You are on page 1of 20


Ethics, sometimes known as philosophical ethics, ethical theory, moral theory, and moral
philosophy, is a branch of philosophy that involves systematizing, defending and
recommending concepts of right and wrong conduct, often addressing disputes of moral
diversity. The term comes from the Greek word ethos, which means "character". The super
field within philosophy known as Axiology includes both ethics and Aesthetics and is unified
by each sub-branch's concern with value. Philosophical ethics investigates what is the best
way for humans to live, and what kinds of actions are right or wrong in particular
circumstances. Ethics may be divided into four major areas of study:

Meta-ethics, about the theoretical meaning and reference of moral propositions and
how their truth values (if any) may be determined;

Normative ethics, about the practical means of determining a moral course of action;

Applied ethics draws upon ethical theory in order to ask what a person is obligated to
do in some very specific situation, or within some particular domain of action (such
as business);

Descriptive ethics, also known as comparative ethics, is the study of people's beliefs
about morality;

Ethics seeks to resolve questions dealing with human moralityconcepts such as good and
evil, right and wrong, virtue and vice, justice and crime
Richard Paul and Linda Elder of the Foundation for Critical Thinking define ethics as "a set
of concepts and principles that guide us in determining what behavior helps or harms sentient
creatures". The Cambridge Dictionary of Philosophy states that the word ethics is
"commonly used interchangeably with 'morality' ... and sometimes it is used more narrowly
to mean the moral principles of a particular tradition, group or individual." Paul and Elder
Page 1

state that, "most people confuse ethics with behaving in accordance with social conventions,
religious beliefs and the law", and don't treat ethics as a stand-alone concept.
Luca Pacioli, in a 1495 portrait by an unknown Renaissance artist, wrote on accounting
ethics in 1494.
Luca Pacioli, the "Father of Accounting", wrote on accounting ethics in his first book Summa
de arithmetica, geometrica, proportioni, et proportionalita, published in 1494.Ethical
standards have since then been developed through government groups, professional
organizations, and independent companies. These various groups have led accountants to
follow several codes of ethics to perform their duties in a professional work environment.
Accountants must follow the code of ethics set out by the professional body of which they
are a member. United States accounting societies such as the Association of Government
Accountants, Institute of Internal Auditors, and the National Association of Accountants all
have codes of ethics, and many accountants are members of one or more of these societies.
In 1887, the American Association of Public Accountants (AAPA) was created; it was the
first step in developing professionalism in the United States accounting industry. By 1905,
the AAPA's first ethical codes were formulated to educate its members. During its twentieth
anniversary meeting in October 1907, ethics was a major topic of the conference among its
members. As a result of discussions, a list of professional ethics was incorporated into the
organization's bylaws. However, because membership to the organization was voluntary, the
association could not require individuals to conform to the suggested behaviors. [10] Other
accounting organizations, such as the Illinois Institute of Accountants, also pursued
discussion on the importance of ethics for the field. The AAPA was renamed several times
throughout its history, before becoming the American Institute of Certified Public
Accountants (AICPA) as its named today. The AICPA developed five divisions of ethical
principles that its members should follow: "independence, integrity, and objectivity";
"competence and technical standards"; "responsibilities to clients"; "responsibilities to
colleagues"; as well as "other responsibilities and practices". Each of these divisions
Page 2

provided guidelines on how a Certified Public Accountant (CPA) should act as a
professional. Failure to comply with the guidelines could have caused an accountant to be
barred from practicing. When developing the ethical principles, the AICPA also considered
how the profession would be viewed by those outside of the accounting industry.
The definition of ethics is shaped by personal, societal and professional values, all of which
are difficult to specify. Some stress the importance of societys interests and others stress the
interests of the individual. These conflicting viewpoints have dominated the discussion of
ethics for a long time and may remain in the future as well. Thus, the term ethics will have
to be defined in this context.
The word ethics is derived from the Greek word ethos (character) and Latin word moras
(customs). Taken together these two words define how individuals choose to interact with
one another. Thus, ethics is about choices. It signifies how people act in order to make the
right choice and produce good behavior. It encompasses the examination of principles,
values and norms, the consideration of available choices to make the right decision and the
strength of character to act in accordance with the decision. Hence, ethics, as a practical






