Ethical Reasoning:
Implications for
Accounting
Chapter 1
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Ethical Reasoning
• Ethical dilemma: Betty Vinson, how a
genuinely good person can get caught up in
fraud
• Ethical blind spots refers to the gap
between who you want to be and who you
actually are
• Organizational goals, rewards, compliance
systems, and informal pressures all
contribute to ethical fading
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Integrity: The Basis for Ethics in
Accounting
• Integrity:
• Meaning on principle
• Traces back to Socrates, Plato and Aristotle
• Is the foundational virtue of the ancient Greek
philosophy of virtue
• Helps withstand pressures to subordinate
judgment
• Is a “must have” for accountants
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Religious and Philosophical Foundations of
Ethics
• A version of the Golden Rule appears in
each of the world’s religions
• Ethics can be traced back to ancient Greek
philosophy
• “What is the best sort of life for human beings to
live?”
• Greeks believed the ultimate goal of happiness
was to attain some objectively good status: the
life of excellence
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Ethics, Morals, Values
• Ethics, derived from the Greek word ethikos
(character), deals with the concepts of right
and wrong; standards of how people ought
to act.
• Morals, derived from the Latin word moralis,
deals with manners, morals, character.
• Values are basic and fundamental beliefs
that guide or motivate attitudes or actions.
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What is Ethics?
• Ethics describes the way people ought to
act:
•
•
•
•
Accepted standards of behavior
Practices of those in a profession
Laws
Expectations of society
• Gaa and Thorne
• Ethics is the actions of people in situations
where these actions have effects on the welfare
of both oneself and on others
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Ethics: Norms and Values, and Law
• Norms:
• Ethical decision-making entails following norms of
behavior
• Does not describe the way people do act (descriptive)
• Deals with the way people should act
(prescriptive/normative)
• Values:
• Basic beliefs that guide or motivate attitudes or actions
• Values of a profession (i.e. Accounting) are embedded
in codes of ethics
• “Golden Rule” prescribes that we should treat others
the way we want to be treated
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Ethics and the Law
The Law:
• Being ethical is not the same as following the
law
• Existence of specific laws prohibiting certain
behaviors will not stop a person who is
unethical from violating those laws
• Laws create a minimum set of standards that
ethical people usually go beyond
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Norms, Values, and the Law:
The Gray Area
• When facts are unclear and legal issues are
uncertain, consider the following:
• Established standards of ethical behavior.
• Moral philosophies.
• Gray Area/Unclear Rules
• Willingness to take action not in ones own
self-interest.
• Look beyond self-interest and consider all
perspectives involved.
• Process followed to decide on a course of
action is more important than achieving the
end goal
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Moral Relativism
• View that ethical statements vary from
person to person
• Each statement is equally valid
• No one’s opinion of right vs wrong is better
than another’s
• There is no ultimate standard of good or evil
• Morals are based on one’s culture, religion,
place and time where they occur
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Ethical Relativism
• If correct, there can be no common
framework to resolve any moral disputes
between different societies
• Theory is rejected by most ethicists
• Societies may differ in their application of
fundamental moral principles but agree on
the principles.
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Situation Ethics
• Theory that recognizes the existence of
certain principles but questions whether
they should be strictly applied or used as
guidelines in a particular situation
• Circumstances around ethical dilemma
should influence decision making process
• Problem: it can be used to rationalize
actions such as cheating
• University of North Carolina
• Harvard
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Social Networkers and Workplace Ethics
• Ethics Resource Center survey on employees
using social networking on the job
• Discussing company information online
• Active social networkers are unusually
vulnerable to risks
• Witness more misconduct
• Experience more retaliation as a result when
reported
• Training and ongoing commitment to an ethical
culture can mitigate the risks presented by
social networking at work
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Six Pillars of Character
• Trustworthiness
• Respect
• Responsibility
• Fairness
• Caring
• Citizenship
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Trustworthiness
• Trustworthiness: being honest, acting with
integrity, being reliable, and exercising
loyalty in dealing with others.
