Ethical Behavior in Accounting:

What is Ethics?
Lecture #1

Chapters covered:
Brooks 5; Duska & Duska 2 and 3;
and Mintz & Morris 1 and 2.
Have the courage to say no. Have the
courage to face the truth. Do the right thing
because it is right. These are the magic keys
to living your life with integrity.
W. Clement Stone (1902-2002)
 Events Regarding Ethics
Rite Aid Corporation
CFO resigns
Adjust three years of Earnings by $500 million
KPMG quits as Auditor
W.R. Grace
Tucked earnings away for use at a later date
Used earnings to get closer to earnings target
Auditor let slide because of immateriality
 Events Regarding Ethics
PricewaterhouseCoopers
8,064 violations at firm
Stockownership in clients
Enron
Largest bankruptcy petition in U.S. history
Restating earnings, cutting $600 million in profits
Arthur Anderson internal and external auditing
$25 mil. in audit fees, $27 mil. in consulting, etc.
 What is Ethics?
Accepted standards of behavior
Practices of those in a profession
Laws
Expectations of society
Society expects us to do more
 Definition of Ethics
1. the discipline dealing with what is good and bad, with
moral duty and obligation
2. a: a set of moral principles; a theory or system of moral
values b: the principles of conduct governing an
individual or a group <professional> c: a guiding
philosophy d: a consciousness of moral importance
3. a set of moral issues or aspects (as rightness)
Merriam-Webster Dictionary
 Why Study Ethics?
Why should an accountant get involved in this
study?

Doesnt every accountant already have a set of

moral beliefs that he or she already follows?
 Reasons To Study Ethics
Simple beliefs may be inadequate for complex issue
The study can help a person sort out these complex
issue, by seeing what principles operate in those
cases.
Conflicting ethical principles
Ethics can provide insights into how to adjudicate
between conflicting principles and show why certain
courses of action are more desirable than others
 Reasons To Study Ethics
Inadequate beliefs to inadequate values
one time you thought some things were wrong
but now you think they are acceptable, or vice
versa.
Caveat emptor let the buyer beware.
Caveat vendor - let the seller beware.
Understand whether and why our opinions
are worth holding on to
Socrates showed that the unexamined life is not
worth living.
 Reasons To Study Ethics
Identify and apply basic ethical principle
Helps to develop the skill of determining what should
be done and an understanding of why it should be
done.
It is often helpful to have a checklist of basic questions
or considerations that need to be raised and applied to
the situation.
The study of ethics can make us aware of the number
and types of principles that can be used in determining
what should be done.
 Questions for class:

Is being ethical the same as being

legal?
Is it possible to act within the law,
but not act ethically?
 Ethics and Morality
Ethics derived from Greek meaning custom or
character
Morals derived from Latin meaning customs,
manners, character
Essentially ethics and morals are the same
 Ethics
Every person has an ethical set of beliefs or
ethical principles.
Ethical beliefs contain two elements:
Subject
Predicate
Example: Cooking the books is wrong
Subject: Cooking the books
Predicate: Wrong
 What is Right?
Ethics involves the analysis and evaluation of
moral beliefs or judgments.
Analysis: What is the belief asserting?
Evaluation: Are there any good reasons for
why the action is ethical?
Reason: Precepts from common morality
that we learned growing up.
 Action
Human actions are the primary subject matter of
our ethical judgments.
Deliberate action about which a person
deliberates and freely chooses to perform.
Note that not all deliberate actions have ethical
impact.
Discussion will focus on deliberate actions which
benefit or harm other people or ourselves
positively or negatively in some way.
Social Practices, Institutions,
and Systems
Human actions are not the only subject matter
for ethics.
Ethics examines and evaluates social practices.
Actions are individual activities;

A social practice is a class of individual action.

