Case 1-6 Capitalization versus Expensing

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Chapter1EthicalReasoningImplicationsforAccounting.pdf

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Ethical Reasoning: Implications for

Accounting Chapter 1

Ethical Reasoning

• Ethical dilemma: Penn State, a culture of indifference

• 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

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

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

What is Ethics?

• Accepted standards of behavior • Practices of those in a profession • Laws • Expectations of society

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.

Ethics: Norms, Values, and Law

• Norms: • Ethical decision-making entails following certain well established 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 its codes of ethics • “Golden Rule” prescribes that we should treat others the way we want to

be treated

• 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

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

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.

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

• Penn State scandal • University of North Carolina

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

Cultural values

• Cultural dimensions that can explain similarities and differences in cultures worldwide, include:

• Individualism • Power distance • Uncertainty avoidance • Masculinity

• Long term orientation recently added to this list

Six Pillars of Character

• Trustworthiness • Respect • Responsibility • Fairness • Caring • Citizenship

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 ones convictions. • Reliability: following through with ones

promises/commitments. • Loyalty: not violating confidence placed in us.

A Word about Whistleblowing

• Loyalty is the one value that should NEVER take precedence over other values.

• “Dogs are loyal to their master while cats are loyal to the house.”

• Loyalty requires a commitment to do the right thing for the right people in the right way (i.e., public interest in accounting)

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.”

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.

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.

• Takes a long time to build a reputation of trust but not long at all to tear it down.

Civility, Ethics, and Workplace Behavior

• Instances of inconsiderate, “in your face” behavior

• Civility requires restraint, respect, and responsible action in both personal and professional activities

• Can be well behaved and gracious to others but motivated by non-ethical values such as greed

• Treating others bad and with disrespect shows non commitment to act in accordance with the pillars of character

Modern Moral Philosophies

• A few of the philosophies applicable to the study of accounting ethics include:

• Teleology • Egoism • Enlightened Egoism • Utilitarianism

• Deontology • Rights Theory • Justice

• Virtue

Egoism and Enlightened 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

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

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

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

Rights Principles

• Hobbes and Locke • Kant • 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

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

Virtue Ethics

• Greek philosophers, Plato and Aristotle • Less emphasis on learning rules • Stress importance of developing good habits of

character • Cardinal virtues

• Wisdom • Courage • Temperance • Justice

Virtue Ethics

• Other Important Virtues • Fortitude • Generosity • Self-respect • Good temper • Sincerity

• Bad Character Traits, also known as Vices • Cowardice • Insensitivity • Injustice • Vanity

Virtues in Accounting Practice

• Ethical obligations to clients, employers, government, and public at large

• Perform services • Without bias • Avoid conflicts of interests • Independence • Integrity

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

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

Personal Integrity

• Essential characteristic for CPA • Learn to be ethical

• By practice • Gaining wisdom • Exercising virtues • Enable you to lead a life of excellence

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

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

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

Aristotole’s Virtues • Trustworthiness,

benevolence, altruism • Honesty, integrity • Impartiality, open-

mindedness • Reliability, dependability,

faithfulness

Ethical Standards for CPAs • Integrity • Truthfulness, non-

deception • Objectivity, independence • Loyalty (confidentiality) • Due care (competence and

prudence)

Virtue, Character and CPA Obligations

Institute of Management Accountants (IMA)

• Principles • Honesty

• Fairness

• Objectivity

• Responsibility

• Standards • Confidence

• Confidentiality

• Integrity

• 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.

DigitPrint

• Outsourcing business for high-speed digital printing

• $2 million in venture capital • $200,000 net income for 1st year • $1 million unrecorded accrued expenses • Income becomes $800,000 loss

DigitPrint

• IMA Standards • Integrity, inform Higgins, seek outside counsel

• Utilitarianism • Greatest benefit to the public, company, and

employees

• Rights Theory • Venture capitalist (and Higgins) have ethical right to

know

• Justice • Virtue of integrity and not subordinate judgment

What to DO?

• Take concerns to Higgins • Whistle-blowing • Confidentiality • Right to do versus the Right thing to do

Concluding Thought

• 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.

Videos on Cases

• Harvard Cheating Scandal • http://www.youtube.com/watch?v=hHUJuEYw0SU • http://www.youtube.com/watch?v=1PBsVH68Iig

• NYC Subway Death • http://www.youtube.com/watch?v=3UkS8VfotU8

• Bystander Effect • http://www.youtube.com/watch?v=3UkS8VfotU8

• Other • http://www.youtube.com/watch?v=NxdbzcR4nfA • http://www.youtube.com/watch?v=Lhwhgf01Ozw