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A social contract is an unwritten agreement based on custom and ... Rarely, would compliance with the law be unethical, however such instances can arise ... – PowerPoint PPT presentation

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  • Professor Garry Carnegie
  • Lectures 23 24

Lectures 23 and 24 Ethics in accounting
  • Introduction
  • Normative ethical behaviour
  • Nature of ethical behaviour
  • Professional codes of ethics
  • Societys standards of ethical behaviour
  • Choosing forms of behaviour

  • Individuals choose to act ethically or not
  • There exists in Australia a general belief that
    the level of business ethics is low
  • Ethics comes from the Greek word ethicos, meaning
    relating to custom or habit
  • Unethical behaviour is unacceptable and has its

  • Commercial history in Australia is littered with
    financial crises caused by behaviour that would
    today be generally regarded as unethical
  • In accounting, among damages to clients and
    employers, unethical behaviour damages the
    reputation of the individual practitioners
    concerned but may also damage the reputation of
    the accounting profession

  • Accountants face a variety of ethical issues in
    the practice of their profession
  • Refer to study by Leung and Cooper (1995) (read
    H, P H, pp. 1044-1045)
  • Ethical problems are a major issue for
    accountants in Australia

  • Above all, accountants are to act in the public
    interest, known as the service ideal
  • The independent professional person is to act in
    the best interests of society
  • Professional ethics involves the application of
    ethical principles by a professional who has an
    obligation to those who rely upon the services

Normative ethical behaviour
  • Ethical theories are normative theories and
    propose how we ought to or should behave
  • Such theories, otherwise known as moral
    philosophies, are intended to assist in
    explaining why a person believes an action is
    right whereas another action is wrong
  • In developing an understanding of how individuals
    make ethical decisions, it is useful to have an
    understanding of ethical theories

Normative ethical behaviour
  • Normative ethical theories do not explain how we
    actually act or behave
  • Rather, they seek to establish principles that
    guide peoples behaviour
  • There exists a diversity of such ethical theories
  • Normative theories are classified into two
    categories teleological and deontological

Normative ethical behaviour
  • Teleological theories
  • Teleological comes from the Greek word telos,
    meaning end
  • Teleological theories decide whether behaviour is
    good or bad (i.e. ethical or unethical) by
    examining the consequences of that behaviour
  • Behaviour is ethical if it results in desirable
    consequences (i.e. outcomes)

Normative ethical behaviour
  • Four main classes of teleological theories of
    ethical behaviour are addressed
  • - Ethical egoism
  • - Ethical elitism
  • - Ethical parochialism
  • - Ethical universalism or utilitarianism

Normative ethical behaviour
  • Ethical egoism
  • Under this theory, people should act in a way
    that maximises the good of the person making
    the decision
  • The ethical egoist, therefore, ought to act in
    his/her own interests
  • The effect of the behaviour on other people is of
    much less consequence

Normative ethical behaviour
  • When considering ethical egoism, a distinction is
    generally made between decisions based primarily
    on self interest (i.e. promoting ones wellbeing)
    and decisions based on selfishness (i.e. ignoring
    the interests of others)
  • The latter is a form of egoism known as
    psychological egoism, and is rather a theory of
    human nature and is concerned with how people
    behave (i.e. psychology)

Normative ethical behaviour
  • Where ethical egoism is restricted, it is known
    as restricted egoism
  • Under this notion, the behaviour of individuals
    seeking to maximise their self interest should be
    constrained by the law and the conventions of
    fair play
  • Restricted egoism would not allow the breaking of
    the law in pursuing ones self interests,
    otherwise chaos may result

Normative ethical behaviour
  • Consider the young professional accountant who
    engages in the practice known as kitchen
  • Is kitchen tabling an example of ethical egoism
    or selfishness?

