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An examination of ethical standards for tax issues
Journal of Accounting E&*cation. Vol. 16. No. 1, pp. 85 100, 1998 1998 Elsevier Science Ltd. All rights reserved. Printed in Great Britain. 0748 5751/98 $19.00 + I].0(I
Pergamon
P l h S0748-5751 (98)00004-9
AN E X A M I N A T I O N OF ETHICAL S T A N D A R D S FOR TAX I S S U E S Lawrence P. Grasso and Stcvcn E. Kaplan A R I Z O N A STATE UNIVERSITY Ahslracl: This study examines the extent to which educational background and demog,aphic
l,tctors are associated with students' personal standards for ethical issues involving tax professionals. Two hundred and twenty-three students about to complelc an introductory tax course were given ten brief scenarios focusing on the ethical and professional responsibilities of CPAs with tax practices. For each scenario, the students were asked whether they helkwed the opinion or the situation described was considered appropriate under existing professional standards, and whether they personally believed the opinion or situation described was appropriate. They were also asked whether they believed evading taxes was immoral. The results indicated that female students had higher personal ethical standards for issues revolving tax professionals than did male students. Exposure to a course in auditing (the accounting course generally having the most extensive coverage of ethical issues) was associated with higher ethical standards, bul exposure to a general course on ethics was not. Students aspiring to be tax professionals had higher ethical standards for issues involving tax professionals than those that did not, but their beliefs about the morality of tax evasion were not significantly different. The implications of these and other results are discussed. ~, 1998 Elsevier Science Lid. All rights reserved
AN EXAMINATION OF ETHICAL STANDARDS FOR TAX ISSUES O v e r the past decade there has been a widespread effort by p r act i t i o n er s and e d u c a t o r s to e n c o u r a g e g r e a te r emphasis on ethics in a c c o u n t i n g e d u c a t i o n . F o r example, f o r m a l r e c o m m e n d a t i o n s for increasing ethics instruction have been m a d e by the A m e r i c a n A s s e m b l y o f Collegiate Schools o f Business ( A A C S B , 1988), the A m e r i c a n A c c o u n t i n g A s s o c i a t i o n (The Bedford C o m m i t t e e , A A A , 1986), the F e d e r a t e d Schools o f A c c o u n t a n c y (Kiger, Sterling, H e r m a n s o n & Mitchell, 1988), and the A c c o u n t i n g Education C h a n g e C o m m i s s i o n ( A E C C , 1990). In o r d e r to better p r e p a r e students for entry into the a c c o u n t i n g profession, the B ed f o rd C o m m i t t e e r e c o m m e n d e d that professional a c c o u n t i n g educ a t i o n should " . . . i n s t i l l the ethical s t a n d a r d s an d c o m m i t m e n t o f a professional. T h e general effort to d e v e l o p in students a c o n c e r n for individual needs an d the overall a d v a n c e m e n t o f society must be given m o r e e m p h a s i s " ( A A A , 1986, p. 179). T h e A I C P A m a d e a similar point. " A sense o f responsibility to society and to o n e ' s o w n profession should be a c q u i r e d very early in the e d u c a t i o n a l process a n d can begin with the n u r t u r i n g o f m o r a l and ethical 85
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L.P. Grasso and StevenE. Kaplan
values" (AICPA, 1988, p. 10). The apparent concern of the above groups is that the ethical standards of students may somehow be lacking or that students may not sufficiently take into account the needs of society. Research is needed to assess whether the ethical standards of accounting students are sufficient for the accounting profession. Ward, Ward and Deck (1993) contend that since individuals ultimately make decisions, personal ethical standards are likely to shape individuals' decision making. Professional standards, such as the AICPA's Code of Professional Conduct, represent minimum standards and are incomplete guides to behavior. This contention is consistent with groups such as the AAA and the AICPA recognizing that it is important that students have high ethical standards. Research outside of education has found that personal values and personal ethical standards influence decision making. For example, values have been found to influence corporate strategy decisions (Guth & Tagiuri, 1965) and managerial decisions (England, 1975). More recently, McDonald and Gandz (1991) contend that values influence the perception of ethical business dilemmas. This paper reports the results of a survey that provides evidence on tax students' personal ethical standards in the context of tax issues. We focus on the tax setting because taxpayers and tax preparers confront ethical and moral issues. In highlighting this point, Fisher (1994, p. 3) states, "tax compliance choices should not be viewed as a simple gamble, but rather as a classic social dilemma involving conflict between financial self-interest and social cooperation." Consistent with this characterization is research demonstrating a positive relationship between ethical beliefs and compliance (Jackson & Milliron, 1986; Roth, Scholz & Witte, 1989). These findings strongly suggest that the personal ethical standards related to tax compliance are important, influencing both an individuals treatment of their own tax issues and their treatment of clients' tax issues when serving as a tax preparer. The purpose of the survey was to determine the extent to which personal ethical standards among tax students were associated with educational background and other demographic information. It is important to note that the focus of the present survey is quite different from prior tax research which has tended to treat ethical beliefs (e.9., evasion is immoral) as an independent variable in an effort to understand compliance behavior (Jackson & Milliron, 1986). Instead, the current study treats ethical beliefs as the dependent variable in order to gain insight into why different individuals might adopt different personal ethical standards in the context of tax issues. The concept of ethical dilemmas in tax practice is briefly discussed in the next section of the paper. Following that discussion, research questions are developed concerning factors potentially associated with formation of personal beliefs about ethics in the context of taxation. The research method and results sections of the paper contain descriptions of the questionnaire that was administered and the results that were obtained, respectively. The
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87
paper concludes with a discussion of the results and suggestions for further research. Ethical Dilemmas in Tax Practice Professional standards such as the Statements on Responsibilities in Tax Practice (SRTP) and the American Institute of Certified Public Accountants' Code qf Professional Conduct (AICPA Code) have been promulgated to ensure that CPAs consider their responsibilities to both the client and to the public when performing tax compliance work. The A I C P A Code and the SRTP include general statements for all public accountants, as well as 'advisory opinions' and recommendations specifically directed towards CPAs engaged in tax practice. In particular it is worth noting that a CPA's responsibility to be a client advocate is not intended to mitigate or overshadow a CPA's responsibilities to society. Because CPAs have responsibilities that extend beyond the client, ethical conflicts related to tax issues may arise, which in turn, created a need for professional standards to guide CPAs working on tax issues. Further, professional standards were also needed because the proper application of the law to the Pacts and circumstances of many situations is ambiguous. The findings of Finn, Chonko and Hunt (1988) are particularly useful to demonstrate the scope of ethical problems arising from tax work. The authors conducted a study to examine the nature of ethical problems confronting senior level A I C P A members. The authors analyzed responses to the following open-ended question: "In all professions, managers are exposed to at least some situations that pose a moral or ethical problem. Would you please briefly describe the job situation that poses the most difficult ethical or moral problem for you personally?" (Finn et al., 1988, p. 609). By far the most common problem, cited by 47 percent of senior level A I C P A member respondents, concerned client proposals of tax alteration and tax fraud. At the core of this problem is the difficulty the tax preparers have sorting out their dual responsibilities to the client and an outside party (e.g., the IRS). One of Finn et al. (1988, p. 609)'s respondents articulated this well in his/her response, as follows: Preparing income tax returns whereby the basis of taking a deduction on the tax return is not 100 percent supportable (in other words, a 'grey area'). In this situation, the preparer is compensated by the client yet the Internal Revenue Service can subject the preparer to penalties unless the preparer can sho~ he relied on "substantial" authority. It seems the regulations are enacted to pressure the preparer into making tax decisions which favor the IRS. This can, at times, be a moral dilemma. Personal Ethical Standards If an individual incorporates the interests of the public into resolution of ethical conflicts, we characterize that as 'high personal ethical standards."
