Ethical reasoning and privileged information: Resolving moral conflict
Nixon, Mark R. Journal of Business Ethics. Dordrecht: Jul 1994.Vol.13, Iss. 7; pg. 571, 7 pgs
Abstract (Document Summary)
Rule 301 in the Code of Professional Conduct - Confidential Client Information - has
traditionally been strictly interpreted. In some instances this has placed certified public
accountants (CPA) in a situation where their own personal moral standards are in conflict
with the Code of Professional Conduct. Moral reasoning is suggested as a means of
resolving this conflict. The process of moral reasoning is illustrated by contrasting Act
utilitarianism with Rule Utilitarianism. The actual resolution of a moral conflict may result in a
CPA violating the Code of Professional Conduct as it is presently being interpreted.
Full Text (4499 words)
Copyright Kluwer Academic Publishers Group Jul 1994
Most Certified Public Accounts (CPAs) would think it ridiculous to expect their actions to
damage a client. However, it is possible that as a result of strictly following the Professional
Code of Conduct (Code) a CPA could allow clients to be defrauded. For most CPAs, the
desire to protect a client from harm versus following the Code would cause a moral conflict.
This potential moral conflict needs to be resolved, at least in the mind of the CPA. The
purpose of this paper is to discuss a rational method for addressing this dilemma.
The Code for CPAs has experienced dramatic evolution within a changing professional
environment. Its purpose is to restrict certain actions of members of the AICPA considered
harmful to members of the profession, clients, or the public. The Code addresses moral and
ethical behavior regarding activities, attitudes, and procedures involved in most aspects of
professional conduct The Code's evolution has been especially evident during the past
decade, with the most recent changes coming in 1991. Yet, the Code has remained a
beneficial means of increasing the professional stature of CPAs. Thus, the Code is
considered as the ultimate authority on proper professional conduct.
There are instances, however, where the Code in proscribing a specific type of activity can
place a CPA in a morally conflicting situation. Specifically, while CPAs generally feel a
responsibility to avoid actions that are prohibited by the Code, consideration of client
interests are also important. Most CPAs would consider promoting the interests of clients as
one of the hallmark's of their professionalism. The ability to resolve difficult situations in a
manner beneficial to the client is a reflection of that professionalism. Further, most CPAs
would agree that true professionals strive for consistency between their actions and their
personal moral criteria. This paper presents a moral dilemma where requirements of the
Code for confidentiality of privileged information conflicts with the desire to Protect clients
from potential financial harm.
It is desirable that any course the professional takes, including no action, be consistent with
their personal moral criteria. What is available to the professional to assist in resolving this
moral conflict? Ethical reasoning is suggested as one rational approach for the CPA. Ethical
reasoning is most valuable in the context of a moral paradigm. Although there are numerous
recognized moral paradigms (Utilitarianism, Egotism, Respect For Persons, Natural Law,
Communitarianism), for simplicity and brevity, only one paradigm will be discussed with
respect to the case below.
The balance of this paper will be as follows: first, a case is presented in which a CPA is
confronted with a moral conflict. The sections of the Code dealing with ethical behavior will
then be reviewed. Ethical reasoning will then be defined, followed by a brief discussion of
consequential versus non-consequential moral theories. Next, the paradigm of Utilitarianism,
a consequentialist theory, will be discussed, including comparisons and contrasts of act
utilitarianism and rule utilitarianism. Finally, a discussion of the current legal environment will
be presented to assist in resolving apparent conflicts regarding privileged information.
ETHICAL BEHAVIOR CASE
Karen, a CPA, has just completed the tax return for a new client, Peter. Peter, a sole
proprietor, was referred to Karen by Robert (Peter's brother), who is a substantial and long
term client of Karen's. Peter told Karen that when the tax return was completed it would be
used by a bank to document his income in order to qualify for a large business loan. Peter
provided adequate documentation and Karen had no difficulties in preparing the tax return.
Upon delivery of the tax return and original documents, Peter commenced that he was
satisfied with Karen's work, particularly since the return indicated sufficient income to qualify
for the business loan. However, Peter complained that the total tax due was much more than
he could afford. Peter then indicated he was going to prepare his own return for filing with the
IRS in order to show a much smaller tax liability. Karen firmly and clearly explained that if
Peter reduced the income or increased the expenses in any material way he would be filing a
fraudulent tax return. Further, Karen informed Peter she knew the bank required that the tax
return used for income documentation had to be the same as the one filed with the IRS. In
addition, Karen stated that to file a tax return that was materially different from the return
submitted to the bank, would be committing fraud against the bank. Peter informed Karen
that he simply could not afford to pay the taxes and would "take his chances."
