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Ethics Exam 1 Study Guide

Ethics: Exam 1 Study Guide (Ch 1-3)
Chapter 1
 Definition of ethics:
o The branch of philosophy that involved systematizing, defending, and
recommending concepts of right and wrong behavior
o His definition: “The study or evaluation of “right and wrong” behaviors”
 Do your job. Tell the truth. Obey the law.
 Duska Chapter 1
o Purpose of accounting- To make sure that the portrait the company’s
accountants paint in the financial statements is as accurate as possible
o I.E. True Disclosure
 Nature & Purpose of Accounting
o Accounting is a technique and craft developed to help people monitor their
economic transactions
o Gives people a financial picture of their affairs
o Fundamental purpose- to provide information about the economic dealings of a
person or organization
o Conceptual Framework (FASB)- a coherent system of interrelated objectives and
fundamentals that is expected to lead to consistent standards and that
prescribes the nature, function, and limits of financial accounting and reporting
 Expected to serve the public interest
o Accounting Information
 If the information is truthful, no ethical problems arise
 If the information is not truthful, …
 Lying- a deceptive activity meant to evoke a certain response
o Commission- untrue statements
o Omission- withholding known pertinent information
 Proper Disclosure
o The accountant must at least meet the disclosure requirements of all applicable
governing authorities
 Obeying the law: brief history of accounting standards
o Securities Act of 1933 and 1934
 Congress’ response to the Great Depression to promote ethical behavior
through legislation and regulation
 Established the SEC
o Cohen Commission 1974
 AICPA hired this commission to see if a gap may exist between what the
public expects and needs and what auditors can and should reasonably
expect to accomplish
 Found that there wasn’t enough focus on auditing- fault with the
accounting profession for not keeping pace with the business
o US Senate Metcalf Committee 1977
 Also formed to investigate the accounting profession
 Recommended accounting profession improves procedures for assuring
independence in view of the public’s needs and expectations
 Also recommended as best policy to require that independent auditors of
public companies perform only services directly related to accounting
o FCPA of 1977
 2 main provisions
 Addresses the accounting transparency requirements under the
Securities Act of 1934, and
 Another concerning bribery of foreign officials
Discussion Questions:
o Enron Significant Results (4)?
 Largest American bankruptcy ever
 Lead to the creation of SOX
 Arthur Andersen also went bankrupt
 Creation of the PCAOB
o Working definition of Ethics?
 The study of right and wrong behaviors
o What is the purpose of accounting?
o What are the 3 components of the working definition for ethical behavior?
 Do your job
 Obey the law
 Tell the truth
o How would you describe lying?
 In general it’s not telling the truth, but could be by omission or
commission (equally as bad)
o How much must an accountant disclose?
 We must disclose to the appropriate audience, which depends on the
requirements and laws. We must disclosure to people who have a right to
the information, giving them the right disclosure and that it’s correct.
Chapter 2
Why study ethics?
o 1. Some moral beliefs an individual holds may not suffice because they are
simple beliefs about complex issues
o 2. It may be difficult to determine what to do in some situations because of
conflicting ethical principles
o 3. Individuals may hold inadequate beliefs or cling to inadequate values
o 4. To understand whether and why our opinions are worth holding
o 5. To identify the basic ethical principles that can be applied to action
Accountants have an ethical obligation to do their job
o Fundamental purpose: to provide information about the economic dealings of a
person or organization with “true disclosure”
2 kinds of reasons to justify our moral beliefs and subsequent actions:
o 1. Reasons that validate doing something (affirmative duties), and
o 2. Reasons that validate not doing something (negative injunctions)
Ethical Theory
o 5 basic questions
 Is the action good for me?
 Fulfills basic human needs
 Not necessarily what you want or desire, rather something that
fulfills basic human needs
 Is the action good or harmful for society?
 Considering the benefits for everyone affected
 Is the action fair or just?
 The principle of justice- the same should be treated the same
 But whom and what are equal/same?
