Module 4_Week 4_Ethical Reasoning, Decision Making, and Professional Judgment_Accounting Ethics | ACCT 340 - Accounting Ethics

Module 4 Ethical Reasoning, Decision Making, and Professional Judgment

A. The Basis of Accounting

According to Mintz (1995), “Integrity is a fundamental trait of character that enables a CPA to withstand client and competitive pressures that might otherwise lead to the subordination of judgment.” A person of integrity will act out of moral principle and not expediency. That person will do what is right, even if it means the loss of a job or client. In accounting, the public interest (i.e., investors and creditors) always must be placed ahead of one’s own self-interest or the interests of others, including a supervisor or client. Integrity means that a person acts on principle—a conviction that there is a right way to act when faced with an ethical dilemma. For example, assume that your tax client fails to inform you about an amount of earned income for the year, and you confront the client on this issue. The client tells you not to record it and reminds you that there is no W-2 or 1099 form to document the earnings. The client adds that you will not get to audit the company’s financial statements anymore if you do not adhere to the client’s wishes. Would you decide to “go along to get along”? If you are a person of integrity, you should not allow the client to dictate how the tax rules will be applied in the client’s situation. You are the professional and know the tax regulations best, and you have an ethical obligation to report taxes in accordance with the law. If you go along with the client and the Internal Revenue Service (IRS) investigates and sanctions you for failing to follow the IRS Tax Code, then you may suffer irreparable harm to your reputation. An important point is that a professional must never let loyalty to a client cloud good judgment and ethical decision making. Virtually all the world’s great religions contain in their religious texts some version of the Golden Rule: “Do unto others as you would wish them to do unto you.” In other words, we should treat others the way we would want to be treated. This is the basic ethic that guides all religions. If we believe honesty is important, then we should be honest with others and expect the same in return. One result of this ethic is the concept that every person shares certain inherent human rights, which will be discussed later in this chapter. Exhibit 1.1 provides some examples of the universality of the Golden Rule in world religions provided by the character education organization Teaching Values. Integrity is the key to carrying out the Golden Rule. A person of integrity acts with truthfulness, courage, sincerity, and honesty. Integrity means to have the courage to stand by your principles even in the face of pressure to bow to the demands of others. As previously mentioned, integrity has particular importance for certified public accountants (CPAs), who often are pressured by their employers and clients to give in to their demands. The ethical responsibility of a CPA in these instances is to adhere to the ethics of the accounting profession and not to subordinate professional judgment to the judgment of others. Integrity encompasses the whole of the person, and it is the foundational virtue of the ancient Greek philosophy of virtue. The origins of Western philosophy trace back to the ancient Greeks, including Socrates, Plato, and Aristotle. The ancient Greek philosophy of virtue deals with questions such as: What is the best sort of life for human beings to live? Greek thinkers saw the attainment of a good life as the telos, the end or goal of human existence. For most Greek philosophers, the end is eudaimonia, which is usually translated as “happiness.” However, the Greeks thought that the end goal of happiness meant much more than just experiencing pleasure or satisfaction. The ultimate goal of happiness was to attain some objectively good status, the life of excellence. The Greek word for excellence is arete, the customary translation of which is “virtue.” Thus for the Greeks, “excellences” or “virtues” were the qualities that made a life admirable or excellent. They did not restrict their thinking to characteristics we regard as moral virtues, such as courage, justice, and temperance, but included others we think of as nonmoral, such as wisdom.