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L.P. Grasso and StevenE. Kaplan
If an individual instead consistently decides in favor of the taxpayer, we characterize that as 'lower personal ethical standards.' As indicated earlier, prior research (Jackson & Milliron, 1986) has consistently shown a relationship between ethical beliefs and compliance. This relationship is important because it suggests that a range of personal ethical standards exists among individuals. In this section we propose hypotheses suggesting an association between certain background factors of individuals and their personal ethical standards for tax issues. The moral psychology and philosophy literature suggests that the ethical judgments made by males and females may differ. For example, Gilligan (1982) contends that males and females use different perspectives to resolve moral and ethical issues. Whereas males tend to view moral issues in terms of a justice perspective, females employ a care perspective. The justice perspective emphasizes the concepts of fairness and impartiality; the care perspective emphasizes the needs of others in a particular context. Females' focus on others may result in higher personal standards for tax issues compared to the personal standards held by males. Males may also be more prone than females to hold lower ethical standards to the extent males are more concerned than females about such issues as personal advancement and power (Betz, O'Connell & Shepard, 1989). This discussion leads to our first hypothesis. H(1): Females will possess higher personal ethical standards for tax issues than males. Age represents a second variable that may influence individuals' personal ethical standards for tax issues. Again drawing upon the moral psychology literature, age has been found to be associated with an individual's level of moral reasoning in a variety of sudies (Rest, 1986). This literature would suggest that older individuals will have higher personal standards for tax issues than younger individuals. Tax compliance research exploring the relationship between age and tax compliance is also relevant. Based upon their review of this literature, Roth et al. (1989) conclude that older taxpayers generally are more compliant. They caution, however, that several explanations may explain this result. We explore one potential explanation: older individuals may hold higher personal ethical standards for tax issues. This discussion leads to our second hypothesis. H(2): Older individuals will possess higher personal ethical standards for tax issues than younger individuals. Ethics education reresents a third variable that may influence personal ethical standards for tax issues. Research has shown a modest, but positive association between ethics education and moral reasoning (Enright, Lapsley & Levy, 1983; Leming, 1981; Lawrence, 1980). Within the accounting literature, both Armstrong and Mintz (1989) and Cohen and Pant (1989) contend that insufficient coverage of ethics during professional training has a negative
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89
influence on m o r a l r e a s o n i n g within the profession. This literature also recognizes that ethics c o v e r a g e m a y c o m e f r o m a variety o f sources. F o r e x a m p l e , in an u n d e r g r a d u a t e a c c o u n t i n g p r o g r a m , ethical issues m a y be covered either in a s e p a r a t e ethics course o r i n t e g r a t e d within the a c c o u n t i n g curriculum. W i t h i n the a c c o u n t i n g c u r r i c u l u m , research has d e m o n s t r a t e d t h a t the greatest ethics c o v e r a g e c o m e s f r o m the a u d i t i n g course ( C o h e n & Pant, 1989: T h o m p s o n , M c C o y & W a l l e s t a d , 1992). Both o f these sources o f ethics c o v e r a g e are c o n s i d e r e d in this study. This leads to the next two hypotheses. H(3): Individuals who have taken an ethics course will possess higher personal ethical standards for tax issues than individuals who have not taken an ethics course. H(4): Individuals who have taken an auditing course will possess higher personal ethical standards for tax issues than individuals who have not taken an auditing course. Finally, p e r s o n a l ethical s t a n d a r d s for tax issues m a y be a s s o c i a t e d with career aspirations. A c c o u n t i n g students who aspire to b e c o m e tax p r o fessionals m a y hold higher p e r s o n a l ethical s t a n d a r d s for tax issues than o t h e r students. By the n a t u r e o f their work, tax p r o f e s s i o n a l s c o n d u c t tax services for i n d i v i d u a l s o t h e r t h a n themselves. The responsibilities to society s t e m m i n g f r o m tax issues also m a y be m o r e salient a m o n g students with career a s p i r a t i o n s for tax work. In a n t i c i p a t i o n o f such w o r k , students m a y have t h o u g h t m o r e a b o u t their dual responsibilities to t a x p a y e r s a n d to society. In the absence o f such a s p i r a t i o n s , students ethical s t a n d a r d s m a y reflect m o r e o f an i n d i v i d u a l perspective. ~ A c c o r d i n g l y . we p r o p o s e the following hypothesis. H(5): Individuals who aspire to a tax career will possess higher personal ethical standards for tax than individuals who do not aspire to a ~ax career.
RESEARCH METHOD
Survey Instrument D a t a to test o u r h y p o t h e s e s were o b t a i n e d by surveying u n d e r g r a d u a t e students in the final week o f an i n t r o d u c t o r y tax course. The survey is presented, a l o n g with a s u m m a r y o f the responses, in T a b l e 2. T h e subjects were given ten b r i e f scenarios focusing on the ethical a n d professional responsibilities o f C P A s with tax practices. T h e ten scenarios were d r a w n
~While several studies have examined the reasons students choose accounting as a major or career (Cohen & Hanno, 1993; Gul, Andrews, Leong & lsmail, 1989; Paolillo & Estes, 1982), we are not aware of any research considering career aspirations among accounting students tbr particular types of work within accounting.
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L.P. Grasso and Steven E. Kaplan
from issues specifically addressed by either the A I C P A Code or SRTP. An attempt was made to identify a broad range of ethical issues that provide an opportunity for various ethical opinions to manifest themselves. For each scenario subjects were asked to indicate: (1) whether they believed the opinion or the behavior described was defined as appropriate under the A I C P A Code or SRTP (i.e., column 1 response); and (2) whether they personally believed the opinion or behavior described was appropriate (i.e., column 2 response). The first response was intended to reflect knowledge of professional standards whereas the second response was intended to reflect personal ethical standards. Subjects also completed a debriefing questionnaire about their backgrounds, professional aspirations, and beliefs regarding the morality of evasion. The entire survey including the debriefing questionnaire took about fifteen minutes to complete.
Subjects To avoid institutional bias, student subjects were obtained from three universities in different areas of the country. Student subjects were from a large public university in the western United States, a large public university in the north-central United States, and a large private university in the northeastern United States. The survey was administered during the week of classes preceding final examinations to students enrolled in the introductory course on federal taxation at each university. Two-hundred and twenty-three students completed the survey, although not all students responded to every question. To control for possible institutional or regional differences, two d u m m y variables created for universities were included in statistical tests.
Independent Variables The study included five independent variables. These five variables are measured variables and were not manipulated between subjects. Information about these independent measures was drawn from the debriefing questionnaire. Regarding gender, subjects indicated whether they were female or male. The responses were coded female = 0 male = 1. Regarding age, subjects indicated their birth year. Subjects' responses were used to create two age classes: under 25 (coded 0) and over 25 (coded 1). Students over 25 were assumed to have been more likely to have been self supporting for some significant period of time and would therefore have had the experience of filing a return as a primary tax payer. Regarding key course work, subjects were asked to indicate whether they had completed or were currently taking a course in auditing and/or ethics. 'Yes' responses were coded l, and 'no' responses were coded 0. Career aspirations represented the fifth independent variable. Subjects were asked, "After graduation, do you plan to work as a
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Ol
paid tax preparer?" 'Yes' responses were coded l, and 'no' responses were coded 0.
Dependent Variables The study examined two measures of ethical standards regarding tax issues. The first is a measure of subjects' personal code of ethics in tax professional settings (personal code of ethics, hereafter). This measure was based upon subjects" personal beliefs regarding the appropriateness of the situations (e.g., column 2 responses) and was constructed as follows. For each subject we determined the number of times that his/her personal belief about the propriety of the scenarios presented in the survey represented the higher ethical standard. In making this determination responses of ~appropriate' to survey items 3 and 6 and 'inappropriate' to survey items 1,2, 4a, 4b, 8a, and 8b were judged to represent higher ethical standards. Survey questions 5 and 7 were excluded because we did not believe either response necessarily reflected a higher ethical standard. Thus, the measure of the personal code of ethics regarding tax issues has a theoretical range of 0-8. The second measure was subjects" response to the statement, "'It is morally wrong to evade paying taxes." This measure is referred to as belief about morality of tax evasion (morality belief, hereafter). The responses were on a Likert scale anchored on '1 -agree completely' and '6 disagree completely." This second measure was examined because it potentially incorporates beliefs related to non-professional behavior. Additionally, this type of measure has been considered in prior tax compliance research (Jackson & Milliron, 1986). One measure of knowledge of professional ethics was also examined. This measure was the number of times out of ten that the subject's first column response about appropriateness of tile scenario according to the AICPA Code or SRTP was accurate. This score could range from 0 to 10.