• Honesty: is the most basic ethical value and
means that we should express the truth as we
know it and without deception.
• Integrity: strength and courage of one’s
convictions.
• Reliability: following through with one’s
promises/commitments.
• Loyalty: not violating confidence placed in us.
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A Word about Whistleblowing
• Loyalty requires a commitment to do the
right thing for the right people in the right
way (i.e., public interest in accounting)
• Loyalty is the one value that should NEVER
take precedence over other values.
• Your ethical obligation is to report violations
to your supervisor and up the management
chain
• Only in rare situations would external
whistleblowing be appropriate
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Respect, Responsibility, and Fairness
• Respect: treating every individual with dignity.
The golden rule encompasses respect for
others through notions such as civility, courtesy,
decency, dignity, autonomy, tolerance and
acceptance.
• Responsibility: the ability to reflect on
alternative courses of action, persevere and
carry out moral action diligently.
• Fairness: treating others equally, impartially,
and openly.
• Michael Josephson points out, “fairness implies
adherence to a balanced standard of justice without
relevance to one’s own feelings or inclinations.”
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Caring and Citizenship
• Caring: The essence of caring is empathy.
Empathy is the ability to understand, be
sensitive to, and care about the feelings of
others. Caring and empathy support each
other and enable a person to put herself in the
position of another. This is essential to ethical
decision making.
• Citizenship: Josephson points out that
“citizenship includes civic virtues and duties
that prescribe how we ought to behave as part
of a community.” An important part of good
citizenship is to obey the laws, be informed of
the issues, volunteer in your community, and
vote in elections.
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Reputation
• Reputation: overall quality or character in
the opinion of the public towards a person
or group or organization. It is an important
factor in many professional fields, including
accounting.
• One builds “reputational capital” through
favorable actions informed by ethical
behavior.
• Takes a long time to build a reputation of
trust but not long at all to tear it down.
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Modern Moral Philosophies
• A few of the philosophies applicable to the
study of accounting ethics include:
• Teleology
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•
•
•
Egoism
Enlightened Egoism
Rational Egoism
Utilitarianism
• Deontology
• Rights Theory
• Justice
• Virtue
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Egoism, Enlightened Egoism, and Rational
Egoism
• Consequences for individual
• “Do the act that promotes the greatest good
for oneself.”
• Enlightened egoists
• Allow for the well-being of others
• Help achieve some ultimate goal for self
• Self-interest remains paramount
• Rational egoists
• Make decisions that promote one’s own selfinterest in accordance with reason
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Utilitarianism
• Bentham and Mill
• Consider impartially the interests of all
persons affected by an action and pick the
greater benefit
• “Greatest good to greatest number”
• Difficulties
• Impossible to foresee all consequences
• Consequences difficult to measure
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Utilitarian Types
• Act-Utilitarian
• Examines the specific action itself versus
rule
• Sets aside the rule only if increase in net
utility to all stakeholders
• Rule-Utilitarian
• Basis behavior on rules designed to
promote the greatest utility
• Maximizes intrinsic value
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Deontology
• Derived from Greek “deon” meaning duty
• Moral norms establish basis for action
• Based on rights of individuals and
motivation rather than consequences
• Concerned with means rather than end
result
• Rights
• Justice
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Rights Principles
• Hobbes and Locke
• Kant (1724-1804)
• Categorical Imperative
• Motivated by sense of obligation
• Universality of moral actions
• People should never be treated as a means
only, i.e., a means to an end
• Difficulties
• Moral Absolutes
• No clear way to resolve conflicts between moral
duties
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Justice
• John Rawls (1921-2002)
• “Original Position” – behind the “veil of
ignorance”
• Each permitted the maximum amount of
basic liberty compatible with others.
• Social and economic inequalities are
allowed only if benefit all.