B. Definition of Ethics

The term ethics is derived from the Greek word ethikos, which itself is derived from the Greek word ethos, meaning “custom” or “character.” Morals are from the Latin word moralis, meaning “customs,” with the Latin word mores being defined as “manners, morals, character.” In philosophy, ethical behavior is that which is “good.” The Western tradition of ethics is sometimes called “moral philosophy.” The field of ethics or moral philosophy involves developing, defending, and recommending concepts of right and wrong behavior. These concepts do not change as one’s desires and motivations change. They are not relative to the situation. They are immutable. In a general sense, ethics (or moral philosophy) addresses fundamental questions such as: How should I live my life? That question leads to others, such as: What sort of person should I strive to be? What values are important? What standards or principles should I live by? There are various ways to define the concept of ethics. The simplest may be to say that ethics deals with “right” and “wrong.” However, it is difficult to judge what may be right or wrong in a particular situation without some frame of reference. In addition, the ethical standards for a profession, such as accounting, are heavily influenced by the practices of those in the profession, state laws and board of accountancy rules, and the expectations of society. Gaa and Thorne define ethics as “the field of inquiry that concerns the actions of people in situations where these actions have effects on the welfare of both oneself and others.” We adopt that definition and emphasize that it relies on ethical reasoning to evaluate the effects of actions on others—the stakeholders. Ethics and morals relate to “right” and “wrong” conduct. While they are sometimes used interchangeably, they are different: ethics refer to rules provided by an external source, such as codes of conduct for a group of professionals (i.e., CPAs), or for those in a particular organization. Morals refer to an individual’s own principles regarding right and wrong and may be influenced by a religion or societal mores. Ethics tend to be more practical than morals, conceived as shared principles promoting fairness in social and business interactions. For example, a CEO involved in a sex scandal may involve a moral lapse, while a CEO misappropriating money from a company she is supposed to lead according to prescribed standards of behavior is an ethical problem. These terms are close and often used interchangeably, and both influence ethical decision making. In this text we oftentimes use the terms synonymously while acknowledging differences do exist Ethics deal with well-based standards of how people ought to act, does not describe the way people actually act, and is prescriptive, not descriptive. Ethical people always strive to make the right decision in all circumstances. They do not rationalize their actions based on their own perceived self-interests. Ethical decision making entails following certain well-established norms of behavior. The best way to understand ethics may be to differentiate it from other concepts. Values are basic and fundamental beliefs that guide or motivate attitudes or actions. In accounting, the values of the profession are embedded in its codes of ethics that guide the actions of accountants and auditors in meeting their professional responsibilities. Values are concerned with how a person behaves in certain situations and is predicated on personal beliefs that may or may not be ethical, whereas ethics is concerned with how a moral person should behave to act in an ethical manner. A person who values prestige, power, and wealth is likely to act out of self-interest, whereas a person who values honesty, integrity, and trust will typically act in the best interests of others. It does not follow, however, that acting in the best interests of others always precludes acting in one’s own self-interest. Indeed, the Golden Rule prescribes that we should treat others the way we want to be treated. When the rules are unclear, an ethical person looks beyond his / her own self- interest and evaluates the interests of the stakeholders potentially affected by the action or decision. Ethical decision making requires that a decision maker be willing, at least sometimes, to take an action that may not be in his / her best interest. This is known as the “moral point of view.” Sometimes people believe that the ends justify the means. In ethics it all depends on one’s motives for acting. If one’s goals are good and noble, and the means we use to achieve them are also good and noble, then the ends do justify the means. However, if one views the concept as an excuse to achieve one’s goals through any means necessary, no matter how immoral, illegal, or offensive to others the means may be, then that person is attempting to justify the wrongdoing by pointing to a good outcome regardless of ethical considerations such as how one’s actions affect others. Nothing could be further from the truth. The process you follow to decide on a course of action is more important than achieving the end goal. If this were not true from a moral point of view, then we could rationalize all kinds of actions in the name of achieving a desired goal, even if that goal does harm to others while satisfying our personal needs and desires. Ethical relativism is the philosophical view that what is right or wrong and good or bad is not absolute but variable and relative, depending on the person, circumstances, or social situation. Ethical relativism holds that morality is relative to the norms of one’s culture. That is, whether an action is right or wrong depends on the moral norms of the society in which it is practiced. The same action may be morally right in one society but be morally wrong in another. For the ethical relativist, there are no universal moral standards—standards that can be universally applied to all peoples at all times. The only moral standards against which a society’s practices can be judged are its own. If ethical relativism is correct, then there can be no common framework for resolving moral disputes or for reaching agreement on ethical matters among members of different societies. Accountants record and report financial truths. Their conduct is regulated by state boards of accountancy, professional codes of behavior, and moral conventions directed towards fairness and accountability. However, moral dilemmas and conflicts of interest inevitably arise when determining how best to present financial information. Betty Vinson is a case in point. She rationalized that in her circumstances going along with the improper accounting was justified because if Scott Sullivan, one of the foremost chief financial officers in the country, thought the accounting was all right, who was she to question it. After all, ethical judgments can be subjective and, perhaps, this was one of those situations. Clearly, Vinson suffered from moral blindness because she failed to