DC PAPER 1

Ethics in Finance and Accounting: Editorial Introduction

Domènec Melé1 • Josep M. Rosanas1 • Joan Fontrodona1

Received: 1 September 2016 / Accepted: 9 September 2016 / Published online: 28 September 2016

� Springer Science+Business Media Dordrecht 2017

Abstract In light of the recent crisis and its aftershocks, it

becomes crucial to reflect on the relationship between

finance and accounting and on how to integrate ethics and

efficiency, as well as on how to motivate and empower

practitioners in the world of finance to commit to justice,

fairness and enhanced understanding, and to improving

their personal integrity. This article, written as an editorial

introduction to a special issue includes works related to

control measurement and ethical behavior, misbehaviors in

finances and accounting, professionalism in accounting,

ethical investing and corporate reporting. We conclude by

suggesting further research for a better integration of

technical aspects of accounting and finances into business

activity—human activity actually—and an for under-

standing of ethics not limited to rules, but as a mutual and

interdependent system of values (human goods), virtues

and principles.

Keywords Capitalism � Ethics in finance � Ethics in accounting � Managerial control systems � The separation thesis � Ethical rules � Goods and virtues

Today we must regain control of the future before it

is too late—reverse the financialization process and

ensure that finance once again operates in the inter-

ests of human dignity and progress.

Manifesto of Observatoire de la Finance (2008).

Finance and accounting are important functions for the

management of any firm. Accounting systems are an

essential tool for providing information for decision-mak-

ing, as well as for the evaluation of decisions previously

made, and the finance function must seek resources at a

reasonable cost and use them efficiently.

Finances and accounting are not merely technical tools

with no connection with ethics. They cannot work without

trust and trust is not possible without ethics. Ethics

includes action, foreseeable consequences and people,

with their virtues or lack of virtues, involved in any

human activity.

Let us briefly reflect on the causes of the financial crisis.

At the end of May 2015, Mrs. Christine Lagarde, Managing

Director of the International Monetary Fund, pointed out

that ‘‘… recently (…) capitalism has been characterized by ‘excess’—in risk-taking, leverage, opacity, complexity,

and compensation. It led to massive destruction of value. It

has also been associated with high unemployment, rising

social tensions, and growing political disillusion—all of

this happening in the wake of the Great Recession.’’ (La-

garde 2014) This is contrary to what she calls ‘‘inclusive

capitalism’’ the attributes of which are ‘‘trust, opportunity,

rewards for all within a market economy—allowing

everyone’s talents to flourish.’’ We could add that such

‘‘excess’’ (perhaps more accurately termed, ‘‘greed’’)

erodes both the common good and, connected with this,

public trust. Again, it is Mrs. Largarde who recognizes

such consequences: ‘‘In this age of diminished trust, it is

the financial sector that takes last place in opinion surveys.

This might not be surprising in light of some of the

behavior that triggered the global financial crisis. But it is

nevertheless disturbing. As many have pointed out, the

& Domènec Melé [email protected]

1 IESE Business School, University of Navarra, Av Pearson,

21, 08034 Barcelona, Spain

123

J Bus Ethics (2017) 140:609–613

DOI 10.1007/s10551-016-3328-y

very word credit derives from the Latin word for trust.’’

(Ibidem).

From a different perspective, Pope Francis, in quite

severe terms, has warned us about the rejection of ethics

and the necessity to recover it: ‘‘Ethics has come to be

viewed with a certain scornful derision. It is seen as

counterproductive, too human, because it makes money

and power relative. It is felt to be a threat, since it con-

demns the manipulation and debasement of the person (…) Ethics—a non-ideological ethics—would make it possible

to bring about balance and a more humane social order’’

(Pope Francis 2013, #57). He advocated a financial reform

in which ethics is central and proposed the motto: ‘‘Money

must serve, not rule!’’ (Ibidem #58). We do not know if

Mrs. Largarde read these comments, but in her above-

mentioned speech, she affirms something similar:

‘‘Thankfully, the crisis has prompted a major course cor-

rection—with the understanding that the true role of the

financial sector is to serve, not to rule, the economy. Its real

job is to benefit people, especially by financing investment

and thus helping with the creation of jobs and growth.’’

(Lagarde 2014).

