Accounting professionals have faced increased pressure from regulators and the public in the wake of corporate scandals over the last few years. The sight of chief executive and financial officers parading into courtrooms has raised public awareness and concern about ethical behavior in management and accounting. With the creation of the Sarbanes-Oxley Act of 2002 and Statement on Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit, ignoring ethics in accounting education is no longer an option.
Currently, the accounting profession relies on codes of conduct to express its obligations to the public, employers, clients and colleagues. The AICPA Code of Professional Conduct identifies principles that express the basic tenets of ethical and professional conduct. These principles should guide CPAs in the performance of their professional responsibilities and should include, for example, the public interest, integrity, objectivity, independence and due care.
CPA requirements are currently being reviewed and revised. The National Association of State Boards of Accountancy has proposed revisions of Rules 5-1 and 5-2 of the Uniform Accountancy Act that would require a three-semester credit hour course, “Ethics and Professional Responsibilities of CPAs.”
Need for Ethics Courses
Despite widespread agreement that ethics should be an integral part of accounting education, implementation has been slow. Several surveys have found little integration of ethics into the accounting curriculum. A recent survey by the American Accounting Association found that only 46% of schools offered a separate course in ethics. The majority of those courses did not provide adequate coverage of ethics, values and appropriate professional conduct; see Mastracchio, “Teaching CPAs About Serving the Public Interest,” CPA Journal (January 2005), available at www.nysscpa.org/cpajournal/2005/105/perspectives/p6.htm.
On the bright side, many studies have concluded that ethics education has a positive effect on students. A survey of college sophomores found no significant differences between accounting and other business majors in their willingness to “manipulate earnings”; see Clikeman and Henning, “The Socialization of Undergraduate Accounting Students,” 15 Issues in Acct’g Ed. 1 (February 2000). A resurvey of these same students as seniors indicated that accounting majors were less willing to manipulate earnings than were other business majors, suggesting that accounting education promotes fundamental ethical awareness of professional responsibility. Despite evidence that ethics education can be effective, many accounting programs continue to avoid teaching it. Considering the current climate, educators can no longer continue this inertia; see Haas, “Now Is the Time for Ethics in Education,” CPA Journal (June 2005), available at www.nysscpa.org/cpajournal/2005/605/essentials/p66.htm.
Ordinary vs. Ethical Decisions
In reaching a decision in a situation one has never faced before, there comes a point at which traditional rules may no longer apply. One may be forced to make a decision based on personal values and beliefs.
Ethics education is more than studying a code of professional conduct. It is also a process in which individuals become more consciously involved in making ethical decisions; see Langenderfer and Rockness, “Integrating Ethics into the Accounting Curriculum: Issues, Problems, and Solutions,” 4 Issues in Acct’g Ed. 58 (Spring 1989). One of the main goals of ethics education should be to encourage students to recognize social responsibilities within their profession; see Lehman, “Accounting Ethics: Surviving Survival of the Fittest,” in Advances in Public Interest Acct’g (Jai Press, 1988), vol. 2, pp. 71–82. The development of abilities needed to deal with ethical conflicts and uncertainties as key objectives in educating accountants is examined by Loeb, “Teaching Students Accounting Ethics: Some Crucial Issues,” 3 Issues in Acct’g Ed. 316 (Fall 1988).
Is it even possible to teach ethics? Are not adult values already set in youth? Aristotle observed that a good adult is formed by habituating a good child to do the right thing. In time, praise for truth-telling and sanctions for dishonesty will make a person “naturally” honest. Others believe, however, that moral behavior is a product of training, not just reflection. Adult values can and do change via educational intervention.
Thus, a goal of ethics education is to provide an opportunity for students to recognize and resolve ethical issues, by applying their current values and convictions in thinking through the effect of a decision and its effect on their personal integrity, professional future and firm, and society.
Ethics in accounting courses: The challenge to the accounting professor is to integrate the teaching of ethics and professionalism in accounting across a broad spectrum of courses, so that students develop abilities related to moral reasoning and ethical decision making and safeguards for preventing unethical behavior. Professors need to learn how to meet students’ needs so that they, in turn, will later meet the accounting profession’s needs; see Karr, “Accounting School Gets an Ethics Makeover,” Financial Executive (June 2004), available at http://accounting.smartpros.com/x44086.xml. Thus, goals of ethics in an accounting course should be to:
- Expose students to their personal responsibilities and the need for integrity.
- Provide a philosophical framework for ethical analysis.
- Review the ethical obligations of accountants as detailed in the profession’s code of conduct.
- Discuss situations that present ethical conflicts and determine how to resolve them in a morally appropriate way.