knowledge and the skills to properly apply such

knowledge to the problems of daily life.
The nature of the work carried out by accountants and
auditors requires a high level of ethics. Shareholders,
potential shareholders, and other users of the financial
statements rely heavily on the yearly financial statements of a company as they can use this
information to make an informed decision about investment. They rely on the opinion of the
accountants who prepared the statements, as well as the auditors that verified it, to present a
true and fair view of the company. Knowledge of ethics can help accountants and auditors to
Page 3

overcome ethical dilemmas, allowing for the right choice that, although it may not benefit the
company, will benefit the public who relies on the accountant/auditor's reporting.
Most countries have differing focuses on enforcing accounting laws. In Germany, accounting
legislation is governed by "tax law"; in Sweden, by "accounting law"; and in the United
Kingdom, by the "company law". In addition, countries have their own organizations which
regulate accounting. For example, Sweden has the Bokfringsnmden (BFN - Accounting
Standards Board), Spain the Institute de Comtabilidad y Auditoria de Cuentas (ICAC), and
the United States the Financial Accounting Standards Board (FASB).
Decision making based on intuition or personal feeling does not always lead to the right
course of action. Therefore, ethical decision making requires a criterion to ensure good
judgment. The philosophical theories of ethics provide different and distinct criteria for good,
right or moral judgment.
Three prominent philosophical theories of ethics are utilitarianism, rights and justice. They
are normative theories of ethics, which provide a principle or standard on how a person ought
to behave towards others by considering the right and wrong of an action. These normative
theories are divided into two broad classifications, consequential and non-consequential.
Consequential theories define good in terms of its consequences, and a best known example
is theory of utilitarianism. In contrast, non-consequential theories define good not by its
consequences but by its intrinsic value and the best known examples are the rights and justice
theories. These theories are described below.
(a) The theory of utilitarianism
According to this theory, the ethical alternative is the one that maximizes good consequences
over bad consequences. Jeremy Bentham, who is considered as the father of utilitarian ethics,
defines utilitarianism as the greatest happiness principle (the principle of utility), which

Page 4

measures good and bad consequences in terms of happiness and pain. He wrote as follows in
his book An Introduction to the Principles of Morals and Legislation:
"Nature has placed mankind under the governance of two sovereign masters, pain and
pleasure. It is for them alone to point out what we ought to do, as well as to determine what
we shall do. On the one hand the standard of right and wrong, chain of causes and effects, are
fastened to their throne. They govern us in all we do, in all we say, in all we think."
The terms happiness and pain have broad meaning and encompass all aspects of human
welfare, including pleasure and sadness, health and sickness, satisfaction and disappointment,
positive and negative emotions, achievement and failure and knowledge and ignorance.
Applying the utilitarian principle is a procedural process involving five steps:
(1) Define the problem;
(2) Identify the stakeholders affected by the problem;
(3) List the alternative courses of action for resolving the problem;
(4) Identify and calculate the short- and long- term costs and benefits (pain and happiness)
for each alternative course of action and
(5) Select the course of action that yields greatest sum of benefits over costs for the greatest
number of people. Thus, ethical conduct by accountants based on this theory leads to
consideration of all possible consequences of a decision for all parties affected by it.
This theory takes a pragmatic and common sense approach to ethics. Actions are right to the
extent that they benefit people (i.e. actions, which produce more benefit than harm are right
and those that do not are wrong). Thus, the cognitive process required for utilitarian decision
making appears similar to the cost-benefit analysis that is normally applied in business
decisions. However, there are important distinctions between the two concepts in relation to
the nature of consequences, the measurability of the consequences and stakeholder analysis.