Behind the previous statements are a great number of

well-known scandals which, since the beginning of this

century, have prompted the business and academic com-

munities to reflect on the role of ethics in the business

world. As the financial industry experiences major trans-

formations, there is wide debate about the role of finance in

society and how it can and should contribute to the com-

mon good. Similarly, certain auditing and reporting activ-

ities have been questioned in a number of notorious cases.

The debate has been particularly nourished by the global

financial crisis and its aftermath. Voices from different

arenas are questioning certain widespread practices of

financial and non-financial companies and their manage-

ment. Managers, businesspeople, politicians and, of course,

academics and researchers should learn from the causes of

this crisis and the scandals and deliberate on the proper role

and ethical content of finance and accounting.

Aligned with this concern, there emerges the necessity

to reflect on the analysis of the causes and consequences of

ethical and unethical behavior in the financial sector and in

accounting practices. Even more importantly, academics

should seek and evaluate new proposals for a solid inte-

gration of ethics in finance and accounting. These problems

were discussed in the 18th IESE Symposium on Ethics,

Business and Society, held in Barcelona, Spain, on June

30–July 31, 2014. This special issue contains a selection of

articles presented there. This editorial introduction gives an

overview of these articles and proposes some short

reflections on the integration of ethics in finance and

accounting.

Control Measurement and Ethical Behavior

The theory of the firm based on the classical standard

economic model proposes value maximization as an

objective because, under some assumptions, this decision

rule results in a socially efficient outcome. However, in

practice, the basic assumptions often do not hold. Apart

from other considerations, under the premise that ‘‘maxi-

mizing value goes first’’ one could manipulate accounting

if necessary. This often leads to poor decisions and to

unethical behavior. We suggest that to prevent this from

happening, firms must have a strong sense of both internal

and external mission, attempting to satisfy the respective

real needs of employees and customers while not harming

other stakeholders, making decisions in accordance with

these two missions and integrating ethics into any man-

agement decision.

In the context of management control systems, and more

specifically in performance evaluation the establishment of

incentive systems typically ‘hangs’ from performance

measures. The root of many misbehaviors is that organi-

zational objectives cannot be entirely quantified; and while

it is true that a ‘bad’ measure is better than nothing (if

properly used), a bad measure poorly used may be much

worse than nothing. If people are pushed only in the

direction of quantifiable goals though ‘strong’ incentive

systems that reward the quantitative results, it is very likely

that they will not pursue the ‘real’ objectives of the firm,

but seek to maximize the thing measured instead, which

may well be, at the same time, both unprofessional and

unethical.

The recent scandal Toshiba is illustrative. Toshiba is

one of the ten biggest firms in Japan in terms of revenues,

and one which is widely respected. In 2014 Toshiba

overstated its profits by more than 1.2 billion dollars, or

about one-third of the total figure reported, in order to

meet the (otherwise unrealistic) targets that top manage-

ment had established for the company and its subunits.

According to the New York Times (Soble 2015), there

were problems in ‘‘virtually all corners of its business,

which encompasses products stretching from refrigerators

to nuclear power plants.’’ Therefore, it is easy to conclude

that the practice did not have to do with one manager

occasionally misbehaving, but with the whole reporting

and reward system. The same newspaper also reports that

Hisao Tanaka, the serving chief executive, who has sub-

sequently resigned, acknowledged that the company had

engaged in ‘‘inappropriate accounting,’’ but said this had

not been done intentionally, and denied that he had told

subordinates to exaggerate the profitability of their divi-

sions. How then, did it come to occur in ‘‘all corners of its

business’’? The answer is quite simple: it was through the

610 D. Melé et al.

123

pressure put on the executives by the measurement and

reward system. Taking such measures triggered by the

control system, they fostered unethical practices (lying to

obtain an economic advantage) and damaged the whole

company.

Related with control systems is the article co-authored

by Cugueró-Escofet and Rosanas (2016), which focuses on

the dysfunctional effects of certain current systems of

measurement and incentives and the possible ways to

overcome these effects and to achieve a stable state of

congruence between corporate and individual goals. They

develop a model of control systems based on justice.