RESULTS
Descriptive Statistics Response frequencies on questionnaire items eliciting responses related to the five independent variables are presented in Table 1. As shown, approximately half of the subjects were male and approximately half of the subjects had previously taken or were currently taking an auditing course. A majority of subjects were younger (e.g., under 25), had taken a course in ethics, and were not planning to work as a paid preparer. The responses to the ten scenarios on specific ethical issues in tax are summarized in Table 2. The items are reproduced in Table 2 as they appeared on the survey instrument completed by the students. The proportion of students that believed the opinion or the situation described was defined as
92
L.P. Grasso and Steven E. Kaplan Table 1. Background information and morality of tax evasion response
Gender Male Female Total
Tax work aspirations 110 113 223
Yes No Not responding Total
t83 124 16 223
Age 20-24 > 25 (25-49) Not Responding Total
181 37 5 223
Previously taken or currently taking a course in... Ethics Yes No Total
141 82 223
Auditing Yes No Total
107 116 223
Location Northeast North-central West Total
78 91 54 223
It is morally wrong to evade paying taxes 1--agree completely 2 3 4 5 6~disagree completely Not responding Total
98 5 28 19 17 3 1 223
appropriate under the AICPA Code or SRTP is given under Column 1. The correct response and the AICPA Code or SRTP reference (AICPA, 1991a, 1991 b) is provided following each scenario. The percentage of students indicating that they personally believed the opinion or situation described was appropriate is given in Column 2. Descriptive statistics (number of responses, means, and standard deviations) and Spearman correlations between the variables examined in this study are presented in Table 3. The first five items in Table 3 are the dichotomous independent variables. The last three items are the dependent measures examined. With regard to the three dependent variables, Table 3 shows that subjects tended to have a relatively high level of knowledge of professional ethics (with a mean of over seven out of a possible score of ten), tended to agree that evasion is morally wrong, and tended to have middle personal codes of professional tax ethics scores. Also, it should be noted that the standard deviations for each of these dependent variables was larger than one, suggesting the presence of individual differences.
Hypothesis Tests Two regression analyses were performed to test the five hypotheses. The independent variables were gender, age, ethics course, auditing course, tax work aspirations, and two dummy variables for universities. In the first
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93
Table 2. Responses to survey items on ethics in tax practice Survey Items (AICPA position and reference)
#1
#2
84.6%
95.0%
1
12.6%
15.8%
2
94.1%
85.8%
3
15.4%
21.6%
50.0%
52.9%
80.7%
93.7%
4(a) A taxpayer wishes to take a position that the tax preparer believes is not warranted in existing law. The position, however, is not patently improper. The tax preparer signs the return taking the position the taxpayer wishes, without any special disclosure calling attention to this position. (Inappropriate, SRTP section 112.09) 4(b) Assume the same situation as 4(A), except that the tax return contains a disclosure that the position is not warranted in existing law.The tax preparer signs the return taking the position the taxpayer wishes. (Appropriate, SRTP section 112.09) 5 In order to increase business, the tax preparer begins to advertise. The advertising is not false, misleading, or deceptive. (Appropriate,
95.5%
89.6%
6
The tax preparer should accept the obligation to act in a way that will serve the public interest and honor the public trust. (Appropriate,
70.5%
85.3%
7
The tax preparer resolves a questionable issue in favor of the client.
When giving advice to a taxpayer when more than one position can be supported in good faith, the tax preparer discusses with the taxpayer the likelihood that each such position might or might not cause the taxpayer's return to be examined and/or challenged by the IRS. (appropriate, SRTP section 112.08) A tax preparer charges the taxpayer a contingent fee, based upon how much the tax liability goes down from the prior year's return.
(Inappropriate, AICPA Code, Rule 302) The tax preparer has a duty to the tax system. (Appropriate, SRTP
section 112.06)
AICPA Code, Rule 502) AICPA Code, Article II) (Appropriate, SRTP sections 112.04 and 112.06) 8
38.0%
61.3%
23.8%
38.6%
In the process of preparing the current year's tax return, the tax preparer became aware of an error in the taxpayer's previously filed tax return. The previous return had been prepared by another tax preparer. (A) The tax preparer wants to avoid having anything in writing about this matter but ORALLY recommends to the client the measures to be taken. (Appropriate, SRTP section 162.03) (B) The tax preparer does not inform the IRS of this error. (Appropriate,
SRTP section 162.03) Col. 1 Percentage of respondents indicating they believed the situation or opinion was appropriate under the AICPA Code of Professional Conductor Statements on Responsibilities
in Tax Practice. Col. 2 Percentage of respondents indicating they personally believed the situation or opinion was appropriate.
analysis the dependent measure was personal code of ethics and in the second analysis the dependent measure is morality belief. The results of these two multiple regressions are summarized in Table 4. As shown in Table 4, the multiple regression model for personal code of ethics was statistically significant at an extremely high level. Overall, the independent variables explained over 13 percent of the variation in the scores for personal code of professional
Gender ~ Ethics course 2 Auditing course 3 Tax work aspirations4 Personal code of ethics 5 Morality beliefs6 Knowledge of professional ethics ~
223 223 223 207 216 214 212
0.49 0.63 0.48 0.49 4.90 2.14 7.11
Mean 0.50 0.48 0.50 0.49 1.35 1.34 1.25
SD 0.01 - 0.07 0.09 -0.09 0.22*** -0.03
1
- 0.31 *** - 0.04 -0.10 0.04 0.02
2
- 0.01 0.16" 0.21"* 0.06
3
0.19"* 0.01 0.02
4
-0.26*** 0.16"
5
0.09
6
p < .10, *p < .05, **p < .01, ***p < .001. 1Female =0, Male= 1. 2Ethics course: 1 = currently taking or have taken, 0= otherwise. 3Auditing course: 1 = currently taking or have taken, 0= otherwise. 4Tax Work aspirations: 1 = tax aspirations after graduation, 0= otherwise. 5Personal code of ethics: based on responses to eight scenarios, with a theoretical range of 0-8, with a higher score indicative of a higher personal code of ethics. 6Morality beliefs: extent of agreement to statement,"lt is morally wrong to evade paying taxes," where 'agree completely' is assigned a value of 1 and 'disagree completely' is assigned a value of 6. 7Knowledge of professional ethics: based on responses to ten scenarios, with a theoretical range of 0-10, with a higher score indicative of greater knowledge.
1 2 3 4 5 6 7
N
Table 3. Descriptive statistics and correlations
O
C~
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95
Table 4. Regression analyses on measures of ethical standards for tax issues a Dependent variables Personal code of ethics ~ Intercept Northeastern U. S. coefficient Western U. S. coefficient Gender coefficient Age coefficient Ethics course coefficient Auditing course coefficient Tax work aspiration coefficient Model sum of squares Error sum of squares F value df, model df, error p < R-square Adjusted R-square
4.68 (16.11 )*** 0.14 (0.44) 0.79 (2.28) - 0 . 5 5 ( 2.84)** - 0 . 6 9 ( 2.27)* - 0.29 ( - 1.14) 0.60 (2.54)* 0.62 (3.15)** 49.11 312.41 4.20 7 187 0.001 0.136 0.104
Morality Belief I 2.23 (7.92)*** 0.10 (0.34) 0.07 (0.22) 0.52 (2.76)** 0.32 ( - 1.11) - 0.11 ( 0.43) - 0 . 5 5 ( - 2.42)* 0.08 ( 0.43) 34.42 314.23 3.04 7 194 0.005 0.099 0.066
a t statistics in parentheses. p < .10, *p < .05, **p < .01, ***p < .001 1 See Table 3 for description of variable.
tax ethics. The model for the morality belief also achieved a high level of statistical significance, and the independent variables explained almost 10 percent of the variation in responses. Considering the specific hypotheses, an examination of the parameter estimates (Table 4) reveals that there were significant differences in both personal codes of ethics and morality belief based on gender. The negative sign on the gender parameter estimate for personal code of ethics indicates that the scores among females were systematically higher than the scores among males (mean scores for females and males are 5.06 and 4.74, respectively). A t-test of the univariate relationship between gender and personal codes of ethics had a similar result. Regarding morality belief, the positive sign on the gender parameter indicates that females tended to believe more strongly than males that evading taxes is immoral, as higher scores indicated disagreement with the statement (mean scores for females and males are 1.83 and 2.45, respectively). A t-test of the univariate relationship between gender and morality belief had a similar result. Thus, the pattern of results supports hypothesis one. The parameter for age was statistically significant in the personal code of ethics model. The negative parameter indicates that contrary to expectation, the younger students had higher personal code of ethics scores. The negative
96
L.P. Grasso and StevenE. Kaplan
sign on the the parameter for age in the morality belief model indicates that older students tended to agree more strongly than younger students that evading taxes is immoral. However the age parameter was not significant in the morality belief model. Having exposure to an ethics course was not significantly associated with either personal code of ethics or morality belief. Hypotheses two and three are not supported by the results. Exposure to an auditing course had a significant association with both dependent measures of personal ethical standards. The positive sign on the auditing course parameter estimate for personal code of ethics indicates that the scores among subjects with an exposure to an auditing course were systematically higher than subjects without such exposure (mean scores with and without an auditing course are 5.12 and 4.70, respectively). A t-test of the univariate relationship between auditing exposure and personal codes of ethics had a similar result. Regarding morality beliefs, the negative sign of the parameter indicates that subjects with an exposure to auditing tended to believe more strongly than subjects without an exposure to auditing that evading taxes is immoral (mean scores with and without an auditing course are 1.84 and 2.41, respectively). A t-test of the univariate relationship between auditing exposure and personal codes of ethics had a similar result. Thus, the pattern of results supports hypothesis four. Finally, Table 4 shows that there was a significant difference in personal codes of ethics based on career aspirations. The positive sign on the tax work aspirations parameter estimate for personal code of ethics indicates that the scores among subjects aspiring to become a paid preparer were systematically higher than subjects without such aspirations (mean scores with tax work aspirations and without are 5.21 and 4.71, respectively). A t-test of the univariate relationship between tax work aspirations and personal codes of ethics had a similar result. However, tax work aspirations were not associated with subjects' morality belief. Thus, the pattern of results provides only partial support for hypothesis four.
