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  1. BA606 FINANCIAL ACCOUNTING Professor Garry Carnegie Lectures 23 & 24

  2. Lectures 23 and 24: Ethics in accounting • Introduction • Normative ethical behaviour • Nature of ethical behaviour • Professional codes of ethics • Society’s standards of ethical behaviour • Choosing forms of behaviour

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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)

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

  11. 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

  12. Normative ethical behaviour • When considering ethical egoism, a distinction is generally made between decisions based primarily on self interest (i.e. promoting one’s 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)

  13. 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 one’s self interests, otherwise chaos may result

  14. 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?

  15. 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

  16. Normative ethical behaviour • Ethical parochialism • Under this class of theories, ethical behaviour should protect the interest of the individual’s “in-group” • The in-group may comprise or include the individual’s family, friends, professional or business associates, and, more broadly, one’s religious community or gender or cultural group

  17. 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

  18. 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

  19. 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

  20. 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

  21. 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

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

  23. 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 God’s rules is ethical • Nonconforming is unethical

  24. 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 God’s rules

  25. 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

  26. 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

  27. 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

  28. 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

  29. 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

  30. 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

  31. 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

  32. Nature of ethical behaviour • The courts • For illegal behaviour to be judged as unethical, it needs to be related to the accountant’s 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

  33. 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

  34. 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

  35. 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

  36. 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

  37. 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

  38. 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

  39. Society’s 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

  40. Society’s standards of ethical behaviour • This incomplete list of criteria is relevant: - Honesty - Reliability - Value for money - Respect for the law - Discretion - Competency - Principles - Fairness

  41. 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

  42. 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

  43. 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”

  44. 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

  45. 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

  46. 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.” (Shakespeare’s Othello, III: 3) • Acting ethically is about not flinching one’s own good name and, of course, about not causing damage to others.