Misbehaviors in Accounting and Finance

Causes of misbehaviors in finance and accounting can be

diverse. The ‘‘fraud triangle’’ theory (Albrecht 1991) is often

used to predict the likelihood of fraud within an organization

by considering the presence of opportunity, incentive/pres-

sure, and attitude/rationalization. The latter can include lack

of awareness, intuition coupled with rationalization, and

reasoning (Murphy and Dacin 2011). The model has been

questioned, however, since fraud is a multifaceted phe-

nomenon and its contextual factors may not fit into a par-

ticular framework (Lokanan 2015). Soltani (2014), by

analyzing six well-known corporate frauds—three Ameri-

can (Enron, WorldCom and HealthSouth) and three Euro-

pean (Parmalat, Royal Ahold and Vivendi Universal)—

identified possible causes as ineffective boards, inefficient

corporate governance and control mechanisms, distorted

incentive schemes, accounting irregularities, failure of

auditors, dominant CEOs, dysfunctional management

behavior and the lack of a sound ethical tone at the top.

Three papers refer to particular aspects of accounting

and finance. Vladu et al. (2016) develop a model for

detecting earnings manipulators using financial statement

ratios from a sample of Spanish listed companies. They

suggest that their proposal can be extremely useful in

detecting manipulators and can be employed by a wide

range of users of accounting information including stock

exchange supervisors or investment professionals. Fassin

and Drover (2015) highlights the moral dimension inherent

in the entry and exit of venture partners and the importance

of considering moral judgement, as well as intentions in

decision-making. Using twelve vignettes, they look at the

asymmetries between entrepreneurs and investors and

discusses a set of ethical problems that arise among key

actors concerning the dynamics of venture partner entry

and exit, applying a multiple-lens ethical perspective to

analyze these issues. On their part, Cowton and San-José

(2016) identify and explore the ethics of trade credit.

Making a distinction between ‘‘operating’’ trade credit and

‘‘financial’’ trade credit, they provide an account of the

maximum period for which it is appropriate for one com-

pany to delay payment to another from which it has pur-

chased goods or services.

Professionalism in Accounting and Finance

Many unethical decisions and finance scandals have occurred

in a context of pressure to obtain short-run results. However,

such decisions could have been avoided with good manage-

ment—in the wide sense of being ‘‘good,’’ which involves

professional competence, a strong sense of mission and

behavior consistent with this by establishing the right priorities.

Accounting and finances need ethical rules, but are rules

enough? Rules allow us to answer the question of whether

or not a specific practice is acceptable in order to earn

money. Rules will say that misrepresentation of the finan-

cial situation is not acceptable, nor is the taking of impru-

dent financial risk nor not acting in good faith in banking

operations, to mention a few examples. There are excellent

treatises in this line, which can be applauded, but some

might question whether it is sufficient to adopt a set of rules

added as constraints to economic activities.

Two papers deal with the importance of professional-

ism in accounting and finance. One of these, authored by

Lail et al. (2015), reviews the causes of the recent

accounting and financial reporting frauds and shows that

regulatory reforms are insufficient. They argue that,

although restoring financial reporting systems should

begin with reforms, virtuous professionalism is necessary

to restore the public-servant identity of the accounting

professional. The second paper, by Alzola (2016), criti-

cally examines the normative foundations of gatekeeper

liability. He posits that gatekeeper liability may be

morally objectionable on grounds of both fairness and

consequentialism. After systematizing the framing and the

moral justification of gatekeeping duties, he questions the

normative support for targeting intermediaries instead of

primary wrongdoers. He concludes by anticipating some

negative (and often overlooked) results of gatekeeping

strategies in the accounting profession, specifically in the

realm of clientele selection, the expectation gap, and

auditor compensation.

Responsible Investment

Responsible investment has been encouraged by a great

variety of institutions and voices, including the United

Nations, which, since 2006, has backed principles for

responsible investment (PRI). Two papers focus on

responsible investment. Majoch et al. (2016), by using

Ethics in Finance and Accounting: Editorial Introduction 611

123

empirical research based on an annual survey of signatories

carried out by the PRI in a 5-year period, found that

pragmatic and organizational legitimacy, normative and

utilitarian power, and management values are the attributes

that contribute most to the salience of the PRI as a stake-

holder. The next paper begins with a reminder that

responsible investment provides an opportunity to express

and promote ethical values via choice of financial instru-

ments. In practice, however, the majority of retail investors

retain a conventional approach to investment. Facing this

situation, and based on behavioral economics and nudge

theory, Pilaj (2015) develops a conceptual framework to

improve the effectiveness of policy-making for sustainable

and responsible investment.