• Treat equals (i.e., those with equal claims)
equally and unequals (i.e., those with differing
claims) unequally
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Virtue Ethics
• Greek philosophers, Plato and Aristotle
• Less emphasis on learning rules
• Stress importance of developing good
habits of character
• Cardinal virtues
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•
•
•
Wisdom
Courage
Temperance
Justice
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Virtue Ethics (continued)
• Other Important Virtues
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Fortitude
Generosity
Self-respect
Good temper
Sincerity
• Bad Character Traits, also known as Vices
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•
•
•
Cowardice
Insensitivity
Injustice
Vanity
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Virtues in Accounting Practice
• Ethical obligations to clients, employers,
government, and public at large
• Perform services
• Without bias
• Avoid conflicts of interests
• Independence
• Integrity
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Acting with Integrity
• Act out of moral principle, not expediency
• Never let loyalty cloud good judgment and
ethical decision-making
• Have the courage to stand by your
convictions in accordance with the public
service ideal of the accounting profession
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Moral Point of View
• Emphasizes practical reason and rational
choice
• Deliberation precedes choice of action
• Reason
• Thought
• Voluntary
• Ends do not justify the means
• At least some times we should be willing to
act in the best interests of others and set
aside self-interest and the interests of an
employer or a client
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Accounting and the Public Interest
• Honoring public trust
• Acting with integrity in performance of
professional services
• Being independent of clients
• Making decisions objectively
• Exercising due care in the performance of
services and professional skepticism
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AICPA Code of Conduct
• The code is divided into two sections:
• Principles: are aspirational statements that form
the foundation for the Code’s enforceable Rules
of Professional Conduct. Principles are
expectations but are not legally binding. The
principles of professional conduct include:
• Responsibilities
• Public Interest
• Integrity
• Objectivity and Independence
• Due Care
• Nature and Scope of Services
• Rules: enforceable applications of the Principles
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Overriding Responsibility of CPAs
• Exercise sensitive professional and moral
judgments in all activities.
• Recognize the primacy of a CPA’s
responsibility to the public as the way to
best serve the clients’ and employers’
interest.
• Continued improvement in the level of
competency and quality of services
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Virtue, Character, and CPA Obligations
Aristotle’s Virtues
• Trustworthiness,
benevolence, altruism
• Honesty, integrity
• Impartiality, openmindedness
• Reliability, dependability,
faithfulness
Ethical Standards for CPAs
• Integrity
• Truthfulness, nondeception
• Objectivity, independence
• Loyalty (confidentiality)
• Due care (competence
and prudence)
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Institute of Management Accountants
(IMA)
• Principles
• Honesty
• Standards
• Confidence
• Fairness
• Confidentiality
• Objectivity
• Integrity
• Responsibility
• Credibility
• Resolution of Ethical Conduct
• Discuss issue with immediate supervisor or higher
authority.
• Clarify ethical issues with an IMA Ethics Counselor or
other impartial advisor
• Consult attorney.
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3D Printing Case Study
• Privately held company started after a
successful Kickstarter campaign
• CEO wishes to secure a $10 million bank
loan
• Issue: recording revenue for $200,000 sale
when shipment will occur after year-end cutoff date
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DigitPrint
• IMA Standards
• Integrity, inform higher level of management,
seek outside counsel
• Utilitarianism
• Greatest benefit to the public, company, and
employees would be to delay recording revenue
• Rights Theory
• Investors have ethical right to receive accurate
financial information
• Justice
• Virtue of integrity and not subordinate judgment
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What to DO?
• Attempt to counteract Kyle’s statements
about being a team player
• Take concerns to the Board of Directors
• If needed approach external auditors or
regulatory agencies
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Concluding Thoughts
• In accounting, integrity is its own reward
because it builds trust in client relationships
and helps honor the public trust that is the
foundation of the accounting profession.
• Heroes in accounting do exist: brave people
have spoken out about irregularities in their
organizations.
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Videos on Cases
• Harvard Cheating Scandal
• (Continued)
• The Ethics Quiz
• (Continued)
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