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Irvin T' Nelson Utah State University


What happens in the absence of truth? Stock market crash of 1929. Led to the Great Depression ... The Vinsons depended on her insurance. ... – PowerPoint PPT presentation

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Title: Irvin T' Nelson Utah State University

Ethics in Accounting Does It Really Matter?
Irvin T. NelsonUtah State University
Ethics in Accounting Is it an Oxymoron?
Irvin T. NelsonUtah State University
Ethical Accountants?
  • Are there such things as ethical
    accountants? My father is under the impression
    there are only two ethical accountants in the
    world one located in a small Appalachian hamlet
    who has since given up the profession to
    apiculture, and the other occupying a small
    corner office in New York, teetering on
    bankruptcy. Obviously you can imagine what a
    shock it was a year ago when I announced at the
    Sunday dinner table that I was changing my major
    to accounting. (I am still invited home, but only
    if I dont talk about business.)

Ethical Accountants?
  • The sad thing is, my fathers views turned
    out to be near prophecy. Until the beginning of
    this semester, I held accounting related jobs for
    the last three and a half years. In the course of
    my employment I saw and even participated in
    activities I deemed unethical. These activities
    ranged from falsifying payroll records to padding
    invoices. More than once, I went to my superior
    and aired my disapproval but coming from a
    junior bookkeeper, I was ignored

Ethical Accountants?
  • I also saw a CPA firm not only turn a blind
    eye to such practices, but actively put their
    signatures on an income statement in which the
    net income was understated to lessen the amount
    of dividends paid to non-participating partners.
    My reaction to all of this? Well, to be an
    ethical accountant means to not be an accountant
    at all.
  • --Brian C. McBride, USU

What is the purpose of accounting?
  • To provide useful information

What are the desired characteristics of
  • Timeliness
  • Understandability
  • Reliability
  • Truthfulness

What is truth?
  • Fair
  • Not misleading
  • Unbiased
  • Not predisposed in a particular direction
  • Representational faithfulness
  • Conveys an accurate impression of the underlying

What is Truth?
  • Oh say, what is truth? Tis the fairest gem that
    the riches of worlds can produce Tis an aim for
    the noblest desire. John Jaques

What is Truth?
  • Truth is knowledge of things as they are, and as
    they were, and as they are to come. Joseph
    Smith, Jr.

What is Truth?
  • Truth is a correspondence between what we think
    and what is real. -- Plato

What is Truth?
  • To tell the truth, rightly understood, is not
    just to state the facts, but to convey a true
    impression. Robert Lewis Stevenson

Forms of Untruth
  • Saying something that is not so
  • Overstatement/exaggeration
  • Understatement
  • Withholding relevant information
  • What do these have in common?
  • They all fail to convey a true impression

How Important Is Truth?
  • The truth shall make you free. Jesus of

What is the relationship between truth and
  • What has been the function of the accounting
    profession in society?
  • Historically, it has been looked upon as the
    watchdog of business, the trustworthy
    guardians of truth.
  • The public perceived that the integrity and
    independence of accountants was beyond reproach,
    beyond question.

What happens in the absence of truth?
  • Stock market crash of 1929
  • Led to the Great Depression
  • Audit failures in the 1980s
  • Enron, World Com, etc.
  • Damaging public confidence in capital markets
  • Cost to the economy is not measurable but may be
    larger than 9/11 and Iraq combined

What are the implications to the accounting
  • When a societal institution fails to fill the
    function expected or demanded by society, it is
    done for. Thomas D. Hubbard
  • Hence, the accounting profession is rightly
    concerned over its tarnished reputation.