consider the negative effects on shareholders and other stakeholders and moral failings of Sullivan’s position. There was a gap between the person she truly was and how she acted in the WorldCom fraud brought about by pressures imposed on her by Sullivan. Situation ethics, a term first coined in 1966 by an Episcopalian priest, Joseph Fletcher, is a body of ethical thought that takes normative principles—like the virtues, natural law, and Kant’s categorical imperative that relies on the universality of actions— and generalizes them so that an agent can “make sense” out of one’s experience when confronting ethical dilemmas. Unlike ethical relativism that denies universal moral principles, claiming the moral codes are strictly subjective, situational ethicists recognize the existence of normative principles but question whether they should be applied as strict directives (i.e., imperatives) or, instead, as guidelines that agents should use when determining a course of ethical conduct. In other words, situationists ask: Should these norms, as generalizations about what is desired, be regarded as intrinsically valid and universally obliging of all human beings? For situationists, the circumstances surrounding an ethical dilemma can and should influence an agent’s decision-making process and may alter an agent’s decision when warranted. Thus, situation ethics holds that “what in some times and in some places is ethical can be in other times and in other places unethical.” A problem with a situation ethics perspective is that it can be used to rationalize actions such as those in the Penn State scandal. Another danger of situational ethics is it can be used to rationalize cheating. Cheating in general is at epidemic proportions in society. The 2012 Report Card on the Ethics of American Youth, conducted by the Josephson Institute of Ethics, found that of 43,000 high school students surveyed, 51 percent admitted to having cheated on a test during 2012, 55 percent admitted to lying, and 20 percent admitted to stealing. Cheating in college is prevalent as well. The estimates of number of students engaging in some form of academic dishonesty at least once ranges from 50 to 70 percent. In 1997, McCabe and Treviño surveyed 6,000 students in 31 academic institutions and found contextual factors, such as peer influence, had the most effect on student cheating behavior. Contextual appropriateness, rather than what is good or right, suggests that situations alter cases, thus changing the rules and principles that guide behavior A comprehensive study of 4,950 students at a small southwestern university identified neutralizing techniques to justify violations of accepted behavior. In the study, students rationalized their cheating behavior without challenging the norm of honesty. The most common rationale was denial of responsibility (i.e., circumstances beyond their control, such as excessive hours worked on a job, made cheating okay in that instance). Then, they blamed the faculty and testing procedures (i.e., exams that try to trick students rather than test knowledge). Finally, the students appealed to a higher loyalty by arguing that it is more important to help a friend than to avoid cheating. One student blamed the larger society for his cheating: “In America, we’re taught that results aren’t achieved through beneficial means, but through the easiest means.” The authors concluded that the use of these techniques of neutralization conveys the message that students recognize and accept cheating as an undesirable behavior but one that can be excused under certain circumstances, reflecting a situational ethic. The Ethics Resource Center conducted a survey of social networkers in 2012 to determine the extent to which employees use social networking on the job. The survey points out that social networking is now the norm and that a growing number of employees spend some of their workday connected to a social network. More than 10 percent are “active social networkers,” defined as those who spend at least 30 percent of their workday linked up to one or more networks. One concern is whether active social networkers engage in unethical practices through communications and postings on social media sites. Survey respondents say they think about risks before posting online and consider how their employers would react to what they post. But, they do admit to discussing company information online: 60 percent would comment on their personal sites about their company if it was in the news; 53 percent share information about work projects once a week or more; greater than one-third say they often comment, on their personal sites, about managers, coworkers, and even clients. The survey concludes that nothing is secret anymore and, unlike in Las Vegas, management must assume that what happens at work does not stay at work and may become publicly known. Between 1967 and 1973, Dutch researcher Geert Hofstede conducted one of the most comprehensive studies of how values in the workplace are influenced by culture. Using responses to an attitude study of approximately 116,000 IBM employees in 39 countries, Hofstede identified four cultural dimensions that can be used to describe general similarities and differences in cultures around the world: (1) individualism, (2) power distance, (3) uncertainty avoidance, and (4) masculinity. In 2001, a fifth dimension, long-term orientation—initially called Confucian dynamism—was identified. More recently, a sixth variable was added—indulgence versus restraint—as a result of Michael Minkov’s analysis of data from the World Values Survey. Exhibit 1.2 summarizes the five dimensions from Hofstede’s work for Japan, the United Kingdom, and the United States, representing leading industrialized nations; and the so-called BRIC countries (Brazil, Russia, India, and China), which represent four major emerging economies. Other variables have important implications for workplace behavior as well, such as the Power Distance index (PDI), which focuses on the degree of equality between people in the country’s society. A high PDI indicates inequalities of wealth and power have been allowed to grow within society, as has occurred in China and Russia as they develop economically. Long-term orientation (LTO) versus short-term orientation has been used to illustrate one of the differences between Asian cultures, such as China and Japan, and the United States and United Kingdom. In societies like China and Japan, high LTO scores reflect the values of long-term commitment and respect for tradition, as opposed to low-LTO countries, such as the United Kingdom and United States, where change can occur more rapidly. Time can often be a stumbling block for Western- cultured organizations entering the China market. The length of time it takes to get business deals done in China can be two or three times that in the West. One final point is to note that Brazil and India show less variability in their scores than other countries, perhaps reflecting fewer extremes in cultural dimensions.

