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Accounting: Ethics in the Profession
Taylor A. Moretto
University of Cincinnati
Intermediate Composition
Dr. Ruth Benander
October 21, 2013
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Accounting: Ethics in the Profession
Ethics can be defined as moral principles that govern a person's or group's behavior;
though individuals have their own definition of ethics engraved in their minds. Religion, culture,
feelings and upbringing can all affect our individual definitions of the expression. With today’s
ever changing world, it brings about new ethical decisions to be made each day. Businesses,
large and small, look to hire employees they deem to be ethical and responsible—but how does
one measure such an attribute? In the field of accounting, having the ability to make ethical
decisions is one of the most important attributes an employee can have because these decisions
can ultimately determine the success or failure of a business.
In the accounting profession individuals take numerous courses teaching them the
numerical and reporting rules and regulations of the profession, but what they fail to teach in
college courses on accounting is the ethical aspect of the field. With ethical codes of conduct in
place, such as the generally accepted auditing standards (GAAS) created by the American
Institute of Certified Public Accountants (AICPA), the accounting field has addressed the topic
but very loosely considering the significance. These codes provide guidance for professionals in
the accounting field, specifically in auditing, but do not require professionals to act in any
specified way—ultimately leaving the majority of the decision making to the auditor. Doctor
Amy Doolan of Mercyhurst University states, “the accounting profession has the right, and
perhaps even the obligation, to require accounting students to complete an ethics course prior to
becoming a member of the profession.” One would argue if ethics can even be taught in a
classroom, stating that individuals at the college level already have a set code of ethics they
believe to be true and just previously etched in their mind based on a number of factors from
their upbringing. Doolan then argues, “[e]thics are a part of one’s personality [and] culture and
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cannot be taught.” Though it can also be argued that ethics cannot be properly taught due to the
continuously changing world we live in today. Doolan then states that, “the conceptual
framework of accounting and the generally accepted accounting principles (GAAP) have failed
to keep pace with the radically changing business environment of today.”
The generally accepted accounting principles, or GAAP for short, refers to the standard
framework of guidelines for financial accounting used in any given jurisdiction; generally known
as accounting standards or standard accounting practice. If a document such as this cannot hold
relevant through the years, how could information taught in a course on ethics in accounting?
Individuals would have to continuously attend courses in order to be up to date on current ethical
issues that may present themselves due to new technology, resources, etc. The University of
Cincinnati does require accounting students to take three graduate credit hours of Professional
Ethics, teaching students the study of professional ethics and the standard setting process in
accounting, in order to graduate. This course may not provide future accountants with ways to
handle every ethical decision they may encounter, but it provides them with an idea of what they
may face in the future rather than throwing them into the field blindly. Consider the first day at a
new job, managers can provide their employees with basic training and skills, but as everything
else in our world each new problem that arises is unpredictable. The same holds true for the
accounting profession, new problems arise every day that had never been imagined before due to
a number of factors. The ethical decisions one may face in this field will never be predictable,
“accounting is an applied science and new ideas constantly emerge as technology changes”
(Waples & Shaub, 1991, p. 390). “[A]ccounting professionals need more guidance than ever
before addressing events and transactions while fulfilling their duty to society,” says Doolan.
Therefor requiring professionals in the field to attend some variety of an ethics in accounting
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course may not be so unrealistic and may also aid employers and individuals to better pick
reliable accountants to hire.
When hiring new employees or hiring a personal financial accountant, it may be
difficult to know from the beginning if the individual one is considering is trustworthy to make
proper ethical decisions. So how do employers choose whom to hire? There is no surefire way to
measure how reliable or moral an individual will be when working with them, but “[t]he best
predictor of future behavior is past behavior” (“Here's how to hire ethical employees,” 2011). It
is common knowledge that employers will conduct background checks on potential recruits to
ensure that they have a clean history in regards to legal concerns. A predictor that is less
commonly used among companies is personality tests. These tests ask individuals a series of
questions based on events that provoke individuals to sometimes make tough ethical decisions.
Each question is asked numerous times in different ways to ensure the individual is answering
honestly. Some examples of circumstances that may be presented to individuals include, “include
lying to protect friends
or playing dirty to
achieve noble ends,
making an illegal act
seem less harmful when
compared to another,
placing blame on an
authority figure, telling
Fig. 1. This comic strip shows an example of a personality test that proved
to be inaccurate. Most personality tests tend to be flawed, but some can
provide a fairly accurate representation of the individual that took the test
(Weinstein, Personality Test).
small lies if no one is hurt and not being responsible for their actions because others are
committing the same unethical act” (Smith, 2012). This form of testing can provide companies
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with a satisfactory predictor of future behavior based on an individual’s responses. Though this
is not necessarily the most reliable predictor of behavior, and may lead to incorrectly labeling
individuals.
