They are, therefore, more tions, including all countries used in the GLOBE study likely to try to justify ethically suspect behaviours (Par- (House et al. 2004). From this initial sample, Germany and boteeah et al. 2005). Also, the tendency to be cooperative South Africa (a total of 24 society–year observations) were and to consider the well being of others is relatively weak excluded due to data segmentation, as the former was di- in those societies. Therefore, in highly assertive societies, vided into west and east, and the latter into a Caucasian and individuals are more prone to interpret the legal regula- Indigenous sample. Switzerland (a total of 12 society–year tions, such as auditing and reporting standards, in favour of observations), which has German and French Speaking themselves or the more powerful members of society, and samples, was excluded due to the dual classiﬁcation in show less interest in protecting the weaker members. Ac- cultural clusters. The Czech Republic and Iran (a total of cordingly, we claim that the positive relationship between 12 society–year observations) were excluded due to the SARS and EBF is negatively inﬂuenced by the level of missing cultural values. The ﬁnal sample comprises of 324 assertiveness. society–year observations for 54 countries. Data for EBF and SARS were gathered from the Hypothesis 6 Assertiveness weakens the relationship World Competitiveness Index (WCI) database, through between SARS and EBF in a country. the World Economic Forum’s Executive Opinion Survey. UAI expresses the degree to which the members of a The Executive Opinion Survey, a worldwide ranking society feel uncomfortable with uncertainty and ambiguity extending more than 30 years, was chosen for providing (Hofstede 2001). In high UAI societies, people are more both a qualitative and quantitative portrait of countries’ emotional and intolerant, and less accepting of personal- economic and business environment. The survey is 123 The Moderating Role of National Culture 61 carried out with the help of more than 160 partner in- reduces a possible common method bias. In order to stitutes (research institutes, universities, business organi- assure the robustness of the ﬁndings, in our sensitivity zations, etc.) worldwide by using face-to-face interviews analyses we also used an alternative secondary source with business executives, telephone interviews and data that proxy the SARS. mailings and an online survey. In order to capture a Previous research which examines the reasons of une- strong and representative sample, the partner institutes thical behaviour mostly ignores the role of competition are tasked to prepare a ‘‘sample frame,’’ or large list of (Shleifer 2004). However, considering the growth and in- potential respondents. Based on the list, each year, a come enhancing effect of competition, it may improve EBF random selection of ﬁrms, which receive the survey, is in the long run (Shleifer 2004), since the intention to behave applied in order to reduce the survey bias. According to ethically increases as societies get richer (Friedman 2006). 2012 sources, a total of 15,000 surveys were sent out to Thus, following Shleifer (2004) and Friedman (2006), in the 142 economies. After data processing, 14,059 (93 %) current study, competition, which referred to the level of were used to create a unique resource, covering all social market competition in the country, was used as a control and economic indicators, most of which would not variable. The data for market competition were gathered otherwise be publicly available, from multiple countries from the WCI database. It was computed based on the worldwide (WCI 2012). weighted average of 14 items, measured on a seven-point In the Executive Opinion Survey, our dependent vari- Likert scale (1 = lowest and 7 = highest). Sample items able, EBF was measured with one item question: ‘‘How include the extent of market dominance, effectiveness of would you compare the corporate ethics (ethical behaviour anti-monopoly policy and prevalence of trade barriers. in interactions with public ofﬁcials, politicians, and other Countries’ legal system inﬂuences the business environ- enterprises) of ﬁrms in your country with those of other ment where ﬁrms operate. In general, commercial laws are countries in the world?’’. Participants were asked to indi- driven from two broad traditions; common law and civil law cate their response to this question on a seven-point Likert (La Porta et al. 1998). According to La Porta et al. (1998), legal scale (1 = among the worst in the world; 7 = among the systems are determinants of corporate governance, and com- best in the world). Although the survey measured EBF with mon law countries give stronger legal rights and investor a single item, it has been found reliable in previous re- protection to market participants. Consequently, it is expected search (Ekici and Onsel 2013; Mehanna and Yazbeck that ﬁrms operating in common law countries are more tend to 2009). behave ethically. Therefore, following La Porta et al. (1998), Similarly, SARS was measured with a single question: the legal system of the countries was used as a control variable. ‘‘In your country, how would you assess ﬁnancial auditing Common law was a dummy variable equal to one if the origin and reporting standards regarding company ﬁnancial per- of country’s legal system was derived from common law, and formance?’’ Participants reﬂected their opinions on a sev- zero if from a civil law country. The data for the legal origin of en-point Likert scale (1 = among the worst in the world; countries were gathered from the data set used in La Porta et al. 7 = among the best in the world). (1998) and downloaded from Shleifer’s website. Our study may be subject to a common method bias Additionally, as an economic control variable that af- due to collecting the dependent and independent vari- fects the level of development, GDP per capita is consid- ables from the same survey and from the same respon- ered. GDP per capita is an indicator of standards of living dents. Podsakoff et al. (2012) suggest several ways to in a country and it shows the relative performance of overcome this problem. Therefore, to avoid a possible countries. Friedman (2006) and Shleifer (2004) argues that common method bias, in our analysis we decided to use there is a positive relationship between EBFs and GDP per the data for our independent variable collected at a dif- capita. Therefore, GDP effect must be controlled in a cross- ferent time period. Speciﬁcally, the perceived SARS was country study. The data for GDP per capita were collected measured based on the last year’s score. Using this from the World Bank database (2012). measure is fair when we consider a time lag between the The moderating variable, national culture was measured auditing and reporting standards perception and its re- based on the country scores regarding the eight cultural ﬂection to the perceived EBF. While the survey ques- dimensions (PDI, FUTR_O, human orientation, perfor- tions regarding SARS remain the same, considering the mance orientation, IGC, INST_C, assertiveness and UAI) random sampling process, the survey is sent out to dif- deﬁned in the GLOBE project (House et al. 2004). In this ferent participants. As such, this may help to deal with common source biases that possibly may result from The data was gathered from the online resources available on using dependent and independent variables coming from Professor Anne-WilHarzing’s web page from University of Mel- the same source. In that term, as informed by Podsakoff bourne, Australia available on http://www.harzing.com/resources. et al. (2012), using SARS score of the previous year htm. 123 62 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli well-known project, data were collected from 17,000 hand, as expected, the regression results in Model 2 show managers from 951 different organizations, who assessed that the interaction term of SARS and FUTR_O is positive the cultural characteristics of 62 societies on a seven-point and signiﬁcant, suggesting that higher FUTR_O strengthens Likert scale. the impact of SARS on EBF. Model 5 documents that in- In the GLOBE study, each country was measured along creased IGC weakens the impact of SARS on EBF. each of the dimensions. In order to provide more robust In Model 6, the interaction term of SARS and INST_C ﬁndings, we considered the possible impact of the multi- becomes positive and signiﬁcant, indicating that higher variate context of cultural dimensions in each country and INST_C strengthens the impact of SARS on EBF. Finally, used cultural clusters deﬁned in the GLOBE study as contrary to our expectations, Model 8 shows that the inter- control dummies. In the sensitivity analysis, the predicting action term of SARS and UAI is positive and signiﬁcant, and moderating roles of the cultural clusters were exam- supporting the idea that higher UAI strengthens the impact ined as an alternative to our main analysis. The list of the of SARS on EBF. The results provide no signiﬁcant mod- cultural clusters with associated societies and the cultural erating impact of human orientation, performance orienta- characteristics are presented in ‘‘Appendix 1’’ section. tion or assertiveness on SARS and EBF relation. The signiﬁcant moderating effects of each cultural di- Analysis mension on SARS–EBF relationship are also presented separately in Fig. 1. This study uses a regression analysis methodology to ex- amine the moderating role of culture on EBF and SARS relation. Ethical behaviour is closely associated with many Sensitivity Analysis different social and economic issues in the market, there- fore, in order to control country speciﬁc factors, the level of In order to check the robustness of the results we conducted market competition, the legal origin of countries, GDP per several sensitivity analyses by using alternative measures capita and cultural clusters were added into the model as or estimation methods. control variables. We employed pooled OLS estimation First, to test the sensitivity of the results to the measure with robust standard errors for the estimation of the we used for SARS, we run the regressions by using a coefﬁcients. secondary data source. An IFRS dummy that assumed to proxy the SARS was used. For countries where IFRS is Results required for ﬁnancial reporting it takes the value of 1, 0 otherwise. Tables 4 and 5 report the results of the multiple regression analysis using IFRS and reveal similar results Table 1 presents the correlation results among EBF, SARS, GLOBE’s cultural dimensions, countries’ legal origin, and with respect to the main ﬁndings reported in Tables 2 and market competition. There were signiﬁcant correlations 3. In addition to our ﬁndings, if IFRS is used, the cultural between the EBF and the control variables. The use of dimensions that are insigniﬁcant in the main ﬁndings are those variables to control country-speciﬁc differences has found signiﬁcant. According to the results, the effective- an explanatory power for the analysis. ness of IFRS on EBF strengthens in countries with high Table 2 shows the results of the multiple regression INST_C, FUTR_O, UAI, human orientation and perfor- analysis, SARS and cultural dimensions as predictors of mance orientation while it weakens in countries with high EBF. As the cultural dimensions are correlated with each PDI, IGC and assertiveness. The results are in line with our other, the impact of each cultural dimension was examined expectations except for the performance orientation and in separate models and control dummies for 10 cultural UAI. Even though the use of IFRS is a good proxy for clusters were used. All models for the eight different cultural ﬁnancial reporting quality, it does not capture the auditing dimensions are signiﬁcant at 0.01. In all models, in line with standards. Therefore, the sensitivity of the results might be the theory, SARS has a signiﬁcant positive impact on EBF. due to the differences in the scope of IFRS and SARS. Table 3 shows the results of the multiple regression Second, in order to test the sensitivity of our analysis to analysis for the moderating effect of culture on the asso- the model speciﬁcation that takes only one of the cultural ciation of SARS and EBF. Similarly, the impact of each dimensions into account at a time, we used cultural clusters cultural dimension was examined in separate models and as predictors and moderators in two different analyses. control dummies for 10 cultural clusters were used. Ac- Based on the similarities and differences in cultural char- cording to the regression results documented in Model 1, the acteristics, the GLOBE study divides the countries into interaction term of SARS and PDI becomes negative and cultural (regional) clusters. Considering the multivariate signiﬁcant, indicating that higher PDI weakens the impact of context of culture, using cultural clusters might be more SARS on EBF, as hypothesized in this study. On the other explanatory than a single cultural dimension at a time on. 123 The Moderating Role of National Culture 63 The results, presented in Tables 6 and 7, indicate that the moderating impact of clusters is signiﬁcant and weakening for three clusters, namely; Middle East, Latin America and Eastern Europe. The Middle East cluster, where Turkey, Kuwait, Egypt, Morocco and Qatar take place, is charac- terized by high score on IGC, medium score on assertiveness, humane orientation, INST_C, performance orientation, PDI, and low score on FUTR_O, gender egalitarianism and UAI. Latin America is the largest cluster including Ecuador, El Salvador, Columbia, Bolivia, Brazil, Guatemala, Argentina, Costa Rica, Venezuela and Mexico. It is known with high IGC, medium assertiveness, human orientation, gender egalitarianism, and PDI, low FUTR_O, INST_C, performance orientation and UAI. Fi- nally, Eastern Europe cluster consist of Albania, Georgia, Greece, Hungary, Kazakhstan, Poland, Russia and Slove- nia. Its main cultural characteristics are high scores on assertiveness, gender egalitarianism, IGC, medium scores on INST_C, humane orientation and PDI, and low scores on FUTR_O, performance orientation and UAI. When the common characteristics of the three clusters are examined, it is seen that they scored high on IGC, medium on humane orientation and PDI, and low in FUTR_O and UAI. Therefore, it can be said that overall, the results are in line with our ﬁndings obtained with cultural values. Third, to test the sensitivity of the results to the choice of the cultural values, we run all regressions by using Hofstede’s cultural values. It is known that GLOBE study takes Hofstede’s study (1980, 2001) as a base. Therefore, between two studies there are many similarities in terms of cultural values that are used to assess differences and similarities in mindsets across countries. In Hofstede’s study (1980, 2001) societies are assessed based on ﬁve cultural dimensions, namely; PDI, IGC, time orientation (short term vs. long term), UAI and masculinity versus femininity. All these dimensions were used in our sensi- tivity check. Table 8, Panels A and B document that the impact of SARS on EBF weakens if society is character- ized by high UAI, high PDI, high masculinity and low individualism. In general, the results are similar to the ﬁndings presented in Tables 2 and 3 for all dimensions except for