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Some fundamental concepts of professional ethics for accounting


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Title: Some fundamental concepts of professional ethics for accounting

Some fundamental concepts of professional ethics
for accounting
  • Michael Pakaluk

What is the best approach to accounting ethics?
  • The Methods of Ethics approach is rejected.
  • (Not timeless, but originating in late 19th c.,
    due to Henry Sidgwick.)
  • A more classical approach is advocated (Plato,

Methods of Ethics Approach
  1. Distinguish ethical theories
  2. Deduce different practical conclusions from the
    different theories
  3. Students left with picking a theory (based
    presumably on some balance between appeal of
    theory and appeal of practical implications)

Objections to this approach
  • 1. This could not capture what is distinctive
    about accounting ethics it would tell us,
    rather, only what it means to act well as regards
    general morality, for someone who happens to be
    an accountant. (For instance, that someone
    happens to be an accountant does not change the
    fact that, as a human being, he should not

  • 2. What counts as a correct procedure for
    deciding ethical questions is extremely
    controversial, and yet what constitutes ethical
    conduct for an accountant, at least in broad
    outline, is not controversial. Thus, in the area
    of accounting ethics, it would be desirable to
    build upon matters of agreement rather than
    introduce additional reasons for disagreement
    (i.e. above and beyond those already present in
    the interpretation or assessment of the facts of
    a difficult case).

  • 3. The fact that one begins deliberation about
    accounting ethics with a presentation of methods
    of ethical decision suggests that ethical
    deliberation should depend upon the prior choice
    of an ethical system.
  • But this presupposition seems mistaken for two
    reasons, one theoretical and the other

Theoretical objection
  • By hypothesis it would need to be a (so far)
    non-ethical person who engaged in this selection
    of an ethical system, and yet one wonders what
    criteria a non-ethical person would use for such
    a choice (that there exists a valid argument from
    considerations of pure rationality to a system of
    morality, as some philosophers have held, seems
    problematic and is in any case very
    controversial), and how could we have confidence
    in the system thus chosen?

Pedagogical objection
  • Since, for someone who has not yet chosen an
    ethical system, it looks as though only interest
    could provide the motive for a choice, this way
    of setting up the problem encourages the thought
    that, in general, interest dictates the selection
    of an ethical rationale for ones decisionbut
    this is exactly the outlook that one needs to
    reject in the context of accounting ethics
    (desired results determine the selection or
    application of the rules).

Making explicit what is implicit
  • For these considerations it seems best to see
    whether there are ethical principles already
    implicit in the practice of accounting, which
    accountants who practice with integrity are
    already committed to, and then a primary task of
    accounting ethics would be to make these
    principles explicit.

The Ergon Principle
  • A good instance of kind K is that which has
    those traits, or virtues, which enable it to
    carry out well the distinctive work of a thing of
    kind K.
  • The distinctive work of a kind of thing, in turn,
    is understood to be some useful or productive
    thing that a member of that kind can alone
    achieve, or can achieve better than any other
    kind of thing.

The Principle of Associations
  • Persons cooperate to form an association when
    there is something that each wishes to achieve,
    but which each cannot achieve at all, or cannot
    easily achieve, working on his own.

The most important questions for accounting ethics
  • I. What is the distinctive task (ergon) of an
  • II. What are the raison detre and lawlike common
    goal of a professional body of accountants? That
    is, why do accountants form professional
    organizations in the first place, and in what way
    is the practice of accountancy as a consequence
    qualified by the law of a professional body?

Evidence for the distinctive task of accountants
  • Appeal to authorities reflection on accounting
  • Authorities
  • Professional associations
  • Regulatory entitities
  • Practitioners

FASB Statement of Accounting Concepts No. 1
  • Financial reporting should provide information
    that is useful to present and potential investors
    and creditors and other users in making rational
    investment, credit, and similar decisions. The
    information should be comprehensible to those who
    have a reasonable understanding of business and
    economic activities and are willing to study the
    information with reasonable diligence.

  • In a highly developed exchange economy most
    goods and services are exchanged for money or
    claims to money (n. 10) the production and
    marketing of goods and services often involve
    long, continuous, or intricate processes that
    require large amounts of capital this
    productive activity, furthermore, is carried on
    through investor-owned business enterprises (n.
    11) and, on the one hand, management is
    accountable to these investor-owners (n. 12),
    whereas, on the other hand, investors aim to be
    effective in allocating scare resources among
    competing uses (n. 16).

  • Implicit in the Statement is the view that the
    distinctive task of an accountant in the precise
    sense is to provide information that may be
    relied upon by present and potential investors
    and creditors, who cannot themselves directly
    obtain that information.