Karen is especially concerned because she is also the independent auditor of the small local
bank where Peter's loan will be considered. This loan would be considered large for the bank.
Karen is aware that the current loan loss provisions for the bank are barely adequate. A loan
loss of this magnitude would have serious repercussions to the bank.
CODE AND STATEMENT OF RESPONSIBILITIES IN TAX PRACTICE(1)
There are several provisions in the Code that apply to the ethical behavior issues in this case.
The first section of the Code (Principles of the Code of Ethics) contains seven Articles which
serve as a basis for the Rule of Conduct. Articles I, II and III appear to relate directly to
Karen's conflict.
* Article I--Responsibilities--In carrying out their responsibilities as professionals, members
should exercise sensitive professional and moral judgements in all their activities.
* Article II--The Public Interest--Members should accept the obligation to act in a way that will
serve the public interest, honor the public trust, and demonstrate commitment to
professionalism.
* Article III--Integrity--To maintain and broaden public confidence, members should perform.
all professional responsibilities with the highest sense of integrity.
The Rule of Conduct which applies directly to this situation is Rule 301 dealing with
confidential client information. In part, Rule 301 states: "A member in public practice shall not
disclose any confidential client information without the specific consent of the client." Further,
Statement No. 6 in the Statements on Responsibilities in Tax Practice indicates that a CPA is
under no responsibility to report prior errors to the IRS. In addition, CPAs are not required to
correct the prior error, but only make sure it is not perpetuated into the current year. An error
in a prior year does need to be discussed with the client.
Taken as a whole, without Peter's permission, it appears that the Code prohibits Karen from
disclosing to the IRS, the bank, or anyone else, information regarding the potential for fraud
to be committed. Further, if Peter actually does commit fraud against the IRS and/or the
Bank, Karen would still be prohibited, short of a court order, to inform any authorities. Karen
definitely faces a moral dilemma. It is unreasonable to expect a professional to remain in this
state of moral conflict. Rather, it is expected that Karen will resolve this conflict by either
taking specific action or taking no action. The important point is that when Karen reaches the
end of her decision process, she is able to resolve the conflict in her own mind. As a guide to
her decision process, Karen could use rational ethical reasoning.
ETHICAL REASONING
Ethical reasoning is best described as a general scheme of arguments in ethics. The
following is from Strategies of Ethics, by Bernard Rosen (1978):
1. If any x is F, then x is M.
2. This specific x is F.
Therefore,
3. This specific x is M.
The x is a variable that is replaced by the name of any kind of individual: a person, an action,
a specific institution, and so on. For example, one instance x is 'Socrates', and another is
'drinks hemlock'. F and M are property variables, but F will be used for nonmoral predicates
and M for moral or normative predicates--at least usually. For example,
1. If anyone (x) dies rather than give up his most firm beliefs (F), then that person (x) is a
good person (M).
2. Socrates is a person who died rather than give up his most firm beliefs.
Therefore,
3. Socrates is a good person.
1. If anyone (x) holds another person as a slave , then he is doing what is morally wrong (M).
2. Simon Legree held another person as a slave.
Therefore,
3. Simon Legree did what was morally wrong.
The first premise of each of the above arguments is a general moral judgment, and the third
statement is a singular moral judgment. The primary concern of normative ethical theories is
to provide a means for arriving at justified singular moral judgments.
The above general scheme is more easily understood in the context of a specific moral
paradigm. However, it is helpful to first discuss the difference between consequential and
non-consequential moral theories. Consequential moral theory suggests that a person's
actions or motives are judged only on their consequences. In contrast, non-consequential
theory suggests that a person's actions or motives are not judged directly by their
consequences, but by conformity to moral rules (Harris, 1992) This difference in moral
perspective can result in either diverse solutions to the same circumstance, or a single
solution arrived at through diverse reasoning. The circumstances in the case above will be
couched in the context of consequential theory.
UTILITARIANISM(2)
The most popular consequentialist theory today is utilitarianism. Utilitarianism's beginnings
are generally dated to eighteenth-century England, with one of its best known writers being
John Stuart Mill. The root of this theory is based in the concept of utility. According to Jerry
Cederblom (1990):
Utilitarianism holds that the key feature in determining what is right is the usefulness of an
action or policy in producing other things or experiences that people value. An act or policy is
not right because of something about itself; rather, it is right because of the good things it
leads to. Utilitarians hold that when you choose, you are obligated to produce the most good
you can. This theory says that you are doing right when your choices create the greatest
good for the greatest number of those who are affected by your choice. It focuses on the
consequences of actions, and more specifically on the value of these consequences to the
people affected.