UAI. In this area, the ﬁndings obtained from Hofstede’s framework show weakening impact on SARS– EBF relation. The difference in our ﬁndings is most probably due to utilizations of different measurements in GLOBE and Hofstede’s study. As indicated by Venaik and Brewer (2008), although both studies use the same term— UAI—they utilize different questions that aim to address different practices. For instance, Hofstede (1980, 2001) focus more on the role of traditions to cope with uncer- tainties and separate this dimension from risk taking, while GLOBE focus more on business practices such as risk taking in business decisions (House et al. 2004). Therefore, Table 1 Summary statistics and correlation matrix Mean Standard deviation (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (a) EBF 4.566 1.065 1 it (b) SARS 5.028 0.788 0.83* 1 it-1 (c) PDI 5.165 0.367 -0.40* -0.27* 1 it (d) FUTR_O 3.786 0.418 0.71* 0.62* -0.46* 1 it (e) HUM_O 4.121 0.436 -0.02 -0.02 -0.21* 0.05 1 it (f) PERF_O 4.046 0.362 0.59* 0.48* -0.32* 0.58* 0.11* 1 it (g) IGC 5.195 0.681 -0.74* -0.64* 0.44* -0.53* 0.05 -0.29* 1 it (h) INST_C 4.258 0.410 0.58* 0.44* -0.32* 0.50* 0.32* 0.45* -0.38* 1 it (i) ASSERT 4.105 0.332 -0.03 -0.05 0.15* 0.13* -0.40* 0.10 0.02 -0.32 1 it (j) UAI 4.083 0.533 0.81* 0.68* -0.44* 0.76* 0.07 0.62* -0.65* 0.54* -0.04 1 it (k) COMPETITION 4.471 0.663 0.84* 0.77* -0.30* 0.61* -0.03 0.56* -0.51* 0.49* 0.01 0.65* 1 it (l) COMMON 0.2962 0.457 0.27* 0.41* -0.06 0.21* 0.24* 0.28* -0.22* 0.08 -0.13* 0.22* 0.36* 1 (i) lnGDP per capita 9.389 1.265 0.71* 0.59* -0.22* 0.43* -0.27* 0.25* -0.61* 0.35* 0.14* 0.48* 0.62* -0.03 it EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, PDI power distance, FUTR_O future orientation, it it-1 it it HUM_O human orientation, PERF_O performance orientation, IGC in-group collectivism, INST_C institutional collectivism, ASSERT assertiveness, UAI uncertainty avoidance, it it it it it it COMPETITION market competition, COMMON country legal origin, lnGDP per capita natural logarithm of gross domestic product per capita in current US dollars it it it * p \ 0.01. n = 324 (n = 324 for LagSARS) society–year observations between the years 2007 and 2012 64 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli Table 2 Regression results of EBF on SARS and GLOBE cultural values Dependent variable: EBF Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 it Constant 0.520 -2.082*** -2.206*** -3.464*** 1.564*** -2.664*** -0.375 -2.615*** Test variables SARS 0.349*** 0.325*** 0.364*** 0.307*** 0.252*** 0.355*** 0.339*** 0.288*** it-1 PDI -0.307*** it FUTR_O 0.316*** it HUM_O 0.209*** it PERF_O 0.635*** it IGC -0.331*** it INST_C 0.391*** it ASSERT -0.188** it UAI 0.505*** it Control variables COMPETITION 0.656*** 0.632*** 0.683*** 0.555*** 0.683*** 0.647*** 0.694*** 0.570*** it COMMON -0.038 -0.027 -0.050 -0.024 -0.038 -0.002 -0.018 -0.026 lnGDP per capita 0.141*** 0.139*** 0.164*** 0.186*** 0.084*** 0.142*** 0.158*** 0.141*** it Cluster dummies Yes Yes Yes Yes Yes Yes Yes Yes Prob [ F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R 0.900*** 0.898*** 0.896*** 0.913*** 0.905*** 0.902*** 0.895*** 0.914*** EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, PDI it it-1 it power distance, FUTR_O future orientation, HUM_O human orientation, PERF_O performance orientation, IGC in-group collectivism, it it it it INST_C institutional collectivism, ASSERT assertiveness, UAI uncertainty avoidance, COMPETITION market competition, COMMON it it it it it country legal origin, lnGDP per capita natural logarithm of Gross domestic product per capita in current US dollars, cluster dummies, the it dummy variables to control the effect of cultural clusters deﬁned in the GLOBE study *, **, *** p \ 0.10, \ 0.05 and \ 0.01 (one-sided tests), respectively. n = 324 society–year observations between the years 2007 and 2012 most country scores on UAI in Hofstede’s and GLOBE human orientation (hypothesis 3), performance orientation studies are negatively correlated. (hypothesis 4) and assertiveness (hypothesis 6). Furthermore, to understand the sensitivity of the results The business ethics literature contains a myriad of to the estimation method, the regression analysis were run studies describing the relationship between cultural values by random-effect generalised least square estimation model and EBF. However, although there are a number of studies by excluding the cultural cluster dummies. The results are in which culture has been treated as an independent vari- similar to pooled OLS in terms of direction and sig- able, its moderating impact is generally ignored. In this niﬁcance of the coefﬁcients. study, the identiﬁcation of the moderating role of cultural Based on the sensitivity analyses, we conclude that our values in SARS–EBF relationship is considered important main ﬁndings also generally hold when alternative mea- in increasing our understanding of the complex role of sures for independent or moderating variables were used or cultural values in ethical conduct. alternative estimation method was applied. SARS–EBF Relationship Discussion Our ﬁndings indicate that SARS improves EBF through encouraging ﬁrms to become more faithful, accurate, un- This study examines the moderating role of cultural values derstandable, timely, veriﬁable, comparable and relevant in on relationship between SARS and EBF. Results provide sharing ﬁnancial information with all other stakeholders. empirical evidence to support the argument that the posi- The strong positive impact of the SARS–EBF relationship tive relationship between SARS and EBF is moderated by emerges as an important outcome of recent regulations set certain cultural values, namely; PDI (hypothesis 1), by policy makers designed to improve ﬁnancial reporting and auditing standards. FUTR_O (hypothesis 2), IGC (hypothesis 5a), INST_C (hypothesis 5b), and UAI (hypothesis 7). However, em- Although we showed that the stronger perception on pirical data showed no signiﬁcant moderation impact for auditing and reporting standards yield higher levels of 123 The Moderating Role of National Culture 65 Table 3 Two-way moderating regression results of EBF on SARS and GLOBE cultural values Dependent variable EBF Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 it Constant -3.591** 1.941 -4.524** -1.561 -5.428*** 9.286*** -6.004** 2.691*** Test variables SARS 1.402*** 0.634** 0.628** -0.057 1.436*** -1.986*** 1.297** -0.917*** it-1 PDI 0.434 it FUTR_O -1.024** it HUM_O 0.367 it PERF_O -0.166 it IGC 0.737** it INST_C -2.395*** it ASSERT 0.751 it UAI -0.917*** it PDI * SARS -0.175** it FUTR_O * SARS 0.284*** it-1 HUM_O * SARS -0.027 it-1 PERF_O * SARS 0.138 it-1 IGC * SARS -0.207*** it-1 INST_C * SARS 0.568*** it-1 ASSERT * SARS -0.196 it-1 UAI * SARS 0.299*** it-1 Control variables COMPETITION 0.605*** 0.574*** 0.656*** 0.518*** 0.725*** 0.579*** 0.679*** 0.530*** it COMMON -0.034 -0.024 -0.094* -0.123* -0.082* 0.050 -0.067* 0.016 lnGDP per capita 0.180*** 0.176*** 0.221*** -0.208*** 0.113*** 0.170*** 0.212*** 0.171*** it Cluster dummies Yes Yes Yes Yes Yes Yes Yes Yes Prob [ F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R 0.848*** 0.858*** 0.834*** 0.851*** 0.876*** 0.881*** 0.835*** 0.900*** EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, PDI it it-1 it power distance, FUTR_O future orientation, HUM_O human orientation, PERF_O performance orientation, IGC in-group collectivism, it it it it INST_C institutional collectivism, ASSERT assertiveness, UAI uncertainty avoidance, COMPETITION market competition, COMMON it it it it it country legal origin, lnGDP per capita natural logarithm of Gross domestic product per capita in current US dollars, Cluster dummies the it dummy variables to control the effect of cultural clusters deﬁned in the GLOBE study *, **, *** p \ 0.10, \ 0.05 and \ 0.01 (one-sided tests), respectively. n = 324 society–year observations between the years 2007 and 2012 EBF, this relationship is moderated by cultural values. In and Cheung 2012; Scholtens and Dam 2007; Smith and other words, the beneﬁt in enhancing ethical behaviours Hume 2005; Steers et al. 2013; Vitell et al. 1993; Zhang derived from the standards varies according to cultural et al. 2013). Previous research showed that these two di- dimensions of each society. Our results show that societies, mensions have a strong negative impact on ethical be- which scored low in PDI and IGC, and high in INST_C, haviour. Our results are consistent with the previous FUTR_O and UAI, may beneﬁt most from the standards. research and our hypotheses, so that PDI and IGC are Other types of society are more likely to need enforcement found to have weakening moderating impact on SARS– mechanisms to counteract the impact of their cultural EBF relationship. values, which would otherwise reduce the effectiveness of As discussed in the theoretical background, individuals SARS. in high PDI cultures are less sensitive towards ethical acts and more tolerant of inequality (Chan and Cheung 2012; Weakening Moderating Impact of PDI and IGC House et al. 2004; Scholtens and Dam 2007). Accordingly, they may use the ﬂexibility given by the standards to de- In the business ethics literature, PDI and IGC are the most fend the rights of powerful parties, such as majority frequently cited in explanations of variation in ethical be- shareholders in their ﬁrms. As this value is shared by the haviour among societies (e.g., Blodgett et al. 2001; Chan vast majority in their society, managers believe that such 123 66 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli Power Distance (PDI) In-Group Collectivism (IGC) Institutional Collectivism (INST_C) 2 2 2.5 1.8 1.8 1.6 1.6 2 1.4 1.4 1.2 1.2 1.5 0.8 0.8 1 0.6 0.6 0.4 0.4 0.5 0.2 0.2 Low SARS(t-1) High SARS(t-1) Low SARS(t-1) High SARS(t-1) Low SARS(t-1) High SARS(t-1) Low POWER DISTANCE Low IN GROUP COLLECTIVISM Low INSTITUTIONAL COLLECTIVISM High POWER DISTANCE High IN GROUP COLLECTIVISM High INSTITUTIONAL COLLECTIVISM Future Orientation (FUTR_O) Uncertainty Avoidance (UNC_AV) 9 2 1.5 0.5 Low SARS(t-1) High SARS(t-1) Low SARS(t-1) High SARS(t-1) Low UNCERTAINITY AVODICANCE Low FUTURE ORIENTATION High UNCERTAINITY AVODICANCE High FUTURE ORIENTATION Fig. 1 The moderating role of culture on EBF and SARS relation behaviour is both normal and expected. Therefore, at every explained, INST_C and FUTR_O have some common- opportunity, they are willing to interpret the grey areas in alities. INST_C is deﬁned as considering the interests of all the standards to serve the interests of powerful parties. related parties of an institution with a long-term focus; Accordingly, the impact of standards is weaker in terms of long-term focus and sustainability are also at the core of encouraging EBF in high PDI societies. FUTR_O. In other words, managers are more willing to IGC has a very similar impact on SARS–EBF relation- make sustainable and ethical decisions while interpreting ship. When IGC is high, people tend to protect the interests the standards in high institutional collectivist and high fu- of their in-group at the expense of those of the out-groups ture oriented societies. (Franke and Nadler 2008). Therefore, when interpreting the Our ﬁndings about the moderating impact of IGC and auditing and reporting standards, their decisions are more INST_C are also important, as they show that these two likely to favour the interests of their in-groups rather than dimensions of culture have inverse moderating impacts on to support the rights of all. Hence, the impact of SARS SARS–EBF relationship. Although clearly deﬁned as tends to be weaker in those societies. Therefore, as soci- separate in the GLOBE project (House et al. 2004), pre- eties characterized by high PDI and IGC, standards are vious researchers either used the term ‘‘collectivism’’ to unable to make the desired impact in terms of stimulating refer to (a combination of) either types, or to refer to IGC EBF. alone, thus completely ignoring the existence of INST_C. The results of our sensitivity analysis, which is con- Our research has contributed to the literature not only by ducted with cultural clusters, are also in line with these providing empirical evidence that they are two distinct ﬁndings as they indicate that the high score on IGC and dimensions, but also showing that they may have different- medium score on PDI are among the common character- sometimes inverse-impacts on social issues. Thus, we istic of societies where the positive association between recommend researchers to take into account this ﬁnding, SARS and EBF is weaker. and incorporate IGC and INST_C separately in their future research. Strengthening Moderating Impact of INST_C, Our results did not support our hypothesis regarding the FUTR_O and UAI impact of UAI. Although expected to have a weakening impact on the SARS–EBF relationship, UAI has statisti- Our results provided empirical evidence regarding the cally signiﬁcant strengthening impact according to our re- strengthening moderating impact of INST_C and sults. Researchers generally hypothesize an inverse FUTR_O, in line with our hypotheses. As previously relationship between UAI and ethical behaviour due to Ethical Behavior of firms Ethical Behavior of Firms Ethical Behavior of Firms Ethical Behavior of Firms Ethical behavior of firms The Moderating Role of National Culture 67 Table 4 Regression results of EBF on IFRS and GLOBE cultural values Dependent variable EBF Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 it Constant 0.184 -3.774*** -3.421*** -4.351*** 2.402*** -3.953*** -1.402 -3.583*** Test variables IFRS 0.056** 0.003* 0.048** 0.113** 0.101** 0.002* 0.033** 0.078** it PDI -0.433*** it FUTR_O 0.700*** it HUM_O 0.201*** it PERF_O 0.677*** it IGC -0.570*** it INST_C 0.541*** it ASSERT -0.273*** it UAI 0.789*** it Control variables COMPETITION 0.902*** 0.724*** 0.958*** 0.762*** 0.917*** 0.814*** 0.966*** 0.593*** it COMMON -0.146 -0.136 -0.095 -0.131 -0.059 -0.189 -0.115 -0.105 lnGDP per capita 0.282*** 0.259*** 0.309*** 0.286*** 0.119*** 0.272*** 0.298*** 0.245*** it Cluster dummies Yes Yes Yes Yes Yes Yes Yes Yes Prob [ F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R 0.799*** 0.830*** 0.785*** 0.814*** 0.856*** 0.810*** 0.786*** 0.876*** EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, PDI it it-1 it power distance, FUTR_O future orientation, HUM_O human orientation, PERF_O performance orientation, IGC in-group collectivism, it it it it INST_C institutional collectivism, ASSERT assertiveness, UAI uncertainty avoidance, COMPETITION market competition, COMMON it it it it it country legal origin, lnGDP per capita natural logarithm of Gross domestic product per capita in current US dollars, Cluster dummies the it dummy variables to control the effect of cultural clusters deﬁned in the GLOBE study *, **, *** p \ 0.10, \0.05 and\0.01 (one-sided tests), respectively. n = 324 society–year observations between the years 2007 and 2012 deadening impact of UAI on ethical sensitivity (Chan and countries to ﬁnd their own path to the achievement of the Cheung 2012; Vitell et al. 1993; Weaver 2001). However, expected beneﬁt from the implementation of auditing and positive or insigniﬁcant results have also been reported reporting standards. This leads to a discussion over whether (Alas 2006; Scholtens and Dam 2007). A possible expla- adaption or adoption of the standards will be more nation for this ﬁnding is that