Chapter 1 ethical reasoning: implications for accounting (lecture 1)
Ethical questions:
- What motivates an otherwise ethical person to do the wrong thing when faced with an
ethical dilemma?
- Why does a good person act wrongly in a particular situation?
Reason for unethical actions
- Avoid bad publicity
- Failure of university board of trustees to have reporting mechanisms in place to ensure
disclosure of major risks.
- President who discouraged discussion and dissent
- A lack of awareness of the Clery Act, which requires colleges and universities participating in
federal financial aid programs to keep and disclose information about crimes committed on
and near their campuses
- A lack of whistleblower policies and protections
- A culture of reverence for the football program that was ingrained at all levels of
- the campus community
explanations for unethical actions
“honesty, integrity, and always doing what was in the best interests of the university [italics added]
was how everyone agreed to operate and . . . we’ve always operated as a family. Our personal and
social and professional lives were all very intertwined.”
- A culture that fosters organizational interests to the exclusion of others explain what
happened. (also the case at enron and worldcom)
- The culture of an organization should be built on ethical values such as honesty, integrity,
responsibility, and accountability.
Ethical blind spots
Leaders successful at what they do and see themselves as ethical and moral, still cultivate a collection
of blindspots = gaps between who you want to be and the person you actually are.
- Want to do the right thing( act ethically), but internal and external pressures get in the way
What is Ethics?
Economics & Ethics
- Economics = self interest.can be viewed as the sum of actions, and interactions, based on
egoistic behavior “that aims to obtain as much economic gain for the individual as possible”,
while…
- Ethics = common good is “composed of generous actions that aim at the good for everyone
and the common good for the community
- = oxymoron
-
Adam smith: they are selfish, they want to make money as a community we benefit from it
beginning capitalism
1
,Ethics & Morals?
Ethics Greek ethos = custom or character. concepts of right and wrong
Morals Latin moralis= customs, mores= manners, morals, character.
Philosophy = ethical behavior that which is good
Western tradition moral philosophy
Gaa & Thorne: ethics the field of inquire that concerns the actions of people in situation where these
actions have effects on the welfare of both oneself and others”
The field of ethics or moral philosophy involves developing, defending, and recommending concepts
of right and wrong behavior. (immutable= onveranderlijk)
Fundamental questions like:
- How should I live my life?
- What standard or principles do I live by?
the ethical standards for a profession influenced by the practices of those in the profession.
Ethics vs Morals
Ethics: rules provided by an external source (code of conduct)
Morals: individuals own principles regarding right and wrong (culture, religion, country, etc).
Forming a moral judgement using moral standards. (distinct ethics and morals)
- Employing moral standards/principles which we compare what we see in order to form a
conclusion. (might include person’s actions. Person’s character. We compare the dilemma
with a set of principles of conduct we do believe are appropriate for such circumstance.
- Ethics: involve the study and application of those standards and judgements which people
create or are established by organizations. (operational side of morality)
Conflict ethics + morals: output is not in line with your initial beliefs (alignment vs conflict)
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, personal problems, family, partners, etc… - Lack of integrity…
Integrity (basis for ethics in accounting)
One has to act with integrity when making personal decisions in order to be best equipped to act
with integrity on a professional level. acting on moral principles and not on expediencies
It is the ethical value of integrity that provides the moral courage to resist the temptation to stand by
silently while a company misstates its financial statement amounts.
A person of integrity will act out of moral principle and not expediency. That person will do what is
right, even if it means the loss of a job or client.
2
,Integrity key to carrying out the Golden rule: we should treat others the way we would want to be
treated.
A person of integrity acts with truthfulness, courage, sincerity, and honesty.
Integrity means to have the courage to stand by your principles even in the face of pressure to bow
to the demands of others.
The public interest in accounting
In order to regain the trust and respect the profession enjoyed prior to the scandals, the profession
must rebuild its reputation on its historical foundation of ethics and integrity.
Regulation of accounting profession
Regulation of a profession is a specific response to the need for certain standards to be met by the
members of the profession.
Why regulations are necessary to ensure the quality: compliance with ethics, technical, and
professional standards and the need to represent the interests of users of those services.
Regulations because imbalance between the client and the provider of services (professional
expertise). Regulation also helps when there are significant benefits or costs from the provision of
accountancy services that accrue to third parties, other than those acquiring and producing the
services.
To meet the public interest, regulation must be objectively determined, transparent, and
implemented fairly and consistently. The benefits of regulation to the economy and society should
outweigh the costs of that regulation.
