BA606 FINANCIAL ACCOUNTING

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BA606 FINANCIAL ACCOUNTING

• Professor Garry Carnegie
• Lectures 23 24

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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

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Introduction

• 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
  victims

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Introduction

• 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

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Introduction

• 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

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Introduction

• 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
  provided

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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

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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

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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)

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Normative ethical behaviour

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

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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

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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)

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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

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Normative ethical behaviour

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

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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

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Normative ethical behaviour

• Ethical parochialism
• Under this class of theories, ethical behaviour
  should protect the interest of the individuals
  in-group
• 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

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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

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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

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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
  society

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Normative ethical behaviour

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

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Normative ethical behaviour

• Duties are often laid down as rules that must be
  followed regardless of circumstances or the
  consequences
• 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

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Normative ethical behaviour

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

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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

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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

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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
  thing
• Kant proposed the categorical imperative as a
  universally valid ethical law

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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
  nature
• Kant proposed other maxims and argued that
  applying these maxims to every proposed behaviour
  would lead to ethical behaviour

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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

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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

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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

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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

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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

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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

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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

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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
  collapse

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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

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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

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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

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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

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Societys standards of ethical behaviour

• The standards used by society to assess the
  behaviour of accountants is not specific to that
  profession
• 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

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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

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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

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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

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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
  behaviour
• The most important benefit of ethical behaviour
  is likely to be a clear conscience and the
  associated good sleeping patterns

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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

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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

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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.