Design and Validation of a Novel New Instrument for Measuring the Effect of Moral Intensity on Accountants’ Propensity to Manage Earnings Jeanette Ng Gregory P. White Alina Lee Andreas Moneta ABSTRACT. The goal of this study was to construct a valid new instrument to measure the effect of moral intensity on managers’ propensity to manage earnings. More specifically, this study is a pilot study of the impact of moral intensity on financial accountants’ propensity to manage earnings. The instrument, once validated, will be used in a full-study of managers in the hotel industry. Different ethical scenarios were presented to respondents in the survey; each ethical scenario was designed in both high or low moral intensity form, to reflect the importance of the moral dilemma at hand. The results were analysed by factor analysis. The findings of this study have positively validated the instrument, with three of the five moral intensity components identified as having appropriate eigenvalues. This indicates that they have a significant influence in the study. The first factor captures the social consensus dimension and one scenario of the proximity dimension. The second factor indicates an interaction between the temporal immediacy and the magnitude of consequences dimension. The third dimension is probability of effect and one scenario of the proximity dimension. In addition, t-tests indicated that the manipulation of high and low conditions within each scenario were also successful. One limitation of the study might be the use of undergraduate accounting students as manager proxies, although prior evidence suggests use of accounting students as proxies is a valid approach in this type of study. This is a highly novel project as most prior studies have focussed on moral intensity and the general ethical decision-making process. KEY WORDS: ethics, earnings management, moral intensity, factor analysis, survey instrument, hotel industry Introduction With intense political and media attention threatening to overshadow the potential usefulness of accounting regulation, the collapse of companies like Enron, HIH, Tyco, Xerox and Worldcom, has shone a spotlight on managers’ earnings management activity, and caused a general acceleration in reported ethics research studies (Armstrong et al., 2003). Many tra- ditional research projects have explored the likelihood of earnings management with traditional Agency Theory (Jenson and Meckling, 1976) and Positive Accounting Theory (Watts and Zimmerman, 1986) variables. Determining an understanding of ethical deci- sion-making is a substantive focus of the business ethics literature, and has been a major driver for the formulation and testing of ethical decision-making models (Dubinsky and Loken, 1989; Ferrell and Gresham, 1985; Hunt and Vitell, 1986; Rest, 1986; Trevino, 1986). These ethical decision-making models are frameworks which individuals engage when they are faced with ethical dilemmas (such as: (1) Dubinsky and Loken’s Ethical Decision-making model based on the Theory of Reasoned Action; (2) Ferrell and Gresham’s Contingency Framework for Ethical Decision-making; (3) Hunt and Vitell’s General Theory of Marketing Ethics; (4) Rest’s Four Component Model of Ethical Reasoning; and (5) Trevino’s Person-Situation Interactionist Model). The existing ethical decision-making models have a serious limitation; they do not consider the char- acteristics of the moral issue itself (Jones, 1991). They make the assumption that the decision-making process will be similar regardless of the moral dilemma at hand (O’Leary-Kelly and Bowes-Sperry, 2001). Relying on the abovementioned existing ethical decision-making models and drawing predominantly Journal of Business Ethics (2009) 84:367–387 Ó Springer 2008 DOI 10.1007/s10551-008-9714-3