Professors Qinqin Zheng, School of Management Fudan University and Zhiqiang Li, China Executive Leadership Academy Pudong, research the influence of accounting firms on their clients’ moral or immoral conduct.
Accounting firm influence on client conduct. By Tom Gamble. Related research: The Influence of Accounting Firms on Clients’ Immoral Behaviors in China, Qinqin Zheng & Zhiqiang Li, Journal of Business Ethics (2010) 91:137–149 _ Springer 2010 DOI 10.1007/s10551-010-0572-4.
In 2020, three years after its spectacular rise from Chinese unicorn to billion-dollar financed competitor to Starbucks, Luckin Coffee stepped up to join a queue that counts Enron, Lehman Brothers, Under Armour, Steinhoff, and Wirecard to name but a few of the big names convicted of large-scale accounting fraud in the past decade.
Investigators discovered that in order to impress external investors and hike up its share price, Luckin Coffee had been vastly inflating its sales figures in its accounts, faking some $300m in revenue. Needless to say, this has left customers and investors, as well as the US and Chinese regulators, with a bitter taste in their mouths, and sanctions yet to be determined.
A new perspective
Misconduct and immoral behaviour are part of the imperfections of this world. And businesses, like people, are known to indulge in it. Many studies on corporate misconduct have focused either on individual factors – an employee’s weak or immoral character or greed – or situational factors – tough markets, pressure to survive, high tax rates – that push firms to cook the books or cheat on their products.
Professors Zheng and Li offer another, original look at the question. They combine psychology and the notion of “important others”, moral virtues and an analysis of 8 years’ worth of fraudulent accounting events, 1,042 companies’ financial statements and 8,336 observations made by the CICPA – the Chinese Institute of Certified Public Accountants.
Their goal: To explore the extent to which accounting firms influence either their clients’ ethical or immoral behaviour. And to test whether two traditional business beliefs linked to accounting firms’ capacities and responsibility in China hold true.
Accounting firms and their clients: How they tick
For Zheng and Li, companies, like individuals, have what is called “important others” who may influence behaviour. Think of a colleague who strayed from the path, for example – did a family member plant the seed of misconduct? A co-worker? Or a friend who saw an opportunity to extract personal benefit from your colleague’s professional context? Likewise, companies operate in ecosystems where some clients, suppliers, even politicians are special partners that affect corporate decisions.
It is here that accounting firms especially can be considered as “important others” for their clients, with access to sensitive internal business information and activities. Moreover, the opinions and advice provided by accounting firms are usually highly customised to particular clients’ needs and requests.
As such, many companies prefer reliable professional accounting service providers and build long-term relationships with them. On the other side of the coin, it is in the interests of an accounting firm to want to maintain good relationships over the long term – for business, but also because the specific customised approach and service cannot be applied to other firms.
This win-win relationship, rich with mutual benefit, tends to transform the normal provider-client link into a form of business partnership.
What keeps this relationship away from temptation?
In many ways, this unique partnership constitutes a “joint-venture”, with the spectre of immoral activities serving as a safeguard against putting both parties at risk. As shown in the recent Luckin Coffee scandal, though, things can and do go askew.
In any breach of conduct or misunderstanding, clients are generally considered as “the first mover”, intentionally or unintentionally providing incorrect or biased information to pursue self-interest. In some situations, accounting firms may even get involved in the clients’ immoral conduct – for example, when auditors are encouraged to issue unqualified opinion on financial results and sometimes against their will.
An accounting firm therefore has the tricky balancing act of sticking to the rules and ensuring ethical and professional services while at the same time meeting the requirements, expectations and desires of their clients.
Accounting firms: Adopting a stance
Studies undertaken on the approach of accounting firms in an audit context shows that they can assume three attitudes or approaches to their client assignment: tough, business as usual, and accommodating.
It follows that from the perspective of business ethics, accounting firms should take the right disposition and be tough or at least employ a business-as-usual attitude to maintain professionalism.
But playing tough and refusing to provide client-preferred solutions carries a risk – it might mean the end of the beneficial relationship. We can logically think that accounting firms would shy away from toughness and consider it as the least desired approach. Surprisingly though, research has shown the contrary. Although a tough approach might be a cause for conflict, there is no great effect on the longevity of the provider-customer relationship.
The rational argument for this is that both parties consider the cost-benefit of it all, with self-interest and mutual welfare tipping the balance towards acceptance of necessarily rigid rules. Moreover, for the accounting firm, offering tip-top professional service is an important and influential factor in ensuring reputation and a solid client base, so it tends to opt for economic rationale and ethical standards of behaviour.
Generally speaking, accounting firms and their clients are in a constant moral dialogue over what causes the greatest welfare and benefit to the client and the limits of what is right and what is wrong in the search for this. Hero, upholder, or villain? There are some who would be wise to reconsider their opinion that accountants and accounting are boring!