What Stands In the Way of Truth?
  • Greed
  • Gaming Mentality
  • Shifting of responsibility
  • Incorrect conception of business

What Stands In the Way of Truth?
  • The very conception of the corporation as a
    legal fiction defined in terms of obligations
    to its stockholders implies that corporations are
    not moral or morally responsible agencies.
    Robert C. Solomon

Something Has Gone Wrong
  • Trust is the accountants stock in trade.
    Thats all we have to sell.
  • Richard L. Ratliff
  • Gallop Surveys
  • Before Enron, accountants ranked a step above
    clergy in public trust
  • After Enron, accountants ranked a step below used
    car salesmen in trust

Something Has Gone Wrong
  • My heart breaks, and I'm embarrassed for our
    sport right now.
  • NBC commentator Sandra Bezic, a five-time
    Canadian national pairs champion and
    choreographer of many gold medalists, after the
    Canadian pairs skating team of Sale and Pelletier
    lost the gold medal in the 2002 Salt Lake City
    Winter Olympics due to crooked judges, after
    clearly having won the competition based on
    skating merit

Something Has Gone Wrong
  • My heart breaks, and I'm embarrassed for our
    profession right now.
  • Irv Nelson, after hearing Arthur Andersen
    partners defend their audit of Enron by saying
    they didnt do anything wrong because they
    followed GAAP

Something Has Gone Wrong
  • ... certain occurrences (this year) deeply
    trouble me.... in my esteemed profession of
    accounting. It has taken a big hit in what I
    thought were the very roots of this
    profession--integrity. Now we find that some of
    the most highly respected accounting firms have
    violated their dedicated trust. These firms have
    caused the reputation of this once-honored
    profession to be in question. They have bowed to
    corporate greed and have issued audit statements
    that have been found to be misleading and
    outright dishonest

Something Has Gone Wrong
  • Imagine having to create a public
    "accountability board" to see that the integrity
    of the accounting profession is being upheld. The
    purpose of this board would be to address
    accountants' ethical lapses or competency
    deficiencies. U.S. Securities and Exchange
    Commission chair Harvey L. Pitt has declared
    This model . . . sends a loud and clear message
    that the era of self-regulation of the accounting
    profession is over.

Something Has Gone Wrong
  • Furthermore, Mr. Pitt went on to imply that
    the auditing standards are not a problem rather,
    the problem lies with compliance and execution
    according to the standards of this profession.
    For years the profession has signed statements
    that the audit report represents fairly and
    accurately the information contained therein. Now
    the validity of that statement has to be clearly
    questioned because men have violated the
    standards of integrity that are so vital to
    public confidence in the credibility of the audit

Something Has Gone Wrong
  • What a sad, sad commentary on the integrity
    of those we depend on for reliable information
    regarding the businesses of our nation.
    Unfortunately it is just a symptom of what is
    going on. People have become so possessed with
    the desire to achieve worldly recognition, power,
    and wealth that they have lost their sense of
    what is right. They have violated the standards
    that must be upheld for the sake of our nation or
    any other nation.
  • L. Tom Perry

Something Has Gone Wrong
  • When former SEC chairman Aurthur Levitt
    testified before the Senate Hearing on the
    Collapse of Enron (January 24, 2002) he decried
    the culture of gamesmanship in which the
    objective is not to ensure the reality of the
    numbers but rather to try to get away with as
    much as possible.

Management Accounting Examples
  • Manipulating Earnings
  • Smoothing
  • Playing with bad debt reserves, asset lives,
    inventory adjustments, timing of write offs
  • Playing with timing of revenues
  • Hiding Debt
  • Leases
  • Special Purpose Entities

Auditing Examples
  • Allowing clients to get away with accounting
    treatments the purpose of which is to lie /
    distort / manipulate
  • Holding GAAP as the ultimate standard, instead of
  • Failing to follow substance over form
  • Advising clients how to structure transactions so
    as to get around the rules

Whats the Solution?
  • Tighten the rules?
  • Loosen the rules (principles-based rules)?
  • Integrity?
  • PR Campaign?

