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3RESEARCH ARTICLE: EXAMINING AUDITOR ETHICS: THEORETICAL FRAMEWORKS AND IMPLICATIONS FOR
BANK FAILURES
Nosirova Mahliyobegim Abdusalomovna
The Banking and Finance Academy of The Republic of Uzbekistan https://doi.org/10.5281/zenodo.14023774
ARTICLE INFO
ABSTRACT
Qabul qilindi: 25- Oktyabr 2024 yil Ma'qullandi: 28- Oktyabr 2024 yil Nashr qilindi: 31- Oktyabr 2024 yil
KEYWORDS
Audit ethics, Kohlberg's stages of moral development, Agency Theory, ethical decisionmaking, financial bank failures.
stability,
The integrity of financial reporting and the ethical behavior of auditors are critical for the stability of financial institutions. This article explores the theoretical frameworks surrounding auditor ethics, particularly Kohlberg's stages of moral development and Agency Theory. Kohlberg's framework illustrates the evolution of moral reasoning and its impact on ethical decision-making, while Agency Theory underscores the importance of aligning the interests of auditors and stakeholders. The article also discusses the implications of these theories for understanding auditor ethics in the context of bank failures, emphasizing the necessity for robust ethical practices to prevent financial crises.
1. Introduction
The ethical conduct of auditors is paramount in ensuring the reliability of financial reporting and maintaining public trust in financial institutions. Recent bank failures have highlighted the potential consequences of ethical lapses in auditing. This article investigates the theoretical foundations of auditor ethics through Kohlberg's stages of moral development and Agency Theory, examining how these frameworks can inform our understanding of auditor behavior and its implications for bank stability.
2. Theoretical Frameworks
2.1 Kohlberg's Stages of Moral Development
Lawrence Kohlberg's theory of moral development posits that individuals progress through different stages of moral reasoning. These stages range from basic, self-centered moral decisions (pre-conventional) to principled, justice-oriented decisions (post-conventional). This framework is particularly relevant for auditors, as it emphasizes the role of moral reasoning in ethical decision-making (Mathes, 2021).
• Pre-Conventional Level: At this stage, moral reasoning is primarily driven by self-interest. Auditors may make decisions based on personal gain or fear of punishment, potentially compromising their ethical responsibilities.
• Conventional Level: At this stage, individuals adhere to social norms and expectations. Auditors may feel pressure to conform to the expectations of management or organizational culture, which can lead to ethical compromises.
• Post-Conventional Level: Here, moral reasoning is based on universal ethical principles. Auditors at this stage are likely to prioritize ethical standards and public interest over organizational pressures, leading to more reliable financial reporting.
Kohlberg's framework provides insight into how auditors can develop ethical reasoning that supports integrity in financial reporting. However, a lack of progression through these stages can result in ethical lapses that contribute to bank failures. 2.2 Agency Theory
Agency Theory examines the relationship between principals (stakeholders) and agents (auditors) and the challenges that arise when interests diverge. This theory highlights the necessity for governance mechanisms that align the interests of auditors with those of stakeholders (Gwala & Mashau, 2023).
In the context of auditing, Agency Theory emphasizes several key points:
• Conflict of Interest: Auditors may face conflicts between their obligations to stakeholders and the interests of management. A failure to challenge management assertions can increase the risk of financial misstatements and bank failures (Barton et al., 2015).
• Monitoring Mechanisms: Effective governance structures, such as audit committees and regulatory oversight, are essential for ensuring that auditors adhere to ethical standards. These mechanisms can mitigate the risks associated with agency conflicts and promote accountability.
• Incentives for Ethical Behavior: Aligning incentives for auditors with stakeholder interests can enhance ethical decision-making. For example, performance evaluations that prioritize ethical conduct can encourage auditors to prioritize integrity over expediency (DeFond et al., 2024).
Agency Theory underscores the necessity of ethical practices in maintaining financial stability, particularly in high-stakes environments like banking. 3. Implications for Auditor Ethics and Bank Failures
3.1 Ethical Lapses and Their Consequences
The intersection of Kohlberg's stages of moral development and Agency Theory reveals critical insights into the ethical failures that have contributed to recent bank crises. Instances where auditors failed to challenge questionable management practices often stem from inadequate moral reasoning or misaligned interests.
• Case Study: Lehman Brothers: The collapse of Lehman Brothers in 2008 serves as a notable example. Auditors failed to adequately scrutinize the bank's financial practices, ultimately leading to its bankruptcy (Lioudis, 2024). An analysis through the lens of Kohlberg's theory suggests that auditors may have operated at lower moral reasoning stages, prioritizing organizational loyalty over ethical standards.
• Recent Bank Failures: More recent cases, such as the failures of Signature Bank and Silicon Valley Bank, similarly underscore the consequences of ethical lapses in auditing. In these situations, auditors may have succumbed to pressures from management or the prevailing corporate culture, neglecting their ethical responsibilities (Gobbler, 2024; Shinn, 2023).
3.2 The Need for Ethical Governance
The implications of Agency Theory further emphasize the importance of establishing robust governance frameworks to enhance auditor ethics. Organizations must prioritize ethical culture and accountability to prevent financial crises.
• Strengthening Oversight: Enhanced oversight mechanisms, such as independent audit committees and stronger regulatory frameworks, can mitigate agency conflicts and promote ethical conduct among auditors (Darwesh et al., 2023).
• Promoting Ethical Training: Training programs that emphasize moral reasoning and ethical decision-making can help auditors develop the skills necessary to navigate complex ethical dilemmas. Integrating Kohlberg's stages into training can raise awareness of the importance of ethical development in professional contexts (Chaplais, Mard, & Marsat, 2016). 4. Conclusion
Understanding auditor ethics through the lenses of Kohlberg's stages of moral development and Agency Theory provides valuable insights into the factors that contribute to ethical behavior and financial stability. The interplay between moral reasoning and agency dynamics highlights the importance of fostering an ethical culture within organizations, particularly in the banking sector.
As recent bank failures demonstrate, the consequences of ethical lapses can be severe, underscoring the necessity for robust ethical practices and governance mechanisms. By prioritizing ethical training and aligning auditor interests with those of stakeholders, financial institutions can enhance the integrity of their reporting processes and contribute to greater financial stability.
Ultimately, a commitment to ethical standards is not only essential for auditors but also for the broader financial ecosystem, ensuring trust and accountability in financial reporting.
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