The Impact of Authority

To begin:

The career field I am studying for is in accounting; the Forensic Accounting field specifically. The article I have found that was relevant to forensic accounting is called: The Impact of Authority on Reporting Behavior, Rationalization and Affect.

Highlighting the article’s points:

A comparison is made to the similarities of an authority figure instructing subordinates to provide fraudulent financial reports; to the study done by Stanley Milgram about people’s obedience to authority even if it’s unethical.There are three points that make up the ‘fraud triangle’: 1) opportunity, 2) motivation, and 3) attitude/rationalization.Authority figures who instruct to misreport give the individuals/subordinates a reduced negative affect; these misreports rationalize in a way that displaces the responsibility of their actions.The environment is the best way to prevent misreporting.

Relation to Forensic Accounting:

As a forensic accountant my job would be to investigate fraud, embezzlement, and to analyze financial information that could be used in court.Companies are supposed to follow certain rules and regulations when it comes to financial reporting. Ethics and morals are traits highly valued and expected of accountants.The impact of authority on CFO’s (Chief Financial Officers) to misreport on their financial statements for the sake of appearance, and profit, is something that is all too real of a threat to ethics and morals in the workplace.And so, situations and pressures play an important role when it comes to knowingly doing wrong, and justifying those actions.

Results of the study:

There were two quizzes that were used to report behavior: 1 & 2And two conditions for each quiz. A & BFor condition A: the instructions to misreport were given before the second quizFor condition B: the instructions to misreport were given before the first quizAn example from the study: 46.7% of people in condition A misreported in both quizzes. 65.1% of people in condition B misreported in both quizzes.

Comparison of behavior studies:

When Stanley Milgram conducted his study more than 60% of individuals obeyed the person of authority’s request.And for the quiz study almost exactly 65% of individuals obeyed the person of authority’s request to misreport.Both studies were paid, both had the option to be honest/do the right thing, it is interesting how a simple matter of instruction can affect judgement.The most recent study still proves his (Milgram, 1974) findings to be true:“…the social psychology of this century reveals a major lesson: Often, it is not so much the kind of person a man is as the kind of situation in which he finds himself that determines how he ill act.”

Good and the Bad of results:

Going back to the first result for Condition A, and how 46.7% of individuals misreported before the second quiz.Considering that is nearly 50% of the group; if I were a forensic accountant that would make me feel conflicted. Positive in the sense that it ensures a job; but negative in the sense that I would find trust very difficult.These results of the study are relying on the instance of an authority figure with poor morals and ethics; but the point of the result remains that permission to do wrong is not something to take lightly. How can a person be satisfied with going against their morals?

6 Categories of Rationalizations

1) advantageous comparison2) moral justification3) minimize/ignore/misconstrue consequences of the act4) displace responsibility 5) diffuse responsibility6) otherMotivation and opportunity were pretty common for rationalizations.Displacing responsibility was VERY common.Moral justification was second most common.

Fraud Triangle:

The effect authority has is notable .It can be any/all of the points.Environment plays a key role.It can eliminate opportunityAnd motivation.

Opportunity

Motivation

Rationalization

How to avoid rationalization of fraud:

Environments with outside audits would enforce honesty.Having high standards of the professionBeing self-regulated in regard to morals.Having concern for long-term reputation.In the study mutual gain was reason enough for the individuals to act without morals.Understanding the cognitive and emotional reasons helps to see how people rationalize. But what we need to understand still is how to get rid of rationalization of fraud.

In Conclusion:

Fraud can happen for many reasons; it can be pressure, or desperation.Even justified, or simply an opportunity.The impact of authority is such a vital thing that it can not be stressed enough the importance of not abusing that power.While it can not be said that people are all bad, or all good. The study indicates that all people need is a nudge of motivation; in either direction.I might not be a forensic accountant yet, but I’m hoping there are more CEO’s that have a positive impact as authority rather than negative.Bad morals mean bad business, and there’s no mutual gain possible if you’re out of business.

Reference:

Mayhew, B.W., & Murphy, P.R. (2014). The Impact of Authority on Reporting Behavior, Rationalization and Affect. Contemporary Accounting Research, 31(2), 420-443. doi: 10.1111/1911. 12037