Big Four Publications
  • Opening a conversation
  • Showcases our people of integrity
  • Exceptional people, unimpeachable values
  • Building public trust
  • Individuals of integrity do the right thing, not
    what is expedient, not whats permissible, but
    the right thing. You cant compromise the right
    thing. You cant play around the edges. PWC
    2002 annual report

Big Four Publications
  • The cornerstones of our profession and our firm
    are our professional competence and our
  • Instilling professional values
  • No client is too big for us to say no.
  • Maintaining Your Trust, Feb 2002, Ernst Young

Other Publications
  • Stand UP and DO the Right Thing
  • It takes courage. Each day, each of us struggle
    to make the little decisions that forge our
    overall character and integrity.
  • If you want to make a difference, start by
    recommitting yourself to the core values of the

  • Proposed AICPA standards for Independence
  • Essentially the same rules the SEC proposed
    several years ago that the AICPA successfully
    lobbied so hard to defeat

Big Four Web Sites
  • Building Public Trust A New Vision of
    Integrity (PWC)
  • Code of Conduct The Way We Do Business (PWC)
  • Doing the Right Thing (EY)
  • Financial Reporting Rebuilding Trust, Restoring
    Confidence (EY)

Whats the Solution?
  • I dont see nearly as much coming from the
    management accounting community
  • Why?

What are Ethics?
  • Perhaps one of the problems is that we have a
    flawed conception of ethics.
  • Some view ethics as adherence to a set of rules
    (code of ethics)
  • Like the rules of a game (gaming ethics)
  • If its not against the rules, its OK
  • Others view ethics as flexible whats right for
    some might not be right for others

Models of Ethics
  • Utilitarian Approach (Relativism)
  • There is no such thing as right and wrong it all
    depends on the situation
  • There is no such thing as truth it all depends
    on your point of view
  • List the stakeholders, consider their competing
  • Objective the most good for the most people

IMA Code of Ethics
  • Ethics, in its broader sense, deals with human
    conduct in relation to what is morally good and
    bad, right and wrong.
  • To determine whether a decision is good or bad,
    the decision-maker must compare his/her options
    with some standard of perfection.

IMA Code of Ethics
  • This standard of perfection is not a statement
    of static position but requires the
    decision-maker to assess the situation and the
    values of the parties affected by the decision.
  • The decision-maker must then estimate the
    outcome of the decision and be responsible for
    its results.

Models of Ethics
  • Principles-based Approach
  • Virtue Ethics Aristotle
  • There is such a thing as right and wrong
  • Our duty is to figure out whats right and do it
    because its right (not because of an analysis of
    the relative social good of various choices)
  • Objective live a life of virtue and integrity

IMA Code of Ethics
  • Integrity
  • Communicate unfavorable as well as favorable
  • Refrain from engaging in or supporting any
    activity that would discredit the profession.
  • Objectivity
  • Communicate information fairly and objectively.
  • Disclose fully all relevant information that
    could reasonably be expected to influence an
    intended users understanding...

  • Principles
  • Values
  • Pseudo-values
  • Ethical Behavior
  • Integrity

  • Universal truths
  • What IS right and wrong
  • Exist independent of any person or group
  • Do not vary between cultures, time periods

Can We Agree on Universal Principles?
  • Dr. James W. Brackner proposed 10 values that
    seem to be universal across all cultures
  • Honesty
  • Integrity
  • Promise-keeping
  • Fidelity
  • Fairness

Can We Agree on Universal Principles?
  • Caring for Others
  • Respect for Others
  • Responsible Citizenship
  • Pursuit of Excellence
  • Accountability
  • May these be considered examples of correct

  • People cannot see principles perfectly
  • We view principles through the lens of our
  • Colored and distorted to some degree
  • Thus, we dont live our lives on principles we
    have to translate them into VALUES

Life Experiences
  • How each person decides what he/she THINKS is
    right and wrong
  • Core beliefs upon which we live our lives
  • Do vary between individuals and cultures
  • Because each persons lens is different
  • May or may not be based on correct principles
  • Making choices in accordance with values leads to
    healthy self-esteem

What Is Ethical Behavior?
  • To be ethical, a choice must be in accordance
    with ones values, AND
  • Those values must be based upon correct
  • Neither is sufficient both are necessary