in high UAI societies, man- beneﬁcial for a particular country. According to the Inter- agers may be less willing to take risks, especially in regard national Accounting Standards Board, full adoption with to accounting issues (Cieslewicz 2013). This may lead to reporting and auditing standards are required in order to over caution when interpreting the standards or use ﬂex- derive the expected beneﬁt from their application. How- ibility allowed by the standards, as they attempt to satisfy ever, many jurisdictions face cultural difﬁculties, both be- all relevant stakeholders’ interests in the long term. fore and after the period of transition to auditing and Therefore, the standards may be more effective in reporting standards. In order to minimize the effect of such stimulating EBF in high UAI societies. However, the difﬁculties and mitigate the possible problems which may strengthening moderating impact of UAI should be ex- reduce the impact of SARS on EBF, policy makers should plored in future research, considering the conﬂicting results evaluate the national culture, and adapt the new regulations in the literature, our contradictory expectations, and the accordingly. Thus, enforcement and oversight mechanisms sensitivity check results we found using Hofstede’s will be strengthened, and professional training programs framework. will be adjusted to increase the awareness of the need for the transition to new standards and their expected beneﬁts Implications for Managers and Policy Makers for all society. During this process, particularly, the im- portance of having a code of business ethics should be Our results show that cultural values have the potential to addressed by regulators. Our ﬁndings also highlight the need for managers to be accentuate or decrease the impact of SARS on EBF. This ﬁnding is important both for policy makers and managers. aware of the impact of cultural values in their practices. In Policy makers should be aware of the clear need for all order to increase their awareness on this issue, training 123 68 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli Table 5 Two way moderating regression results of EBF on IFRS and GLOBE cultural values Dependent variable EBF Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 it Constant -1.335** -2.509*** -2.642** -3.465 -1.841*** -2.693*** -2.266** -2.643*** Test variables IFRS 2.523*** 2.359*** 1.254** 1.740*** 1.700*** 2.164*** 1.903** 1.748*** it PDI -0.144 it FUTR_O 0.367** it HUM_O 0.040 it PERF_O 0.414*** it IGC 0.474*** it INST_C 0.253*** it ASSERT -0.044 it UAI 0.524*** it PDI * IFRS -0.499*** it FUTR_O * IFRS 0.619*** it HUM_O * IFRS 0.293** it PERF_O * IFRS 0.449*** it IGC * IFRS -0.155** it INST_C * IFRS 0.506*** it ASSERT * IFRS -0.470*** it UAI * IFRS 0.408*** it Control variables COMPETITION 0.874*** 0.687*** 0.951*** 0.766*** 0.893*** 0.791*** 0.972*** 0.604*** it COMMON -0.186 -0.192 -0.100 -0.144 -0.031 -0.202 -0.097 0.152 lnGDP per capita 0.293*** 0.277*** 0.302*** 0.308*** 0.136*** 0.281*** 0.288*** 0.254*** it Cluster dummies Yes Yes Yes Yes Yes Yes Yes Yes Prob [ F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R 0.806*** 0.845*** 0.788*** 0.819*** 0.858*** 0.819*** 0.835*** 0.887*** EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, PDI it it-1 it power distance, FUTR_O future orientation, HUM_O human orientation, PERF_O performance orientation, IGC in-group collectivism, it it it it INST_C institutional collectivism, ASSERT assertiveness, UNC_AV uncertainty avoidance, COMPETITION market competition, it it it it COMMON country legal origin, lnGDP per capita natural logarithm of Gross domestic product per capita in current US dollars, Cluster it it dummies the dummy variables to control the effect of cultural clusters deﬁned in the GLOBE study *, **, *** p \ 0.10, \0.05 and \0.01 (one-sided tests), respectively. n = 324 society–year observations between the years 2007 and 2012 programs should emphasize the importance of gaining an the impact of principle-based standards on ethical be- understanding of the cultural characteristics of societies haviours, parent companies can be more ﬂexible towards with which they have business relationships. Such pro- their local managers, and allow them greater freedom to grams should focus on cultural values and their moderating select ethical approaches. Therefore, by indicating the impacts on associations between principle-based standards moderating impact of culture, our results provide useful and EBF, enabling managers to develop customized insights to international managers to support ethical be- haviours among their different subsidiaries through cus- strategies designed to enhance ethical behaviours in their ﬁrms. Moreover, our ﬁndings can be utilized in the man- tomized standards and policies. agement of subsidiaries in countries with different cultural values from the parent company. Care should be taken Limitations and Future Research when adapting rules and policies for a subsidiary, taking into account the local cultural environment. For instance, in Measuring the complex issue of EBF with a single item the case of countries which score high in PDI and IGC, and rather than a more comprehensive measurement can be low in INST_C, UAI and FUTR_O, managers may need to considered as a limitation of the study. However, due to the set additional control mechanisms and strict rules at the large number of societies used to provide a cross-cultural ﬁrm level to ensure ethical behaviours. In contrast, where comparison, it was essential to use the WCI as the most the local cultural environment of subsidiaries strengthens reliable data source, which included cross national data. 123 The Moderating Role of National Culture 69 Table 6 Regression results of EBF on SARS and GLOBE cultural clusters Dependent variable EBF Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10 it Constant -2.854*** -2.876*** -2.583*** -3.317*** -2.315*** -2.606*** -2.733*** -2.915*** -2.959*** -2.679*** Test variables SARS 0.513*** 0.514*** 0.554*** 0.530*** 0.381*** 0.536*** 0.496*** 0.519*** 0.509*** 0.463*** it Middle East -0.082* Confucian Asia -0.030 Southern Asia -0.453*** Latin America 0.298*** Nordic Europe 0.910*** Anglo 0.325*** Germanic Europe 0.333** Latin Europe -0.181** Sub-Saharan Africa 0.109 Eastern Europe -0.408*** Control variables COMPETITION 0.680*** 0.681*** 0.696*** 0.762*** 0.668*** 0.679*** 0.660*** 0.656*** 0.682*** 0.698*** it COMMON -0.067*** -0.057 -0.037 -0.035 0.121 -0.197** -0.015 -0.054 -0.082 -0.114* lnGDP per capita 0.193*** 0.194*** 0.138*** 0.187*** 0.201*** 0.155*** 0.196*** 0.209*** 0.204*** 0.200*** it Prob [ F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R 0.82 0.82 0.83 0.83 0.85 0.83 0.83 0.82 0.82 0.84 EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, COMPETITION market competition, COMMON it it-1 it it country legal origin, lnGDP per capita natural logarithm of Gross domestic product per capita in current US dollars, Cultural Clusters as deﬁned in the GLOBE Study it *, **, *** p \ 0.10, \0.05 and \0.01 (one-sided tests), respectively. n = 324 society–year observations between the years 2007 and 2012 70 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli Table 7 Two way moderating regression results of EBF on SARS and GLOBE cultural clusters Dependent Variable EBF Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10 it Constant -2.957*** -2.916*** -2.579*** -3.561*** -2.320*** -2.613*** -2.742*** -2.910*** -2.960*** -2.911*** Test variables SARS 0.528*** 0.517*** 0.550*** 0.590*** 0.3871*** 0.552*** 0.501*** 0.514*** 0.519*** 0.552*** it-1 Middle East 1.492* Confucian Asia 0.461 Southern Asia -1.058 Latin America 2.574*** Nordic Europe 4.146 Anglo 1.119 Germanic Europe 5.980 Latin Europe -0.422 Sub-Saharan Africa 0.367 Eastern Europe 2.977*** Middle East * SARS -0.328** it-1 Confucian Asia * SARS -0.092 it-1 Southern Asia * SARS 0.119 it-1 Latin America * SARS -0.523*** it-1 Nordic Europe * SARS -0.530 it-1 Anglo * SARS -0.134 it-1 Germanic Europe * SARS -0.950 it-1 Latin Europe * SARS 0.046 it-1 Sub-Saharan Africa * SARS -0.052 it-1 Eastern Europe * SARS -0.738*** it-1 Control variables COMPETITION 0.665*** 0.684*** 0.700*** 0.795*** 0.666*** 0.673*** 0.661*** 0.657*** 0.675*** 0.670*** it COMMON -0.069 -0.048 -0.045 -0.086 0.118 -0.207 -0.019 -0.053 -0.084 -0.161 lnGDP per capita 0.204*** 0.195*** 0.138*** 0.166*** 0.199*** 0.150*** 0.194*** 0.211*** 0.203*** 0.192*** it Prob [ F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R 0.82 0.82 0.83 0.84 0.85 0.83 0.83 0.82 0.82 0.86 EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, COMPETITION market competition, COMMON it it-1 it it country legal origin, lnGDP per capita natural logarithm of Gross domestic product per capita in current US dollars, Cultural Clusters as deﬁned in the GLOBE Study it *, **, *** p \ 0.10, \0.05 and \0.01 (one-sided tests), respectively. n = 324 society–year observations between the years 2007 and 2012 The Moderating Role of National Culture 71 Table 8 Regression results of EBF on Hofstede cultural values and two way moderating impact Dependent variable EBF Panel A: SARS and Culture as predictors Panel B: The Moderating Effect it Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Constant -1.356*** -2.741 -2.364*** -2.464*** -3.470*** -0.633*** -3.717*** -3.430*** Test variables SARS 0.270*** 0.364*** 0.341*** 0.371*** 0.656*** 0.177** 0.593*** 0.573*** it PDI -0.010*** 0.022** it IDV 0.002* -0.062*** it MAS -0.008*** 0.018* it UAI -0.003*** 0.012*** it PDI * SARS -0.006*** it-1 IDV * SARS 0.011*** it-1 MAS * SARS -0.005** it-1 UAI * SARS -0.003* it-1 Control variables COMPETITION 0.872*** 0.820*** 0.772*** 0.770*** 0.866*** 0.864*** 0.789*** 0.785*** it COMMON -0.078 -0.016 0.101 -0.077 -0.066 0.0003 0.110 -0.098 lnGDP per capita 0.133*** 0.179*** 0.226*** 0.208*** 0.135*** 0.229*** 0.218*** 0.190*** it Prob [ F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R 0.78 0.76 0.78 0.76 0.79 0.78 0.78 0.76 EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, PDI it it-1 it power distance, IVD individualism versus collectivism, MAS masculinity versus femininity, UAI uncertainty avoidance, COMPETITION it it it it market competition, COMMON country legal origin, lnGDP per capita natural logarithm of Gross domestic product per capita in current US it it dollars *, **, *** p \ 0.10, \0.05 and\0.01 (one-sided tests), respectively. n = 426 country-year observations between the years 2006 and 2012 Therefore, EBF measurement by WCI was considered the research explores the moderating impacts of these factors most appropriate alternative for the current study. in a micro-level sample setting. Also, as indicated in the ‘‘Introduction’’ section, our Finally, testing our results across sectors could be very independent and dependent variables depended on per- interesting and useful in order to identify sector-based ceptions, not the absolute indicators. Although, perceptions variations. Unfortunately, our data set did not include could be subjective and misleading, they reﬂect the opin- sector-based data either for SARS or EBF. Therefore, in a ions of executives who have deep knowledge of business future study, sector-based results can be compared with a environment in their countries. Still, our results can be different data set. tested with different indicators in a future study. Another limitation of the study is the relatively narrow focus on the impact of factors that may affect ethical Conclusion behaviours, limited to SARS and culture. However, ethi- cal behaviour is a complex issue which is affected by Our ﬁndings contribute to the literature by addressing the many other factors. Therefore, in order to increase our moderating role of national culture in the relationship be- understanding of the mechanisms which accentuate or tween SARS and EBF. Overall, we ﬁnd evidence sup- decrease ethical behaviour, future research may focus on porting the idea that national culture affects the relationship more complex models, incorporating organizational fac- between SARS and EBF. The main implication of our tors such as organizational culture and strength of human study is that encouraging ethical behaviour is a complex resources management systems, in addition to SARS and issue, and that in themselves, universal standards to en- national culture. hance EBF are inadequate, because any regulation that Moreover, in this study, we hypothesized that perfor- does not consider cultural impact is likely to fail to have mance orientation, human orientation and assertiveness had the required effect. Thus, it is important for policy makers moderating impacts on the SARS–EBF relationship. to put in place the necessary enforcement mechanisms for However, our data provided no empirical support for these the effective implementation of auditing and reporting hypotheses and it would therefore be enlightening if future standards. 123 72 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli Open Access This article is distributed under the terms of the Clusters Countries Cultural values Creative Commons Attribution License which permits any use, dis- tribution, and reproduction in any medium, provided the original Latin France High – author(s) and the source are credited. European Israel Medium Assertiveness Italy Future orientation Portugal Gender Appendix 1 egalitarianism Spain In-group Switzerland (French collectivism speaking) GLOBE Cultural Clusters with Associated Countries and Their Cul- Power distance tural Values Uncertainty Clusters Countries Cultural values avoidance Performance Nordic Denmark High Future orientation orientation Europe Finland Gender Low Humane orientation egalitarianism Iceland Institutional Institutional Norway collectivism collectivism Sweden Latin Ecuador High In-group Uncertainty America collectivism avoidance El Salvador Medium Assertiveness Medium Humane orientation Columbia Human orientation Performance Bolivia orientation Gender Brazil egalitarianism Low Assertiveness Guatemala Power distance In-group Argentina collectivism Low Future orientation Costa Rica Power distance Institutional Venezuela collectivism Germanic Austria High Assertiveness Mexico Europe Performance East Germany Future orientation orientation West Germany Performance Uncertainty orientation The Netherlands avoidance Uncertainty Switzerland Eastern Albania High Assertiveness avoidance Europe Georgia Gender Medium Gender egalitarianism egalitarianism Greece In-group Power distance Hungary collectivism Low Human orientation Kazakhstan Medium Institutional Institutional Poland collectivism collectivism Russia Humane orientation In-group Slovenia Power distance collectivism Low Future orientation Anglo Cluster Australia High Performance orientation Performance Canada (English orientation speaking) Medium Assertiveness Uncertainty England Future orientation avoidance Ireland Gender The Middle Turkey High In-group egalitarianism New Zealand East collectivism Kuwait Humane orientation South Africa (White Medium Assertiveness Egypt sample) Institutional Humane orientation collectivism Morocco The USA Institutional Power distance Qatar collectivism Uncertainty Performance avoidance orientation Low In-group Power distance collectivism 123 The Moderating Role of National Culture 73 References Clusters Countries Cultural values Alas, R. 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DOI: 10.1007/s10551-015-2571-y