Ethics also evaluates organizations, institutions,

or systems.
Social Practices, Institutions,
and Systems
Examples of Institutions: AICPA, a company
such as one of the Big Four accounting firms,
free enterprise economic system.
Capitalism is a corrupt system is an ethical
evaluation of a system.
In short, ethics examines and evaluates actions
and practices or systems, at both the institutional
and individual levels.
 Questions to Ask to Justify any
Action: 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 anyones rights?
Have I made a commitment, implied or explicit?
 Is the Action Good for me?
If an action is beneficial to oneself, then it is a good
reason to do it.
Meaningful work
What is good?
That which fulfills basic human needs is good
Material needs
Social needs

Need for meaningful activity

 Is the Action Good or Harmful
for Society?

If we are thinking ethically, we also think about

everyone that might be affected, and not just
ourselves.
Johnson and Johnson example
 Is the Action Just or Fair?
Principle of Justice
The same (equals) should be treated the same
(equally)
Does the Action Violate Anyones
Rights?
Rights
Entitled to be treated a certain way
Negative
Rights to things no one has to provide for us, things we
already have
Positive
Right to have something provided
If an action treats people fairly and does not violate
any of their rights, there is no reason not to perform
this action.
 Have I Made a Commitment,
Implied or Explicit?
If promises were made, they ought to be kept
A good reason for an action is that you have
promised/committed yourself
Any lasting relationships rests on implied promises
and expectations of guaranteed behavior
Ethical Question: Should assault weapons be legal
and does individual ownership of an assault weapon
ensure your safety?
 Using the Reasons
Are there GOOD reasons for doing so?
Are there good reasons for NOT doing so?
All actions affect:
Society
Organizations
Self
 Using the Reasons
Example:
Education
Benefits Self and Society

Possible Problematic Areas

At times we need to defer pleasure or suffer

pain for some long-run benefit, but there are
times we need to pursue pleasure in life.
Cocaine
Cocaine ABUSE is detrimental to people involved

No benefit to Society
 Ethical Dilemmas
Ethical Theories general principles which are
claimed to be the basic foundation for all ethical
rules or judgments
Ethical Theory would not be necessary if all cases
were clear-cut
Course
Costs
Benefits
Fairness (family)
 Ethical Dilemmas
Ethical dilemma reasons for doing something
and reasons for not doing it
Fairness over harm
Benefits over fairness
Accounting
Harm public
Loyalty to firm
Drug testing
Prevent harm
Privacy rights
 Ethical Values
Basic and fundamental beliefs that guide or motivate
our attitudes or actions
Does acting in ones own best interests preclude
acting in the best interests of others?
 Moral Philosophy
Principles or rules that people use to decide what is
right or wrong
Moral perspectives in the form of abstract principles
that guide decision making
 Moral Philosophy
Philosophies help deal with moral dilemmas that
have no right or wrong answers
No single philosophy is accepted by everyone
Friedman: one and only one social responsibility of
business
Smith: Invisible hand of the marketplace
 Moral Philosophy
Universal virtues (The Golden Rule)
Self interest (Egoism)
Ends or outcomes greatest good for greatest
number (Teleology)
Concerned with duty or means of achieving goal
rather than consequences (Deontology)
Leading a virtuous life (Aristotle, Virtue Ethics)
 Ethical Decision-Making
Framework (EDM)
Purpose
Designed to enhance ethical reasoning
How
Identification and analysis of key issues
Approaches to combining & applying in a practical
setting
Frame the ethical decision
 EDM Framework
What does it assess?
Consequences for net benefit or cost
Rights and duties affected
Fairness
Motivation or virtues expected
 Ethical Theory
Dilemmas help illuminate the nature of ethical
theories

Ethical theory provides the overriding justifying

reason for pursuing any course of action

When there are dramatic dilemmas and conflicts:

What Theory takes precedence?
 Philosophical Foundations
The Golden Rule
Egoism
Teleology
Utilitarianism
Consequentialism
Deontology
Rights Principles
Kants Categorical Imperative
Virtue Ethics
Six Pillars of Character
 The Golden Rule
Do unto others as you would them do unto you
Universality in World Religions