Thus, it appears that utilitarianism holds the middle ground on the spectrum of
consequentialism Egoists are only concerned with how particular actions affect themselves,
while altruists are only concerned with how actions affect others. For the utilitarian, both self
and others are equally important.
The utilitarian moral standard can thus be stated:
Those actions (or moral rules) are right that produce the most utility, or at least as much
utility as any other actions (or rules).
Utility is defined as the greatest total amount of preference or desired satisfaction an
individual receives. For the utilitarian there is no required pattern for the distribution of utility.
The issue is to choose the act that results in the greatest amount of utility.
There are two forms of utilitarianism. First, act utilitarianism, and second, rule utilitarianism.
Act utilitarianism judges the morality of an action by whether or not it produces the most
utility, or at least as much utility as any other action.
Rule utilitarian judges the morality of an action by whether or not the moral rule presupposed
by the action, if generally followed, would produce the most utility, or at least as much utility
as any other rule.
If Karen were an act utilitarian, she would simply judge if informing the loan officer that Peter
intended to use documentation which violated the lending policies of the bank, would result
in more utility than saying nothing.
Below is a checklist for applying act utilitarianism:
1. Describe the action and the most reasonable alternatives to the action.
2. Determine the proper audience for the act, that is, what people or animals would be
affected by the action and how they would be affected.
3. Identify the action that would produce the greatest total amount of utility, assuming it could
realistically be followed.
a. The action that produces the greatest total amount of utility is morally obligatory.
b. Actions that produce less overall utility are morally impermissible.
c. If two or more actions produce equal utility, they are equally morally permissible.
In applying the checklist to Karen, the action and reasonable alternative have been stated.
The audience of the action and potential impact of the action on them is not as clear,
however. A utilitarian desires to measure the total effect of a chosen action. Certainly, the
important consequences would be those whose proximity in time and place are closest to the
action. The consequences are like the ripples in a pond created by dropping a stone, the
strongest of which are where the stone is dropped. As the ripples move away from the point
of impact, they become smaller and smaller.
Whose welfare besides the main characters of Karen, Peter, and the loan officer should be
measured? If Peter does not get the loan will any of his employees lose their jobs? How
would this affect the community? If, as a result of Peter getting the loan, are larger loan loss
provisions required at the bank? Will this affect the ability of other bank customers to obtain
necessary financing? Could the employment of some bank employees be jeopardized? Will
partners or employees of Karen be affected by her decision? Could this situation have any
impact on Karen's firms relationship with Robert, Peter's brother? Further, if Karen does
discuss Peter's actions with the loan officer, what possible impact could this have on the loan
officer's opinion regarding her handling of confidential bank matters? Will the loan officer
decide to terminate the professional relationship with Karen? The potential ripples can
extend further. For example, if it became public knowledge Karen had discussed this issue
with the bank, ocher clients may discontinue their relationship with her office. It is even
possible that the public's confidence, as a whole, for all CPAs may be damaged.
On the other hand, Karen may feel that the likelihood of a negative impact is remote. Instead,
the loan officer may be grateful, while keeping the conversation private, resulting in a higher
degree of mutual respect. In addition, a potentially fraudulent and damaging circumstance
may be avoided. The consequences to Peter could be that he will not get the requested loan.
However, while this specific loan request may be denied, a restructured loan might be
available.
Once Karen has identified the proper audience and how they would be affected, she can
assess which action will lead to the greatest amount of utility, or least amount of disutility.
One of the keys to her decision is how she will weigh the potential reaction of the loan officer
to her disclosing Peter's action. Specifically, whether or not he will keep the disclosure
private. Karen is morally required to follow the action that has the highest amount of utility. In
this case, the correct moral action would be entirely dependent upon Karen's perception of
the consequences. It is easy to imagine the latter circumstances; the loan officer is grateful
and will keep her information private. Karen receives no negative consequences, and the
bank avoids a possible loan problem. Further, the impact to Peter may not be very serious.
He may have to provide additional collateral or be satisfied with a smaller loan. If this is her
conclusion, Karen is obligated, under act utilitarianism, to inform the loan officer of Peter's
intended action, thereby resolving the moral conflict but violating the Code.
The process is different if Karen is a rule utilitarian. While utility is still the criteria by which a
final action is judged, utility is based on the results of following a rule of action and
comparing these results with the utility of following the most reasonable alternative.
Based on a utilitarian viewpoint and while attempting to be as general as possible, the rule of
action should describe all the aspects of the action that are relevant. For Karen, the rule
could be stated: CPAs should keep all privileged information confidential, unless ordered by
a court to do otherwise. The alternative rule could be: there is no requirement that CPAs
keep privileged information confidential, if by so doing, clients are damaged.