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Abstract

J Bus Ethics (2016) 139:55–75 DOI 10.1007/s10551-015-2571-y Do Auditing and Reporting Standards Affect Firms’ Ethical Behaviours? The Moderating Role of National Culture Yasemin Zengin Karaibrahimoglu Burcu Guneri Cangarli Received: 16 April 2014 / Accepted: 5 February 2015 / Published online: 22 February 2015 The Author(s) 2015. This article is published with open access at Springerlink.com Abstract This paper aims to examine the impact of na- organized in many different jurisdictions (e.g., Global tional cultural values on the relation between auditing and Ethics Forum, European Business Ethics Forum) and reporting standards and ethical behaviours of ﬁrms. Based on ethical codes of conducts have been developed by different a regression analysis using data regarding 54 countries be- professions and corporations (e.g., IFAC for professional tween the years 2007 and 2012, we found that the impact of accountants, APA for psychologists; and Code of Conduct the perceived strength of auditing and reporting standards on or Ethics for companies such as Amazon, Apple, and Coca the perceived ethical behaviours of ﬁrms is accentuated Cola). New regulations have also been set (e.g., the use of when a society is characterized by low power distance and in- corporate governance principles for corporations, the in- group collectivism, and high institutional collectivism, fu- troduction of international auditing and reporting stan- ture orientation and uncertainty avoidance. Empirically, the dards). The ultimate aim of these efforts is to enhance EBF study addresses a gap in the literature by highlighting the through the clariﬁcation of ethical values and increasing inﬂuence of national culture on the effectiveness of legal public interest in ethics, which is considered to be an im- settings and regulations on ethical behaviours. portant driver of the economy (Garrison et al. 2008). We follow Sims (1992, p. 506) and deﬁne ethical be- Keywords Ethical behaviour Strength of auditing and haviour as behaviour ‘‘which is morally accepted as ‘good’ reporting standards Culture GLOBE and ‘right’ as opposed to ‘bad’ or ‘wrong’ in a particular setting’’. Previous research shows that in addition to company-speciﬁc (micro) factors, such as personal and Introduction organizational values, EBF are also strongly affected by country-speciﬁc (macro) factors, including social, cultural, The corporate scandals emerging during the last two dec- legal, political and institutional environments (Bartels 1967; Ekici and Onsel 2013; Vitell et al. 1993). ades have increased the amount of attention given to the ethical behaviours of ﬁrms (EBF). All around the world, As a legal and institutional determinant, corporate civic organizations, as well as public and private institu- governance is seen as a vital mechanism for the prevention tions are facing the challenge of how to improve EBF. For of unethical corporate behaviours (Carcello 2009; Felo this purpose, in recent years, forums and panels have been 2011). Corporate governance is a broad concept that sur- rounds all internal (company-speciﬁc) and external (coun- try-speciﬁc) mechanisms with a role in monitoring Y. Zengin Karaibrahimoglu (&) management to protect all stakeholders’ rights (Garcıa- Faculty of Economics and Business, Accounting, University of Osma 2006). From this point of view, all capital market Groningen, Nettelbosje 2, 9747 AE Groningen, The Netherlands e-mail: [email protected] regulations—including political, legal and institutional settings—that aim to enhance the quality of auditing and B. Guneri Cangarli ﬁnancial reporting are closely associated with strong cor- Faculty of Business, Izmir University of Economics, Sakarya porate governance (Karaibrahimoglu 2010). Stronger au- Cad. No: 156 Balcova, Izmir 35330, Turkey diting and reporting standards are assumed to provide more e-mail: [email protected] 123 56 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli reliable information (Boolaky and O’Leary 2012), and contribute to the literature by examining how this rela- consequently improve EBF. However, ethics can be af- tionship changes across cultures. Identifying the impact of fected by many contextual factors, and improving the culture in this relationship will lead to a better under- quality of legal and institutional settings alone may not be standing of the required adjustment on enforcement sufﬁcient to enhance EBF. mechanisms, allowing for customization in accordance In fact, ethical values, attitudes and behaviours evolve with cultural environment. Thus, policy makers may en- under the inﬂuence of culture (Hunt and Vitell 1992; courage managers, who are responsible to present faithful Scholtens and Dam 2007). Culture, deﬁned as ‘‘the col- and reliable information to the public, to behave more lective programming of the mind’’ (Hofstede 2001, p. 9), ethical. affects various steps—from awareness to behaviour—in ethical conduct (e.g., Alas 2006; Dubinsky et al. 1991). Accordingly, in the business ethics literature, cultural dif- Theoretical Background and Hypothesis Development ferences are perceived as the main indicators explaining variation in practices in economic or entrepreneurial ac- SARSs and EBFs tivities (Alderson and Kakabadse 1994; Becker and Fritzsche 1987; Bodley 2005; Hawkins 1993; Kaptein Corporate governance is a management mechanism that aims 2004; Karnes et al. 1989; Langlois and Schlegelmilch at the efﬁcient use of organizations’ assets in the interests of all 1990; Mensah 2013; Schultz et al. 1993). Although there stakeholders, and mitigating of any opportunistic behaviour of are a small number of universally accepted ethical values, the management (Gillan 2006). La Porta et al. (2000,p.4) such as honesty or loyalty, their practical interpretations in deﬁne it as ‘‘a set of mechanisms through which outside in- business can vary across cultures (Smith and Hume 2005; vestors protect themselves against expropriation by the in- Vitell et al. 1993). Therefore, it can be argued that the siders’’. Good corporate governance improves ethical practical implementation of international auditing and re- behaviours (Ienciu 2012). According to Hoffman and Rowe porting standards, and hence their impact on EBF can be (2007), poor (weak) oversight of management by the board of affected by the cultural context. Although the recent lit- directors is a major cause of corporate scandals. This clearly erature on standards stresses the importance of cultural indicates that poor corporate governance leads management to factors (Doupnik and Richter 2004; Tsakumis 2007), it has make inappropriate or unethical decisions. Thus, strong cor- not yet been identiﬁed how culture inﬂuences the rela- porate governance that leads management to assure equality, tionship between the strength of auditing and reporting transparency, accountability and responsibility would be standards (SARS) and the EBF. Based on this gap, we aim likely to improve EBF. to examine the moderating impact of the cultural values on Reliable ﬁnancial reporting, an essential mechanism for this relationship. In this paper, data on the SARS and the improving corporate governance, reduces information EBF across countries are obtained from the World Ex- asymmetry and mitigates any possible agency problems ecutive Opinion Survey. Hence, both variables reﬂect the among stakeholders. Therefore, it is considered as one of perceptions of executives regarding the auditing and re- the major responsibilities of organizations, and it is an porting standards and ethical practices in their countries. important part of ethical business behaviour (Webley Therefore, throughout the paper, we use SARS to refer to 1999). Both in theory and practice, it is presumed that the perceived strength of auditing and reporting standards, strengthening auditing and reporting standards enhance the and EBF to perceived ethical behaviours of ﬁrms in a EBF (e.g., Ekici and Onsel 2013). country. Auditing and reporting standards deﬁne the principles to be Although there is a wide literature on auditing and re- applied in ﬁnancial reporting and assures the fair and reliable porting standards, the vast majority of studies focus on the presentation of information in ﬁnancial reports. A worldwide consequences of the application of standards on the quality movement to enhance the quality of auditing and reporting of ﬁnancial reporting and the stock market (e.g., Daske standards has existed since 2005. In line with the new et al. 2008; Liu et al. 2011). In contrast, only a limited regulations, international standards have been introduced for number of studies focus on the association of the new both auditing—International Standards on Auditing (ISAs)— standards with other issues such as EBF. To the best of our and also reporting—International Financial Reporting Stan- knowledge, Ekici and Onsel (2013) is the only recent study dards (IFRSs). New standards require organizations to make focusing on the ways in which EBF are inﬂuenced by reliable and faithful presentations, which are understandable, political and legal institutions, including the SARS. How- timely, veriﬁable, comparable and relevant to all stakeholders ever, this study did not identify the moderating impact of (IFRS Framework, pp. A33–A36), and also to assure the ac- national culture in the legal regulations and the ethical curacy of the information presented in order to enhance the behaviour relationship. Therefore, the current study aims to degree of conﬁdence (ISA 200, p. 73). 123 The Moderating Role of National Culture 57 The new standards enhance the quality of ﬁnancial re- language-culture and translation effect in the interpreta- porting. However, there are some aspects of the imple- tions of international accounting standards and suggest that mentation of the standards, which have been widely non-native English speakers may be less conﬁdent in their criticized. First of all, the new standards for ﬁnancial re- interpretation of uncertainty terms expressed in English porting are principle-based, which provides management than in their native language. Furthermore, it is argued by with greater ﬂexibility, and which leads to the need for Doupnik and Richter (2004) that the culture affects the judgment and estimates in the preparation of ﬁnancial re- interpretations of verbal probability terms used in interna- ports. For example, for the liabilities of uncertain timing or tional accounting standards in a systematic and predictable amount, which are called as provisions, standards require a manner. In another study, Doupnik and Riccio (2006), ar- measurement at the best estimate of the expenditure to gued that national cultural values may affect the interpre- settle the present obligation at the reporting date, taking tation of probability expressions used in IFRSs, and into account the risks and uncertainties related with op- consequently that may lead differences in the practices. erations (IAS-37). It is clear that the term ‘‘best estimate’’ Although standards have grey areas, they are based on a is ambiguous and subject to the judgment of the manage- conceptual framework that aims to direct management to ment. Another example is related with the subsequent be ﬂexible in making judgments, estimates, and choices in measurement of the property, plant and equipment. IAS-16 order to reﬂect the economic reality of each corporation. allows management to make a choice between the cost Also, it is argued that this ﬂexibility allows ﬁrms to use model and the revaluation model. This standard also allows tailor-made reporting standards, suited to the needs of en- management to use different depreciation models (e.g., tities, which facilitates the quality of the ﬁnancial report- straight line, double-declining), and to make estimates ing. Thus, it is expected that management would use the about the residual value and useful life of property, plant ﬂexibility allowed by the standards to make decisions that and equipment. Both of the examples given in the stan- consider the interests of all relevant stakeholders—i.e., dards make a signiﬁcant difference in the total assets, and ethical behaviours, rather than only the interests of ma- consequently, the size of a ﬁrm. jority shareholders, i.e., unethical behaviours. Conse- The second issue is the interpretation of the standards quently, organizations are pressured to behave more ethical due to its legal origin. The standards are from a common by this ﬂexibility, and the qualitative characteristics (reli- law legal origin, which may cause difﬁculties for entities able, faithful, understandable, timely, veriﬁable, compara- operating in different business cultures, particularly for the ble and relevant) demanded for ﬁnancial reporting. Also, code law countries, in which all rules are clearly deﬁned the new standards both for auditing and reporting assign all and documented under the law. responsibility for the presentation of misleading informa- tion to the management, thus encouraging it to become The ﬁnal issue is language boundaries. Language creates a challenge, even where all standards are fully translated more ethical in its organizational decisions. Considering into the local languages, because the meanings of terms the above beneﬁts, it is expected that a stronger auditing may vary according to the context. Some languages lack and reporting standards set will improve EBF. the vocabulary resources to express the exact meaning of certain terms, making accurate translation difﬁcult, and therefore causing potential misunderstandings. Moreover, Moderating Role of Culture in SARS-EBF Relationship there is subjectivity involved in the use of certain items in the standard, the exact meaning of which may be open to One of the main issues is whether or not the adoption of interpretation. An example is the different terms used to international auditing and reporting standards results in deﬁne the probabilities of some items in the estimates and uniformly strong governance (Boolaky and O’Leary 2011). judgments. These include terms such as most probable, Variation in the application of accounting standards can be probably, and remote. In IAS-37, it is declared that ‘‘dis- expected as consequence of differences in local business closure is not required if payment is remote’’. Another environment and in the institutional structure of a country example from IAS-18 is the statement that ‘‘it is probable (Chen et al. 2010). Furthermore, even high quality re- that any future economic beneﬁt associated with the item of porting standards may not necessarily improve the quality revenue will ﬂow to the entity’’. In these examples, the of accounting information presented (Ball et al. 2003), as terms ‘‘probable’’ and ‘‘remote’’ may refer to a likelihood the quality of ﬁnancial reporting also depends on the in- of anywhere between 5 and 30 %, depending on country centives of both the managers and auditors (Ball et al. and culture, and this discrepancy affects the recognition of 2003), their interpretation, enforcement mechanisms and revenue during a period, and, in turn, the total turnover, and litigation (Barth et al. 2008), local economic systems, and consequently, the ﬁnancial performance of ﬁrms. In their culture (Chen et al. 2010; Qu et al. 2012; Rezaee et al. study, Doupnik and Richter (2003) ﬁnd that there exists a 2010). 