But is that enough to ensure good conduct? No, it seems. Opportunisms or collusions still occur, most probably when accounting firms choose to keep silent or advocate clients’ immoral behaviors. So the rational argument doesn’t always sway – after all, people (and companies) are imperfect.
The rise of the code of conduct – and the question of ethics
Because the rational economic assumption does not always ensure that ethical behaviour is followed, the industry has turned towards developing codes of conduct and ethics, usually grounded in guiding principles on independence, integrity, and objectivity such as the GAAP (Generally Accepted Accounting Principles.)
These codes place the onus on the accounting firm, regulating their behaviour to avoid unethical breach of conduct. And they can also positively influence others including their clients and suppliers.
The weak point in many codes is that doing the proper thing is not the same as doing the good thing. Codes are by nature rule and duty-based, but rarely cover virtues or moral character. Absent is the notion of leading “a good life” and that undertaking such or such an action is charitable or benevolent.
Profs Qinqin Zheng and Zhiqiang Li contend that in addition to self-discipline, accounting firms should have more codes of virtues in their actions so as to ethically influence others. Because when one acts through obligation and rule, such is human imperfection that rules are to be broken and duties to be discarded.
Accounting firm influence on client conduct: A special flavour from China
Accounting firms can influence their clients in three ways: positive influence, no influence, and negative influence. Prior research, coupled with Profs Zheng and Li’s, points to two aspects of accounting firms that affect which way the influence sways the client. These are capabilities and relationships.
Full of highly qualified professionals, supported by codes of conduct and rigorously professional through well-oiled processes, tools and work values, accounting firms’ capabilities should indicate that they possess the “wisdom” to make right decisions and qualification to detect any corporate incidences of immoral behaviour.
Accounting firms in China, however, come up against a tradition of contradictory notions about these capabilities. One is that accounting firms are irrelevant or incapable in terms of being aware of clients’ immoral conduct. It is generally thought that because clients hold much more information than the auditor, this hinders accounting firms from verifying the true conduct of their clients.
It follows that in China, accounting firms are often forgiven or punished gently in corporate scandals by using the excuse of incapability of awareness. Back in the early 2000s, both KPMG and Deloitte were examples of this – the former getting off with only an investigation and no sanction while its client Jinzhou Port Co., Ltd was fined; with Deloitte Touche Tohmatsu in a similar incident also receiving no substantial punishment.
Profs Zheng and Li disagree with these presumed perceptions and their research tends to prove their doubt in this “responsibility loophole”. The nature of the intimate interaction and relationship, in addition to accounting firms’ requirement of professionalism through their expertise, makes it hard to believe that their capabilities are not sufficient to enable awareness of cases of corporate immoral accounting information disclosure.
A second widespread belief is that that accounting firms with stronger capabilities and higher qualifications are better at reducing the accounting immoral behaviors of clients. As a result, some banks and governments have required clients to provide certifications issued by international accounting firms.
In 2001, for example, in order to reduce the occurrence of business scandals, the China Securities Regulatory Commission (CSRC) issued the infamous Rule Sixteen on the compulsory recruitment of international accounting firms in the special audit demand of listed companies. However, in 2007, the CSRC abolished the rule.
The reasons partially relate to the inefficacy of the rule and partly to the fact that no significant results of accounting firms positively influencing their clients’ behaviours had been recorded. The U.S. Sarbanes-Oxley Act, as well as the CSRC, also introduced the notion of maximum audit tenure and the mandatory rotation of auditing firms in an attempt to reduce the risk of misconduct.
Here again, Zheng and Li’s research has led them to question the effectiveness of limiting the time a client works with an accounting firm. For them, an accounting firm will do its job regardless, displaying the necessary expertise and approach as a question of professional values. Rather, given the customised and intimate working partnership that sets in between provider and client, it is long-term relationships that may indeed be helpful in the reduction of clients’ immoral behaviors.
Accounting firm influence on client conduct: Sugar turns the bitter into sweet
For Zheng and Li, every company has the motivation to be a good one. It is not the relationship itself between a firm and its accounting provider that might deteriorate the corporate moral level. Long-term working relationships therefore have a positive effect on shaping good conduct.
Although expertise alone is not enough, accounting firms also have the muscle in terms of professionalism and behavioural guidelines – in the form of codes of conduct – to enable them to detect immoral behaviour. However, it is not the sole responsibility of the accounting firm to ensure their clients’ moral and ethical conduct. Firms should also play the game.
And if ever, as in the Luckin Coffee case, the chase for fast, maximum profit brews a bitter recipe for cheating on its stakeholders, it would be wise for companies to step back and sweeten things with a little ethics for good and moral decisions to be taken.
- View Prof. Zheng’s academic profile and publications
- Read a further article by Prof. Qinqin Zheng: Ethics & Compliance in Firms: Why it happens and what makes it effective
- Discover School of Management Fudan University, Shanghai
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