Personal Ethical Standards and SRTP and AICPA Code Knowledge An examination of students' personal appropriateness responses (Table 2) reveals consistent differences in the responses between the two columns. Specifically, the pattern of differences in responses between columns 1 and 2 in Table 2 suggests that students uniformly believe the professional standards arc more restrictive than they personally feel is appropriate. For example, 95 percent of the respondents found scenario 1 personally appropriate while just under 85 percent believed the behavior described in scenario 1 was considered appropriate by the AICPA Code or SRTP. Thus, over ten percent of the survey respondents believed that in this instance behavior that they would otherwise consider ethical conflicted with existing professional standards
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97
and recommendations. This pattern held for all ten survey items. 2 Perhaps scenarios 3 and 6 provide the most troubling responses. Both o f these questions addressed social responsibilities o f C P A s in tax practice. For each o f these questions, fewer students personally felt an obligation toward society than they believed was professionally required. SUMMARY AND IMPLICATIONS This study investigated ethical standards regarding tax issues a m o n g students enrolled in an introductory tax course. We believe the study makes an important contribution by focusing attention on and enhancing understanding o f personal ethical standards regarding tax issues. The results o f this study suggest that systematic differences across individuals are likely to exist. Two o f the five hypotheses were supported on both the dependent measures and a third hypothesis was supported on one o f the dependent measures. We believe the results o f the study have five key implications. First, the study demonstrates that the level o f personal ethical standards for tax issues varies a m o n g introductory tax students and that the mean level o f personal ethical standards for tax issues was only moderate. These results provide a basis for the Bedford Committee alleging that there still remains a need to 'instill ethical standards.' That is, based on the results of the current study there is clearly r o o m for improvement in the ethical standards for tax observed a m o n g tax students. Second, tax students who had exposure to an auditing course exhibited significantly higher ethical standards than subjects without such exposure. This finding is important because it suggests that exposure to professional ethics and responsibilities t h r o u g h an auditing course yields positive benefits in terms o f enhanced or stronger personal ethics. This finding suggesting positive benefits stemming from a greater emphasis on ethics in the accounting curriculum is much more encouraging than several prior studies. F o r example, P o n e m o n (1993) and L a m p e (1994) found that increased emphasis on ethics in accounting courses was not associated with improved levels o f moral reasoning. O u r results m a y indicate that the focus on moral reasoning as the primary measure of 'effectiveness" has been too narrow. We believe that
~For eight of the ten survey items a response of'appropriate" indicates the respondent's personal code of ethics (or beliefs about the AICPA Code and SRTP) imposes.fiq~:er restrictions on preparer behavior. The percentage of "appropriate" responses was higher in the "personal"column than in the "AICPA' column for all eight of these items. For survey items 3 and 6, a response of "appropriate" indicated that the respondent felt that a greater obligation to act in the public interest existed, imposing 9reater restrictions on preparer behavior. The percentage of "appropriate" responses was higher in the 'AICPA' column than in the "personal" column for both of these items.
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L.P. Grasso and Steven E. Kaplan
further research on assessing the potential effects of ethics education should incorporate a wider range of dependent measures. The third key implication relates to career aspirations. The results indicated that relative to other students, students with aspirations to become a tax professional had higher scores on the personal code of ethics in tax professional settings measure than those not aspiring work in the tax profession. The implication is that the level of ethical standards among those planning to enter tax practice is relatively high. These high ethical standards could be exacerbating the conflict accountants encounter when performing tax work (as described by Finn et al., 1988). A relatively high personal code of ethics in tax professional settings may lead these individuals to more readily recognize that an ethical conflict exists. However, as suggested by the results from Finn et al. (1988), individuals performing tax work have little background on how to resolve ethical conflict. Tax courses have historically placed little or no emphasis on integrating ethics into their content. Thus, individuals who begin performing tax work may have a desire to maintain high ethical standards and yet feel unequipped to solve specific ethical dilemmas involving tax issues. The fourth key implication relates to gender. The results indicated that female subjects had higher scores on the personal code of professional tax ethics measure than males. The results are consistent with Gilligan (1982)'s contention that, relative to males, females tend to view ethical issues from a care perspective, which emphasizes the need of others in a particular context. The current results are consistent with females personal ethical standards reflecting the needs of society more so than males. The last implication concerns the finding that the current models explain a relatively low proportion of the variation in tax students' personal ethical standards. This finding suggests a need for further research to more completely specify the factors that are related to an individual's personal ethical standards. A more complete model would be helpful in developing and assessing different approaches that might be used to instill ethical standards among accounting students. Acknowledgement~The authors would like to thank Cindy Moeckel for her thoughtful comments and suggestions, and Charles Christian, Sanjay Gupta, Linda Johnson, Van Johnson, and Frank Meanor for their assistance in administering the questionnaire.
REFERENCES Accounting Education Change Commission (AECC) (1990). Objectives of Education for Accountants: Position Statement Number One, Issues in Accounting Education, 5, 307-312. American Accounting Association (AAA), Committee on the Future Structure, Content, and Scope of Accounting Education (The Bedford Committee) (1986). Future Accounting Education: Preparing for the Expanding Profession, Issues in Accounting Education, 1, 168-195.
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99
American Assembly of Collegiate Schools of Business (AACSB) (1988). 1987 88 Accreditation Council Policies Procedures and Standards. AACSB, St. Louis, MO. American Institute of Certified Public Accountants (AICPA) (1988). Education Requirements jor Entry Into the Accounting ProJkssion. AICPA, New York, NY. American Institute of Certified Public Accountants (AICPA) (1991a). Code ~1" Pr~l~,ssional Conduct. AICPA, New York, NY. American Institute of Certified Public Accountants (AICPA) (1991b) Statement on Responsibilities in Tax Practice. AICPA Federal Tax Division, New York, NY. Armstrong, M. B. & Mintz, S. M. (1989). Ethics Education in Accounting: Present Status and Policy Implications. Got ernment Accountants Journal, 38(2), 70 76. Betz, M., O'Connell, L. & Shepard, J. (1989). Gender Differences in Proclivity for Unethical Behavior. Journal ¢~/ Business Ethics, 8, 321 324. Casler, D. (1964). The Et~olution ~1' CPA Ethical: A Pr~?/ile ~?/ Prq/~'s.~ionalization, Occaisional Paper No. 12, Bureau of Economic Research, Michigan State University Graduate School of Business Administration, East Lansing MI. Cohen, J. R. & Hanno, D. M, (1993). An Analysis of Underlying Constructs Affecting the Choice of Accounting as a Major. Issues in Accounting Education, ~'. 219 238. Cohen, J. R. & Pant, L. W. (1989). Accounting Educators" Perceptions of Ethics m the Curriculum. Issues in Accounting Education, 4, 70-81. England, G. (1975). The Manager attd His l'alues: An Internatiomd Perspective. Ballinger. Cambridge, MA. Enright, R., Lapsley, M., and Levy, M. (1983). Moral Education Strategies In M. Pressley and 1. Levin, (Eds.) Cognitive Strategy Research: Educational Applicatio~ts, (pp. 43 83). SpringerVerlag, New York, NY. Finn. D. W.. Chonko, L. B. & Hunt, S. D. (1988). Ethical Problems in Public Accounting: The View from the Top. Journal o f Business Ethics, 7, 605 615. Fisher, D. G. (1994). The Use of the Four-Component Model of Moral Reasoning as a Framework lk~r Tax Compliance Research, paper presentation at the Accounting, Behavior. and Organizations Research Conference, San Antonio, TX, (March). Gilligan, C. (1982). b7 a Di[l~,rent Voice. Harvard University Press, Cambridge, MA. Gul, F. A., ,Andrews, B. H., Leong, S. C. & Ismail, Z. (1989). Factors Influencing Choice of Discipline of Study-Accountancy, Engineering, Law, and Medicine. Accountinc¢ and Finance, 29(2), 93 101. Guth, W. & Tagiuri, R. (1965). Personal Values and Corporate Sm~tegies. ftart'ard Busines.v Ret~iew, 43(X), 123 132. Internal Revenue Service, U. S. (IRS) (1987). Surt,ey ~?lTa.v Practitioners and Advisers: Summary ~?l' Results hy Occupation. Office of the Assistant Commisioner, Planning, Finance and Research Division, Internal Revenue Service, Washington, D.C. Jackson, B. R. & Milliron, V. C. (1986). Tax Compliance Research: Findings, Problems. and Prospects. Journal ¢~/'Accountin.q Literature, 5, 125 166. Kaplan, S. E., Reekers, P. M. J., West, S. G. & Boyd, J. C. (1988). ~kn Examination of Tax Reporting Recommendations of Professional Tax Preparers. Journal c?fEconomic Psychology. 8, 423~43. Kiger. J., Sterling, R., Hermanson, R. and Mitchell, A. (1988). Report of the General Education Guidelines Committee, Proceedings of the Elet,enth Annual Meetin9 ~l the k~,deralion ~/ Schools o/Accountam3', (pp. 37~40). Urbana-Champaign, IL:FSA. Lampe, J. C. (1994). The Impact of Ethics Education in Accounting Curricula, Proceedin~ls ~/ the Ernst & Young Research on Accounting Ethics S!'lnposit#n, (pp. 220 236). June, 1994. Binghamton, NY,. Lawrence, J. A. (1980). Moral Judgment Intervention Studies Using the Defining Issues Test. Journal o/Moral Education, 9, 14~29. Leming, J. S. (1981). Curricular Effectiveness in Moral/Values Education: A Review of Research. Journal o f Moral Education, 10, 147 164.