123 58 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli According to previous empirical studies, while some 2012). Thus, in low PDI cultures, even in grey areas in the researchers argue that the quality of ﬁnancial reporting has legal system, efforts are made to achieve the best outcomes been enhanced by the introduction of IFRSs (for an ex- for all parties. On the other hand, in high PDI cultures, tensive review: Barth et al. 2008 in 21 European countries; inequality in distribution of resources can be characterized Daske et al. 2008 in 26 countries all over the world; Liu by a relatively low regard for ethics (Scholtens and Dam et al. 2011 in China), a number of others ﬁnd decreasing 2007). Accordingly, in such societies, grey areas in the accounting quality (for an extensive review: Paananen legal system are more likely to be interpreted in favour of 2008, a study that examines Sweden; Paananen and Lin powerful parties such as majority shareholders (Blodgett 2009, a study conducted in Germany; Jeanjean and et al. 2001). Therefore, we expect that the positive rela- Stolowy 2008, a study comparing companies in Australia, tionship between SARS and EBF will be negatively in- France, and the UK). ﬂuenced by PDI. Speciﬁcally, in high PDI cultures, the In many jurisdictions, the main opposition to interna- impact of SARS on EBF is weaker than in low PDI tional auditing and reporting standards concerned the in- cultures. ﬂuence of culture on their application by practitioners and Hypothesis 1 PDI weakens the relationship between auditors (Perera 1994). Variation in cultural characteristics SARS and EBF in a country. across countries results in different degrees of harmoniza- tion between local standards and the newly introduced ones FUTR_O concerns the way people perceive and treat (Ding et al. 2005). Therefore, the impact of SARS on EBF time. High FUTR_O leads people to focus on the long-term may differ across cultures. in future related activities, such as planning and investing. In order to examine the moderating role of culture on the In future oriented societies, people tend to be more ﬂexible relationship of SARS with EBF, we utilized the framework and adaptive, and saving for the future is emphasized provided by global leadership and organizational behaviour (House et al. 2004). On the other hand, in societies where effectiveness study (GLOBE), which assesses the cultural FUTR_O is low, people focus more on immediate results, characteristics of 62 societies based on the data from 951 and organizations tend to be bureaucratic and inﬂexible organizations and 17,000 managers (House et al. 2004). It (House et al. 2004; Steers et al. 2013). Alas (2006) de- is widely known that, among the many cultural frameworks scribed societies with high FUTR_O as those in which the designed to analyse national cultures (e.g., Hall 1959; requirements for well-established standards of ethical be- Hofstede 2001; Schwartz 1992; Trompenaars 1994), haviour are weaker. Moreover, the FUTR_O dimension has GLOBE is considered as the most ambitious effort (Steers many commonalities with Hofstede’s long-term orientation et al. 2013). Compared to Hofstede’s study (2001), (Steers et al. 2013), which is cited as being positively as- GLOBE is considered to be both more recent and com- sociated with ethical behaviour (Tsui 1996). Therefore, it prehensive (Shi and Wang 2011). Moreover, its method- can be claimed that in future oriented societies, individuals ology is found to have greater validity and reliability try to choose the option which is more sustainable, rather (Parboteeah et al. 2005). than the one producing short-term results which beneﬁts National cultures are assessed on nine dimensions in only few parties. Therefore, people in future oriented so- the GLOBE study, namely; power distance (PDI), future cieties are willing to interpret the legal base, including orientation (FUTR_O), human orientation, performance auditing and reporting standards, in favour of sustainable orientation, in-group collectivism (IGC), institutional outcomes, and hence the impact of SARS will be stronger collectivism (INST_C), assertiveness, uncertainty avoid- on EBF in such societies. ance (UAI) and gender egalitarianism. The current study Hypothesis 2 FUTR_O strengthens the relationship be- aims to explore the moderating role of all the dimen- tween SARS and EBF in a country. sions, with the exception of gender egalitarianism, as neither a literature review nor theoretical reasoning Human orientation is deﬁned as the degree to which suggested any relevance for this dimension to SARS– people reward fairness, altruism and generosity (House EBF relationship. et al. 2004). In societies, which are characterized by high PDI refers to the degree to which less powerful members human orientation, people give importance to the interests of a society accept the unequal distribution of power. In of others. In contrasts, in low human oriented societies, high PDI cultures, powerful individuals are privileged, and individuals focus more on their own self-interests, and their violation of rules may be ignored by other members in value pleasure, comfort and self-enjoyment. A small the society (House et al. 2004). From the ethical behaviour number of studies have examined the relationship between perspective, it is known that in low PDI cultures, people are human orientation and ethical behaviour. Parboteeah et al. more sensitive to ethical issues due to a strong belief in the (2005) found that human orientation is negatively associ- protection of the rights of all people (Chan and Cheung ated with a willingness to justify ethically suspect 123 The Moderating Role of National Culture 59 behaviours, probably due to the nurturing and cooperative express pride, loyalty and cohesiveness in their immediate nature of this type of society. Moreover, Alas (2006) in- groups, such as family, circle of close friends or work team cludes human orientation as one of the characteristics of (House et al. 2004). The in-group protects the interests of societies which have low needs for well-established stan- the individual, but expects unquestioning loyalty in return. dards for ethics. Those societies emphasize concern for the Therefore, when IGC is high, people perceive themselves well-being of others, thus leading to the interpretation of as dependent on the groups they belong to, instead of the rules or standards in line with ethical behaviour. making independent judgments. INST_C, on the other Therefore, we argue that the positive relationship between hand, represents a very different type of collectivism. SARS and EBF is stronger in human oriented societies. Gelfand et al. (2004, p. 476) describe societies with high level of INST_C as ‘‘…future focused and performance Hypothesis 3 Human orientation strengthens the rela- oriented, yet they seek to accomplish such orientations tionship between SARS and EBF in a country. through practices that emphasize being concerned about Performance orientation is the degree to which high others, and not being assertive or power domineering.’’ As performance is encouraged and rewarded (House et al. the comparisons of deﬁnitions yield that these two repre- 2004). High performance orientation characterizes an en- sent totally different dimensions, not surprisingly, many vironment in which individuals believe that they can con- countries in GLOBE sample have signiﬁcantly different trol their own destiny, and value assertiveness and success. scores on IGC and INST_C (Chhokar et al. 2012). There- By deﬁnition, performance orientation overlaps with the fore, we treat these dimensions as completely separate in masculinity dimension deﬁned in Hofstede’s study (2001), the construction of the argument about their moderating in terms of the value given to success and materialism. As impact on SARS–EBF relationship. the literature on the relationship between performance By deﬁnition, IGC has more commonalities with Hof- orientation and ethical behaviour is limited, we utilized stede’s individualism/collectivism dimension compared to studies examining the association between masculinity and INST_C. Therefore, we utilized the rich literature on the ethical behaviour. Blodgett et al. (2001) argue that people relationship between individualism/collectivism and ethical in masculine societies feel great pressure to succeed in their behaviour while exploring IGC’s potential moderation im- careers, and are less concerned about others. In line with pact. Individualism/collectivism has been used in many this argument, Vitell et al. (1993) show that many business studies to explain the impact of national culture on ethical practices considered valid in masculine cultures can be behaviours (e.g., Chan and Cheung 2012; Smith and Hume perceived as unethical in feminine cultures. As a result, the 2005; Vitell et al. 1993; Zhang et al. 2013). For instance, quality of corporate governance practices signiﬁcantly de- ethical sensitivity of US managers is found to be higher than creases in masculine cultures (Chan and Cheung 2012). On that of their Turkish counterparts’ due to the effect of in- the other hand, cultures that are less oriented to perfor- dividualism (Simga-Mugan et al. 2005). Similar results are mance are more consensus-oriented, and general well-be- also found in a study which compares the ethical sensitivity ing is given more importance (House et al. 2004). of government personnel in US and Hong Kong. Accord- Accordingly, we argue that in high performance oriented ingly, compared to government personnel in US, those in societies, managers are more likely to interpret the grey Hong Kong have a greater tendency to perceive ethical areas in auditing and reporting standards in such a way as behaviours as existing purely within the limits of written to present a higher level of performance, based on the rules (Dolecheck and Dolecheck 1987). A further indication ﬂexibility allowed. Therefore, the likelihood of those of this tendency is the lower crime levels found in Scan- standards leading to more ethical decision-making will dinavian countries, due to lower PDI and higher indi- decline in high performance oriented societies. vidualism, factors which outweigh the strength of the legal system (Coffee 2001). This result is interpreted as revealing Hypothesis 4 Performance orientation weakens the re- that in individualistic cultures, people are expected to show lationship between SARS and EBF in a country. respect for the rights of the individuals, rather than pro- Individuals’ relations to social organizations and per- tecting the interests of their in-group at the expense of out- ceptions of self-identity have been used in many studies to groups (Franke and Nadler 2008). Therefore, at the stages of differentiate between cultures (e.g., Chan and Cheung ethical decisions, they are less likely to be inﬂuenced by 2012; Smith and Hume 2005; Steers et al. 2013; Vitell et al. groups or group leaders (Vitell et al. 1993). Based on these 1993; Zhang et al. 2013). While Hofstede (2001) conceives arguments, we claim that those in individualistic societies of the relationship as having a single dimension, i.e., col- are more prone to interpret the legal system in an unbiased lectivism–individualism, the GLOBE project recognizes way when making ethical decisions. Hence, there is an in- two independent dimensions: IGC and INST_C (Chhokar creased likelihood of making decisions which are more et al. 2012). IGC refers to the degree to which individuals ethical because of the importance of the individual’s own 123 60 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli judgments relative to the need to protect the interests of risk. Moreover, they have a signiﬁcantly greater need to their in-groups when interpreting the auditing and reporting be guided by rules, principals and traditions, due to standards. Correspondingly, we expect that IGC has greater levels of uncertainty about the future and the weakening impact in SARS–EBF relationship. appropriate conduct (House et al. 2004). They expect In contrast to IGC, INST_C has been characterized as conduct to be guided by well-deﬁned regulations, and having a future focus, and being opposed to assertiveness therefore they have a lower degree of ethical sensitivity or power-domineering (Gelfand et al. 2004). From the than in low UAI societies (Weaver 2001). Accordingly, ﬁrms’ perspective, INST_C leads to decisions which are their ethical judgment abilities have not been well de- the most beneﬁcial for the long-term sustainability of the veloped (Vitell et al. 1993). Thus, where issues are not whole institution, including all the relevant parties. clearly identiﬁed by written rules, they may feel lost and Therefore, we can argue that managers are more willing anxious, and tend to make less appropriate decisions. In to use the auditing and reporting standards to make sus- line with this claim, Chan and Cheung (2012) identify a tainable decisions in institutionally collectivist societies as lower quality of corporate governance practices in high they are motivated to maximize the beneﬁt to their or- UAI cultures. Due to the dynamic nature of business ganizations. For this reason, we hypothesize that INST_C practices, there is a need for frequent reappraisal and and IGC have opposite impacts on SARS–EBF reconsideration of appropriate conduct, especially for the relationship. issues regulated by principles that allow for ﬂexibility. We argue that this need for ﬂexibility and adaptation Hypothesis 5a IGC weakens the relationship between means that, compared to low UAI societies, high UAI SARS and EBF in a country. societies perform less effectively in the grey areas of the Hypothesis 5b INST_C strengthens the relationship be- auditing and reporting standards. Accordingly, we hy- tween SARS and EBF in a country. pothesize that UAI weakens the positive relationship be- tween SARS and EBF. Assertiveness is the degree to which people are asser- tive, confrontational and aggressive in their relationships. Hypothesis 7 UAI weakens the relationship between In societies characterized by high levels of assertiveness, SARS and EBF in a country. the stronger members are admired, competition is valued, and people are direct and aggressive in their relationships (House et al. 2004). In some aspects, assertiveness has Methodology commonalities with performance orientation. However, performance orientation concerns results, while assertive- Data and Measures ness mainly concerns social relationships (Parboteeah et al. 2005). In assertive societies, people tend to think of others The data cover 62 societies between the years 2007 and as being opportunistic, and are concerned to protect their 2012. The initial sample was 372 society–year observa- own interest (House et al. 2004). They are, therefore, more tions, including all countries used in the GLOBE study likely to try to justify ethically suspect behaviours (Par- (House et al. 2004). From this initial sample, Germany and boteeah et al. 2005). Also, the tendency to be cooperative South Africa (a total of 24 society–year observations) were and to consider the well being of others is relatively weak excluded due to data segmentation, as the former was di- in those societies. Therefore, in highly assertive societies, vided into west and east, and the latter into a Caucasian and individuals are more prone to interpret