What Is Ethical Behavior?
  • It is incumbent upon each person, as well as each
    societal group, to honestly examine its values to
    determine whether they are based on correct
  • Osma Bin Laden
  • Examples from American culture
  • Whistleblowing
  • Blind loyalty

What Is Ethical Behavior?
  • "What ought to be?"
  • The choice that is more right, more good, and
    more just than the others

What Is Ethical Behavior?
  • Rather than questioning if a certain course of
    action is really wrong, perhaps one should ask if
    it is completely right.
  • Brooke Hill, USU freshman

What Is Integrity?
  • When a person consistently makes ethical choices
    across a wide range of situations, over a
    lifetime, that person has integrity.

Everyone must answer the following question
  • What is my highest aspiration?
  • Wealth
  • Power
  • Knowledge
  • Popularity/fame
  • Integrity

  • Be on guard if integrity is secondary to any of
    the alternatives, it will be sacrificed in
    situations in which a choice must be made. Such
    situations inevitably occur in every persons
  • -- Dr. L. Murphy Smith, in testimony to U.S.
    House of Representatives Subcommittee on
    Commerce, Trade, and Consumer Protection hearing
    on accounting scandals, July 26, 2002

  • Beliefs professed but not lived

Enrons Values Statement, included in 2000 annual
  • Excellence
  • Communication
  • Respect
  • Integrity

  • When values are not lived, cognitive dissonance
  • Two possible responses
  • Elevate behavior to level of values, or
  • Use thinking errors

Thinking Errors
  • Excuses we tell ourselves to make us feel better
    about our unethical behavior
  • Examples
  • Rationalization (its OK because)
  • Justification (I deserve it)
  • Minimization (its not so bad)
  • Blame Shifting (its not my fault)
  • Sincere delusion (its only this once)

Look for the Thinking ErrorsPublic Accounting
  • We followed GAAP.
  • Enron didnt do anything illegal.
  • If you want more transparency, you need to
    change the rules. Dont blame us.
  • Those partnership documents are incredibly
    complex and 80 pages long.
  • We couldnt force Enron to put it on the balance
    sheet because we cant break the rules.
  • Our capital markets are the most efficient in
    the world.

Look for the Thinking ErrorsManagement
  • We work for management. Our job is to make
    management look good.
  • Our obligation is to our shareholders. Anything
    we do to make the stock price go up is ethical.
  • Every good accountant knows where to find it.
  • Youre not being a team player.
  • Youve got to stop thinking like a CPA and start
    thinking like a management accountant.
  • You WILL make this journal entry.

Look for the Thinking Errors
  • Ms. Vinson and Mr. Normand told their boss that
    the transfer wasn't good accounting. Mr. Yates
    replied that he wasn't happy about it either. But
    he said that Mr. Myers had assured him that it
    would never happen again and that he had agreed
    to go along. Finally, so did Ms. Vinson and Mr.
    Normand. They made the transfer.

Look for the Thinking Errors
  • Each quarter they found themselves in the same
    uncomfortable spot,and wound up making giant and
    fraudulent entries. In the Second quarter, they
    transferred 560 million to the capital accounts.
    In the third quarter it was 743 million, and in
    the fourth quarter it was 941 million

Look for the Thinking Errors
  • Ms. Vinson balked -- and then caved. Over the
    course of six quarters she continued to make the
    illegal entries to bolster WorldCom's profits at
    the request of her superiors. Each time she
    worried. Each time she hoped it was the last
    time. At the end of 18 months she had helped
    falsify at least 3.7 billion in profits.

Look for the Thinking Errors
  • As Ms. Vinson's experience at WorldCom shows,
    sometimes it's hard to tell right from wrong in
    the heat of a workplace battle. And when an
    employee's livelihood is on the line, it's tough
    to say no to a powerful boss.