C. The Six Pillars of Character

It has been said that ethics is all about how we act when no one is looking. In other words, ethical people do not do the right thing because someone observing their actions might judge them otherwise, or because they may be punished as a result of their actions. Instead, ethical people act as they do because their “inner voice” or conscience tells them that it is the right thing to do. Assume that you are leaving a shopping mall, get into your car to drive away, and hit a parked car in the lot on the way out. Let’s also assume that no one saw you hit the car. What are your options? You could simply drive away and forget about it, or you can leave a note for the owner of the parked car with your contact information. What would you do and why? Your actions will reflect the character of your inner being. According to “virtue ethics,” there are certain ideals, such as excellence or dedication to the common good, toward which we should strive and which allow the full development of our humanity. These ideals are discovered through thoughtful reflection on what we as human beings have the potential to become. Honesty is the most basic ethical value. It means that we should express the truth as we know it and without deception. In accounting, the full disclosure principle supports transparency and requires that the accounting professional disclose all the information that owners, investors, creditors, and the government need to know to make informed decisions. To withhold relevant information is dishonest. Transparent information is that which helps one understand the process followed to reach a decision. In other words it supports an ethical ends versus means belief. The integrity of a person is an essential element in trusting that person. MacIntyre, in his account of Aristotelian virtue, states, “There is at least one virtue recognized by tradition which cannot be specified except with reference to the wholeness of a human life—the virtue of integrity or constancy.” A person of integrity takes time for self-reflection, so that the events, crises, and challenges of everyday living do not determine the course of that person’s moral life. Such a person is trusted by others because that person is true to her word. Ultimately, integrity means to act on principle rather than expediency. If my superior tells me to do something wrong, I will not do it because it violates the ethical value of honesty. If my superior pressures me to compromise my values just this one time, I will not agree. I have the courage of my convictions and am true to the principles of behavior that guide my actions. The promises that we make to others are relied on by them, and we have a moral duty to follow through with action. Our ethical obligation for promise keeping includes avoiding bad-faith excuses and unwise commitments. Imagine that you are asked to attend a group meeting on Saturday and you agree to do so. That night, though, your best friend calls and says he has two tickets to the basketball game between the Dallas Mavericks and San Antonio Spurs. The Spurs are one of the best teams in basketball and you don’t get this kind of opportunity very often, so you decide to go to the game instead of the meeting. You’ve broken your promise, and you did it out of self-interest. You figured, who wouldn’t want to see the Spurs play? What’s worse, you call the group leader and say that you can’t attend the meeting because you are sick. Now you’ve also lied. You’ve started the slide down the proverbial ethical slippery slope, and it will be difficult to climb back to the top. We all should value loyalty in friendship. After all, you wouldn’t want the friend who invited you to the basketball game to telephone the group leader later and say that you went to the game on the day of the group meeting. Loyalty requires that friends not violate the confidence we place in them. In accounting, loyalty requires that we keep financial and other information confidential when it deals with our employer and client. For example, if you are the in-charge accountant on an audit of a client for your CPA firm-employer and you discover that the client is “cooking the books,” you shouldn’t telephone the local newspaper and tell the story to a reporter. Instead, you should go to your supervisor and discuss the matter and, if necessary, go to the partner in charge of the engagement and tell her. Your ethical obligation is to report what you have observed to your supervisor and let her take the appropriate action. However, the ethics of the accounting profession allow for instances whereby informing those above your supervisor is expected, an act of internal whistleblowing, and in rare circumstances going outside the organization to report the wrongdoing. All people should be treated with dignity. We do not have an ethical duty to hold all people in high esteem, but we should treat everyone with respect, regardless of their circumstances in life. In today’s slang, we might say that respect means giving a person “props.” The Golden Rule encompasses respect for others through notions such as civility, courtesy, decency, dignity, autonomy, tolerance, and acceptance. By age 16, George Washington had copied by hand 110 Rules of Civility & Decent Behavior in Company and Conversation. They are based on a set