Below is a checklist for following rule utilitarianism:
1. State the rule that is presupposed by the action you are evaluating. The rule should be
specific enough to describe those features of the situation that would produce positive or
negative utility but not so specific or impractical that it could not realistically be adopted by a
society.
2. State the most reasonable alternative rule or rules, keeping in mind the precautions stated
above.
3. Determine the proper audience for the rule, that is, what people or animals would be
affected by the rule and how they would be affected.
4. Identify the rule that would produce the greatest total utility, assuming that it could
realistically be followed.
a. The rule that produces the greatest utility or whose alternative produces the least utility is
morally obligatory;
b. Rules that produce less utility than alternative rules are morally impermissible.
c. If two rules produce equal utility, or if for any reason a rule cannot be formulated, it is
permissible to resort to act utilitarianism to decide the issue.
5. Apply the obligatory or permissible rule to the particular action. If no rule is justified, move
to act utilitarianism.
The rule and its alternative have already been stated above. In this case, the potential
audience for a rule utilitarian appears to be much broader than for an act utilitarian. The rule
includes the confidentiality of all privileged information and is based on more than the conflict
between two clients. The comparative utility is between the consequences of two rules or
policies, not between two specific actions.
The consequences of the first rule provide an environment of consistency regarding
privileged information for all CPAs, their clients, third party user of CPAs' products (e.g. audit
opinion), and the public in general. The environment allows for free flow of information
between the CPA and the client. Free flow, in turn, should enhance the quality of the CPAs'
product. Clients would thus seek CPAs that have developed areas of expertise and
specialties that increase the effectiveness, efficiency, and quality of their effort. In addition,
clients would feel confident that their specific circumstances would be held in confidence. In
contrast, a potential negative effect could be that privileged information, important to another
client, could not be communicated.
A positive consequence of the alternative rule could be an environment that enhances
feelings of security for CPAs' clients. That is, the clients would feel confident that if their CPA
knew of circumstances or information, regardless of the source, that could minimize or
eliminate harm, they would be informed. Conversely, an obvious negative would be that
clients could expect their own privileged information to be revealed to others if their CPA felt
other clients would be harmed if uninformed. Under these circumstances, clients may feel it
necessary to engage CPAs according to lack of industry specialization, or examine their
CPAs client list before disclosing proprietary information, so as to avoid potential leaks of
information. Further, and more serious, clients may conceal proprietary information resulting
in lower quality service from their CPA. This would have a negative impact on all users of
CPA products.
The first rule is consistent with the present CPA environment. While the first rule is not
perfect, it does appear to produce a higher amount of total utility than the alternative rule.
Therefore, the first rule would be considered morally obligatory. Further, since the first rule
produces more utility than the alternative, the alternative rule is morally impermissible. Thus,
since there is a clear order regarding the two rules, there is no need to consider act
utilitarianism. The result is that Karen is morally obligated to not inform the loan officer of
Peter's intent to use fraudulent documents to qualify for his loan.
Thus, there are opposite results using act versus rule utilitarianism. This is common. Rule
utilitarianism often leads to different conclusions that act utilitarianism. The concept that rule
utilitarianism follows rules, is consistent with most individual's beliefs that morality should
also follow rules. That is, if all individuals follow rules, then one should be able to predict how
others will respond in a given situation, and they, in turn, will be able to predict how the
individual will respond.
It is important to note that rule utilitarianism fits the model of ethical reasoning illustrated
above. Again, per Bernard Rosen (1978):
1. If any person 'a' performs an action from a rule R that, when regularly acted from by
person 'a', increases the good (benefit) of the greatest number more than any other available
action, then R is a direct rule of moral obligation.
2. Person 'a' performs an action from a rule R that, when regularly acted from by person 'a',
increases the good (benefit) of the greatest number more than any other available action
Therefore,
3. R is a direct rule of moral obligation.
In other words, the utilitarian rule becomes statement #1; the measurement of the audience
and consequences is embodied in statement #2; and, the resulting obligatory action is similar
to statement #3. Among utilitarians, rule utilitarianism is more widely accepted than act
utilitarianism.
While rule utilitarians may be satisfied that they have properly applied the rules, they may still
have some unsatisfied feelings. These feelings may stem from the fact that justice appears
to be violated. I should be noted that for utilitarians, the concept of justice is secondary to the
concept of utility. Justice is desirable only if it results in greater total utility than injustice.
There may be a rationale that can address this point.