Corporate Reporting

A specific field related to accounting, and of course,

accountability is corporate reporting. The last two articles

of this special issue focus on ethics in corporate reporting.

S. Prakash Sethi et al. (2015) discuss the quality of Cor-

porate Social Responsibility reports by some of the world’s

largest financial institutions. Their evaluation using a novel

instrument to measure the quality of reports shows, among

other findings, that several factors have a positive influence

on the quality of these reports. They find, for instance,

more quality in countries based on common law and with

higher CSR standards, policies and regulations in place.

However firm size has no significant impact. Similarly,

integrity quality is higher in countries with a common law

regime. They conclude by offering guidelines for compa-

nies toward improving the quality of their reports, and

several suggestions for further research.

Maniora (2015) focuses on integrated reporting, under-

stood as ‘‘a process founded on integrated thinking that

results in a periodic integrated report by an organization

about value creation over time and related communications

regarding aspects of value creation.’’ Through a wide

empirical analysis, she examines the impact of such

reporting on the integration of environmental, social and

governance issues into the business model and the related

economic and performance changes. Her results suggest

that integrated reporting is a superior mechanism for the

integration of environmental, social and governance issues

only in some cases.

Conclusion and Future Research

Some papers presented in this special issue posit some

current problem regarding the integration of ethics in

finance and accounting and present some reflections, but

much more research is still necessary; in all fields men-

tioned here, and others. However, in our opinion, future

research should go to the very roots of the problem. In

particular, two crucial issues deserve attention. The first is

a deep understanding of the so-called ‘‘Separation Thesis’’

and the search for sound alternatives. In accordance with

this thesis, ‘‘the discourse of business and the discourse of

ethics can be separated so that sentences like ‘x is a busi-

ness decision’ have no moral content, and ‘is a moral

decision’ have no business content.’’ (Freeman 1994,

p. 412) A consequence of applying this thesis is seeing

control systems as a business matter exclusively focused on

measuring efficiency—remember Toshiba, mentioned

above—and accounting and finance are a mere technique.

The Separation Thesis, criticized by many, including the

solid arguments of Putnam (2002), is contrary to the

common sense of ordinary people. Who would say, for

instance, that the mortgage securitization of Leman

Brothers was a mere technique with no ethical content? Or

that Bernard Madoff’s behavior was a simple Ponzi

scheme? The Ponzi scheme is the technique used but

Madoff’s behavior was not by any means a bare application

of a technique.

The second issue is a broader view of ethics that comes

from accepting that it entails not only rules, or vales or

virtues, but rules, virtues and ethical values (human goods)

which are mutually interdependent (Macintyre 1992; Melé

2005, 2012, pp. 32–3).

It is not our aim here to develop these two big issues, but

we would like to suggest that a key for future research could

be to go back to the simple idea that business activities are

essentially human activities. And, if economic activities are

essentially human, they belong to the field of philosophical

anthropology and have an intrinsic ethical dimension (Melé

and González Canton 2014). This is completely general for

business, but in the context of this special issue, we can say

that a full integration of ethics in finance and accounting

requires seeing finance and accounting not simply as eco-

nomic tools, or only as mere techniques, but as human

activities and therefore intentional.

Being intentional activities, they can be applied to serve

the cause of good or, on the contrary, for egoistic interests

and to damage others, as happens in what is euphemisti-

cally termed ‘‘earnings management,’’ when actually there

is accounting earnings manipulation or earnings fraud.

References

Albrecht, W. S. (1991). Fraud in government entities: The perpetra-

tors and the types of fraud. Government Finance Review, 7(6),

27–30.

612 D. Melé et al.

123

Alzola, M. A. (2016). Beware of the watchdog: Rethinking the

normative justification of gatekeeper liability. Journal of

Business Ethics. doi:10.1007/s10551-017-3460-3.

Cowton, C. J., & San-Jose, L. (2016). On the ethics of trade credit:

Understanding good payment practice in the supply chain.

Journal of Business Ethics. doi:10.1007/s10551-016-3050-9.

Cugueró-Escofet, N., & Rosanas, J. M. (2016). The ethics of metrics:

Overcoming the dysfunctional effects of performance measure-

ments through justice. Journal of Business Ethics. doi:10.1007/

s10551-016-3049-2.

Fassin, Y., & Drover, W. (2015). Ethics in entrepreneurial finance:

Exploring problems in venture partner entry and exit. Journal of

Business Ethics. doi:10.1007/s10551-015-2873-0.

