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Accounting Ethics. John M. Thornton Washington State University Disclaimer

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accounting ethics

Accounting Ethics

John M. Thornton

Washington State University


Unless plagiarized, the opinions expressed herein are entirely my own. They do not reflect the views of Washington State University, the American Accounting Association, the American Institute of Certified Public Accountants, the Institute of Management Accountants, the United States, the United States Tennis Association, my parents, my church, or ultimate Frisbee team. Plagiarized opinions herein may not reflect the views of the original author, as they are probably misquoted or taken out of context for my own benefit. My own opinions expressed herein hopefully will not reflect my views tomorrow.

pointless pop quiz
Pointless Pop Quiz
  • Can you name these people/places?


They are the former corporate officers at the focus of this movie/book.


Andrew Fastow

Former CFO, Enron


Jeffrey Skilling

Former CEO, Enron


Kenneth Lay,

Former CEO, Enron


Scott Sullivan,

Ex-CFO, WorldCom

bernie ebbers ex ceo worldcom
Bernie Ebbers, Ex-CEO WorldCom

Largest U.S. Corporate Fraud in history: $11 Billion


Bernie MadoffFormer Chairman of the NASDAQ stock exchangeFound guilty of stealing thousands of investors’ savings resulting in $65 billion lostSentenced to 150 years in Federal Prison


Sherron Watkins

Whistleblower at Enron


Cynthia Cooper

Whistleblower at WorldCom


Harry Markopolos,

whistle-blower on Bernie Madoff;photovideo

what s the point
What’s the point?
  • Ethics matter
accounting professionalism
Accounting Professionalism
  • What does it mean to be an accounting professional?
  • What are the biggest ethical issues facing accountants and/or the accounting profession?
my accounting ethics journey
My Accounting Ethics Journey
  • Expectations’ Gap and Going-Concern Opinions
  • Codes of Conduct and Moral Development
  • Auditor Litigation
  • Auditor Independence and Non-Audit Services
  • Whistle-blowing
the expectations gap
The Expectations Gap
  • Definition: the difference between users’ perceptions of auditors’ responsibilities and auditors’ perception of their responsibilities
  • Investors have higher expectations than auditors regarding certain assurances, including integrity of the accounting numbers, oversight responsibilities, economic viability of the entity, and fraud detection
briloff s three gaps 1966
Briloff’s Three Gaps(1966)
  • linguistic (GAAP is incomprehensible to commoners),
  • fairly presented v. fair in fact (a chasm exists between what preparers and users think the attest function entails), and
  • the profession’s involvement in non-audit services unbeknownst to the public.
classic traits of professionals fogarty 2011
Classic Traits of Professionals(Fogarty 2011)
  • Specialized knowledge
  • Community of practice
  • Self-regulation
  • Autonomy
  • Centrality of public interest
the big ethics issues in accounting
The Big Ethics Issuesin Accounting
  • Financial reporting
  • Competence
  • Auditor independence
  • Litigation
  • Whistle-blowing
codes of conduct




Due care






Codes of Conduct

Bottom line: Codes clarify required standards of behavior

code of professional conduct
Code of Professional Conduct
  • Burdensome constraint or core value?
  • Independence
  • Management services
  • Changes in the Code
    • 1917: Men of character, high moral integrity, serve the public interest
    • 1988: Individualism, rationality, and image/public relations
  • Auditor responsibility to the public
  • Lawsuits against auditors
  • Fraud type
  • Private Securities Litigation Reform
  • Auditor independence
ethics education
Ethics Education
  • Can ethics be taught?
  • If so, what should be taught?
    • Cognitive moral development
    • Virtue ethics
    • Rights v. Duties
    • Auditor independence
when and why and how did you get your ethics
When (and why and how) did you get your ethics?
  • When?
    • The answer to this question has important implications on your view of teaching ethics
  • Why?
    • Reason v. Desire
  • How?
    • DIT
the philosophies
The Philosophies
  • Cultural Relativism
  • Ethical Subjectivism
  • Divine Command Theory
  • Natural Law Theory
  • Psychological Egoism
  • Ethical Egoism
  • Utilitarianism
  • Deontology
  • Social Contract Theory
“I believe I have omitted mentioning that, in my first voyage from Boston, being becalm’d off Block Island, our people set about catching cod, and hauled up a great many. Hitherto I had stuck to my resolution of not eating animal food, and on this occasion I consider’d, with my master Tryon, the taking of every fish as a kind of unprovoked murder, since none of them had, or ever could do us any injury that might justify the slaughter. All this seemed very reasonable. But I had formerly been a great lover of fish, and, when this came hot out of the frying-pan, it smelt admirably well. I balanc’d some time between principle and inclination, till I recollected that, when fish were opened, I saw smaller fish taken out of their stomachs; then thought I, “If you eat one another, I don’t see why we mayn’t eat you.” So I din’d upon cod very heartily, and continued to eat with other people, returning only now and then occasionally to a vegetable diet. So convenient a thing is it to be a reasonable creature, since it enables one to find or make a reason for every thing one has a mind to do.” Benjamin Franklin, autobiography
what is whistleblowing
What is ‘whistleblowing’?
  • The essential feature of whistleblowing is the ‘disclosure by organization members (former or current) of illegal, immoral or illegitimate practices under the control of their employers, to persons or organizations that may be able to effect action’ (Miceli and Near 1984:689).
whistle blowing facts
Whistle Blowing Facts
  • Misleading financial statements and lack of disclosure are responsible for about 85% of the most significant instances of corporate fraud.
  • Criminal penalties against those who retaliate against WBs.
  • Occupational Health & Safety Administration (OSHA) found for the WB only 2 of 79 early cases.
what is fair
What is Fair?
  • Equality: fair outcomes are equal outcomes
  • Equity: ratio of inputs is proportional to outputs
  • Need: based on relative needs of the individual
three models of whistle blowing
Three Models of Whistle Blowing
  • Reward Model
    • Monetary payments for WB
  • Anti-Retaliation Model
    • Assumes fear of retaliation prevents WB
    • Bans retaliation (e.g., discharge, demotion)
  • Structural Model
    • Visible, formal, earnest internal channels promote WB
organizational justice
Organizational Justice
  • Distributive Justice
    • Fair outcomes
  • Procedural Justice
    • Fair procedures (i.e., voice in mediation)
  • Interactional Justice
    • Quality of interpersonal treatment of WB employees
accounting and the principle of justice scott 1941
Accounting and the Principle of Justice(Scott 1941)

Accounting rules/techniques/principles must:

  • Afford equitable treatment of all interests actually and potentially involved in the financial situations covered by accounts
  • Be true and accurate
  • Be fair, unbiased and impartial
  • Be continuously revised
  • Be consistently applied