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McDonald, P. & Gandz, J. (1991). Identification of Values Relevant to Business Research. Human Resource Management, 30(2), 217 236. Pany, K., and Whittington, O. R. (1994). Auditing. Richard D. Irwin Inc., Burr Ridge, IL. Paolillo, J. G. P. & Estes, R. W. (1982). An Empirical Analysis of Career Choice Factors among Accountants, Attorneys, Engineers, and Physicians. The Accounting Review, 57, 785-793. Ponemon, L. A. (1993). Can Ethics be Taught in Accounting?. Journal q/'Accounting Education, 11, 185 209. Rest, J. R. (1986). Moral Development: Advances in Research and Theory. Praeger, New York, NY, Roth, J. A., Scholz, J. T., and Witte, A. D., eds. (1989). Taxpayer Compliance: An AgendaJor Research, Vol. 1. Philadelphia, PA: University of Pennsylvania Press. Stanga, K. G. & Turpen, R. A. (1991). Ethical Judgments on Selected Accounting Issues: An Empirical Study. Journal of Business Ethics, 10, 739 747. Thompson, J. H., McCoy, T. L. & Wallestad, D. A. (1992). The Incorporation of Ethics into the Accounting Curriculum. Advances in Accounting, 10, 91-103. Ward, S. P., Ward, D. R. & Deck, A. B. (1993). Certified Public Accountants: Ethical Perception Skills and Attitudes on Ethics Education. Journal ~f Business Ethics, 12, 601-610.
Pergamon
P l h S0748-5751 (98)00004-9
AN E X A M I N A T I O N OF ETHICAL S T A N D A R D S FOR TAX I S S U E S Lawrence P. Grasso and Stcvcn E. Kaplan A R I Z O N A STATE UNIVERSITY Ahslracl: This study examines the extent to which educational background and demog,aphic
l,tctors are associated with students' personal standards for ethical issues involving tax professionals. Two hundred and twenty-three students about to complelc an introductory tax course were given ten brief scenarios focusing on the ethical and professional responsibilities of CPAs with tax practices. For each scenario, the students were asked whether they helkwed the opinion or the situation described was considered appropriate under existing professional standards, and whether they personally believed the opinion or situation described was appropriate. They were also asked whether they believed evading taxes was immoral. The results indicated that female students had higher personal ethical standards for issues revolving tax professionals than did male students. Exposure to a course in auditing (the accounting course generally having the most extensive coverage of ethical issues) was associated with higher ethical standards, bul exposure to a general course on ethics was not. Students aspiring to be tax professionals had higher ethical standards for issues involving tax professionals than those that did not, but their beliefs about the morality of tax evasion were not significantly different. The implications of these and other results are discussed. ~, 1998 Elsevier Science Lid. All rights reserved
AN EXAMINATION OF ETHICAL STANDARDS FOR TAX ISSUES O v e r the past decade there has been a widespread effort by p r act i t i o n er s and e d u c a t o r s to e n c o u r a g e g r e a te r emphasis on ethics in a c c o u n t i n g e d u c a t i o n . F o r example, f o r m a l r e c o m m e n d a t i o n s for increasing ethics instruction have been m a d e by the A m e r i c a n A s s e m b l y o f Collegiate Schools o f Business ( A A C S B , 1988), the A m e r i c a n A c c o u n t i n g A s s o c i a t i o n (The Bedford C o m m i t t e e , A A A , 1986), the F e d e r a t e d Schools o f A c c o u n t a n c y (Kiger, Sterling, H e r m a n s o n & Mitchell, 1988), and the A c c o u n t i n g Education C h a n g e C o m m i s s i o n ( A E C C , 1990). In o r d e r to better p r e p a r e students for entry into the a c c o u n t i n g profession, the B ed f o rd C o m m i t t e e r e c o m m e n d e d that professional a c c o u n t i n g educ a t i o n should " . . . i n s t i l l the ethical s t a n d a r d s an d c o m m i t m e n t o f a professional. T h e general effort to d e v e l o p in students a c o n c e r n for individual needs an d the overall a d v a n c e m e n t o f society must be given m o r e e m p h a s i s " ( A A A , 1986, p. 179). T h e A I C P A m a d e a similar point. " A sense o f responsibility to society and to o n e ' s o w n profession should be a c q u i r e d very early in the e d u c a t i o n a l process a n d can begin with the n u r t u r i n g o f m o r a l and ethical 85
86
L.P. Grasso and StevenE. Kaplan
values" (AICPA, 1988, p. 10). The apparent concern of the above groups is that the ethical standards of students may somehow be lacking or that students may not sufficiently take into account the needs of society. Research is needed to assess whether the ethical standards of accounting students are sufficient for the accounting profession. Ward, Ward and Deck (1993) contend that since individuals ultimately make decisions, personal ethical standards are likely to shape individuals' decision making. Professional standards, such as the AICPA's Code of Professional Conduct, represent minimum standards and are incomplete guides to behavior. This contention is consistent with groups such as the AAA and the AICPA recognizing that it is important that students have high ethical standards. Research outside of education has found that personal values and personal ethical standards influence decision making. For example, values have been found to influence corporate strategy decisions (Guth & Tagiuri, 1965) and managerial decisions (England, 1975). More recently, McDonald and Gandz (1991) contend that values influence the perception of ethical business dilemmas. This paper reports the results of a survey that provides evidence on tax students' personal ethical standards in the context of tax issues. We focus on the tax setting because taxpayers and tax preparers confront ethical and moral issues. In highlighting this point, Fisher (1994, p. 3) states, "tax compliance choices should not be viewed as a simple gamble, but rather as a classic social dilemma involving conflict between financial self-interest and social cooperation." Consistent with this characterization is research demonstrating a positive relationship between ethical beliefs and compliance (Jackson & Milliron, 1986; Roth, Scholz & Witte, 1989). These findings strongly suggest that the personal ethical standards related to tax compliance are important, influencing both an individuals treatment of their own tax issues and their treatment of clients' tax issues when serving as a tax preparer. The purpose of the survey was to determine the extent to which personal ethical standards among tax students were associated with educational background and other demographic information. It is important to note that the focus of the present survey is quite different from prior tax research which has tended to treat ethical beliefs (e.9., evasion is immoral) as an independent variable in an effort to understand compliance behavior (Jackson & Milliron, 1986). Instead, the current study treats ethical beliefs as the dependent variable in order to gain insight into why different individuals might adopt different personal ethical standards in the context of tax issues. The concept of ethical dilemmas in tax practice is briefly discussed in the next section of the paper. Following that discussion, research questions are developed concerning factors potentially associated with formation of personal beliefs about ethics in the context of taxation. The research method and results sections of the paper contain descriptions of the questionnaire that was administered and the results that were obtained, respectively. The
An Examination of Ethical Standards for Tax Issues
87
paper concludes with a discussion of the results and suggestions for further research. Ethical Dilemmas in Tax Practice Professional standards such as the Statements on Responsibilities in Tax Practice (SRTP) and the American Institute of Certified Public Accountants' Code qf Professional Conduct (AICPA Code) have been promulgated to ensure that CPAs consider their responsibilities to both the client and to the public when performing tax compliance work. The A I C P A Code and the SRTP include general statements for all public accountants, as well as 'advisory opinions' and recommendations specifically directed towards CPAs engaged in tax practice. In particular it is worth noting that a CPA's responsibility to be a client advocate is not intended to mitigate or overshadow a CPA's responsibilities to society. Because CPAs have responsibilities that extend beyond the client, ethical conflicts related to tax issues may arise, which in turn, created a need for professional standards to guide CPAs working on tax issues. Further, professional standards were also needed because the proper application of the law to the Pacts and circumstances of many situations is ambiguous. The findings of Finn, Chonko and Hunt (1988) are particularly useful to demonstrate the scope of ethical problems arising from tax work. The authors conducted a study to examine the nature of ethical problems confronting senior level A I C P A members. The authors analyzed responses to the following open-ended question: "In all professions, managers are exposed to at least some situations that pose a moral or ethical problem. Would you please briefly describe the job situation that poses the most difficult ethical or moral problem for you personally?" (Finn et al., 1988, p. 609). By far the most common problem, cited by 47 percent of senior level A I C P A member respondents, concerned client proposals of tax alteration and tax fraud. At the core of this problem is the difficulty the tax preparers have sorting out their dual responsibilities to the client and an outside party (e.g., the IRS). One of Finn et al. (1988, p. 609)'s respondents articulated this well in his/her response, as follows: Preparing income tax returns whereby the basis of taking a deduction on the tax return is not 100 percent supportable (in other words, a 'grey area'). In this situation, the preparer is compensated by the client yet the Internal Revenue Service can subject the preparer to penalties unless the preparer can sho~ he relied on "substantial" authority. It seems the regulations are enacted to pressure the preparer into making tax decisions which favor the IRS. This can, at times, be a moral dilemma. Personal Ethical Standards If an individual incorporates the interests of the public into resolution of ethical conflicts, we characterize that as 'high personal ethical standards."