Buddhism Islam
Christianity Judaism
Confucianism Taoism
Hinduism Zoroastrianism
 Egoism
Consequences for individual
Do 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
Egoism
Always acting in ones
own interest.
Does this action or
behavior benefit me and
my goals?
Promotes selfishness.
Is considered wrong in
many societies.
 Egoism
Selfishness vs. self interest.
Pursuing goals and dreams in the name of self interest is
considered good.
Pursuing these items at the expense of others is considered
bad.
Formal objections
Egoism is incompatible with many human activities.
Advice-giving: how can an egoist give advice to another

person?
Building friendships: how can an egoist be considered a

friend?
Being an agent for another (dispute resolution)
 Egoism
Formal objections continued:
Egoism cannot be formulated in such a way thats not
considered either illogical or absurd.
Reformulate Everyone ought to act in their own interests.
(replace their with my)
Egoism is based on a distorted view of the universe.
The world revolves around me.

Passage from Catcher In The Rye

Are we all looking out for our own interest all the time, in one way

or another?
 Egoism
Psychological egoism
A belief that everyone acts in their own self-interest.
Describes how one does behave as opposed to ethical egoism

which describes how one ought to behave.

Adam Smith quote: It is not from the benevolence of the butcher,

the brewer, or the baker, that we expect our dinner, but from their
regard to their own self-interest.
Economists, philosophers, and social scientists assume that
everyone is self- interested.
Homo economicus economic man.
Economics is the only academic field of study that promotes self-
interest.
Business in general is based on the concept of selfishness.
To be ethical would be bad business.
Adam Smiths Invisible Hand Doctrine
Guiding society by assuring that self-interest will lead to societal
benefits.
 Teleology
Greek for end or purpose
An act is considered morally right or acceptable if it
produces some desired result.
Assess moral worth of behavior by looking at
consequences
Philosophies
Utilitarianism
Consequentialism
 Utilitarianism
Jeremy Bentham and James Mill main
philosophers
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
 Utilitarianism
The ethical doctrine that states: actions should be
performed with the greatest happiness of the
greatest number of people in mind (according to
Mills, as described in Duska and Duska).
 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
Bases behavior on rules designed to promote the
greatest utility
Maximizes intrinsic value
Action is selected because it is required by the correct
moral rules that everyone should follow. (Tell the truth)
 Procedure
Look at the action
Compute the benefits and harm of the
consequences for everyone affected
If the action results in more happiness than
unhappiness for people, then it is justified.
Utilitarianism can be thought of as a theory that uses
the cost benefit approach.
This theory is structured around whether the cost out-
weighs the benefits or the benefits out weigh the cost.
 Weaknesses
Justifying bad actions, rationalizing that the end
justifies the means.
Distribution Problem
Deciding what counts as good
Problem of illicit means (Main Criticism)
What is your cost to your reputation as a CPA?
 Justification
Committing bad acts and justifying them by saying the
consequences will be good.
 Distribution
Greatest good for greatest number of people
Having a product to give out , that everyone does not
necessarily want.
 Good or Bad?
Mill and Bentham were Hedonists
They believed that the good was tied into happiness
and happiness with pleasure.
Philosophers usually see the good as objects of
desire or objects we aim for:
Intrinsic something desired or desirable for one own
sake is good.
Extrinsic/instrumental something that will lead to or
be instrumental in obtaining something else we want is
good.
 Illicit Means
The main criticism of Utilitarianism is the problem of
illicit means.

Accused of letting the ends justify the means even if

the means are immoral.
Saving a large group of people by allowing a smaller
number of people to be killed.
 Utilitarianism vs. Egoism
Similarity: they both justify whether an action is
ethical by whether or not it will result in good
consequences.

Difference: Utilitarianism focuses on getting the best

for the most people and Egoism focuses on the best
for oneself.
 Consequentialism
Also grouped with utilitarianism and teleology
Greatest good for the greatest number
 Issues with the Theory
Which consequences should be counted
How should they be counted
Who deserves to be included as affected
stakeholders
 Deontology
Derived from Greek 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
 Deontology
Focuses on duties or obligations MOTIVATING a
decision or action
Your action should become a Universal Law
 Deontologists
Deontologists, such as 18th century philosopher
Immanuel Kant, analyzed ethical concerns on the
basis of duties and obligations, not consequences.
 Rights Principles
Hobbes and Locke
Kants Categorical Imperative
Motivated by sense of obligation
Universality of moral actions
People should never be a means only
Difficulties
Moral Absolutes
No clear way to resolve conflicts between moral duties
 Deontology
Kants point of view about utilitarianism is a little
different from Bentham and Mills theory.