the legal regula- Indigenous sample. Switzerland (a total of 12 society–year tions, such as auditing and reporting standards, in favour of observations), which has German and French Speaking themselves or the more powerful members of society, and samples, was excluded due to the dual classiﬁcation in show less interest in protecting the weaker members. Ac- cultural clusters. The Czech Republic and Iran (a total of cordingly, we claim that the positive relationship between 12 society–year observations) were excluded due to the SARS and EBF is negatively inﬂuenced by the level of missing cultural values. The ﬁnal sample comprises of 324 assertiveness. society–year observations for 54 countries. Data for EBF and SARS were gathered from the Hypothesis 6 Assertiveness weakens the relationship World Competitiveness Index (WCI) database, through between SARS and EBF in a country. the World Economic Forum’s Executive Opinion Survey. UAI expresses the degree to which the members of a The Executive Opinion Survey, a worldwide ranking society feel uncomfortable with uncertainty and ambiguity extending more than 30 years, was chosen for providing (Hofstede 2001). In high UAI societies, people are more both a qualitative and quantitative portrait of countries’ emotional and intolerant, and less accepting of personal- economic and business environment. The survey is 123 The Moderating Role of National Culture 61 carried out with the help of more than 160 partner in- reduces a possible common method bias. In order to stitutes (research institutes, universities, business organi- assure the robustness of the ﬁndings, in our sensitivity zations, etc.) worldwide by using face-to-face interviews analyses we also used an alternative secondary source with business executives, telephone interviews and data that proxy the SARS. mailings and an online survey. In order to capture a Previous research which examines the reasons of une- strong and representative sample, the partner institutes thical behaviour mostly ignores the role of competition are tasked to prepare a ‘‘sample frame,’’ or large list of (Shleifer 2004). However, considering the growth and in- potential respondents. Based on the list, each year, a come enhancing effect of competition, it may improve EBF random selection of ﬁrms, which receive the survey, is in the long run (Shleifer 2004), since the intention to behave applied in order to reduce the survey bias. According to ethically increases as societies get richer (Friedman 2006). 2012 sources, a total of 15,000 surveys were sent out to Thus, following Shleifer (2004) and Friedman (2006), in the 142 economies. After data processing, 14,059 (93 %) current study, competition, which referred to the level of were used to create a unique resource, covering all social market competition in the country, was used as a control and economic indicators, most of which would not variable. The data for market competition were gathered otherwise be publicly available, from multiple countries from the WCI database. It was computed based on the worldwide (WCI 2012). weighted average of 14 items, measured on a seven-point In the Executive Opinion Survey, our dependent vari- Likert scale (1 = lowest and 7 = highest). Sample items able, EBF was measured with one item question: ‘‘How include the extent of market dominance, effectiveness of would you compare the corporate ethics (ethical behaviour anti-monopoly policy and prevalence of trade barriers. in interactions with public ofﬁcials, politicians, and other Countries’ legal system inﬂuences the business environ- enterprises) of ﬁrms in your country with those of other ment where ﬁrms operate. In general, commercial laws are countries in the world?’’. Participants were asked to indi- driven from two broad traditions; common law and civil law cate their response to this question on a seven-point Likert (La Porta et al. 1998). According to La Porta et al. (1998), legal scale (1 = among the worst in the world; 7 = among the systems are determinants of corporate governance, and com- best in the world). Although the survey measured EBF with mon law countries give stronger legal rights and investor a single item, it has been found reliable in previous re- protection to market participants. Consequently, it is expected search (Ekici and Onsel 2013; Mehanna and Yazbeck that ﬁrms operating in common law countries are more tend to 2009). behave ethically. Therefore, following La Porta et al. (1998), Similarly, SARS was measured with a single question: the legal system of the countries was used as a control variable. ‘‘In your country, how would you assess ﬁnancial auditing Common law was a dummy variable equal to one if the origin and reporting standards regarding company ﬁnancial per- of country’s legal system was derived from common law, and formance?’’ Participants reﬂected their opinions on a sev- zero if from a civil law country. The data for the legal origin of en-point Likert scale (1 = among the worst in the world; countries were gathered from the data set used in La Porta et al. 7 = among the best in the world). (1998) and downloaded from Shleifer’s website. Our study may be subject to a common method bias Additionally, as an economic control variable that af- due to collecting the dependent and independent vari- fects the level of development, GDP per capita is consid- ables from the same survey and from the same respon- ered. GDP per capita is an indicator of standards of living dents. Podsakoff et al. (2012) suggest several ways to in a country and it shows the relative performance of overcome this problem. Therefore, to avoid a possible countries. Friedman (2006) and Shleifer (2004) argues that common method bias, in our analysis we decided to use there is a positive relationship between EBFs and GDP per the data for our independent variable collected at a dif- capita. Therefore, GDP effect must be controlled in a cross- ferent time period. Speciﬁcally, the perceived SARS was country study. The data for GDP per capita were collected measured based on the last year’s score. Using this from the World Bank database (2012). measure is fair when we consider a time lag between the The moderating variable, national culture was measured auditing and reporting standards perception and its re- based on the country scores regarding the eight cultural ﬂection to the perceived EBF. While the survey ques- dimensions (PDI, FUTR_O, human orientation, perfor- tions regarding SARS remain the same, considering the mance orientation, IGC, INST_C, assertiveness and UAI) random sampling process, the survey is sent out to dif- deﬁned in the GLOBE project (House et al. 2004). In this ferent participants. As such, this may help to deal with common source biases that possibly may result from The data was gathered from the online resources available on using dependent and independent variables coming from Professor Anne-WilHarzing’s web page from University of Mel- the same source. In that term, as informed by Podsakoff bourne, Australia available on http://www.harzing.com/resources. et al. (2012), using SARS score of the previous year htm. 123 62 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli well-known project, data were collected from 17,000 hand, as expected, the regression results in Model 2 show managers from 951 different organizations, who assessed that the interaction term of SARS and FUTR_O is positive the cultural characteristics of 62 societies on a seven-point and signiﬁcant, suggesting that higher FUTR_O strengthens Likert scale. the impact of SARS on EBF. Model 5 documents that in- In the GLOBE study, each country was measured along creased IGC weakens the impact of SARS on EBF. each of the dimensions. In order to provide more robust In Model 6, the interaction term of SARS and INST_C ﬁndings, we considered the possible impact of the multi- becomes positive and signiﬁcant, indicating that higher variate context of cultural dimensions in each country and INST_C strengthens the impact of SARS on EBF. Finally, used cultural clusters deﬁned in the GLOBE study as contrary to our expectations, Model 8 shows that the inter- control dummies. In the sensitivity analysis, the predicting action term of SARS and UAI is positive and signiﬁcant, and moderating roles of the cultural clusters were exam- supporting the idea that higher UAI strengthens the impact ined as an alternative to our main analysis. The list of the of SARS on EBF. The results provide no signiﬁcant mod- cultural clusters with associated societies and the cultural erating impact of human orientation, performance orienta- characteristics are presented in ‘‘Appendix 1’’ section. tion or assertiveness on SARS and EBF relation. The signiﬁcant moderating effects of each cultural di- Analysis mension on SARS–EBF relationship are also presented separately in Fig. 1. This study uses a regression analysis methodology to ex- amine the moderating role of culture on EBF and SARS relation. Ethical behaviour is closely associated with many Sensitivity Analysis different social and economic issues in the market, there- fore, in order to control country speciﬁc factors, the level of In order to check the robustness of the results we conducted market competition, the legal origin of countries, GDP per several sensitivity analyses by using alternative measures capita and cultural clusters were added into the model as or estimation methods. control variables. We employed pooled OLS estimation First, to test the sensitivity of the results to the measure with robust standard errors for the estimation of the we used for SARS, we run the regressions by using a coefﬁcients. secondary data source. An IFRS dummy that assumed to proxy the SARS was used. For countries where IFRS is Results required for ﬁnancial reporting it takes the value of 1, 0 otherwise. Tables 4 and 5 report the results of the multiple regression analysis using IFRS and reveal similar results Table 1 presents the correlation results among EBF, SARS, GLOBE’s cultural dimensions, countries’ legal origin, and with respect to the main ﬁndings reported in Tables 2 and market competition. There were signiﬁcant correlations 3. In addition to our ﬁndings, if IFRS is used, the cultural between the EBF and the control variables. The use of dimensions that are insigniﬁcant in the main ﬁndings are those variables to control country-speciﬁc differences has found signiﬁcant. According to the results, the effective- an explanatory power for the analysis. ness of IFRS on EBF strengthens in countries with high Table 2 shows the results of the multiple regression INST_C, FUTR_O, UAI, human orientation and perfor- analysis, SARS and cultural dimensions as predictors of mance orientation while it weakens in countries with high EBF. As the cultural dimensions are correlated with each PDI, IGC and assertiveness. The results are in line with our other, the impact of each cultural dimension was examined expectations except for the performance orientation and in separate models and control dummies for 10 cultural UAI. Even though the use of IFRS is a good proxy for clusters were used. All models for the eight different cultural ﬁnancial reporting quality, it does not capture the auditing dimensions are signiﬁcant at 0.01. In all models, in line with standards. Therefore, the sensitivity of the results might be the theory, SARS has a signiﬁcant positive impact on EBF. due to the differences in the scope of IFRS and SARS. Table 3 shows the results of the multiple regression Second, in order to test the sensitivity of our analysis to analysis for the moderating effect of culture on the asso- the model speciﬁcation that takes only one of the cultural ciation of SARS and EBF. Similarly, the impact of each dimensions into account at a time, we used cultural clusters cultural dimension was examined in separate models and as predictors and moderators in two different analyses. control dummies for 10 cultural clusters were used. Ac- Based on the similarities and differences in cultural char- cording to the regression results documented in Model 1, the acteristics, the GLOBE study divides the countries into interaction term of SARS and PDI becomes negative and cultural (regional) clusters. Considering the multivariate signiﬁcant, indicating that higher PDI weakens the impact of context of culture, using cultural clusters might be more SARS on EBF, as hypothesized in this study. On the other explanatory than a single cultural dimension at a time on. 123 The Moderating Role of National Culture 63 The results, presented in Tables 6 and 7, indicate that the moderating impact of clusters is signiﬁcant and weakening for three clusters, namely; Middle East, Latin America and Eastern Europe. The Middle East cluster, where Turkey, Kuwait, Egypt, Morocco and Qatar take place, is charac- terized by high score on IGC, medium score on assertiveness, humane orientation, INST_C, performance orientation, PDI, and low score on FUTR_O, gender egalitarianism and UAI. Latin America is the largest cluster including Ecuador, El Salvador, Columbia, Bolivia, Brazil, Guatemala, Argentina, Costa Rica, Venezuela and Mexico. It is known with high IGC, medium assertiveness, human orientation, gender egalitarianism, and PDI, low FUTR_O, INST_C, performance orientation and UAI. Fi- nally, Eastern Europe cluster consist of Albania, Georgia, Greece, Hungary, Kazakhstan, Poland, Russia and Slove- nia. Its main cultural characteristics are high scores on assertiveness, gender egalitarianism, IGC, medium scores on INST_C, humane orientation and PDI, and low scores on FUTR_O, performance orientation and UAI. When the common characteristics of the three clusters are examined, it is seen that they scored high on IGC, medium on humane orientation and PDI, and low in FUTR_O and UAI. Therefore, it can be said that overall, the results are in line with our ﬁndings obtained with cultural values. Third, to test the sensitivity of the results to the choice of the cultural values, we run all regressions by using Hofstede’s cultural values. It is known that GLOBE study takes Hofstede’s study (1980, 2001) as a base. Therefore, between two studies there are many similarities in terms of cultural values that are used to assess differences and similarities in mindsets across countries. In Hofstede’s study (1980, 2001) societies are assessed based on ﬁve cultural dimensions, namely; PDI, IGC, time orientation (short term vs. long term), UAI and masculinity versus femininity. All these dimensions were used in our sensi- tivity check. Table 8, Panels A and B document that the impact of SARS on EBF weakens if society is character- ized by high UAI, high PDI, high masculinity and low individualism. In general, the results are similar to the ﬁndings presented in Tables 2 and 3 for all dimensions except for UAI. In this area, the ﬁndings obtained from Hofstede’s framework show weakening impact on SARS– EBF relation. The difference in our ﬁndings is most probably due to utilizations of different measurements in GLOBE and Hofstede’s study. As indicated by Venaik and Brewer (2008), although both studies use the same term— UAI—they utilize different questions that aim to address different practices. For instance, Hofstede (1980, 2001) focus more on the role of traditions to cope with uncer- tainties and separate this dimension from risk taking, while GLOBE focus more on business practices such as