88
L.P. Grasso and StevenE. Kaplan
If an individual instead consistently decides in favor of the taxpayer, we characterize that as 'lower personal ethical standards.' As indicated earlier, prior research (Jackson & Milliron, 1986) has consistently shown a relationship between ethical beliefs and compliance. This relationship is important because it suggests that a range of personal ethical standards exists among individuals. In this section we propose hypotheses suggesting an association between certain background factors of individuals and their personal ethical standards for tax issues. The moral psychology and philosophy literature suggests that the ethical judgments made by males and females may differ. For example, Gilligan (1982) contends that males and females use different perspectives to resolve moral and ethical issues. Whereas males tend to view moral issues in terms of a justice perspective, females employ a care perspective. The justice perspective emphasizes the concepts of fairness and impartiality; the care perspective emphasizes the needs of others in a particular context. Females' focus on others may result in higher personal standards for tax issues compared to the personal standards held by males. Males may also be more prone than females to hold lower ethical standards to the extent males are more concerned than females about such issues as personal advancement and power (Betz, O'Connell & Shepard, 1989). This discussion leads to our first hypothesis. H(1): Females will possess higher personal ethical standards for tax issues than males. Age represents a second variable that may influence individuals' personal ethical standards for tax issues. Again drawing upon the moral psychology literature, age has been found to be associated with an individual's level of moral reasoning in a variety of sudies (Rest, 1986). This literature would suggest that older individuals will have higher personal standards for tax issues than younger individuals. Tax compliance research exploring the relationship between age and tax compliance is also relevant. Based upon their review of this literature, Roth et al. (1989) conclude that older taxpayers generally are more compliant. They caution, however, that several explanations may explain this result. We explore one potential explanation: older individuals may hold higher personal ethical standards for tax issues. This discussion leads to our second hypothesis. H(2): Older individuals will possess higher personal ethical standards for tax issues than younger individuals. Ethics education reresents a third variable that may influence personal ethical standards for tax issues. Research has shown a modest, but positive association between ethics education and moral reasoning (Enright, Lapsley & Levy, 1983; Leming, 1981; Lawrence, 1980). Within the accounting literature, both Armstrong and Mintz (1989) and Cohen and Pant (1989) contend that insufficient coverage of ethics during professional training has a negative
An Examination of Ethical Standards for Tax Issues
89
influence on m o r a l r e a s o n i n g within the profession. This literature also recognizes that ethics c o v e r a g e m a y c o m e f r o m a variety o f sources. F o r e x a m p l e , in an u n d e r g r a d u a t e a c c o u n t i n g p r o g r a m , ethical issues m a y be covered either in a s e p a r a t e ethics course o r i n t e g r a t e d within the a c c o u n t i n g curriculum. W i t h i n the a c c o u n t i n g c u r r i c u l u m , research has d e m o n s t r a t e d t h a t the greatest ethics c o v e r a g e c o m e s f r o m the a u d i t i n g course ( C o h e n & Pant, 1989: T h o m p s o n , M c C o y & W a l l e s t a d , 1992). Both o f these sources o f ethics c o v e r a g e are c o n s i d e r e d in this study. This leads to the next two hypotheses. H(3): Individuals who have taken an ethics course will possess higher personal ethical standards for tax issues than individuals who have not taken an ethics course. H(4): Individuals who have taken an auditing course will possess higher personal ethical standards for tax issues than individuals who have not taken an auditing course. Finally, p e r s o n a l ethical s t a n d a r d s for tax issues m a y be a s s o c i a t e d with career aspirations. A c c o u n t i n g students who aspire to b e c o m e tax p r o fessionals m a y hold higher p e r s o n a l ethical s t a n d a r d s for tax issues than o t h e r students. By the n a t u r e o f their work, tax p r o f e s s i o n a l s c o n d u c t tax services for i n d i v i d u a l s o t h e r t h a n themselves. The responsibilities to society s t e m m i n g f r o m tax issues also m a y be m o r e salient a m o n g students with career a s p i r a t i o n s for tax work. In a n t i c i p a t i o n o f such w o r k , students m a y have t h o u g h t m o r e a b o u t their dual responsibilities to t a x p a y e r s a n d to society. In the absence o f such a s p i r a t i o n s , students ethical s t a n d a r d s m a y reflect m o r e o f an i n d i v i d u a l perspective. ~ A c c o r d i n g l y . we p r o p o s e the following hypothesis. H(5): Individuals who aspire to a tax career will possess higher personal ethical standards for tax than individuals who do not aspire to a ~ax career.
RESEARCH METHOD
Survey Instrument D a t a to test o u r h y p o t h e s e s were o b t a i n e d by surveying u n d e r g r a d u a t e students in the final week o f an i n t r o d u c t o r y tax course. The survey is presented, a l o n g with a s u m m a r y o f the responses, in T a b l e 2. T h e subjects were given ten b r i e f scenarios focusing on the ethical a n d professional responsibilities o f C P A s with tax practices. T h e ten scenarios were d r a w n
~While several studies have examined the reasons students choose accounting as a major or career (Cohen & Hanno, 1993; Gul, Andrews, Leong & lsmail, 1989; Paolillo & Estes, 1982), we are not aware of any research considering career aspirations among accounting students tbr particular types of work within accounting.
90
L.P. Grasso and Steven E. Kaplan
from issues specifically addressed by either the A I C P A Code or SRTP. An attempt was made to identify a broad range of ethical issues that provide an opportunity for various ethical opinions to manifest themselves. For each scenario subjects were asked to indicate: (1) whether they believed the opinion or the behavior described was defined as appropriate under the A I C P A Code or SRTP (i.e., column 1 response); and (2) whether they personally believed the opinion or behavior described was appropriate (i.e., column 2 response). The first response was intended to reflect knowledge of professional standards whereas the second response was intended to reflect personal ethical standards. Subjects also completed a debriefing questionnaire about their backgrounds, professional aspirations, and beliefs regarding the morality of evasion. The entire survey including the debriefing questionnaire took about fifteen minutes to complete.
Subjects To avoid institutional bias, student subjects were obtained from three universities in different areas of the country. Student subjects were from a large public university in the western United States, a large public university in the north-central United States, and a large private university in the northeastern United States. The survey was administered during the week of classes preceding final examinations to students enrolled in the introductory course on federal taxation at each university. Two-hundred and twenty-three students completed the survey, although not all students responded to every question. To control for possible institutional or regional differences, two d u m m y variables created for universities were included in statistical tests.