The difference is that utilitarianism does not include

moral motive (duty)

Kants theory about a person acting with inclination

or desire: he/she is not acting morally.
 Humans
Humans have the ability to act on a moral level

Have the ability to achieve their goals

Have the freedom to achieve those goals

Have the ability to act against their inclination

 Animals
Animals live their lives by instincts as well as by
inclination.
Instincts
Animals instincts are developed by nature
They follow their instincts to pursue goals

Inclination
Animals must follow their instincts to achieve their
inclination
They are naturally born with the necessary skills and
abilities to survive
They have no choices and are not free
 Moral Point of View
Emphasizes practical reason and rational choice
Deliberation precede choice of action
Reason
Thought
Voluntary
Ends do not justify the means
 Hypothetical imperatives
Qualified oughts

What is good

What is bad

Prudent versus Inprudent

 Categorical Imperatives
Unqualified oughts to fulfill our inclination:
There are no ifs
No buts
No maybes

Do it because its your duty

 Kants Categorical
Imperatives

The Formulas of the

Categorical Imperative
 The First Formula of the
Categorical Imperative

Act so that you can will the maxim of your action to

become a universal law.
 Universalizing our rule
Scenario: you borrowed money from your friend.
When it is time to repay the debt:
You dont want to borrow from the bank and your
friend wont press you about it.

Your maxim: Dont repay debts if its inconvenient to

do so.
 Universalizing our Rule
What happens if everyone broke promises because
it is inconvenient?
Can lead to chaos
Creates mistrust

Kant realizes that whether consequences were

unfavorable or not is NOT the determining factor.
 Contradiction
The categorical imperative stresses that you
must will the maxim to be a universal law.
You cannot will promises not to be kept.
It is will contradiction.
Will contradiction is to have your cake and eat it
too.
When we universalize, we get out of our
egocentric view.
We see that we are the same as others.
Basis of the rule of justice
Equals should be treated equally.
 The second formula of the
categorical imperative
Humans are not like animals because human
beings can transcend these limitations.
Determine our moral life
Autonomous, self regulating

Make values and ends

Consequently, humans are special.

Act so as never to treat another rational being merely as a
means
 The second formula (continued)
Everyone is morally equal and ought to be treated with
respect and dignity and no one ought to be used
merely as a means or instrument to bring about
consequences that benefit the user.
It is not justifiable to use someone or exploit someone
to make society better.
Examples:
Employers should not exploit employees.

False advertising: deceiving customers

Ethical reasoning for justice, fairness, dignity, and

rights are deontological in inspiration.
 Criticisms of Kants and
Deontology:
Belief that one ought to be moral because virtue will
be rewarded but it reduces deontology to an egoistic
or at least utilitarian reason.

If there is conflicts of rights, then eventually

deontologists will have to give priority to
considerations of consequences.

What exactly does it mean to say merely as a

means? Kants notion of use is unspecified.
 Virtue Ethics
Addresses the question not of what one should do
so much as the question of what one should be or
become.
Aristotle: one should be in activity in accord with
virtue. Habit forming
A person should live up to their their potential
Potential is determined by goals, purpose or
determined end
 Virtue Ethics
Agent centered
Focuses on character or integrity of the moral actor
and looks to moral communities
 Virtue Principles
Greek philosophers, Plato and Aristotle
Less emphasis on learning rules, more on principles
Stress importance of developing good habits of
character
Cardinal virtues
Wisdom
Courage
Temperance
Justice
 Virtue Principles
Other Important Virtues
Fortitude
Generosity
Self-respect
Good temper
Sincerity
Avoid Vices too!
 Bad Character Traits
Always known as Vices
Cowardice
Insensibility
Injustice
Vanity