Charles Waldo Haskins
  • Questions and cross-questionings, of owners, of
    stockholders, of directors,
  • of presidents, are often to be answered as
    supplementary to the report the
  • answer must be intelligent, ready, and never
    resentful. These gentlemen
  • desire truth and nothing else it belongs to the
    spirit of professional
  • Accountancy to seek out and reveal to them the
  • The ideal conception of its true mission by the
    profession itselfa
  • conception from within and not dependent upon
    extraneous exigencies
  • places Accountancy far outside the pale of all
    ordinary callings, and sets it
  • upon a platform of its own as a learned
    profession, self-impelled to
  • culture, to moral enlargement, and to scientific
    attainment it lays a basis
  • of confidence for every business enterprise that
    in professional
  • Accountancy there is a self-centered soul of
    economic truth.

U.S. v Arthur Young
  • By certifying the public reports that
    collectively depict a corporations financial
    status, the independent auditor assumes a public
    responsibility transcending any employment
    relationship with the client. The independent
    public accountant performing this special
    function owes ultimate allegiance to the
    corporation's creditors and stockholders, as well
    as to the investing public.
  • This public watchdog function demands that the
    accountant maintain total independence from the
    client at all times and requires complete
    fidelity to the public trust.

Reflections on the nature of accountancy
itself-- e.g. FASB Statement ofFinancial
Accounting Concepts, no. 2, Qualitative Concepts
of AccountingInformation.
  • If alternative accounting methods could be given
    points for each ingredient of usefulness to in a
    particular situation, it would be an easy matter
    to add up each methods points and select the one
    (subject to its cost) that scored highestso
    long, of course, as there were some general
    agreement on the scoring system and how points
    were to be awarded.
  • There are some who seem to harbor the hope that
    somewhere waiting to be discovered there is a
    comprehensive scoring system that can provide a
    universal criterion for making accounting
    choices. Unfortunately, neither the Board nor
    anyone else has such a system at the present
    time, and there is little probability that one
    will be forthcoming in the foreseeable future.
  • Consequently, those who must choose among
    alternatives are forced to fall back on human
    judgment to evaluate the relative merits of
    competing methods (para. 10).

  • FASB goes on to identify and explain the concepts
    of relevance, reliability, comparability,
    materiality, and cost-effectiveness.
  • FASB indirectly defines the distinctive task of
    an accountant
  • someone who is capable of exercising judgment
    in order to compile, present, and evaluate
    financial information about an enterprise which
    realizes in an appropriate way these qualitative
    characteristics, or ideals ( attest)
  • This spells out more concretely what is meant by
    truth in the definition we earlier gave.

Why do accountants organize themselves into a
professional body?
  • What can accountants/auditors do in common which
    cannot be achieved by each working on his/her own?

Why a profession (and not a business)?
  • Professionals need to confer with one another
    in order to improve and perfect their
    professional judgment (professional development)
    they need to clarify publicly, through a public
    profession, the ideal of truthfulness to which
    they adhere (public standing) and, because of
    the difficulty of adhering to this ideal, they
    need to set standards for themselves and remove
    members who in some serious way fail to adhere to
    the ideal (quality control).

Fill out the ergon of accountants, adding this
social element of professionalism
  • Cooperating with other like professionals in the
    truthful presentation, in observance of the
    qualitative characteristics of accounting, of the
    financial condition of an enterprise, for an
    altruistic purpose, viz. so that others may rely
    on this for their serious purposes.

From this one may deduce and discuss the
virtues of an accountant.
  • Objectivity
  • Independence
  • Due diligence
  • Integrity
  • --rethought not as high-level rules, but as
    traits of practitioners.

Questions which naturally arise
  • Exactly how many virtues of an accountant are
    there, and which of these are more fundamental,
    and which are less so? Which virtues are
    derivative or actually species (special cases) of
    some more comprehensive virtue?

  • How are the virtues of an accountant acquired,
    and how are they fostered and preserved in the
    culture of a firm?
  • How important for these purposes is classroom
  • What are the roles of mentoring, examples, and

  • To what extent are the virtues of an accountant
    dependent upon, or grafted upon, the virtues
    that someone has as a human being?
  • Is it possible to be a bad human being, and lack
    important human virtues, and yet nonetheless have
    all of the virtues of an accountant?

  • Can a consideration of the virtues of an
    accountant help to decide which among various
    codes of ethical conduct is preferable, when
    these codes differ? For instance, can it shed
    light on whether international and European
    formulations are preferable to U.S. formulations,
    and, if so, why?
  • Also, can a reflection on the underlying virtues
    lead to a simplification or at least
    rationalization of the unwieldy rules governing

  • To what extent can reflection on the virtues
    (and vices) which pertain to accountants as
    professionals lead to useful reflections about
    the causes and prevention of accounting scandals?

  • What difference does it makeand is the
    difference importantwhen case studies are
    thought about not in terms of rules and
    principles solely, but also as cases in which an
    accountants virtues might be exemplified?