Independent Variables The study included five independent variables. These five variables are measured variables and were not manipulated between subjects. Information about these independent measures was drawn from the debriefing questionnaire. Regarding gender, subjects indicated whether they were female or male. The responses were coded female = 0 male = 1. Regarding age, subjects indicated their birth year. Subjects' responses were used to create two age classes: under 25 (coded 0) and over 25 (coded 1). Students over 25 were assumed to have been more likely to have been self supporting for some significant period of time and would therefore have had the experience of filing a return as a primary tax payer. Regarding key course work, subjects were asked to indicate whether they had completed or were currently taking a course in auditing and/or ethics. 'Yes' responses were coded l, and 'no' responses were coded 0. Career aspirations represented the fifth independent variable. Subjects were asked, "After graduation, do you plan to work as a
An Examination of Ethical Standards for Tax Issues
Ol
paid tax preparer?" 'Yes' responses were coded l, and 'no' responses were coded 0.
Dependent Variables The study examined two measures of ethical standards regarding tax issues. The first is a measure of subjects' personal code of ethics in tax professional settings (personal code of ethics, hereafter). This measure was based upon subjects" personal beliefs regarding the appropriateness of the situations (e.g., column 2 responses) and was constructed as follows. For each subject we determined the number of times that his/her personal belief about the propriety of the scenarios presented in the survey represented the higher ethical standard. In making this determination responses of ~appropriate' to survey items 3 and 6 and 'inappropriate' to survey items 1,2, 4a, 4b, 8a, and 8b were judged to represent higher ethical standards. Survey questions 5 and 7 were excluded because we did not believe either response necessarily reflected a higher ethical standard. Thus, the measure of the personal code of ethics regarding tax issues has a theoretical range of 0-8. The second measure was subjects" response to the statement, "'It is morally wrong to evade paying taxes." This measure is referred to as belief about morality of tax evasion (morality belief, hereafter). The responses were on a Likert scale anchored on '1 -agree completely' and '6 disagree completely." This second measure was examined because it potentially incorporates beliefs related to non-professional behavior. Additionally, this type of measure has been considered in prior tax compliance research (Jackson & Milliron, 1986). One measure of knowledge of professional ethics was also examined. This measure was the number of times out of ten that the subject's first column response about appropriateness of tile scenario according to the AICPA Code or SRTP was accurate. This score could range from 0 to 10.
RESULTS
Descriptive Statistics Response frequencies on questionnaire items eliciting responses related to the five independent variables are presented in Table 1. As shown, approximately half of the subjects were male and approximately half of the subjects had previously taken or were currently taking an auditing course. A majority of subjects were younger (e.g., under 25), had taken a course in ethics, and were not planning to work as a paid preparer. The responses to the ten scenarios on specific ethical issues in tax are summarized in Table 2. The items are reproduced in Table 2 as they appeared on the survey instrument completed by the students. The proportion of students that believed the opinion or the situation described was defined as
92
L.P. Grasso and Steven E. Kaplan Table 1. Background information and morality of tax evasion response
Gender Male Female Total
Tax work aspirations 110 113 223
Yes No Not responding Total
t83 124 16 223
Age 20-24 > 25 (25-49) Not Responding Total
181 37 5 223
Previously taken or currently taking a course in... Ethics Yes No Total
141 82 223
Auditing Yes No Total
107 116 223
Location Northeast North-central West Total
78 91 54 223
It is morally wrong to evade paying taxes 1--agree completely 2 3 4 5 6~disagree completely Not responding Total
98 5 28 19 17 3 1 223
appropriate under the AICPA Code or SRTP is given under Column 1. The correct response and the AICPA Code or SRTP reference (AICPA, 1991a, 1991 b) is provided following each scenario. The percentage of students indicating that they personally believed the opinion or situation described was appropriate is given in Column 2. Descriptive statistics (number of responses, means, and standard deviations) and Spearman correlations between the variables examined in this study are presented in Table 3. The first five items in Table 3 are the dichotomous independent variables. The last three items are the dependent measures examined. With regard to the three dependent variables, Table 3 shows that subjects tended to have a relatively high level of knowledge of professional ethics (with a mean of over seven out of a possible score of ten), tended to agree that evasion is morally wrong, and tended to have middle personal codes of professional tax ethics scores. Also, it should be noted that the standard deviations for each of these dependent variables was larger than one, suggesting the presence of individual differences.
Hypothesis Tests Two regression analyses were performed to test the five hypotheses. The independent variables were gender, age, ethics course, auditing course, tax work aspirations, and two dummy variables for universities. In the first
An Examination of Ethical Standards for Tax Issues
93
Table 2. Responses to survey items on ethics in tax practice Survey Items (AICPA position and reference)
#1
#2
84.6%
95.0%
1
12.6%
15.8%
2
94.1%
85.8%
3
15.4%
21.6%
50.0%
52.9%
80.7%
93.7%
4(a) A taxpayer wishes to take a position that the tax preparer believes is not warranted in existing law. The position, however, is not patently improper. The tax preparer signs the return taking the position the taxpayer wishes, without any special disclosure calling attention to this position. (Inappropriate, SRTP section 112.09) 4(b) Assume the same situation as 4(A), except that the tax return contains a disclosure that the position is not warranted in existing law.The tax preparer signs the return taking the position the taxpayer wishes. (Appropriate, SRTP section 112.09) 5 In order to increase business, the tax preparer begins to advertise. The advertising is not false, misleading, or deceptive. (Appropriate,
95.5%
89.6%
6
The tax preparer should accept the obligation to act in a way that will serve the public interest and honor the public trust. (Appropriate,
70.5%
85.3%
7
The tax preparer resolves a questionable issue in favor of the client.
When giving advice to a taxpayer when more than one position can be supported in good faith, the tax preparer discusses with the taxpayer the likelihood that each such position might or might not cause the taxpayer's return to be examined and/or challenged by the IRS. (appropriate, SRTP section 112.08) A tax preparer charges the taxpayer a contingent fee, based upon how much the tax liability goes down from the prior year's return.
(Inappropriate, AICPA Code, Rule 302) The tax preparer has a duty to the tax system. (Appropriate, SRTP
section 112.06)
AICPA Code, Rule 502) AICPA Code, Article II) (Appropriate, SRTP sections 112.04 and 112.06) 8
38.0%
61.3%
23.8%
38.6%
In the process of preparing the current year's tax return, the tax preparer became aware of an error in the taxpayer's previously filed tax return. The previous return had been prepared by another tax preparer. (A) The tax preparer wants to avoid having anything in writing about this matter but ORALLY recommends to the client the measures to be taken. (Appropriate, SRTP section 162.03) (B) The tax preparer does not inform the IRS of this error. (Appropriate,
SRTP section 162.03) Col. 1 Percentage of respondents indicating they believed the situation or opinion was appropriate under the AICPA Code of Professional Conductor Statements on Responsibilities
in Tax Practice. Col. 2 Percentage of respondents indicating they personally believed the situation or opinion was appropriate.
analysis the dependent measure was personal code of ethics and in the second analysis the dependent measure is morality belief. The results of these two multiple regressions are summarized in Table 4. As shown in Table 4, the multiple regression model for personal code of ethics was statistically significant at an extremely high level. Overall, the independent variables explained over 13 percent of the variation in the scores for personal code of professional
Gender ~ Ethics course 2 Auditing course 3 Tax work aspirations4 Personal code of ethics 5 Morality beliefs6 Knowledge of professional ethics ~
223 223 223 207 216 214 212
0.49 0.63 0.48 0.49 4.90 2.14 7.11
Mean 0.50 0.48 0.50 0.49 1.35 1.34 1.25
SD 0.01 - 0.07 0.09 -0.09 0.22*** -0.03
1
- 0.31 *** - 0.04 -0.10 0.04 0.02
2
- 0.01 0.16" 0.21"* 0.06
3
0.19"* 0.01 0.02
4
-0.26*** 0.16"
5
0.09
6
p < .10, *p < .05, **p < .01, ***p < .001. 1Female =0, Male= 1. 2Ethics course: 1 = currently taking or have taken, 0= otherwise. 3Auditing course: 1 = currently taking or have taken, 0= otherwise. 4Tax Work aspirations: 1 = tax aspirations after graduation, 0= otherwise. 5Personal code of ethics: based on responses to eight scenarios, with a theoretical range of 0-8, with a higher score indicative of a higher personal code of ethics. 6Morality beliefs: extent of agreement to statement,"lt is morally wrong to evade paying taxes," where 'agree completely' is assigned a value of 1 and 'disagree completely' is assigned a value of 6. 7Knowledge of professional ethics: based on responses to ten scenarios, with a theoretical range of 0-10, with a higher score indicative of greater knowledge.