Global code of ethics: IFAC
Fundamental principles (IESBA, 2016, pp.9):
- Integrity: to be straightforward and honest in all professional and business relationships
- Objectivity: take decision using an unbiased professional judgment
- Professional Competence and Due Care: keep the level of knowledge and skills high in
performing professional services
- Confidentiality: respect confidentiality of information acquired
- Professional Behavior: comply with Law and Regulations ( save the reputation of profession)
AICPA Code of Conduct
The Principles of the AICPA Code are aspirational statements that form the foundation for the Code’s
enforceable rules.
Principles section of the AICPA code includes:
- The overriding responsibilities of CPAs is to exercise sensitive professional and moral
judgments in all activities. By linking professional conduct to moral judgment, the AICPA
Code recognizes the importance of moral reasoning in meeting professional obligations.
- Public interest: include others, take care of all individuals who rely on the objectivity and
integrity of CPAs to maintain the orderly functioning of commerce. resolving conflicts
3
, between stakeholders groups by recognizing the primacy of a CPA’s responsibility to the
public as the way to best serve clients’ and employers’ interests.
- integrity live following principles rather than expediency
- Objectivity + independence requires that all CPAs maintain a mental attitude of impartiality
and intellectual honesty and be free of conflicts of interest in meeting professional
responsibilities.
- The due care standard (diligence) calls for continued improvement in the level of
competency and quality of services.
- scope and nature of services individual judgments, whether the scope and nature of other
services provided to an audit client would create a conflict of interest in performing an audit
for that client.
integrity+ objectivity related to quality of the individual
Integrity principle should be used when: • Accounting rules are unclear • Difference of opinion with
an employer or client on an accounting issue • Conflicts between the interests of stakeholder groups
Independence
- Independence required for audit and other attestation services; in fact and in appearance
- Independence allows a CPA to act with integrity and professional skepticism
- AICPA uses risk based approach for analyzing threats using the following steps:
1. Identifying and evaluating threats to independence
2. Determining whether safeguards already eliminate or sufficiently mitigate identified threats
and whether threats that have not yet been mitigated can be eliminated or sufficiently
mitigated by safeguards
3. If no safeguards are available to eliminate an unacceptable threat or reduce it to an
acceptable level, independence would be considered impaired
Threats to independence + Safeguards (are controls that eliminate or reduce threats to
independence.)
4
Ethical questions:
- What motivates an otherwise ethical person to do the wrong thing when faced with an
ethical dilemma?
- Why does a good person act wrongly in a particular situation?
Reason for unethical actions
- Avoid bad publicity
- Failure of university board of trustees to have reporting mechanisms in place to ensure
disclosure of major risks.
- President who discouraged discussion and dissent
- A lack of awareness of the Clery Act, which requires colleges and universities participating in
federal financial aid programs to keep and disclose information about crimes committed on
and near their campuses
- A lack of whistleblower policies and protections
- A culture of reverence for the football program that was ingrained at all levels of
- the campus community
explanations for unethical actions
“honesty, integrity, and always doing what was in the best interests of the university [italics added]
was how everyone agreed to operate and . . . we’ve always operated as a family. Our personal and
social and professional lives were all very intertwined.”
- A culture that fosters organizational interests to the exclusion of others explain what
happened. (also the case at enron and worldcom)
- The culture of an organization should be built on ethical values such as honesty, integrity,
responsibility, and accountability.
Ethical blind spots
Leaders successful at what they do and see themselves as ethical and moral, still cultivate a collection
of blindspots = gaps between who you want to be and the person you actually are.
- Want to do the right thing( act ethically), but internal and external pressures get in the way
What is Ethics?
Economics & Ethics
- Economics = self interest.can be viewed as the sum of actions, and interactions, based on
egoistic behavior “that aims to obtain as much economic gain for the individual as possible”,
while…
- Ethics = common good is “composed of generous actions that aim at the good for everyone
and the common good for the community
- = oxymoron
-
Adam smith: they are selfish, they want to make money as a community we benefit from it
beginning capitalism
1
,Ethics & Morals?
Ethics Greek ethos = custom or character. concepts of right and wrong
Morals Latin moralis= customs, mores= manners, morals, character.
Philosophy = ethical behavior that which is good
Western tradition moral philosophy
Gaa & Thorne: ethics the field of inquire that concerns the actions of people in situation where these
actions have effects on the welfare of both oneself and others”
The field of ethics or moral philosophy involves developing, defending, and recommending concepts
of right and wrong behavior. (immutable= onveranderlijk)
Fundamental questions like:
- How should I live my life?