Gender should never be the basis of why companies hire an individual, but does it make a
difference subconsciously in the accounting profession? In general, people tend to find women to
be more honest and trustworthy than men, but these attributes vary from woman to woman. Alice
Lattal—president and CEO of Aubrey Daniels International—states, “[w]omen do operate with a
unique ethical perspective because of cultural conditioning.” Women are raised from a young
age understanding the ideas of being conscientious, caring for others and fairness whereas men
are typically taught to be tough, strong and aggressive. Though the characteristics of men tend to
be in greater demand in the business world, employers are not necessarily looking for those
characteristics in accounting departments. Ben Haimowitz of the American Accounting
Association states, “companies with female CFOs tend to have higher accruals quality, which, all
else being equal means higher earnings quality” (Haimowitz, 2010). Women can also be
associated with being more detail oriented than men. Men typically just want the job done, not
caring how it was done. Being detail oriented in the accounting profession is very important, it
allows mistakes to be found and resolved—but it also takes a moral and ethical person to point
out those mistakes so they can be fixed. In the corporate world today, “a mere eight to nine
percent [of firms have a female CFO]” (Haimowitz, 2010). This begs the question as to what
approach is more effective and more sought after in the business world, aggression or fairness.
Personal gain, pressure from management and decisions made for the greater good are
among some of the reasons people may choose to make unethical decisions. In some instances
individuals may go to extremes in order to ensure their ideal outcome of an event—such as being
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put under pressure by upper management—causing these unethical decisions to be made in order
to ensure the happiness of the boss. Jonathan Lister of Demand Media states that, “unethical
accountants could easily alter company financial records and maneuver numbers to paint false
pictures of company successes.” These successes may be short lived though, as we will learn
about in the Enron and Freddie Mac scandals shortly. Individuals look to gain approval from
superiors as well as their peers and may find themselves acting in ways they never thought they
would have. Henagan and Bedeian, from Nothern Illinois University and Louisiana State
University respectively, state “social comparisons are capable of producing a wide-ranging set of
emotional reactions.” Working in the accounting department of a company, employees have a lot
of responsibility but also have a lot of freedom, making it very easy to change any number with
the click of a button. Changing numbers may lead to company gains, but can also lead to
personal gains. It is very easy, when working with large amounts of money, to lose focus and
pock five dollars here and there thinking no one will notice or be harmed by such a trivial
amount of money missing. Money is a significant factor in the making of many unethical
decisions, but is not the only factor.
In some cases accountants and auditors may find themselves facing a question of where
loyalties lie. According to Waples and Shaub of the University of Nebraska, “[o]n the surface,
the auditor’s principle may appear to be on the client; however, as a member of a profession, an
auditor must recognize an obligation to serve the public.” When making tough decisions
regarding a client, auditors tend to choose in favor of the public interest. Though at times
auditors may find themselves in the difficult decision of whom their loyalties belong to. Waples
and Shaub also state, “an auditor function[s] in a more complicated professional relationship than
a lawyer or a physician.” If the auditor is asked by the client to omit entries or change financial
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records in any way they have the obligation to refuse their services at that point in time, but may
also choose to follow the instructions given by the client. “The auditing profession recognizes
fairness as an ethic of accounting,” says Waples and Shaub. The definition of fairness is left up
to the auditor.
Enron, an American energy company based in Houston, Texas, is known today as one of
the worst accounting scandals in history. Through their accounting department Enron, was able
to hide billions of dollars in debt from unsuccessful business adventures and add billions to its
earnings, leaving the company and its stocks in high demand because of its perceived great
successes. The company’s stock value plummeted drastically in mid-2000 leaving many upset
and confused
shareholders. The
executives involved in the
scandal kept it going for a
number of years without
any questions from the
outside, allowing them to
pocket billions of dollars’
worth of stock they had
invested in, knowing
exactly what the outcome would be for
their employees and shareholders. Had it
Fig. 2. This graph shows the decline of Enron
stock prices from around $90 in mid-2000 to
less than $1 in late 2001 (Wikimedia Commons,
Enron Stock Price).
not been for Sherron Watkins this scandal may never have been brought to the surface. Watkins,
the whistle-blower—one whom reveals wrongdoing within an organization to the public or to
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those in positions of authority—of the Enron case, did not bring the accounting practices in
question to the public but instead sent an anonymous memo to Enron
Chairman Kenneth Lay Kenneth Lay “raising suspicions of accounting improprieties” (Ackman,
2002). Upon hearing of this memo “Enron’s then Chief Financial Officer Andrew Fastow wanted
[Watkins] fired and her computer seized” (Ackman, 2002). Greed was the driving factor behind
the unethical decisions made by the executives and the accounting department of Enron.