1 2 3 4 5 6 7
N
Table 3. Descriptive statistics and correlations
O
C~
An Examinationof Ethical Standards for Tax Issues
95
Table 4. Regression analyses on measures of ethical standards for tax issues a Dependent variables Personal code of ethics ~ Intercept Northeastern U. S. coefficient Western U. S. coefficient Gender coefficient Age coefficient Ethics course coefficient Auditing course coefficient Tax work aspiration coefficient Model sum of squares Error sum of squares F value df, model df, error p < R-square Adjusted R-square
4.68 (16.11 )*** 0.14 (0.44) 0.79 (2.28) - 0 . 5 5 ( 2.84)** - 0 . 6 9 ( 2.27)* - 0.29 ( - 1.14) 0.60 (2.54)* 0.62 (3.15)** 49.11 312.41 4.20 7 187 0.001 0.136 0.104
Morality Belief I 2.23 (7.92)*** 0.10 (0.34) 0.07 (0.22) 0.52 (2.76)** 0.32 ( - 1.11) - 0.11 ( 0.43) - 0 . 5 5 ( - 2.42)* 0.08 ( 0.43) 34.42 314.23 3.04 7 194 0.005 0.099 0.066
a t statistics in parentheses. p < .10, *p < .05, **p < .01, ***p < .001 1 See Table 3 for description of variable.
tax ethics. The model for the morality belief also achieved a high level of statistical significance, and the independent variables explained almost 10 percent of the variation in responses. Considering the specific hypotheses, an examination of the parameter estimates (Table 4) reveals that there were significant differences in both personal codes of ethics and morality belief based on gender. The negative sign on the gender parameter estimate for personal code of ethics indicates that the scores among females were systematically higher than the scores among males (mean scores for females and males are 5.06 and 4.74, respectively). A t-test of the univariate relationship between gender and personal codes of ethics had a similar result. Regarding morality belief, the positive sign on the gender parameter indicates that females tended to believe more strongly than males that evading taxes is immoral, as higher scores indicated disagreement with the statement (mean scores for females and males are 1.83 and 2.45, respectively). A t-test of the univariate relationship between gender and morality belief had a similar result. Thus, the pattern of results supports hypothesis one. The parameter for age was statistically significant in the personal code of ethics model. The negative parameter indicates that contrary to expectation, the younger students had higher personal code of ethics scores. The negative
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L.P. Grasso and StevenE. Kaplan
sign on the the parameter for age in the morality belief model indicates that older students tended to agree more strongly than younger students that evading taxes is immoral. However the age parameter was not significant in the morality belief model. Having exposure to an ethics course was not significantly associated with either personal code of ethics or morality belief. Hypotheses two and three are not supported by the results. Exposure to an auditing course had a significant association with both dependent measures of personal ethical standards. The positive sign on the auditing course parameter estimate for personal code of ethics indicates that the scores among subjects with an exposure to an auditing course were systematically higher than subjects without such exposure (mean scores with and without an auditing course are 5.12 and 4.70, respectively). A t-test of the univariate relationship between auditing exposure and personal codes of ethics had a similar result. Regarding morality beliefs, the negative sign of the parameter indicates that subjects with an exposure to auditing tended to believe more strongly than subjects without an exposure to auditing that evading taxes is immoral (mean scores with and without an auditing course are 1.84 and 2.41, respectively). A t-test of the univariate relationship between auditing exposure and personal codes of ethics had a similar result. Thus, the pattern of results supports hypothesis four. Finally, Table 4 shows that there was a significant difference in personal codes of ethics based on career aspirations. The positive sign on the tax work aspirations parameter estimate for personal code of ethics indicates that the scores among subjects aspiring to become a paid preparer were systematically higher than subjects without such aspirations (mean scores with tax work aspirations and without are 5.21 and 4.71, respectively). A t-test of the univariate relationship between tax work aspirations and personal codes of ethics had a similar result. However, tax work aspirations were not associated with subjects' morality belief. Thus, the pattern of results provides only partial support for hypothesis four.
Personal Ethical Standards and SRTP and AICPA Code Knowledge An examination of students' personal appropriateness responses (Table 2) reveals consistent differences in the responses between the two columns. Specifically, the pattern of differences in responses between columns 1 and 2 in Table 2 suggests that students uniformly believe the professional standards arc more restrictive than they personally feel is appropriate. For example, 95 percent of the respondents found scenario 1 personally appropriate while just under 85 percent believed the behavior described in scenario 1 was considered appropriate by the AICPA Code or SRTP. Thus, over ten percent of the survey respondents believed that in this instance behavior that they would otherwise consider ethical conflicted with existing professional standards
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97
and recommendations. This pattern held for all ten survey items. 2 Perhaps scenarios 3 and 6 provide the most troubling responses. Both o f these questions addressed social responsibilities o f C P A s in tax practice. For each o f these questions, fewer students personally felt an obligation toward society than they believed was professionally required. SUMMARY AND IMPLICATIONS This study investigated ethical standards regarding tax issues a m o n g students enrolled in an introductory tax course. We believe the study makes an important contribution by focusing attention on and enhancing understanding o f personal ethical standards regarding tax issues. The results o f this study suggest that systematic differences across individuals are likely to exist. Two o f the five hypotheses were supported on both the dependent measures and a third hypothesis was supported on one o f the dependent measures. We believe the results o f the study have five key implications. First, the study demonstrates that the level o f personal ethical standards for tax issues varies a m o n g introductory tax students and that the mean level o f personal ethical standards for tax issues was only moderate. These results provide a basis for the Bedford Committee alleging that there still remains a need to 'instill ethical standards.' That is, based on the results of the current study there is clearly r o o m for improvement in the ethical standards for tax observed a m o n g tax students. Second, tax students who had exposure to an auditing course exhibited significantly higher ethical standards than subjects without such exposure. This finding is important because it suggests that exposure to professional ethics and responsibilities t h r o u g h an auditing course yields positive benefits in terms o f enhanced or stronger personal ethics. This finding suggesting positive benefits stemming from a greater emphasis on ethics in the accounting curriculum is much more encouraging than several prior studies. F o r example, P o n e m o n (1993) and L a m p e (1994) found that increased emphasis on ethics in accounting courses was not associated with improved levels o f moral reasoning. O u r results m a y indicate that the focus on moral reasoning as the primary measure of 'effectiveness" has been too narrow. We believe that
~For eight of the ten survey items a response of'appropriate" indicates the respondent's personal code of ethics (or beliefs about the AICPA Code and SRTP) imposes.fiq~:er restrictions on preparer behavior. The percentage of "appropriate" responses was higher in the "personal"column than in the "AICPA' column for all eight of these items. For survey items 3 and 6, a response of "appropriate" indicated that the respondent felt that a greater obligation to act in the public interest existed, imposing 9reater restrictions on preparer behavior. The percentage of "appropriate" responses was higher in the 'AICPA' column than in the "personal" column for both of these items.
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further research on assessing the potential effects of ethics education should incorporate a wider range of dependent measures. The third key implication relates to career aspirations. The results indicated that relative to other students, students with aspirations to become a tax professional had higher scores on the personal code of ethics in tax professional settings measure than those not aspiring work in the tax profession. The implication is that the level of ethical standards among those planning to enter tax practice is relatively high. These high ethical standards could be exacerbating the conflict accountants encounter when performing tax work (as described by Finn et al., 1988). A relatively high personal code of ethics in tax professional settings may lead these individuals to more readily recognize that an ethical conflict exists. However, as suggested by the results from Finn et al. (1988), individuals performing tax work have little background on how to resolve ethical conflict. Tax courses have historically placed little or no emphasis on integrating ethics into their content. Thus, individuals who begin performing tax work may have a desire to maintain high ethical standards and yet feel unequipped to solve specific ethical dilemmas involving tax issues. The fourth key implication relates to gender. The results indicated that female subjects had higher scores on the personal code of professional tax ethics measure than males. The results are consistent with Gilligan (1982)'s contention that, relative to males, females tend to view ethical issues from a care perspective, which emphasizes the need of others in a particular context. The current results are consistent with females personal ethical standards reflecting the needs of society more so than males. The last implication concerns the finding that the current models explain a relatively low proportion of the variation in tax students' personal ethical standards. This finding suggests a need for further research to more completely specify the factors that are related to an individual's personal ethical standards. A more complete model would be helpful in developing and assessing different approaches that might be used to instill ethical standards among accounting students. Acknowledgement~The authors would like to thank Cindy Moeckel for her thoughtful comments and suggestions, and Charles Christian, Sanjay Gupta, Linda Johnson, Van Johnson, and Frank Meanor for their assistance in administering the questionnaire.
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