A theoretical model of guanxi, regional marketisation differences, perceived ethical climate, and organisational deviant behaviour among internal auditors in China

This paper extends internal auditors’ judgement and decision making (JDM) research by developing and empirically testing a theoretical model that links guanxi and regional marketisation differences to perceived ethical climate and organisational deviant behaviour (ODB) in China. Guanxi is selected because it permeates interpersonal relationships among Chinese people in every aspect of organisational and social life in contemporary China. Therefore, guanxi is an important cultural variable in understanding ethical climate and ODB in China. Guanxi is defined as intricate and pervasive networks whereby individuals are bound by implicit social and psychological contracts to follow norms such as maintaining long-term harmonious relationships, mutual commitment, loyalty, obligation, assurance, and understanding. Specifically, this theoretical model investigates three types of guanxi, namely rent-seeking, favour-seeking, and supervisor–subordinate guanxi as antecedents to perceived ethical climate. This model also incorporates regional marketisation differences as another important antecedent to perceived ethical climate. This study uses a Marketisation Index to measure various degrees of marketisation across three major economic regions, namely the Eastern, Central, and Western Regions of China. The Marketisation Index encompasses indicators measuring effectiveness and efficiency of regional compliance, enforcement, and accountability mechanisms. Moreover, this model includes ODB as an important consequence of perceived ethical climate. Most theoretical models pertaining to ethical climate are developed and empirically tested in Anglo-American countries driven by cultural values of individualism and independence. This study suggests that such models may not be applicable to collectivist and interdependent societies such as China, where dominant cultural values include implicit mutual obligation, reciprocity, and harmony within hierarchy. These dominant cultural values are embedded in guanxi. Internal auditors have been selected because they play a dominant role in enhancing ethical climate, as Chinese regulators place significant importance on internal auditors in designing internal control systems centred around preventing wrongdoing and enhancing ethical practices. Moreover, guanxi poses special challenges to Chinese internal auditors because they hold allegiance to both management and the internal audit profession. Findings from Structural Equation Modelling (SEM) support the theoretical model, which shows the importance of guanxi and regional marketisation differences in understanding ethical climate and mitigating ODB in China. Evidence shows a negative association between rent-seeking guanxi and perceived ethical climate and a positive association between favour-seeking guanxi and perceived ethical climate. In addition, internal auditors working in regions with a higher Marketisation Index perceive ethical climate to be stronger. The results further validate the theoretical model by showing that ethical climate is negatively associated with internal auditors’ ODB. These findings provide holistic insights into linkages among guanxi, regional marketisation differences, perceived ethical climate, and ODB. The findings in this study have a number of implications for global standard-setters, such as Institute of Internal Auditors (IIA), Chinese regulators, such as China Institute of Internal Audit (CIIA), Chinese firms, multinational enterprises operating in China, and international organisations with Chinese employees. The model shows that a country’s unique contextual factors cannot be ignored in enhancing ethical climate and mitigating ODB.