Normative ethical behaviour
  • Ethical elitism
  • Under this class of theories, society is viewed
    as being stratified and ethical behaviour should
    maximise the interests of only the top stratum,
    or the so-called elite
  • The dismissal of the accounts clerk in order to
    protect the reputation of the CEO would be seen
    as ethical behaviour by a society which
    subscribed to ethical elitism

Normative ethical behaviour
  • Ethical parochialism
  • Under this class of theories, ethical behaviour
    should protect the interest of the individuals
  • The in-group may comprise or include the
    individuals family, friends, professional or
    business associates, and, more broadly, ones
    religious community or gender or cultural group

Normative ethical behaviour
  • Ethical universalism or utilitarianism
  • Under this class of theories, ethical behaviour
    should be concerned with the good of all
    citizens, or of human kind, and individuals are
    all of equal value
  • Jeremy Bentham (1748-1832) and John Sturt Mill
    (1806-1873) are generally credited with the
    utilitarian (or utility) principle

Normative ethical behaviour
  • Under this class of theories or utilitarianism,
    determining right from wrong, or good from bad,
    is an act or decision the produces the greatest
    benefit to the greatest number of people
  • Where negative implications arise, the act or
    decision that minimises the harm to the greatest
    number of people determines right from wrong, or
    good from bad

Normative ethical behaviour
  • Utilitarianism is probably regarded as the most
    acceptable of the teleological theories
  • It provides a contrast of self interest against
    the notion of a wider public interest
  • Accountants serving the public interest, under
    the service ideal, are seeking to provide
    professional services for the betterment of

Normative ethical behaviour
  • Deontological theories
  • Deontological comes from the Greek word deon,
    meaning duty
  • Deontological theories are based on duties and
  • Duties are activities that a person is expected
    to perform
  • Rights are behaviours that a person expects of

Normative ethical behaviour
  • Duties are often laid down as rules that must be
    followed regardless of circumstances or the
  • A deontologist asserts that there are more
    important considerations than outcomes
  • According to the deontologist, the intention of
    the act or decision itself is more important that
    the results of an act or decision

Normative ethical behaviour
  • Three main classes of deontological theories of
    ethical behaviour are addressed
  • - Theological ethics
  • - Rationalism
  • - Social contract theory or justice theory

Normative ethical behaviour
  • Theological ethics
  • Classical deontological theory relies on religion
  • Rules to be followed are laid down in religious
    literature, such as the Bible or the Koran
  • The rules were established by God
  • Conforming to Gods rules is ethical
  • Nonconforming is unethical

Normative ethical behaviour
  • Acceptance of religious rules requires a faith or
    belief that is not universal
  • There are many different religions
  • There are varying degrees of faith among people
    of the same religion
  • Some people (atheists) do not believe in God and
    may, even inadvertently, not follow Gods rules

Normative ethical behaviour
  • Rationalism
  • Immanuel Kant (1724-1804) provided an
    interpretation of the Judaeo-Christian view of
    deontology where persons of good will are
    motivated by a sense of duty to do the right
  • Kant proposed the categorical imperative as a
    universally valid ethical law

Normative ethical behaviour
  • The categorical imperative is as follows
  • Act as if the principle from which you act were
    to become through your will a universal law of
  • Kant proposed other maxims and argued that
    applying these maxims to every proposed behaviour
    would lead to ethical behaviour

Normative ethical behaviour
  • Social contract theory or justice theory
  • The social contract view of ethics assumes there
    is a social contract between the individual and
    the state which requires both to perform certain
    duties and gives to both certain rights
  • A social contract is an unwritten agreement based
    on custom and accepted without dissent

Normative ethical behaviour
  • Failure to perform the duties implied by social
    contract would constitute unethical behaviour
  • The notion of a social contract comes from Thomas
    Hobbes (1588-1679)
  • John Rawls (1921-2002) is a more modern exponent
    of this theory
  • Rawls derived a theory of justice as a social
    contract that relies on cooperation
  • According to Rawls, justice is concerned with
    fairness and equality

Normative ethical behaviour
  • In broad terms, the principle of justice, or
    justice theory, focuses on how fairly our actions
    or decisions distribute benefits or impose
    burdens among members of the group
  • An unfair or unequal distribution of the benefits
    or burdens is an unjust act, and an unjust act is
    a morally wrong act
  • According to Rawls, behaviour targeted at
    ensuring justice, and achieving cooperation as a
    result, would constitute ethical behaviour

Nature of ethical behaviour
  • Put simply, ethical behaviour is that which is
    acceptable to the community
  • Accordingly, ethical behaviour is determined by
    community standards, beliefs and expectations
  • Ethical behaviour varies among communities where
    differences are found in the respective community
    standards, beliefs and expectations

Nature of ethical behaviour
  • The community in the case of professional
    accountants comprises at least three communities
  • - The courts or the legal system
  • - The profession or among peers
  • - The general public or the public at large