Within the Enron scandal many of the executives involved ended up being sentenced to
prison; including Rick Causey, former chief accounting officer, and the former chief executive
Jeff Skilling whom is currently serving a 24-year jail sentence. It was found by the United States
Supreme court in 2010 that, “[Skilling] had not violated the honest services rule as he had not
solicited or accepted bribes or kickbacks, but rather he conspired to defraud Enron’s shareholders
by other means” (Partington, 2010). Upon looking at different scandals within companies, the
higher up official’s work to find their way out of a prison sentence when possible—such as the
Freddie Mac accounting scandal. According to Mark Trumbull, staff writer for The Christian
Science Monitor, “[t]he
Justice Department has
opened up probes into
Year Reported Net Income Restated Net Income Difference
2000
$2.547
$3.666
$ 1.119
2001
4.147
3.158
(0.989)
2002
5.764
10.090
4.326
Freddie [Mac] but has
not charged anyone
Fig. 3. Freddie Mac understated some $5 billion dollars in earnings
between 2000 and 2002; the table above shows the net income
reported versus the restated net income for each year (Ketz, 2007).
with a crime.”
The Federal Home Loan Mortgage Corporation, also known as Freddie Mac, is a
public government-sponsored enterprise, based out of Fairfax County, Virginia. In mid-2003 it
was discovered that through their accounting department Freddie Mac had “misstated earnings
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by some $5 billion—mostly underreporting them—for 2000 [to] 2002 to smooth quarterly
volatility in earnings and meet Wall Street expectations” ("Freddie mac settles," 2007). Freddie
Mac felt the pressure to meet the expectations set for them and in order to ensure those
expectations were met, they choose to alter the accounting books disregarding all ethical
standards.
When the scandal was made public, four executives were convicted of fraud and were
required to pay fines ranging from $65,000 to $250,000. The company itself, Freddie Mac, was
required to pay a fine of $50 million—which was to be paid back by investors in the company
whom had nothing to do with the fraud committed. The Securities and Exchange Commission
(SEC) is a government commission created by Congress to regulate the securities markets and
protect investors against fraudulent and manipulative practices. According to J. Edward Ketz,
Associate Professor of Accounting from the Pennsylvania State University, “[t]he [Securities and
Exchange Commission] continues to give miscreants a slap on the wrist while hitting the
innocents with massive fine[s].” The fines given to the executives of Freddie Mac are
insignificant to these individuals six-figure incomes, seeming to them to “amount to no more
than a speeding ticket” (Ketz, 2007). The SEC and the federal government need to impose
harsher fines and lengthy prison sentences to ensure that these individuals do not ‘get away with’
this kind of unethical behavior.
Many CEOs and CFOs work very hard to ensure that their company is perceived by the
public in the most flattering light possible. When a company is thrown into a scandal regarding
the ethical decisions made within the firm, or even before a company finds itself in this position
CEOs and CFOs look to promote a code of ethics in order to restore or establish confidence and
trust in a business. A code of ethics “[is] intended to capture the key values of a firm and to
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convey those values to both internal and external stakeholders” (Garcia-Sanchez et al., 2011).
Isabel-Maria Garcia-Sanchez of the University of Salamanca, states that these codes are adopted
“to encourage good behavior by employees, to prevent behavior that might lead to legal liability,
and to foster goodwill for the company with customers, investors, the business and the regulatory
community, and the public.” This code is directly influenced by the CEO of a company, through
his personal moral, cultural and religious beliefs. Whether or not this code of ethics is actually
followed by the firm is uncertain, but to the public it creates a sense of hope that they can trust
in.
Ethics is a very loosely defined term, which affects each and every one of us daily.
Whether we are shareholders in a company, are hiring a personal finance accountant or are
working within the accounting department of a firm, we will never be able to avoid ethical
decisions made by others as well as ourselves. It is important that society educates itself on
ethics and the problems it faces due to individuals making poor ethical decisions. Society must
work to ensure that history does not repeat itself in regards to any of the past ethical accounting
dilemmas and our society as a whole must work to become a more ethical environment. As an
accountant, you must be a role model to others of what good ethical practices look like. People
look to people they trust, and as an accountant in today’s society it is important to be that person.
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References
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http://www.forbes.com/2002/02/14/0214watkins.html
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