risk taking in business decisions (House et al. 2004). Therefore, Table 1 Summary statistics and correlation matrix Mean Standard deviation (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (a) EBF 4.566 1.065 1 it (b) SARS 5.028 0.788 0.83* 1 it-1 (c) PDI 5.165 0.367 -0.40* -0.27* 1 it (d) FUTR_O 3.786 0.418 0.71* 0.62* -0.46* 1 it (e) HUM_O 4.121 0.436 -0.02 -0.02 -0.21* 0.05 1 it (f) PERF_O 4.046 0.362 0.59* 0.48* -0.32* 0.58* 0.11* 1 it (g) IGC 5.195 0.681 -0.74* -0.64* 0.44* -0.53* 0.05 -0.29* 1 it (h) INST_C 4.258 0.410 0.58* 0.44* -0.32* 0.50* 0.32* 0.45* -0.38* 1 it (i) ASSERT 4.105 0.332 -0.03 -0.05 0.15* 0.13* -0.40* 0.10 0.02 -0.32 1 it (j) UAI 4.083 0.533 0.81* 0.68* -0.44* 0.76* 0.07 0.62* -0.65* 0.54* -0.04 1 it (k) COMPETITION 4.471 0.663 0.84* 0.77* -0.30* 0.61* -0.03 0.56* -0.51* 0.49* 0.01 0.65* 1 it (l) COMMON 0.2962 0.457 0.27* 0.41* -0.06 0.21* 0.24* 0.28* -0.22* 0.08 -0.13* 0.22* 0.36* 1 (i) lnGDP per capita 9.389 1.265 0.71* 0.59* -0.22* 0.43* -0.27* 0.25* -0.61* 0.35* 0.14* 0.48* 0.62* -0.03 it EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, PDI power distance, FUTR_O future orientation, it it-1 it it HUM_O human orientation, PERF_O performance orientation, IGC in-group collectivism, INST_C institutional collectivism, ASSERT assertiveness, UAI uncertainty avoidance, it it it it it it COMPETITION market competition, COMMON country legal origin, lnGDP per capita natural logarithm of gross domestic product per capita in current US dollars it it it * p \ 0.01. n = 324 (n = 324 for LagSARS) society–year observations between the years 2007 and 2012 64 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli Table 2 Regression results of EBF on SARS and GLOBE cultural values Dependent variable: EBF Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 it Constant 0.520 -2.082*** -2.206*** -3.464*** 1.564*** -2.664*** -0.375 -2.615*** Test variables SARS 0.349*** 0.325*** 0.364*** 0.307*** 0.252*** 0.355*** 0.339*** 0.288*** it-1 PDI -0.307*** it FUTR_O 0.316*** it HUM_O 0.209*** it PERF_O 0.635*** it IGC -0.331*** it INST_C 0.391*** it ASSERT -0.188** it UAI 0.505*** it Control variables COMPETITION 0.656*** 0.632*** 0.683*** 0.555*** 0.683*** 0.647*** 0.694*** 0.570*** it COMMON -0.038 -0.027 -0.050 -0.024 -0.038 -0.002 -0.018 -0.026 lnGDP per capita 0.141*** 0.139*** 0.164*** 0.186*** 0.084*** 0.142*** 0.158*** 0.141*** it Cluster dummies Yes Yes Yes Yes Yes Yes Yes Yes Prob [ F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R 0.900*** 0.898*** 0.896*** 0.913*** 0.905*** 0.902*** 0.895*** 0.914*** EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, PDI it it-1 it power distance, FUTR_O future orientation, HUM_O human orientation, PERF_O performance orientation, IGC in-group collectivism, it it it it INST_C institutional collectivism, ASSERT assertiveness, UAI uncertainty avoidance, COMPETITION market competition, COMMON it it it it it country legal origin, lnGDP per capita natural logarithm of Gross domestic product per capita in current US dollars, cluster dummies, the it dummy variables to control the effect of cultural clusters deﬁned in the GLOBE study *, **, *** p \ 0.10, \ 0.05 and \ 0.01 (one-sided tests), respectively. n = 324 society–year observations between the years 2007 and 2012 most country scores on UAI in Hofstede’s and GLOBE human orientation (hypothesis 3), performance orientation studies are negatively correlated. (hypothesis 4) and assertiveness (hypothesis 6). Furthermore, to understand the sensitivity of the results The business ethics literature contains a myriad of to the estimation method, the regression analysis were run studies describing the relationship between cultural values by random-effect generalised least square estimation model and EBF. However, although there are a number of studies by excluding the cultural cluster dummies. The results are in which culture has been treated as an independent vari- similar to pooled OLS in terms of direction and sig- able, its moderating impact is generally ignored. In this niﬁcance of the coefﬁcients. study, the identiﬁcation of the moderating role of cultural Based on the sensitivity analyses, we conclude that our values in SARS–EBF relationship is considered important main ﬁndings also generally hold when alternative mea- in increasing our understanding of the complex role of sures for independent or moderating variables were used or cultural values in ethical conduct. alternative estimation method was applied. SARS–EBF Relationship Discussion Our ﬁndings indicate that SARS improves EBF through encouraging ﬁrms to become more faithful, accurate, un- This study examines the moderating role of cultural values derstandable, timely, veriﬁable, comparable and relevant in on relationship between SARS and EBF. Results provide sharing ﬁnancial information with all other stakeholders. empirical evidence to support the argument that the posi- The strong positive impact of the SARS–EBF relationship tive relationship between SARS and EBF is moderated by emerges as an important outcome of recent regulations set certain cultural values, namely; PDI (hypothesis 1), by policy makers designed to improve ﬁnancial reporting and auditing standards. FUTR_O (hypothesis 2), IGC (hypothesis 5a), INST_C (hypothesis 5b), and UAI (hypothesis 7). However, em- Although we showed that the stronger perception on pirical data showed no signiﬁcant moderation impact for auditing and reporting standards yield higher levels of 123 The Moderating Role of National Culture 65 Table 3 Two-way moderating regression results of EBF on SARS and GLOBE cultural values Dependent variable EBF Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 it Constant -3.591** 1.941 -4.524** -1.561 -5.428*** 9.286*** -6.004** 2.691*** Test variables SARS 1.402*** 0.634** 0.628** -0.057 1.436*** -1.986*** 1.297** -0.917*** it-1 PDI 0.434 it FUTR_O -1.024** it HUM_O 0.367 it PERF_O -0.166 it IGC 0.737** it INST_C -2.395*** it ASSERT 0.751 it UAI -0.917*** it PDI * SARS -0.175** it FUTR_O * SARS 0.284*** it-1 HUM_O * SARS -0.027 it-1 PERF_O * SARS 0.138 it-1 IGC * SARS -0.207*** it-1 INST_C * SARS 0.568*** it-1 ASSERT * SARS -0.196 it-1 UAI * SARS 0.299*** it-1 Control variables COMPETITION 0.605*** 0.574*** 0.656*** 0.518*** 0.725*** 0.579*** 0.679*** 0.530*** it COMMON -0.034 -0.024 -0.094* -0.123* -0.082* 0.050 -0.067* 0.016 lnGDP per capita 0.180*** 0.176*** 0.221*** -0.208*** 0.113*** 0.170*** 0.212*** 0.171*** it Cluster dummies Yes Yes Yes Yes Yes Yes Yes Yes Prob [ F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R 0.848*** 0.858*** 0.834*** 0.851*** 0.876*** 0.881*** 0.835*** 0.900*** EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, PDI it it-1 it power distance, FUTR_O future orientation, HUM_O human orientation, PERF_O performance orientation, IGC in-group collectivism, it it it it INST_C institutional collectivism, ASSERT assertiveness, UAI uncertainty avoidance, COMPETITION market competition, COMMON it it it it it country legal origin, lnGDP per capita natural logarithm of Gross domestic product per capita in current US dollars, Cluster dummies the it dummy variables to control the effect of cultural clusters deﬁned in the GLOBE study *, **, *** p \ 0.10, \ 0.05 and \ 0.01 (one-sided tests), respectively. n = 324 society–year observations between the years 2007 and 2012 EBF, this relationship is moderated by cultural values. In and Cheung 2012; Scholtens and Dam 2007; Smith and other words, the beneﬁt in enhancing ethical behaviours Hume 2005; Steers et al. 2013; Vitell et al. 1993; Zhang derived from the standards varies according to cultural et al. 2013). Previous research showed that these two di- dimensions of each society. Our results show that societies, mensions have a strong negative impact on ethical be- which scored low in PDI and IGC, and high in INST_C, haviour. Our results are consistent with the previous FUTR_O and UAI, may beneﬁt most from the standards. research and our hypotheses, so that PDI and IGC are Other types of society are more likely to need enforcement found to have weakening moderating impact on SARS– mechanisms to counteract the impact of their cultural EBF relationship. values, which would otherwise reduce the effectiveness of As discussed in the theoretical background, individuals SARS. in high PDI cultures are less sensitive towards ethical acts and more tolerant of inequality (Chan and Cheung 2012; Weakening Moderating Impact of PDI and IGC House et al. 2004; Scholtens and Dam 2007). Accordingly, they may use the ﬂexibility given by the standards to de- In the business ethics literature, PDI and IGC are the most fend the rights of powerful parties, such as majority frequently cited in explanations of variation in ethical be- shareholders in their ﬁrms. As this value is shared by the haviour among societies (e.g., Blodgett et al. 2001; Chan vast majority in their society, managers believe that such 123 66 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli Power Distance (PDI) In-Group Collectivism (IGC) Institutional Collectivism (INST_C) 2 2 2.5 1.8 1.8 1.6 1.6 2 1.4 1.4 1.2 1.2 1.5 0.8 0.8 1 0.6 0.6 0.4 0.4 0.5 0.2 0.2 Low SARS(t-1) High SARS(t-1) Low SARS(t-1) High SARS(t-1) Low SARS(t-1) High SARS(t-1) Low POWER DISTANCE Low IN GROUP COLLECTIVISM Low INSTITUTIONAL COLLECTIVISM High POWER DISTANCE High IN GROUP COLLECTIVISM High INSTITUTIONAL COLLECTIVISM Future Orientation (FUTR_O) Uncertainty Avoidance (UNC_AV) 9 2 1.5 0.5 Low SARS(t-1) High SARS(t-1) Low SARS(t-1) High SARS(t-1) Low UNCERTAINITY AVODICANCE Low FUTURE ORIENTATION High UNCERTAINITY AVODICANCE High FUTURE ORIENTATION Fig. 1 The moderating role of culture on EBF and SARS relation behaviour is both normal and expected. Therefore, at every explained, INST_C and FUTR_O have some common- opportunity, they are willing to interpret the grey areas in alities. INST_C is deﬁned as considering the interests of all the standards to serve the interests of powerful parties. related parties of an institution with a long-term focus; Accordingly, the impact of standards is weaker in terms of long-term focus and sustainability are also at the core of encouraging EBF in high PDI societies. FUTR_O. In other words, managers are more willing to IGC has a very similar impact on SARS–EBF relation- make sustainable and ethical decisions while interpreting ship. When IGC is high, people tend to protect the interests the standards in high institutional collectivist and high fu- of their in-group at the expense of those of the out-groups ture oriented societies. (Franke and Nadler 2008). Therefore, when interpreting the Our ﬁndings about the moderating impact of IGC and auditing and reporting standards, their decisions are more INST_C are also important, as they show that these two likely to favour the interests of their in-groups rather than dimensions of culture have inverse moderating impacts on to support the rights of all. Hence, the impact of SARS SARS–EBF relationship. Although clearly deﬁned as tends to be weaker in those societies. Therefore, as soci- separate in the GLOBE project (House et al. 2004), pre- eties characterized by high PDI and IGC, standards are vious researchers either used the term ‘‘collectivism’’ to unable to make the desired impact in terms of stimulating refer to (a combination of) either types, or to refer to IGC EBF. alone, thus completely ignoring the existence of INST_C. The results of our sensitivity analysis, which is con- Our research has contributed to the literature not only by ducted with cultural clusters, are also in line with these providing empirical evidence that they are two distinct ﬁndings as they indicate that the high score on IGC and dimensions, but also showing that they may have different- medium score on PDI are among the common character- sometimes inverse-impacts on social issues. Thus, we istic of societies where the positive association between recommend researchers to take into account this ﬁnding, SARS and EBF is weaker. and incorporate IGC and INST_C separately in their future research. Strengthening Moderating Impact of INST_C, Our results did not support our hypothesis regarding the FUTR_O and UAI impact of UAI. Although expected to have a weakening impact on the SARS–EBF relationship, UAI has statisti- Our results provided empirical evidence regarding the cally signiﬁcant strengthening impact according to our re- strengthening moderating impact of INST_C and sults. Researchers generally hypothesize an inverse FUTR_O, in line with our hypotheses. As previously relationship between UAI and ethical behaviour due to Ethical Behavior of firms Ethical Behavior of Firms Ethical Behavior of Firms Ethical Behavior of Firms Ethical behavior of firms The Moderating Role of National Culture 67 Table 4 Regression results of EBF on IFRS and GLOBE cultural values Dependent variable EBF Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 it Constant 0.184 -3.774*** -3.421*** -4.351*** 2.402*** -3.953*** -1.402 -3.583*** Test variables IFRS 0.056** 0.003* 0.048** 0.113** 0.101** 0.002* 0.033** 0.078** it PDI -0.433*** it FUTR_O 0.700*** it HUM_O 0.201*** it PERF_O 0.677*** it IGC -0.570*** it INST_C 0.541*** it ASSERT -0.273*** it UAI 0.789*** it Control variables COMPETITION 0.902*** 0.724*** 0.958*** 0.762*** 0.917*** 0.814*** 0.966*** 0.593*** it COMMON -0.146 -0.136 -0.095 -0.131 -0.059 -0.189 -0.115 -0.105 lnGDP per capita 0.282*** 0.259*** 0.309*** 0.286*** 0.119*** 0.272*** 0.298*** 0.245*** it Cluster dummies Yes Yes Yes Yes Yes Yes Yes Yes Prob [ F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R 0.799*** 0.830*** 0.785*** 0.814*** 0.856*** 0.810*** 0.786*** 0.876*** EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, PDI it it-1 it power distance, FUTR_O future orientation, HUM_O human orientation, PERF_O performance orientation, IGC in-group collectivism, it it it it INST_C institutional collectivism, ASSERT assertiveness, UAI uncertainty avoidance, COMPETITION market competition, COMMON it it it it it country legal origin, lnGDP per capita natural logarithm of Gross domestic product per capita in current US dollars, Cluster dummies the it dummy variables to control the effect of cultural clusters deﬁned in the GLOBE study *, **, *** p \ 0.10, \0.05 and\0.01 (one-sided tests), respectively. n = 324 society–year observations between the years 2007 and 2012 deadening impact of UAI on ethical sensitivity (Chan and countries to ﬁnd their own path to the achievement of the Cheung 2012; Vitell et al. 1993; Weaver 2001). However, expected beneﬁt from the implementation of auditing and positive or insigniﬁcant results have also been reported reporting standards. This leads to a discussion over whether (Alas 2006; Scholtens and Dam 2007). A possible expla- adaption or adoption of the standards will be more nation for this ﬁnding is that in high UAI societies, man- beneﬁcial for a particular country. According to the Inter- agers may be less willing to take risks, especially in regard national Accounting Standards Board, full adoption with to accounting issues (Cieslewicz 2013). This may lead to reporting and auditing standards are required in order to over caution when interpreting the standards or use ﬂex- derive the expected beneﬁt from their application. How- ibility allowed by the standards, as they attempt to satisfy ever, many jurisdictions face cultural difﬁculties, both be- all relevant stakeholders’ interests