Page 5


(b) The theory of rights

The theory of rights stems from the belief that people have an inherent worth as human
beings that must be respected. Therefore, according to this theory, a good decision is one that
respects the rights of others. Conversely, a decision is wrong to the extent that it violates
another persons rights. In general, the rights can be divided into two categories:
(1) natural rights (rights that exist independently of any legal structure) and
(2) Legal rights and contractual rights (rights that are created by social agreement). The
natural rights are commonly known as human rights or constitutional rights.
Among many natural rights, the right to the truth is important to the function of accounting.
The users of financial statements have the right to truthful and accurate financial information
when making choices on alternative investment strategies. This right imposes a moral
obligation on the accountant and the reporting entity to prepare and issue, true and fair
financial statements. On the other hand, legal and contractual rights are important in the
accountant-employer and the accountant-client relationships. These contractual relationships
mean that employers and clients have a legal right to expect professional and competent
service from the accountants. In turn, the accountants have a corresponding legal duty to
perform their tasks to the best of their ability within the constraints of their expertise.
(c) The theory of justice
Understanding this theory requires understanding various notions of justice. Generally,
justice is described as fairness, which refers to the correlation between contribution and
reward. However, fairness alone cannot define the term justice. There are also other forms of
justice, which include equality (assumes that all people have equal worth), procedural justice
(concerns with due process) and compensatory justice (addressed the loss from a wrongful
Page 6

act). However, a comprehensive theory incorporating these various domains of justice has yet
to be developed. Thus, the focus of this paper is on the theory of justice, which is based on
the principle of distributive justice. It focuses on how fairly ones decisions distribute
benefits and burdens among members of the group. Unjust distribution of benefits and
burdens is an unjust act and an unjust act is a morally wrong act. Hence, under this theory,
an ethical decision is one that produces the fairest overall distribution of benefits and
Teaching ethics
Universities began teaching business ethics in the 1980s. Courses on this subject have grown
significantly in the last couple of decades. Teaching accountants about ethics can involve role
playing, lectures, case studies, guest lectures, as well as other mediums. Recent studies
indicate that nearly all accounting textbooks touch on ethics in some way. In 1993, the first
United States center that focused on the study of ethics in the accounting profession opened
at State University of New York at Binghamton. Starting in 1999, several U.S. states began
requiring ethics classes prior to taking the CPA exam.
Seven goals of accounting ethics education

Relate accounting education to moral issues.

Recognize issues in accounting that have ethical implications.

Develop "a sense of moral obligation" or responsibility.

Develop the abilities needed to deal with ethical conflicts or dilemmas.

Learn to deal with the uncertainties of the accounting profession.

"Set the stage for" a change in ethical behavior.

Page 7


Appreciate and understand the history and composition of all aspects of

accounting ethics and their relationship to the general field of ethics.

In 1988, Stephen E. Loeb proposed that accounting ethics education should include seven
goals (adapted from a list by Daniel Callahan). To implement these goals, he pointed out that
accounting ethics could be taught throughout accounting curriculum or in an individual class
tailored to the subject. Requiring it be taught throughout the curriculum would necessitate all
accounting teachers to have knowledge on the subject (which may require training). A single
course has issues as to where to include the course in a student's education (for example,
before preliminary accounting classes or near the end of a student's degree requirements),
whether there is enough material to cover in a semester class, and whether most universities
have room in a four-year curriculum for a single class on the subject.
Accounting, or accountancy, is the measurement, processing and communication of
financial information about economic entities. Accounting, which has been called the
"language of business", measures the results of an organization's economic activities and
conveys this information to a variety of users including investors, creditors, management,
and regulators. Practitioners of accounting are known as accountants.
Accounting can be divided into several fields including financial accounting, management
accounting, auditing, and tax accounting. Financial accounting focuses on the reporting of an
organization's financial information, including the preparation of financial statements, to
external users of the information, such as investors, regulators and suppliers; and
management accounting focuses on the measurement, analysis and reporting of information
for internal use by management. The recording of financial transactions, so that summaries of
the financials may be presented in financial reports, is known as bookkeeping, of which
double-entry bookkeeping is the most common system.

Page 8

Financial accounting
Financial accounting focuses on the reporting of an organization's financial information to
external users of the information, such as investors, regulators and suppliers. It measures and
records business transactions and prepares financial statements for the external users in
accordance with generally accepted accounting principles (GAAP). GAAP, in turn, arises
from the wide agreement between accounting theory and practice, and change over time to
meet the needs of decision-makers.
Financial accounting produces past-oriented reportsfor example the financial statements
prepared in 2006 reports on performance in 2005on an annual or quarterly basis, generally
about the organization as a whole.
Management accounting
Management accounting focuses on the measurement, analysis and reporting of information
that can help managers in making decisions to fulfill the goals of an organization. In
management accounting, internal measures and reports are based on cost-benefit analysis,
and are not required to follow GAAP.
Management accounting produces future-oriented reportsfor example the budget for 2006
is prepared in 2005and the time span of reports varies widely. Such reports may include
both financial and nonfinancial information, and may, for example, focus on specific
products and departments.
"Accountants and the accountancy profession exist as a means of public service; the
distinction which separates a profession from a mere means of livelihood is that the
profession is accountable to standards of the public interest, and beyond the compensation
paid by clients."
Robert H. Montgomery

