Some fundamental concepts of professional ethics for accounting

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Some fundamental concepts of professional ethics
for accounting

• Michael Pakaluk

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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,
  Aristotle)

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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)

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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
  steal.)

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• 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).

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• 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
  pedagogical.

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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?

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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).

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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.

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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.

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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.

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The most important questions for accounting ethics

• I. What is the distinctive task (ergon) of an
  accountant?
• 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?

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Evidence for the distinctive task of accountants

• Appeal to authorities reflection on accounting
  itself.
• Authorities
• Professional associations
• Regulatory entitities
• Practitioners

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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.

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• 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).

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• 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.

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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
  truth.
• 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.

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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.

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Reflections on the nature of accountancy
itself-- e.g. FASB Statement ofFinancial
Accounting Concepts, no. 2, Qualitative Concepts
of AccountingInformation.
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• 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).

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• 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.

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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?

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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).

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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.

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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.

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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?

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• 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
  instruction?
• What are the roles of mentoring, examples, and
  stories?

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• 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?

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• 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
  independence?

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• 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?

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• 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?