Look for the Thinking Errors
  • After further thought, Ms. Vinson decided
    against quitting. She was the family's chief
    breadwinner, earning more than her husband's
    roughly 40,000 a year compensation. The Vinsons
    depended on her insurance. She was anxious about
    entering the job market as a middle-age worker.

Look for the Thinking Errors
  • They commiserated about how hard it would be to
    leave their jobs and probably Jackson, where it
    wasn't easy to find well-paying work.

Look for the Thinking Errors
  • Though Ms. Vinson still worried about the
    accounting issues, she began to rationalize her
    decision to comply with her bosses request.
    After all, Mr. Sullivan had been heralded as one
    of the top chief financial officers in the
    country. If he thought the transfer was all
    right, who was she to question it?

Look for the Thinking Errors
  • Today Ms. Vinson, 47 years old, is awaiting
    sentencing on conspiracy and securities-fraud
    charges. She has begun to prepare her 12-year-old
    daughter for the possibility that she will go to

Look for the Thinking Errors
  • My first duty is to my son. Theres nothing I
    would not do for him.
  • -- mother of a 5 year old child, explaining why
    she works as an exotic dancer
  • Are accountants sometimes using similar thinking

To Whom is our First Duty?
  • Employer?
  • Profession?
  • Society?
  • Self?

What Happened to the accounting staff at World
  • The firm owns you
  • Team player lose individual identity
  • Culture Were here to help World Com succeed
  • Desensitization from ignoring conscience
  • Principles fell like dominoes
  • Integrity fell first, knocking down others
  • Truth, fairness, empathy then fell

  • We, as individuals, become the resultant sum
    of each ethical confrontational event as
    experienced from the beginning of our careers.
    Simply stated, if we have conditioned ourselves
    to blink at the small decision opportunities at
    the beginning of our careers, then we will
    precondition ourselves to also blink at the more
    important decision opportunities later.
  • -- Roger M. Boisjoly, Morton Thiokol engineer
    who strongly argued against Space Shuttle
    Challenger launch at 29 degrees F, in the face of
    tremendous management pressure

  • Strength of financial markets
  • Health (survival?) of accounting profession
  • Bigger implications than these???

  • Before the American Republic, a common belief was
    that where there was liberty, anarchy would
    result because people are unable to govern
    themselves. Yet Americans were free and well
    behaved. How could this be?

  • The great English writer, G.K. Chesterson,
    observed that America was the only nation in the
    world founded on a creed. He said that creed was
    set forth with dogmatic and even theological
    lucidity in the Declaration of Independence.

Declaration of Independence The second paragraph
of America's founding document states "We hold
these truths to be self-evident, that all men are
created equal, that they are endowed by their
Creator with certain unalienable rights, that
among these are life, liberty and the pursuit of
  • A society teeters on the brink of disaster
    when its people lack moral character. No nation
    survives for long without citizens who share
    common values such as courage, devotion to duty,
    respect for other peoples lives and property,
    and a willingness to sacrifice personal interests
    for a greater cause. L. Murphy Smith

A nation or a culture
cannot endure for long
it is undergirded
by common values such

as valor, public
spiritedness, respect for

others and for the law It cannot stand unless it
is populated by people who will act on the
motives superior to their own immediate
interest." Chuck Colson, Against the Night
Can you make a difference?
  • It all boils down to personal choices

Be sure you are right, then go ahead. Davy
Crockett 1786-1836
To sin by silence when they should protest makes
cowards of men. Abraham Lincoln
  • Employees have both a right and a
    responsibility to become involved in attempting
    to correct any irresponsible or dishonest actions
    that senior management is promoting Roger M

Leadership is a potent combination of strategy
and character. But if you must be without one, be
without strategy. General H. Norman Schwarzkopf
The reputation of a thousand years may be
determined by the conduct of one
hour. Japanese proverb
  • Accountants should strive for behavior beyond the
    minimum level of acceptable conduct set forth in
    a code of ethics or a FASB pronouncement or a
    congressional mandate
  • "A man should be upright not be kept upright."
    (Marcus Aurelius).

President Lincoln said Honor is better than