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
 Accountants Virtue Ethics
Have the goal to respond truthfully as possible

But which of these virtues accountants are called

upon to develop or utilize becomes an important
question

Loyalty is a virtue, but can we as a accountants be

obligated to our clients to be loyal when doing a job
for them
Ethical Theoretical Considerations
That Accountants Should Use
An accountant should benefit others and avoid
harming others
An accountant should live up to his or hers
responsibilities because they have committed to
them
An accountant should not exploit others
An accountant should develop virtues like integrity
and honesty to assure a life practiced with virtue
 Six Pillars of Character
From Josephson Institute of Ethics
Six Pillars of Character:
Trustworthiness
Respect
Responsibility
Fairness
Caring
Citizenship
 Trustworthiness
Honesty
Truth without deception
Acting with integrity
Courage of convictions
Being reliable
Follow through with promises and commitments
Exercising loyalty
Keep confidences
Never take precedence over honesty and integrity
 Integrity
Acts of an person with Integrity
Truthfulness
Courage
Sincerity
Honesty
Courage to stand by principles even in face of
pressure
Act out of moral principle, not expediency
Never let loyalty cloud good judgment and ethical
decision-making
 Personal Integrity
Essential characteristic for CPA
Learn to be ethical
By practice
Exercising virtues
Enable to lead life of excellence
Let it be habit forming
You are what you repeatedly do. Therefore your
excellence.
 Respect
Civility
Courtesy
Decency
Dignity
Autonomy
Tolerance
Acceptance
 Responsibility
Accountable for what we do and who we are
Reflect on alternative courses of action using ethical
principles
Act diligently
Due Care Test
Reasonable person would conclude one acted with
level of care expected in circumstance
 Fairness
Treats others
Equally
Impartially
Openly
Balance without influence
According to Josephson, Fairness implies adherence
to a balanced standard of justice without relevance to
ones own feelings or inclinations.
 Caring
Empathy the essence of caring
Ability to understand
Sensitive
Concern about the feelings of others
Caring and empathy support each other, enabling a
person to put themselves in anothers place
Essential to ethical decision making
 Citizenship
Civic virtues and duties
Prescribe how we ought to behave as part of a
community
To be a good citizen:
Obey the laws
Be informed of the issues
Volunteer in your community
Vote in elections
 Accounting Community
Citizenship
To be a good citizen in the CPA community,
principles to uphold:
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
AICPA Code of Professional Ethics guides CPAs
Virtue and Ethical Obligations
of CPAs
Aristotles Virtues Ethical Standards for
Trustworthiness, CPAs
benevolence, altruism Integrity
Honesty, integrity Truthfulness, non-
Impartiality, open- deception
mindedness Objectivity,
Reliability, dependability, independence
faithfulness Loyalty (confidentiality)
Trustworthiness Due care (competence
and prudence)
 Conclusions
We can look at these theories as the underlying
principles, we should use in any ethical decision
making process.
However, we wont since, as individuals, we rely on
instinct and our guts
In our profession we dont have that luxury -- we just
have to follow the code of ethics
Just do your Job.
 Ethical Reasoning Overview
Application of Ethics Theory
Rests Model of Morality
James E. Rest (1941-1999)
Kohlbergs Stages of Moral Development
Lawrence Kohlberg
Ethics of Care
Carol Gilligan
Ethical Relativism
Theory of Justice
John Rawls (1921-2002)
Rests Four Component
Model of Morality
Moral Sensitivity
Moral Judgment
Moral Motivation
Moral Character
 Moral Sensitivity
Ability to identify an ethical situation
Ability to focus on how alternative courses of action
might affect ourselves and others
Ethics is about how we act when no one is looking
 Moral Judgment
Determine which of the available actions are most
ethically justified
 Moral Motivation
Must have the desire to be a moral person in order
to make an ethical decision
Must overcome internal and external pressures that
might lessen the desire to act morally
 Moral Character
Construct an appropriate course of action
Avoid distractions
Maintain the courage to continue
 Kohlbergs Six Stages of
Moral Development

