The influence of language, personality, and accountability on accountants' aggressive financial reporting judgments: experimental evidence from China

Aggressive financial reporting, which refers to accountants' preference for reporting disclosure that portrays events favourably when accounting treatments are not clearly indicated by the facts, accounting standards and relevant literature, has long been recognized as a critical ethical issue for the accounting profession. The aim of the dissertation is to examine the influence of three factors, namely language, personality, and accountability on Chinese accountants' aggressive financial reporting judgments. These three factors have been selected for examination in the three papers comprising this dissertation because of their importance and relevance both globally and in China. This dissertation is based on the 'thesis by publication', and comprises three separate experimental studies. This dissertation includes an introduction (Chapter 1), three separate experimental studies (Chapter 2-4), and a conclusion (Chapter 5). Specifically, the three papers comprising this dissertation are as follows. The first paper is entitled, "The Influence of Native versus Foreign Language on Chinese Subjects' Aggressive Financial Reporting Judgments". Researchers have suggested that ethical judgments about "right" and "wrong" are the result of deep and thoughtful principles and should therefore be consistent and not influenced by factors, such as language. As long as an ethical scenario is understood, individuals' resolution should not depend on whether the ethical scenario is presented in their native language or in a foreign language. Given the forces of globalization and international convergence, an increasing number of accountants and accounting students are becoming proficient in more than one language and they are required to interpret and apply complex ethical pronouncements issued by various global standard setters both in their native language and in English. There have been calls in the literature to examine whether subjects make systematically different ethical judgments in a foreign language than in their native language. This paper contributes to the literature by drawing on culture, linguistics and psychology research to provide empirical evidence that Chinese subjects are more aggressive in interpreting the concept of control when providing their consolidation reporting recommendations in English than in Simplified Chinese. This paper applied 2x2 within-subject and between-subject randomized experimental design using a sample of Chinese final year undergraduate accounting students at a leading Chinese university, where accounting courses are taught in both Simplified Chinese and English. Students in this study are proxy for entry-level accounting practitioners. This paper provides empirical evidence that Chinese accounting students are more aggressive in interpreting the concept of control when providing their consolidation reporting recommendations in English than in their native language. The second paper is entitled, "Construal of Self and Chinese Accountants' Aggressive Financial Reporting Judgments". This study responds to calls in the literature to examine personality variables which may provide sharper insights into accountants' judgments in applying principles-based International Financial Reporting Standards (IFRS). This paper contributes to the literature on the global convergence of financial reporting by examining the influence of an important personality variable, construal of self, on Chinese accountants' aggressive financial reporting judgments. A between-subjects quasi-experiment was applied. One hundred and twenty-two Chinese professional accountants were categorized as either independents or interdependents, on the basis of their scores on construal of self scales. Subjects made their consolidation reporting judgments in the manipulated situations based on the financial performance of the investee entity, which refers to the situation where the investee entity makes a significant profit or a significant loss in the reporting period. The findings of this study show that compared to interdependent accountants, independent accountants used the flexibility allowed in the principles-based standards to make more aggressive consolidation reporting judgments. Also, adoption of IFRS may not necessarily ensure consistent judgments even within China. The third paper is entitled, "The Influence of Formal and Felt Accountability on Chinese Accountants' Aggressive Reporting Judgments". This paper extends the literature on accountability by providing causal experimental evidence to show the competing importance of formal and felt accountability in influencing Chinese professional accountants' aggressive financial reporting judgments. Specifically, a between-subject randomized experiment was conducted to examine whether felt accountability influences ethical judgments under two conditions, namely, when formal accountability is imposed and when formal accountability is not imposed. This paper uses a cultural lens to draw on the literature on Confucianism and interdependence to suggest that the Chinese cultural values of harmony within hierarchy and interdependence provide useful insight in understanding accountability. However, faced with intense globalization and international convergence of accounting and accountability, the intensity of these cultural values is changing particularly among professionals in contemporary China. The results show that both accountants who experience greater felt accountability and those who experience lesser felt accountability coexist within contemporary China. The findings support the hypothesis that when formal accountability is imposed, accountants are not likely to make aggressive financial reporting judgments, irrespective of their scores on felt accountability measures. The findings further show that when formal accountability is not imposed, accountants who experience lesser felt accountability are more aggressive in providing their financial reporting judgments, compared to those who experience greater felt accountability. The implications of each paper are as follows. The findings of the first paper have implications for the globalized business world and cross-cultural research by challenging the commonly held assumption that an individual's ethical judgment is consistent in different languages. The findings suggest that systematically different ethical judgments in native and foreign languages needs to be recognized. The second paper provides empirical evidence of the importance of construal of self in examining accountants' aggressive judgments. The findings suggest that it may be premature to assume that adoption of IFRS will lead to comparable financial reporting. The findings are relevant to researchers who are interested in examining personality and cultural influences on accountants' judgments both within and across countries. Companies and organizations may incorporate appropriate strategies to recruit and train independent and interdependent accountants, particularly by addressing the influence of construal of self on aggressive financial reporting judgments. The findings of the third paper have implications for enterprises when designing and developing culturally appropriate accountability mechanisms. The findings also have implications for global standard setters, national regulators and researchers who are interested in examining accountability and cultural influences on accountants' ethical judgments and behaviour both within and between countries. This dissertation makes significant and original contributions to the literature by providing causal experimental evidence on the influence of three important and relevant factors, namely language, personality, and accountability on accountants' aggressive financial reporting judgments in the Chinese national context. The first paper has been published in the Journal of Business Ethics, which is ranked A by the Australian Business Deans Council (ABDC) Journal ranking. The second paper has been accepted for publication in a forthcoming issue of the Accounting, Auditing & Accountability Journal, which is ranked A by the ABDC. The third paper is under peer review in the Accounting, Organizations and Society journal, which is ranked A* by the ABDC.