Page 9

Accounting ethics is primarily a field of applied ethics, the study of moral values and
judgments as they apply to accountancy. It is an example of professional ethics. Accounting
ethics were first introduced by Luca Pacioli, and later expanded by government groups,
professional organizations, and independent companies. Ethics are taught in accounting
courses at higher education institutions as well as by companies training accountants and
Due to range of accounting services and recent corporate collapses, attention has been drawn
to ethical standards accepted within the accounting profession. These collapses have resulted
in a widespread disregard for the reputation of the accounting profession. [3] To combat the
criticism and prevent fraudulent accounting, various accounting organizations and
governments have developed regulations and remedies for improved ethics among the
accounting profession.
Accounting ethics has been deemed difficult to control as accountants and auditors must
consider the interest of the public (which relies on the information gathered in audits) while
ensuring that they remained employed by the company they are auditing. They must consider
how to best apply accounting standards even when faced with issues that could cause a
company to face a significant loss or even be discontinued. Due to several accounting
scandals within the profession, critics of accountants have stated that when asked by a client
"what does two plus two equal?" the accountant would be likely to respond "what would you
like it to be?".This thought process along with other criticisms of the profession's issues with
conflict of interest, have led to various increased standards of professionalism while stressing
ethics in the work environment.
The role of accountants is critical to society. Accountants serve as financial reporters and
intermediaries in the capital markets and owe their primary obligation to the public interest.
The information they provide is crucial in aiding managers, investors and others in making
critical economic decisions. Accordingly, ethical improprieties by accountants can be

Page 10

detrimental to society, resulting in distrust by the public and disruption of efficient capital
market operations.
"Every company in the country is fiddling its profits. Every set of published accounts is
based on books which have been gently cooked or completely roasted. The figures which are
fed twice a year to the investing public have all been changed in order to protect the guilty. It
is the biggest con trick since the Trojan horse. ... In fact this deception is all in perfectly good
taste. It is totally legitimate. It is creative accounting."


Samanthi Senaratne is Professor in Accounting and the present Head of the Department of
Accounting at the University of Sri Jayewardenepura. She holds a Bachelors Degree in
Accounting with a first class, an MBA and a PhD specializing in finance. She is prolific
researcher and has published widely in the areas of corporate governance, corporate social
responsibility reporting and accounting education. She engages in teaching in the areas of
financial reporting and accounting theory at both undergraduate and postgraduate levels.
Ethics and professional practice
It is extremely important for accounting professionals to be ethical in their practices due to
the very nature of their profession. The nature of accountants work puts them in a special
position of trust in relation to their clients, employers and general public, who rely on their
professional judgment and guidance in making decisions. These decisions in turn affect the
resource allocation process of an economy. The accountants are relied upon because of their
professional statues and ethical standards. Thus, the key to maintaining confidence of clients
and the public is professional and ethical conduct
Ensuring highest ethical standards is important to a public accountant (one who renders
professional services such as assurance and taxation service to clients for a fee) as well as to
an accountant in business (one who is employed in a private or public sector organisation
for a salary). Both public accountants and accountants in business are in a fiduciary
Page 11

relationship, former with the client and latter with the employer. In such a relationship, they
have the responsibility to ensure that their duties are performed in conformity with the ethical
values of honesty, integrity, objectivity, due care, confidentiality, and the commitment to the
public interest before ones own
The Framework for International Education Standards for Professional Accountants (2009)
published by International Accounting Education Standards Board (IAESB) of IFAC
identifies that the overall objective of accounting education should be to develop competent
professional accountants, who possess the necessary (a) professional knowledge, (b)
professional skills, and (c) professional values, ethics, and attitudes. In this respect, the
International Education Standard (IES) 4 - Professional Values, Ethics and Attitudes of
IAESB recommends that a programme of professional accounting education should provide
potential professional accountants with a framework of professional values, ethics and
attitudes to exercise professional judgment and act in an ethical manner that is in the best
interest of society and the profession.
Accountants are given access to private information and therefore the nature of your job
means that people expect you to be highly trustworthy, says Sally. With companies and
clients investing more than just their trust in accountants, it is important that you have a
strong sense of ethics beyond the basic wrong versus rights.