Nature of ethical behaviour
  • The courts
  • For illegal behaviour to be judged as unethical,
    it needs to be related to the accountants
    professional work
  • Failure to convict an accountant of illegal
    activities related to professional work, does not
    mean it will not perceived as unethical within
    the profession or in the community at large
  • Rarely, would compliance with the law be
    unethical, however such instances can arise

Nature of ethical behaviour
  • The profession
  • The accounting profession assesses behaviour
    against a code of ethics
  • The Code prescribes the behaviour expected of
    members of the profession
  • It deals with such things as appropriate
    behaviour, conflicts of interest, and the
    interests of clients and employers

Nature of ethical behaviour
  • The general public
  • The public includes investors, employers,
    employees, trade unions, the media and so on
  • The behaviour of accountants must conform with
    standards, expectations and beliefs of the public
  • While such rules are not codified as such, the
    anguish of the public becomes readily apparent,
    for instance, in cases of surprise corporate

Professional codes of ethics
  • Professional codes of ethics establish ethical
    requirements for professional accountants
  • Such codes can be classified into two types
  • - Disciplinary codes
  • - Aspirational codes

Professional codes of ethics
  • Disciplinary codes of ethics set down behaviour
    that will not be tolerated and that, if
    undertaken, results in disciplinary action
  • Aspirational codes of ethics set down ideals (or
    goals) to which all members of the profession
    should aspire to attain

Professional codes of ethics
  • Such codes of ethics are favoured by the
    accounting profession for two key reasons
  • - they can be used to pre-empt externally
    developed regulations, as usually imposed by a
    government agency
  • - the profession is in control of the discipline
    mechanism and, hence, it can exercise its own
    discretion over who is charged and what penalties
    are imposed

Professional codes of ethics
  • In June 2006, the two leading professional
    accounting bodies in Australia issued a new joint
    entitled Code of Ethics for Professional
    Accountants based on the International Federation
    of Accountants (IFAC) Code of Ethics for
    Professional Accountants (IFAC, 2005)
  • The new code replaces the joint Code of
    Professional Conduct

Societys standards of ethical behaviour
  • The standards used by society to assess the
    behaviour of accountants is not specific to that
  • Such standards are used to assess the behaviour
    of all people and they are applied impartially
  • As indicated, such standards are not codified but
    are readily understood and accepted by most
    members of society

Societys standards of ethical behaviour
  • This incomplete list of criteria is relevant
  • - Honesty
  • - Reliability
  • - Value for money
  • - Respect for the law
  • - Discretion
  • - Competency
  • - Principles
  • - Fairness

Choosing forms of behaviour
  • Unethical behaviour results from choice
  • An accountant chooses between ethical and
    unethical conduct
  • Choices involve explicit (formal) or implicit
    (informal) cost benefit analysis
  • In making such choices, the process may be both
    protracted and agonised
  • Ethical behaviour and unethical behaviour each
    have their own benefits and costs

Choosing forms of behaviour
  • The costs of unethical behaviour are often not as
    well defined as the benefits involved
  • The costs include
  • - Conscience-driven costs
  • - Society-imposed costs
  • - Loss of freedom of choice

Choosing forms of behaviour
  • The benefits of ethical behaviour include, of
    course, avoiding the costs of unethical behaviour
  • On the other hand, a major cost of ethical
    behaviour is going without the material benefits
    that typically derive from engaging in unethical
  • The most important benefit of ethical behaviour
    is likely to be a clear conscience and the
    associated good sleeping patterns

Choosing forms of behaviour
  • Assessing the costs and benefits of ethical and
    unethical behaviour is subjective
  • Some accountants unethical behaviour may cease
    abruptly or not on being spoken to about their
    conduct, such as by a client or a colleague
  • Once again, whether such behaviour ceases or not
    is a choice that is made by the accountant

Choosing forms of behaviour
  • Unethical behaviour is a high-risk strategy and
    is not recommended
  • Ethical behaviour is a low-risk strategy and is
    to be encouraged
  • Pleasing the client should not, as a golden
    rule, involve unethical behaviour

Choosing forms of behaviour
  • Good name in man and woman, dear my lord, is the
    immediate jewel of their souls Who steals my
    purse steals trash. But he that filches from me
    my good name robs me of that which not enriches
    him, and makes me poor indeed. (Shakespeares
    Othello, III 3)
  • Acting ethically is about not flinching ones own
    good name and, of course, about not causing
    damage to others.