of rules composed by French Jesuits in 1595. While many of the rules seem out of place in today’s society, Washington’s first rule is noteworthy: “Every Action done in Company, ought to be with Some Sign of Respect, to those that are Present.” A responsible person carefully reflects on alternative courses of action using ethical principles. A responsible person acts diligently and perseveres in carrying out moral action. Imagine if you were given the task by your group to interview five CPAs in public practice about their most difficult ethical dilemma, and you decided to ask one person, who was a friend of the family, about five dilemmas that person faced in the practice of public accounting. Now, even if you made an “honest” mistake in interpreting the requirement, it is clear that you did not exercise the level of care that should be expected in this instance in carrying out the instructions to interview five different CPAs. The due care test is whether a “reasonable person” would conclude that you had acted with the level of care, or diligence, expected in the circumstance. The courts have used this test for many years to evaluate the actions of professionals. A person of fairness treats others equally, impartially, and openly. In business, we might say that the fair allocation of scarce resources requires that those who have earned the right to a greater share of corporate resources as judged objectively by performance measures should receive a larger share than those whose performance has not met the standard. Let’s assume that your instructor told the case study groups at the beginning of the course that the group with the highest overall numerical average would receive an A, the group with second highest a B, and so on. At the end of the term, the teacher gave the group with the second-highest average—90.5—an A and the group with the highest average—91.2—a B. Perhaps the instructor took subjective factors into account in deciding on the final grading. You might view the instructor’s action as unfair to the group with the highest average. It certainly contradicts his original stated policy and is capricious and unfair, especially if the instructor does not explain his reason for doing this. As Josephson points out, “Fairness implies adherence to a balanced standard of justice without relevance to one’s own feelings or inclinations.” Josephson points out that “citizenship includes civic virtues and duties that prescribe how we ought to behave as part of a community.” An important part of good citizenship is to obey the laws, be informed about the issues, volunteer in your community, and vote in elections. During his presidency, Barack Obama called for citizens to engage in some kind of public service to benefit society as a whole. Accounting professionals are part of a community with specific ideals and ethical standards that govern behavior. These include responsibilities to one another to advance the profession and not bring discredit on oneself or others. As citizens of a community, accountants and auditors should strive to enhance the reputation of the accounting profession. Universum, the global employer branding and research company, annually surveys college undergraduate and MBA students. In 2014, it surveyed about 60,000 U.S. college students from 311 institutions to find out what they were looking for as they enter the world of work, as well as their views on the attractiveness of specific employers. The results of the survey reflect a desire to join an organization that respects its people, provides a supportive environment, recognizes performance, provides development and leadership opportunities, challenges one intellectually, fosters a work/life 45 balance, and serves the public good. Edwards violated virtually every tenet of ethical behavior and destroyed his reputation. He lied about the affair and attempted to cover it up, including allegations that he fathered Hunter’s baby. He violated the trust of the public and lied after telling his family about the affair in 2006. He even had the audacity to run for the Democratic nomination for president in 2008. One has to wonder what it says about Edwards’s ethics that he was willing to run for president of the United States while hiding the knowledge of his affair, without considering what might happen if he had won the Democratic nomination in 2008, and then the affair became public knowledge during the general election campaign. His behavior is the ultimate example of ethical blindness and the pursuit of one’s own self-interests to the detriment of all others. Perhaps the noted Canadian-American chemist and author Orlando Aloysius Battista (1917–1995), said it best: “An error doesn’t become a mistake until you refuse to correct it.” In other words, when you do something wrong, admit it, take responsibility for your actions, accept the consequences, promise never to do it again, and move on. Unfortunately, most adulterers like Edwards go to great lengths to cover up their moral failings and don’t admit to them until they have been caught. Can there be any doubt that incivility in society is on the rise? Not according to one of your authors. Mintz opines in his blog about incivility that daily we witness instances of inconsiderate, “in your face” behavior in communications and other forms of rudeness. There