 Fairness gives rise to the idea of entitlement- the person has a
right to it and that person’s rights should be respected
 Does the action violate anyone’s rights?
 Two types of rights/entitlements: Negative and Positive
o Negative: rights to things that no one has to provide for us
that we already have, or that are to be respected and not
taken away
 Ex. Right to life, liberty, right to property
o Positive: an entitlement in which something must be
provided- a right to recipience
 Ex. Education, health care, employment, housing
 Have I made a commitment, implied or explicit? (relationships)
o In situation when there are reasons for doing something and reasons for not
doing it, we are faced with an ethical dilemma
 A problem that arises when a reason to act in a certain way is offset by a
reason not to act that way
 Ethical dilemmas occur when there is a conflict of reasons, and ethical
theories arise to resolve ethical dilemmas
Discussion Questions
o Reasons why studying ethics would benefit an accountant:
 Moral beliefs may not be sufficient because they are simple beliefs about
complex issues
 Conflicting ethical principles may make it difficult to determine what to
 Individuals may cling to inadequate values
 Understand whether and why our opinions are worth holding
 Identify the basic ethical principles that can be applied to action
o 5 questions that form the basis of ethical theory:
 Is the action good for me?
 Is the action good or harmful for society?
 Is the action fair or just?
 Does the action violate anyone’s rights?
 Have I made a commitment, implied or explicit?
o What is an “ethical dilemma”?
 When there are reason for and against doing something (conflict of
o Give an example of an ethical dilemma you might encounter in accounting:
Session 2
Chapter 3
Applicable ethical theories for business and accounting
o Egoism
o Utilitarianism
o Kant’s Duty Based (Deontology)
o When we consider only what is good for ourselves and give self-interested
concerns priority over what is good for others and what is fair
o Some people belief self-interest is inherently unethical
o Difference between self-interest and selfishness
 Self-interest- is doing what is in one’s own best interest
 Selfishness- pursuing one’s own interest at the expense of another
o This is not an acceptable method in accounting because the code of ethics
mandates an “obligation to act in a way that will serve the public interest”
o When we give priority to what is good for most of the people affected over
considerations of fairness
o The ultimate justifying reason for an action is that the action brings about more
good for people than it does harm
o Ends justify the means
o “Actions are right in proportion as they tend to promote happiness, wrong as
they tend to produce the reverse of happiness”
 Not the agent’s own greatest happiness, but the greatest amount of
happiness all together
o Because of its focus on societal rather than individual happiness, this method is
in greater accord with our moral sensibilities than egoism
o This method uses a cost-benefit approach
o Problems with utilitarianism:
 Distribution Problem
Creates a total happiness versus greatest number of people
included dilemma
Prediction Problem
 The future if often unknowable and predictive models are often
What’s good Problem:
 What we need or what we desire?
 What should be the focus? Who decides?
Illicit means Problem:
 From a utilitarian perspective, the ends justify the means, even if
the means are immoral
Special Duties Problem:
 Most people want to give special consideration to those they feel
have a special duty or responsibility to (family, friends, etc.)
o When we give considerations of fairness and duty priority over the
consequences of the action
o Believe that actions themselves are ethical in spite of consequences
o Ends don’t justify the means- do what must be done
o Immanuel Kant
o Humans have two abilities that animals don’t have:
 1. The ability to choose between alternate means or ways to achieve the
 2. Freedom to set aside those goals or inclinations and act out of a higher
o Humans can and should sometimes act against their inclinations for the sake of
 To act morally, we do something simply because it is the right or moral
thing to do, i.e. categorical imperative
 2 formulas for categorical imperative:
 First: Act so that you can will the maxim of your action to become
a universal law
 Second: Act so as never to treat another rational being merely as
a means
Discussion Questions
o How can an ethical theory be defined?
o Give a brief differentiation between the 3 primary ethical theories:
o Differentiate between self-interest and selfishness
o What are the main differentiators between Utilitarianism and Deontology?
o Name briefly define several problems we discussed concerning Utilitarianism:
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