Freeman, R. E. (1994). The politics of stakeholder theory: Some

future directions. Business Ethics Quarterly, 4(4), 409–429.

Lagarde, C. (2014). Economic inclusion and financial integrity—An

address to the conference on inclusive capitalism. London, May

27. Retrieved September 9, 2015, from https://www.imf.org/

external/np/speeches/2014/052714.htm

Lail, B., MacGregor, J., Marcum, J., & Stuebs, M. (2015). Virtuous

professionalism in accountants to avoid fraud and to restore

financial reporting. Journal of Business Ethics. doi:10.1007/

s10551-015-2875-y.

Lokanan, M. E. (2015). Challenges to the fraud triangle: Questions on

its usefulness. Accounting Forum, 39(3), 201–224.

Macintyre, A. (1992). ‘‘Plain persons and moral philosophy: Rules,

virtues and goods’’ American catholic philosophical quarterly

(vol. 66 pp. 3–19) (Reprinted from The MacIntyre reader,

pp. 136–152, by K. Knight, Ed., 1998, Cambridge: Polity Press.

Majoch, A. A. A., Hoepner, A. G. F., & Hebb, T. (2016). Sources of

stakeholder salience in the responsible investment movement:

Why do investors sign the principles for responsible investment?

Journal of Business Ethics. doi:10.1007/s10551-016-3057-2.

Maniora, J. (2015). Is integrated reporting really the superior

mechanism for the integration of ethics into the core business

model? An Empirical Analysis. Journal of Business Ethics.

doi:10.1007/s10551-015-2874-z.

Melé, D. (2005). Ethical education in accounting: Integrating rules,

values and virtues. Journal of Business Ethics 57(1), 97–109.

Melé, D. (2012). Management ethics: Placing ethics at the core of

good management. Basingstoke: Palgrave MacMillan.

Melé, D., & González Canton, C. (2014). Human foundations of

management. Understanding the homo humanus. Basingstoke:

Palgrave-MacMillan.

Murphy, P., & Dacin, M. (2011). Psychological pathways to fraud:

Understanding and preventing fraud in organizations. Journal of

Business Ethics 101(4), 601–618.

Observatoire de la Finance .(2008). Manifesto of Observatoire de la

Finance. For finance that serves the common good. Retrieved

September 9, 2015, from http://www.obsfin.ch/wp-content/

uploads/Document/2011-ENG-Manifeste%20de%20l’Observa

toire.pdf, In other languages, http://www.obsfin.ch/founding-

texts/manifesto-for-finance-that-serves-the-common-good/

Pilaj, H. (2015). The choice architecture of sustainable and respon-

sible investment: Nudging investors toward ethical decision-

making. Journal of Business Ethics. doi:10.1007/s10551-015-

2877-9.

Pope Francis. (2013). Evangelii Gaudium (The Joy of the Gospel).

Retrieved September 9, 2015, from http://w2.vatican.va/content/

francesco/en/apost_exhortations/documents/papa-francesco_esor

tazione-ap_20131124_evangelii-gaudium.html

Putnam, H. (2002). The collapse of the fact/value dichotomy and

other essays. Cambridge, MA: Harvard University Press.

Sethi, S. P., Martell, T. F., & Demir, M. (2015). An evaluation of the

quality of corporate social responsibility reports by some of the

world’s largest financial institutions. Journal of Business Ethics.

doi:10.1007/s10551-015-2878-8.

Soble, J. (2015). ‘‘Scandal upends Toshiba’s lauded reputation.’’ New

York Times, July 22. Retreived from September 9, 2015, from

www.nytimes.com/2015/07/22/business/international/toshiba-chief-

and-7-others-resign-in-accounting-scandal.html?ref=topics&_r=0)

Soltani, B. (2014). The anatomy of corporate fraud: A comparative

analysis of high profile American and European corporate

scandals. Journal of Business Ethics 120(2), 251–274.

Vladu, A. B., Amat, O., & Cuzdriorean, D. D. (2016). Truthfulness in

accounting: How to discriminate accounting manipulators from

non-manipulators. Journal of Business Ethics. doi:10.1007/

s10551-016-3048-3.

Ethics in Finance and Accounting: Editorial Introduction 613

123

Journal of Business Ethics is a copyright of Springer, 2017. All Rights Reserved.