are many causes of incivility, many of which are social media–driven. The sometimes anonymous feel of posts on Twitter and other social media sites makes it relatively easy to use impersonal forms of communication to vent one’s feelings without the immediate consequences of face-to-face discussions. One inappropriate Twitter rant begets another and eventually we see a further erosion of ethics in society. Civility is not peripheral to ethics, dealing merely with manners, proper etiquette, and politeness. It runs much deeper and requires restraint, respect, and responsible action both in one’s personal behavior and professional activities. Remember, ethics deals in broad terms with how we treat others. Two pertinent questions are: Can you be civil and not entirely ethical? Can you be ethical and not terribly civil? The answer to the first is a qualified “yes.” You can be well behaved and gracious to others but still be motivated by non-ethical values such as greed. The problem is you may wind up using others to advance your self-interests. The answer to the second is “no.” Treating others badly and with disrespect means you have not committed to act in accordance with the pillars of character.

D. Modern Moral Philosophies

The ancient Greeks believed that reason and thought precede the choice of action and that we deliberate about things we can influence with our decisions. In making decisions, most people want to follow laws and rules. However, rules are not always clear, and laws may not cover every situation. Therefore, it is the ethical foundation that we develop and nurture that will determine how we react to unstructured situations that challenge our sense of right and wrong. In the end, we need to rely on moral principles to guide our decision making. However, the ability to reason out ethical conflicts may not be enough to assure ethical decision making occurs in accounting. This is because while we believe that we should behave in accordance with core values, we may wind up deviating from these values that trigger ethical reasoning in accounting because of internal pressures from supervisors and others in top management. In the end, a self- interest motive may prevail over making a decision from an ethical perspective, and unethical behavior may result. This is the moral of the story of Betty Vinson’s role in the WorldCom fraud. Moreover, even if we know what the right thing to do is, we still may be unable to act on our beliefs because others in the organization provide reasons and rationalizations to deviate from those beliefs and may establish barriers to ethical action. This occurred in the WorldCom fraud when Scott Sullivan, the CFO, attempted to divert Cynthia Cooper from her goal to reveal the accounting fraud. Adam Smith’s seminal work, An Inquiry Into the Nature and Causes of the Wealth of Nations (1776), outlined the basis for free-market capitalism. Capitalism laissez-faire philosophies, such as minimizing the role of government intervention and taxation in the free markets, and the idea that an “invisible hand” guides supply and demand are key elements of his political philosophy. These ideas reflect the concept that each person, by looking out for his or her self-interest, inadvertently helps to create the best outcome for all. “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest,” Smith wrote. Even before Smith wrote The Wealth of Nations he produced a treatise on moral philosophy. The Theory of Moral Sentiments (1759) makes the case that business should be guided by the morals of good people. Smith sets forth a theory of how we come to be moral, of how morality functions on both individual and societal levels, and of what forces are likely to corrupt our sense of morality, which is derived from our capacity to sympathize directly and indirectly with other people. This occurs by feeling what others actually feel in their circumstances. We are able to achieve this moral perspective because of our consciences, which allow us to envision our own actions just as a disinterested observer might. Recall that telos is the Greek word for “end” or “purpose.” In teleology, an act is considered morally right or acceptable if it produces some desired result such as pleasure, the realization of self-interest, fame, utility, wealth, and so on. Teleologists assess the moral worth of behavior by looking at its consequences, and thus moral philosophers often refer to these theories as consequentialism. Two important teleological philosophies that typically guide decision making in individual business decisions are egoism and utilitarianism. Egoism defines right or acceptable behavior in terms of its consequences for the individual. Egoists believe that they should make decisions that maximize their own self- interest, which is defined differently by each individual. In other words, the individual should “[d]o the act that promotes the greatest good for oneself.” Many believe that egoistic people and companies are inherently unethical, are short-term-oriented, and will take advantage of others to achieve their goals. Our laissez-faire economic system enables the selfish pursuit of individual profit, so a regulated marketplace is essential to protect the interests of those affected by individual (and corporate) decision making. The junior auditor faces a challenge