in the long term. fore and after the period of transition to auditing and Therefore, the standards may be more effective in reporting standards. In order to minimize the effect of such stimulating EBF in high UAI societies. However, the difﬁculties and mitigate the possible problems which may strengthening moderating impact of UAI should be ex- reduce the impact of SARS on EBF, policy makers should plored in future research, considering the conﬂicting results evaluate the national culture, and adapt the new regulations in the literature, our contradictory expectations, and the accordingly. Thus, enforcement and oversight mechanisms sensitivity check results we found using Hofstede’s will be strengthened, and professional training programs framework. will be adjusted to increase the awareness of the need for the transition to new standards and their expected beneﬁts Implications for Managers and Policy Makers for all society. During this process, particularly, the im- portance of having a code of business ethics should be Our results show that cultural values have the potential to addressed by regulators. Our ﬁndings also highlight the need for managers to be accentuate or decrease the impact of SARS on EBF. This ﬁnding is important both for policy makers and managers. aware of the impact of cultural values in their practices. In Policy makers should be aware of the clear need for all order to increase their awareness on this issue, training 123 68 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli Table 5 Two way moderating regression results of EBF on IFRS and GLOBE cultural values Dependent variable EBF Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 it Constant -1.335** -2.509*** -2.642** -3.465 -1.841*** -2.693*** -2.266** -2.643*** Test variables IFRS 2.523*** 2.359*** 1.254** 1.740*** 1.700*** 2.164*** 1.903** 1.748*** it PDI -0.144 it FUTR_O 0.367** it HUM_O 0.040 it PERF_O 0.414*** it IGC 0.474*** it INST_C 0.253*** it ASSERT -0.044 it UAI 0.524*** it PDI * IFRS -0.499*** it FUTR_O * IFRS 0.619*** it HUM_O * IFRS 0.293** it PERF_O * IFRS 0.449*** it IGC * IFRS -0.155** it INST_C * IFRS 0.506*** it ASSERT * IFRS -0.470*** it UAI * IFRS 0.408*** it Control variables COMPETITION 0.874*** 0.687*** 0.951*** 0.766*** 0.893*** 0.791*** 0.972*** 0.604*** it COMMON -0.186 -0.192 -0.100 -0.144 -0.031 -0.202 -0.097 0.152 lnGDP per capita 0.293*** 0.277*** 0.302*** 0.308*** 0.136*** 0.281*** 0.288*** 0.254*** it Cluster dummies Yes Yes Yes Yes Yes Yes Yes Yes Prob [ F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R 0.806*** 0.845*** 0.788*** 0.819*** 0.858*** 0.819*** 0.835*** 0.887*** EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, PDI it it-1 it power distance, FUTR_O future orientation, HUM_O human orientation, PERF_O performance orientation, IGC in-group collectivism, it it it it INST_C institutional collectivism, ASSERT assertiveness, UNC_AV uncertainty avoidance, COMPETITION market competition, it it it it COMMON country legal origin, lnGDP per capita natural logarithm of Gross domestic product per capita in current US dollars, Cluster it it dummies the dummy variables to control the effect of cultural clusters deﬁned in the GLOBE study *, **, *** p \ 0.10, \0.05 and \0.01 (one-sided tests), respectively. n = 324 society–year observations between the years 2007 and 2012 programs should emphasize the importance of gaining an the impact of principle-based standards on ethical be- understanding of the cultural characteristics of societies haviours, parent companies can be more ﬂexible towards with which they have business relationships. Such pro- their local managers, and allow them greater freedom to grams should focus on cultural values and their moderating select ethical approaches. Therefore, by indicating the impacts on associations between principle-based standards moderating impact of culture, our results provide useful and EBF, enabling managers to develop customized insights to international managers to support ethical be- haviours among their different subsidiaries through cus- strategies designed to enhance ethical behaviours in their ﬁrms. Moreover, our ﬁndings can be utilized in the man- tomized standards and policies. agement of subsidiaries in countries with different cultural values from the parent company. Care should be taken Limitations and Future Research when adapting rules and policies for a subsidiary, taking into account the local cultural environment. For instance, in Measuring the complex issue of EBF with a single item the case of countries which score high in PDI and IGC, and rather than a more comprehensive measurement can be low in INST_C, UAI and FUTR_O, managers may need to considered as a limitation of the study. However, due to the set additional control mechanisms and strict rules at the large number of societies used to provide a cross-cultural ﬁrm level to ensure ethical behaviours. In contrast, where comparison, it was essential to use the WCI as the most the local cultural environment of subsidiaries strengthens reliable data source, which included cross national data. 123 The Moderating Role of National Culture 69 Table 6 Regression results of EBF on SARS and GLOBE cultural clusters Dependent variable EBF Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10 it Constant -2.854*** -2.876*** -2.583*** -3.317*** -2.315*** -2.606*** -2.733*** -2.915*** -2.959*** -2.679*** Test variables SARS 0.513*** 0.514*** 0.554*** 0.530*** 0.381*** 0.536*** 0.496*** 0.519*** 0.509*** 0.463*** it Middle East -0.082* Confucian Asia -0.030 Southern Asia -0.453*** Latin America 0.298*** Nordic Europe 0.910*** Anglo 0.325*** Germanic Europe 0.333** Latin Europe -0.181** Sub-Saharan Africa 0.109 Eastern Europe -0.408*** Control variables COMPETITION 0.680*** 0.681*** 0.696*** 0.762*** 0.668*** 0.679*** 0.660*** 0.656*** 0.682*** 0.698*** it COMMON -0.067*** -0.057 -0.037 -0.035 0.121 -0.197** -0.015 -0.054 -0.082 -0.114* lnGDP per capita 0.193*** 0.194*** 0.138*** 0.187*** 0.201*** 0.155*** 0.196*** 0.209*** 0.204*** 0.200*** it Prob [ F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R 0.82 0.82 0.83 0.83 0.85 0.83 0.83 0.82 0.82 0.84 EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, COMPETITION market competition, COMMON it it-1 it it country legal origin, lnGDP per capita natural logarithm of Gross domestic product per capita in current US dollars, Cultural Clusters as deﬁned in the GLOBE Study it *, **, *** p \ 0.10, \0.05 and \0.01 (one-sided tests), respectively. n = 324 society–year observations between the years 2007 and 2012 70 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli Table 7 Two way moderating regression results of EBF on SARS and GLOBE cultural clusters Dependent Variable EBF Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10 it Constant -2.957*** -2.916*** -2.579*** -3.561*** -2.320*** -2.613*** -2.742*** -2.910*** -2.960*** -2.911*** Test variables SARS 0.528*** 0.517*** 0.550*** 0.590*** 0.3871*** 0.552*** 0.501*** 0.514*** 0.519*** 0.552*** it-1 Middle East 1.492* Confucian Asia 0.461 Southern Asia -1.058 Latin America 2.574*** Nordic Europe 4.146 Anglo 1.119 Germanic Europe 5.980 Latin Europe -0.422 Sub-Saharan Africa 0.367 Eastern Europe 2.977*** Middle East * SARS -0.328** it-1 Confucian Asia * SARS -0.092 it-1 Southern Asia * SARS 0.119 it-1 Latin America * SARS -0.523*** it-1 Nordic Europe * SARS -0.530 it-1 Anglo * SARS -0.134 it-1 Germanic Europe * SARS -0.950 it-1 Latin Europe * SARS 0.046 it-1 Sub-Saharan Africa * SARS -0.052 it-1 Eastern Europe * SARS -0.738*** it-1 Control variables COMPETITION 0.665*** 0.684*** 0.700*** 0.795*** 0.666*** 0.673*** 0.661*** 0.657*** 0.675*** 0.670*** it COMMON -0.069 -0.048 -0.045 -0.086 0.118 -0.207 -0.019 -0.053 -0.084 -0.161 lnGDP per capita 0.204*** 0.195*** 0.138*** 0.166*** 0.199*** 0.150*** 0.194*** 0.211*** 0.203*** 0.192*** it Prob [ F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R 0.82 0.82 0.83 0.84 0.85 0.83 0.83 0.82 0.82 0.86 EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, COMPETITION market competition, COMMON it it-1 it it country legal origin, lnGDP per capita natural logarithm of Gross domestic product per capita in current US dollars, Cultural Clusters as deﬁned in the GLOBE Study it *, **, *** p \ 0.10, \0.05 and \0.01 (one-sided tests), respectively. n = 324 society–year observations between the years 2007 and 2012 The Moderating Role of National Culture 71 Table 8 Regression results of EBF on Hofstede cultural values and two way moderating impact Dependent variable EBF Panel A: SARS and Culture as predictors Panel B: The Moderating Effect it Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Constant -1.356*** -2.741 -2.364*** -2.464*** -3.470*** -0.633*** -3.717*** -3.430*** Test variables SARS 0.270*** 0.364*** 0.341*** 0.371*** 0.656*** 0.177** 0.593*** 0.573*** it PDI -0.010*** 0.022** it IDV 0.002* -0.062*** it MAS -0.008*** 0.018* it UAI -0.003*** 0.012*** it PDI * SARS -0.006*** it-1 IDV * SARS 0.011*** it-1 MAS * SARS -0.005** it-1 UAI * SARS -0.003* it-1 Control variables COMPETITION 0.872*** 0.820*** 0.772*** 0.770*** 0.866*** 0.864*** 0.789*** 0.785*** it COMMON -0.078 -0.016 0.101 -0.077 -0.066 0.0003 0.110 -0.098 lnGDP per capita 0.133*** 0.179*** 0.226*** 0.208*** 0.135*** 0.229*** 0.218*** 0.190*** it Prob [ F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R 0.78 0.76 0.78 0.76 0.79 0.78 0.78 0.76 EBF the perceived ethical behaviours of ﬁrms, SARS the perceived strength of accounting and auditing standards of previous year, PDI it it-1 it power distance, IVD individualism versus collectivism, MAS masculinity versus femininity, UAI uncertainty avoidance, COMPETITION it it it it market competition, COMMON country legal origin, lnGDP per capita natural logarithm of Gross domestic product per capita in current US it it dollars *, **, *** p \ 0.10, \0.05 and\0.01 (one-sided tests), respectively. n = 426 country-year observations between the years 2006 and 2012 Therefore, EBF measurement by WCI was considered the research explores the moderating impacts of these factors most appropriate alternative for the current study. in a micro-level sample setting. Also, as indicated in the ‘‘Introduction’’ section, our Finally, testing our results across sectors could be very independent and dependent variables depended on per- interesting and useful in order to identify sector-based ceptions, not the absolute indicators. Although, perceptions variations. Unfortunately, our data set did not include could be subjective and misleading, they reﬂect the opin- sector-based data either for SARS or EBF. Therefore, in a ions of executives who have deep knowledge of business future study, sector-based results can be compared with a environment in their countries. Still, our results can be different data set. tested with different indicators in a future study. Another limitation of the study is the relatively narrow focus on the impact of factors that may affect ethical Conclusion behaviours, limited to SARS and culture. However, ethi- cal behaviour is a complex issue which is affected by Our ﬁndings contribute to the literature by addressing the many other factors. Therefore, in order to increase our moderating role of national culture in the relationship be- understanding of the mechanisms which accentuate or tween SARS and EBF. Overall, we ﬁnd evidence sup- decrease ethical behaviour, future research may focus on porting the idea that national culture affects the relationship more complex models, incorporating organizational fac- between SARS and EBF. The main implication of our tors such as organizational culture and strength of human study is that encouraging ethical behaviour is a complex resources management systems, in addition to SARS and issue, and that in themselves, universal standards to en- national culture. hance EBF are inadequate, because any regulation that Moreover, in this study, we hypothesized that perfor- does not consider cultural impact is likely to fail to have mance orientation, human orientation and assertiveness had the required effect. Thus, it is important for policy makers moderating impacts on the SARS–EBF relationship. to put in place the necessary enforcement mechanisms for However, our data provided no empirical support for these the effective implementation of auditing and reporting hypotheses and it would therefore be enlightening if future standards. 123 72 Y. Zengin Karaibrahimoglu, B. Guneri Cangarli Open Access This article is distributed under the terms of the Clusters Countries Cultural values Creative Commons Attribution License which permits any use, dis- tribution, and reproduction in any medium, provided the original Latin France High – author(s) and the source are credited. European Israel Medium Assertiveness Italy Future orientation Portugal Gender Appendix 1 egalitarianism Spain In-group Switzerland (French collectivism speaking) GLOBE Cultural Clusters with Associated Countries and Their Cul- Power distance tural Values Uncertainty Clusters Countries Cultural values avoidance Performance Nordic Denmark High Future orientation orientation Europe Finland Gender Low Humane orientation egalitarianism Iceland Institutional Institutional Norway collectivism collectivism Sweden Latin Ecuador High In-group Uncertainty America collectivism avoidance El Salvador Medium Assertiveness Medium Humane orientation Columbia Human orientation Performance Bolivia orientation Gender Brazil egalitarianism Low Assertiveness Guatemala Power distance In-group Argentina collectivism Low Future orientation Costa Rica Power distance Institutional Venezuela collectivism Germanic Austria High Assertiveness Mexico Europe Performance East Germany Future orientation orientation West Germany Performance Uncertainty orientation The Netherlands avoidance Uncertainty Switzerland Eastern Albania High Assertiveness avoidance Europe Georgia Gender Medium Gender egalitarianism egalitarianism Greece In-group Power distance Hungary collectivism Low Human orientation Kazakhstan Medium Institutional Institutional Poland collectivism collectivism Russia Humane orientation In-group Slovenia Power distance collectivism Low Future orientation Anglo Cluster Australia High Performance orientation Performance Canada (English orientation speaking) Medium Assertiveness Uncertainty England Future orientation avoidance Ireland Gender The Middle Turkey High In-group egalitarianism New Zealand East collectivism Kuwait Humane orientation South Africa (White Medium Assertiveness Egypt sample) Institutional Humane orientation collectivism Morocco The USA Institutional Power distance Qatar collectivism Uncertainty Performance avoidance orientation Low In-group Power distance collectivism 123 The Moderating Role of National Culture 73 References Clusters Countries Cultural values Alas, R. 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Do Auditing and Reporting Standards Affect Firms’ Ethical Behaviours? The Moderating Role of National Culture

Do Auditing and Reporting Standards Affect Firms’ Ethical Behaviours? The Moderating Role of National Culture

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Do Auditing and Reporting Standards Affect Firms’ Ethical Behaviours? The Moderating Role of National Culture

Do Auditing and Reporting Standards Affect Firms’ Ethical Behaviours? The Moderating Role of National Culture

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