Lawrence Kohlberg, psychologist

Moral development
Specific sequence of six stages
Three levels of moral reasoning
Ethics may change with additional education and
experience

Read Brooks on Kohlberg, Unerstand it

Rick Rigsby on Character
I admit fault without hesitation
I assume responsibility for my actions
I speak 100% the truth 100% of the time
 Kohlbergs Stages of Moral
Development
Level 1 Pre-conventional
The individual is very self-centered. Rules are seen as
something external imposed on the self. Fear of
punishment, a child
Level 2 Conventional
The individual becomes aware of the interest of others
and ones duty to society
Level 3 Post-conventional
The individual looks to basic principles to guide decision
making i.e. integrity.
 Kohlbergs Level 1
Pre-conventional
Stage 1. Obedience to rules; avoidance of punishment
What is right is judged by ones obedience to rules and
authority
Stage 2. Satisfying ones own needs
Rules are important only if acting in accordance with them
satisfies ones own needs
 Kohlbergs Level 2
Conventional
Stage 3. Fairness to others
Motivated by rules but also wants to do what is in the best
interests of others
Stage 4. Law and order
Duty to society, respect for authority, and maintaining the
social order become the focus of decision making
 Kohlbergs Level 3
Post-conventional
Stage 5. Social Contract
Motivated by upholding basic rights and values - recognizes

that in some cases legal and moral points of view may conflict
Decisions are based on a rational calculation of benefits and
harms to society, develop concern for society
Stage 6. Universal ethical principles
Believes that right and wrong is determined by universal ethical

principles that everyone should follow

If law conflicts with ethical principle, and individual should act in

accordance with the principle

My Goal for Your Ethical
Behavior
Unconscious Incompetent
Conscious Incompetent
Conscious Competent
Unconscious - Competent
 Where do CPAs reason?
Studies in 1990s, CPAs reasoned primarily at stages
3 and 4
Implies that a larger percentage of CPAs may have
been overly influenced by
Peers, superiors, and clients (stage 3) or
By rules (stage 4)
Today: thanks to SOX, accountants are now
operating in Stages 4 and 5
 Ethics of Care
Carol Gilligan
Feminine approach versus a masculine ethic of justice
Females look for ways to resolve dilemmas so no one is
hurt
Three stages:
1) pre-conventional selfish;
2) conventional value interest of others and not self;

3) post-conventional balance interest of others and self

 Ethical Relativism
Morality is relative to the norms of ones culture
No universal moral standards
Rejected by moral ethicists
While moral practices of societies may differ
Underlying Moral principles do not differ
 Ethical Relativism
Example: The young American in Singapore painted
graffiti on several cars
Differ on application
Agree on principles
Rawls -The Theory of Justice
Based on rights, fairness, and equality
Stepping behind the veil of ignorance would
allow us to examine issues from our Original
Position
We would not know our race, gender, age, education
level, or social connections
Would prevent us from arguing for principles of justice
for personal benefit
The Theory of Justice
Two principles of Rawls original position:
1. Each person would be permitted the maximum amount
of basic liberty compatible with similar liberties of
others.
2. Social and economic inequalities are allowed only if
benefit all.
Note: Rawls does not argue that all persons should
benefit equally but that, if inequalities exist, that the
least advantaged person must end up better off than
before
 The Theory of Justice
Questions of Distributive Justice arise when conflicts of
interest exist over the fair distribution of goods and services
Aristotle and impartiality impartiality means that
Equals are treated equally
Un-equals are treated unequally
Example: a manager with an unfair/unequal distribution
of resources expected to compete with one who has a
greater distribution of resources
The problem with this interpretation is in determining which
criteria are morally relevant to distinguish between those
who are equal and those who are unequal.
Do you want to succeed? Follow Mark Twain
I have never allowed my schooling to get in the way of
my education
Find a wise mentor (I would that is ethical as well, loaded
with integrity)
The mentor must have endured some setbacks, failures,
and disappointments, for wisdom is rarely acquired
without a storm.
Remain with this person for as long as you can
Learn, grow and proser!
Questions?