The first step in this process is identifying ethical issues. This starts with a problem, situation or opportunity in which one must make a choice. This choice must involve conflicts between personal moral philosophy and values; there must be no easy answer.
An initial assignment could include McCoy, “The Parable of the Sadhu,” 75 Harvard Business Review 54 (May/June 1997), which recounts the life-and-death situation of the managing director of Morgan Stanley and a host of ethical issues about values, moral dilemmas, the pressures of organizational life and tensions between personal morality and the firm’s morality.
As detailed in that article, real ethical dilemmas are ambiguous; many overlook them. When someone makes an issue of them (usually after the fact), his or her peers tend to resent it.
Elemental Ethical Response Model
Resolving an ethical dilemma requires a systematic reflection of individual values (and the consequent behavior) based on a set of standards. An “ethical response model” can provide guidance in choosing an ethically defensible act. In its most elementary form, such a model would simply ask, “Is it legal?”
This model has great appeal considering the many rules and regulations for CPAs, including those set forth in the AICPA Code of Professional Conduct; AICPA’s Statements on Standards for Tax Services; Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers Before the Internal Revenue Service; generally accepted auditing standards; GAAP; regulations of the various state boards of accountancy; regulatory agencies such as the Securities and Exchange Commission, the IRS and the U.S. Department of Labor; and legal standards for due diligence and negligence. The assumption is, if it is legal, it is proper.
However, this has never been (nor can ever be) the true standard of ethical behavior. By their very nature, legal standards will (and must) be a consensus of minimal standards of impropriety; see Josephson, “The Need for Ethics Education in Accounting,” in Ethical Issues in the Practice of Acct’g (South-Western, 1992), pp. 1–20.
Working through an ethical dilemma (or seeking the common good) is a three-step process. A comprehensive and workable ethical response model includes (1) sensitivity to all stakeholders; (2) anticipation; and (3) a feasible action justified by universalism, utilitarianism and social norms; see Beem, “Ethics Response—An Important Ingredient of Good Management,” Business Insights 13 (Spring/Summer 1989).
Step one: Ethical issues arise whenever there is a potential for harm to parties affected by a decision. There is a need to identify and empathize with all the stakeholders (parties external to managers and their organization who are affected by managerial decisions) or the parties involved. Students need to imagine those who may be affected by the decision.
Step two: Students need to anticipate the effect of alternative decisions on the stakeholders and make the one that comes closest to the common good for all affected.
Step three: The final step is justification—applying one of the generally accepted ethical concepts, such as universalism, utilitarianism or social norms.
Universalism, Utilitarianism, Social Norms
In “The Categorical Imperative,” Ethics for Modern Life (St. Martin’s Press, 1987), Kant argued that ethical justification is a matter of principles, not consequences. Since the “common good” depends on mutual trust and goodwill, what duties do we owe to one another? Kant’s universalism is very similar to the Golden Rule: Do unto others as you would have them do unto you.
The utilitarian theory of ethics deals with conflicting duties and depends on consequences, not principles. Under this theory, considering each stakeholder, which action will yield the greatest balance of good outcomes over bad for society? It is the classic cost-benefit analysis. One problem with this theory is the uncertainty of the eventual outcome of a chosen action on “all” stakeholders. It could encourage wishful thinking—the belief that an action that is good for someone personally is good for everyone.
Another theory is that if the consequences are uncertain, ethical dilemmas should be decided based on justice and fairness, as a matter of law and custom; see Rawls, A Theory of Justice (Belknap Press of Harvard University Press, 1971). Most of our laws rest and endure on the basis of social norm approaches of “wrongdoing.” This test addresses actions that people in general would justify. However, the absence of laws is an unreliable indicator of social approval. Laws generally emerge only when violations of social norms are especially serious and (at least to a degree) correctible; see Beem.
In teaching ethics to accounting majors, instructors need to use the principles of the ethical response model as a discussion framework. With the identified ethical issue in focus, the task is to seek the common good for all stakeholders, not just for the firm or oneself. With the goal of achieving the common good, students should:
Identify ethical issues and potential dilemmas, being sensitive to all parties affected by the decision.
Create two or three feasible courses of action and anticipate how each would affect the various stakeholders’ interests.
Evaluate the choices using the ethical concepts of universalism, utilitarianism and social norms.
In the end, students must be able to justify their decisions. Working through this model will give them a way to recognize, resolve and explain ethical issues. More important, it provides an opportunity to assess the consequences of their behavior and to see how a decision can affect them, their firm and society.
Prof. Nellen is a former member of the AICPA Tax Division’s Tax Executive Committee and a current member of the Individual Income Tax Technical Resource Panel. For more information about this column, contact Prof. Nellen at firstname.lastname@example.org or Prof. Monsour at email@example.com.