- What standard or principles do I live by?
the ethical standards for a profession influenced by the practices of those in the profession.
Ethics vs Morals
Ethics: rules provided by an external source (code of conduct)
Morals: individuals own principles regarding right and wrong (culture, religion, country, etc).
Forming a moral judgement using moral standards. (distinct ethics and morals)
- Employing moral standards/principles which we compare what we see in order to form a
conclusion. (might include person’s actions. Person’s character. We compare the dilemma
with a set of principles of conduct we do believe are appropriate for such circumstance.
- Ethics: involve the study and application of those standards and judgements which people
create or are established by organizations. (operational side of morality)
Conflict ethics + morals: output is not in line with your initial beliefs (alignment vs conflict)
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, personal problems, family, partners, etc… - Lack of integrity…
Integrity (basis for ethics in accounting)
One has to act with integrity when making personal decisions in order to be best equipped to act
with integrity on a professional level. acting on moral principles and not on expediencies
It is the ethical value of integrity that provides the moral courage to resist the temptation to stand by
silently while a company misstates its financial statement amounts.
A person of integrity will act out of moral principle and not expediency. That person will do what is
right, even if it means the loss of a job or client.
2
,Integrity key to carrying out the Golden rule: we should treat others the way we would want to be
treated.
A person of integrity acts with truthfulness, courage, sincerity, and honesty.
Integrity means to have the courage to stand by your principles even in the face of pressure to bow
to the demands of others.
The public interest in accounting
In order to regain the trust and respect the profession enjoyed prior to the scandals, the profession
must rebuild its reputation on its historical foundation of ethics and integrity.
Regulation of accounting profession
Regulation of a profession is a specific response to the need for certain standards to be met by the
members of the profession.
Why regulations are necessary to ensure the quality: compliance with ethics, technical, and
professional standards and the need to represent the interests of users of those services.
Regulations because imbalance between the client and the provider of services (professional
expertise). Regulation also helps when there are significant benefits or costs from the provision of
accountancy services that accrue to third parties, other than those acquiring and producing the
services.
To meet the public interest, regulation must be objectively determined, transparent, and
implemented fairly and consistently. The benefits of regulation to the economy and society should
outweigh the costs of that regulation.
Global code of ethics: IFAC
Fundamental principles (IESBA, 2016, pp.9):
- Integrity: to be straightforward and honest in all professional and business relationships
- Objectivity: take decision using an unbiased professional judgment
- Professional Competence and Due Care: keep the level of knowledge and skills high in
performing professional services
- Confidentiality: respect confidentiality of information acquired
- Professional Behavior: comply with Law and Regulations ( save the reputation of profession)
AICPA Code of Conduct
The Principles of the AICPA Code are aspirational statements that form the foundation for the Code’s
enforceable rules.
Principles section of the AICPA code includes:
- The overriding responsibilities of CPAs is to exercise sensitive professional and moral
judgments in all activities. By linking professional conduct to moral judgment, the AICPA
Code recognizes the importance of moral reasoning in meeting professional obligations.
- Public interest: include others, take care of all individuals who rely on the objectivity and
integrity of CPAs to maintain the orderly functioning of commerce. resolving conflicts
3
, between stakeholders groups by recognizing the primacy of a CPA’s responsibility to the
public as the way to best serve clients’ and employers’ interests.
- integrity live following principles rather than expediency
- Objectivity + independence requires that all CPAs maintain a mental attitude of impartiality
and intellectual honesty and be free of conflicts of interest in meeting professional
responsibilities.
- The due care standard (diligence) calls for continued improvement in the level of
competency and quality of services.
- scope and nature of services individual judgments, whether the scope and nature of other
services provided to an audit client would create a conflict of interest in performing an audit
for that client.
integrity+ objectivity related to quality of the individual
Integrity principle should be used when: • Accounting rules are unclear • Difference of opinion with
an employer or client on an accounting issue • Conflicts between the interests of stakeholder groups
Independence
- Independence required for audit and other attestation services; in fact and in appearance
- Independence allows a CPA to act with integrity and professional skepticism
- AICPA uses risk based approach for analyzing threats using the following steps:
1. Identifying and evaluating threats to independence
2. Determining whether safeguards already eliminate or sufficiently mitigate identified threats
and whether threats that have not yet been mitigated can be eliminated or sufficiently
mitigated by safeguards
3. If no safeguards are available to eliminate an unacceptable threat or reduce it to an
acceptable level, independence would be considered impaired
Threats to independence + Safeguards (are controls that eliminate or reduce threats to
independence.)
4