During the past several years there have been several important social and economic issues
that have ultimately been resolved in the court system of our country. These issues have
ranged from air and water pollution and chemical ingredients in food, to environmental
concerns for endangered species, to corporate business practices. For example,(3) in the
business practices area, a CPA firm had two clients, where client A committed a fraudulent
act in its dealings with client B. The CPA firm was aware of client A's fraud only through
privileged information. The CPA firm, based on the rule of nor divulging privileged
information, did not inform client B of the fraud. As a result, client B was materially damaged.
When client B sued the CPA firm, the court ruled in favor of company B. The CPA's defense,
that they had acted completely in accordance with the professional code of conduct, and
were prohibited from informing client B of client A's action, was unsuccessful. The conclusion
of the court was to say, that if a CPA was aware of circumstances of fraud, regardless of the
source, and also aware these circumstances could have a material negative impact on a
client, the CPA was obligated to inform its client. There are two features of this case that
prevent it from being universally applied to all privileged information. First, due to privileged
information being withheld, the client was damaged. Further, and more importantly, the
damage was material. Second, the undisclosed action of client A was fraudulent in nature.
The court held that any party committing a fraud should not be allowed to benefit from the
fraudulent action. The result of the court decision could be summarized as: the rule of
privileged information does not apply when the client of a CPA could be materially damaged
by a fraudulent act that the CPA was aware of.
For a rule utilitarian, the proper statement of the rule is very important. If the rule Karen is to
follow was modified to fit the court's requirements, she must reevaluate the audience of her
new rule and its potential consequences in order to judge the new total utility. The modified
rule will probably satisfy individuals' desire for justice, but may reduce the value of CPAs'
services. The value of service may be reduced because clients who would commit fraud will
actively seek to hide their actions from their CPA.(4) The amount of any disutility is uncertain.
However, the negative consequences, for a CPA firm for not disclosing privileged information
consistent with the court's ruling, is easily measured. Therefore, in keeping with the ripple
effect previously discussed (consequences closest to a specific action have the most weight),
Karen would probably decide to disclose privileged information.
At this point the actions of both the act utilitarian and rule utilitarian are the same. However,
this may not always be the case. In the case in which either no fraud was involved or Karen
thought Peter's fraudulent action was immaterial, Karen, as a rule utilitarian, would probably
decide not to disclose the privileged information.
CONCLUSION
We often find resolving ethical problems difficult in a business environment. The difficulty
occurs because we have put aside our ordinary personal standards and judge a situation
based only within a business context. It is important that professionals not allow moral
dilemmas to remain unresolved. Instead, professionals need to use rational ethical reasoning
consistent with their personal moral values to direct their actions.
NOTES
1 This section is based on: Code of Professional Conduct, American Institute of Certified
Public Accountants, 1991; Statement on Responsibilities in Tax Practice, American Institute
of Certified Public Accountants, Revised 1969; Hermanson, Strawser, and Strawser, Auditing
Theory and Practice, Irwin, 1989.
2 Terminology, logic, and checklists for utilitarianism comes from C. E. Harris, Applying
Moral Theories, 2nd Ed.
3 The scenario presented is based on an actual court case involving a "Big 8" accounting
firm. See "Big Fraud Verdict Against Anderson Shakes Up Accounting Profession," The Wall
Street Journal, Wednesday, February 3, 1982, page 25.
4 These clients would probably attempt to hide their fraudulent acts in the first place, but if
they were aware that their CPA would not keep their action confidential their efforts may
increase. This increase attempt to hide fraud may be source of some degree of disutility.
REFERENCES
Cederblom, J. and C. J. Dougherty: 1990, Ethics at Work (Wadsworth Publishing Company,
Belmont, CA).
Code of Professional Conduct: 1991, American Institute of Certified Public Accounts, New
York.
Harris, C. E. Jr.: 1992, Applying Moral Ethics, 2nd Ed. (Wadsworth Publishing Company,
Belmont, CA).
Hermanson, R. H., J. R. Strawser, R. H. Strawser: 1989, Auditing Theory and Practice, 5th
Ed. (Irwin, Homewood, IL).
Gigot, P. A.: 1982, 'Big Fraud Verdict Against Andersen Shakes Up Accounting Profession',
The Wall Street Journal Feb. 3, 25.
Rosen, B.: 1978, Strategies of Ethics (Houghton Mifflin Company, Boston, MA).
Statement on Responsibilities in Tax Practice: 1969 (revised), American Institute of Certified
Public Accounts, Inc., New York.
Mark R. Nixon is Assistant Professor at Bently College, Waltham, Massachusetts. Previously,
he was to-founder of a regional telecommunication business, and was involved in public
accounting as a sole practitioner and with the Big 8.