to integrity in this instance. The client is attempting to circumvent GAAP. The ethical obligation of the staff auditor is not to subordinate judgment to others’ judgment, including that of top management of the firm. If you are an egoist, you might conclude that it is in your best interests to go along with the firm’s position, to support the client’s presumed interests. After all, you do not want to lose your job. An enlightened egoist would consider the interests of others, including the investors and creditors, but still might reason that it is in her long-run interests to go along with the firm’s position to support the client because she may not advance within the firm unless she is perceived to be a “team player.” Utilitarians follow a relatively straightforward method for deciding the morally correct course of action for any particular situation. First, they identify the various courses of action that they could perform. Second, they determine the utility of the consequences of all possible alternatives and then select the one that results in the greatest net benefit. In other words, they identify all the foreseeable benefits and harms (consequences) that could result from each course of action for those affected by the action, and then choose the course of action that provides the greatest benefits after the costs have been taken into account. Given its emphasis on evaluating the benefits and harms of alternatives on stakeholders, utilitarianism requires that people look beyond self-interest to consider impartially the interest of all persons affected by their actions. The utilitarian theory was first formulated in the eighteenth century by the English writer Jeremy Bentham (1748–1832) and later refined by John Stuart Mill (1806–1873). Bentham sought an objective basis that would provide a publicly acceptable norm for determining what kinds of laws England should enact. He believed that the most promising way to reach an agreement was to choose the policy that would bring about the greatest net benefits to society once the harms had been taken into account. His motto became “the greatest good for the greatest number.” Over the years, the principle of utilitarianism has been expanded and refined so that today there are many different variations of the principle. Modern utilitarians often describe benefits and harms in terms of satisfaction of personal preferences or in purely economic terms of monetary benefits over monetary costs. While utilitarianism is a very popular ethical theory, there are some difficulties in relying on it as a sole method for moral decision making because the utilitarian calculation requires that we assign values to the benefits and harms resulting from our actions. But it is often difficult, if not impossible, to measure and compare the values of certain benefits and costs. Let’s go back to our receivables example. It would be difficult to quantify the possible effects of going along with the client. How can a utilitarian measure the costs to the company of possibly having to write off a potential bad debt after the fact, including possible higher interest rates to borrow money in the future because of a decline in liquidity? What is the cost to one’s reputation for failing to disclose an event at a point in time that might have affected the analysis of financial results? On the other hand, how can we measure the benefits to the company of not recording the allowance? Does it mean the stock price will rise and, if so, by how much? The term deontology is derived from the Greek word deon, meaning “duty.” Deontology refers to moral philosophies that focus on the rights of individuals and on the intentions associated with a particular behavior, rather than on its consequences. Deontologists believe that moral norms establish the basis for action. Deontology differs from rule-utilitarianism in that the moral norms (or rules) are based on reason, not outcomes. Fundamental to deontological theory is the idea that equal respect must be given to all persons. In other words, individuals have certain inherent rights and I, as the decision maker, have a duty (obligation, commitment, or responsibility) to respect those rights. Philosophers claim that rights and duties are correlative. That is, my rights establish your duties and my duties correspond to the rights of others. The deontological tradition focuses on duties, which can be thought of as establishing the ethical limits of my behavior. From my perspective, duties are what I owe to others. Other people have certain claims on my behavior; in other words, they have certain rights against me. A right is a justified claim on others. For example, if I have a right to freedom, then I have a justified claim to be left alone by others. Turned around, I can say that others have a duty or responsibility to leave me alone. In accounting, because investors and creditors have a right to accurate and complete financial information, I have the duty to ensure that the financial statements “present fairly” the financial position, results of operations, and changes in cash flows. Formulations of rights theories first appeared in the seventeenth century in writings of Thomas Hobbes and John Locke. One of the most important and influential interpretations of

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