Page 12




David Christensen, Jeff Barnes, and David Rees

Southern Utah University

On 21 July 2002 the second largest telecommunications company in the U.S.,
WorldCom, Inc., applied for bankruptcy protection. WorldCom failed because of the bad
business decisions of its executives to manipulate earnings with improper accounting entries.
The key executives involved in the fraud were CEO Bernard Ebbers and CFO Scott Sullivan.
The accountants who were pressured by Ebbers and Sullivan to prepare improper accounting
entries included Director of General Accounting Bufford Yates, Controller David Meyers,
Director of Legal Entity Accounting Troy Norman, and Director of Management Reporting
Betty Vinson. Each was convicted of securities fraud and received federal jail sentences,
including billionaire Bernie Ebbers who received a 25-year sentence in federal prison.1 Betty
Vinson received a 5-month jail sentence.
Another key player in this sad story of greed and conflicting loyalties is Vice President of
Internal Audit Cynthia Cooper, a whistleblower who with two other internal auditors, Gene
Page 13

Morse and Glyn Smith, doggedly investigated and revealed the fraud to WorldComs audit
In this case study we found about the ethical pressure faced by Betty Vinson and Cythia
Cooper as they each balanced conflicting loyalties between family, employer, and profession.
Betty first balked then caved to the pressure and ruined her career; Cynthia did not cave and
was named one of three Persons of the Year by Time Magazine in 2002 for her moral
courage at WorldCom (Lacayo and Ripley 2002).

Page 14


Page 15

What Can Result from Poor Ethics in Accounting?
Many negative consequences can result from poor ethics in accounting practices. The first
result is generally a lag in business. Accounting firms rely heavily on word-of-mouth for
promotion, and it's all too easy for a few bad stories about unethical behaviour to sway
prospective clients away from a particular firm. There can also be serious legal repercussions
for those who are found to be violating legal codes and standards for their jurisdiction
What Can I Do to Be an Ethical Accountant?
To begin with, study your area's legal statutes regarding accounting practices. While it is true
that what is legal and what is ethical can be two different things, the legal code is a good
basic guide to help you understand the prevailing feeling towards what is right. Likewise,
make sure that you always put the interests of your clients ahead of your own, that you
safeguard client information doggedly and never behave in a fashion that you know to be
wrong while handling accounting work.
Why are Ethics Important in Accounting?
Proper ethics and ethical behaviour are extremely important in accounting for a variety of
reasons. To begin with, accountants are often privy to sensitive information regarding their
clients, such as Social Security or bank account numbers. This gives accountants a good deal
of power in regard to their clients and it is important that the trust between an accountant and
their clients not be abused. In the same way it is important that the industry itself does not
become stigmatized as an unethical one, something that could potentially harm business for
all accounting firms.
Ethical Issues Facing Accountants
The collapse of Enron resulted in black marks against the accounting profession and several
reforms to change accounting standards. It is hoped that these changes will eliminate such
unethical procedures as making the company's shares financially more viable, but
establishing no gain to shareholders and creditors.
Page 16

The task of accounting is to state the truth about an organization's financial condition and
provide the conditions of trust required by a market economy. The American Institute of
Certified Public Accountants has established ethical guidelines and rules of conduct that are
to be followed by its members. This Code of Professional Conduct is applicable not only to
accountants but to financial professionals. A part of the code stresses the profession's ultimate
responsibility to its public, which includes shareholders, clients, creditors, the business
community, governments, and employers who are involved with commerce.
One of the reasons that Enron and similar events occurred is that the accounting firms placed
too much importance on the corporate interests and not enough on the investors' interests.
The accountants cooperated with the company's management team, which led to "cookiecutter" rather than principle-founded accounting practices, such as depreciation and inventory

Because there can be such leeway with financial statements, accountants must act as
"security guards" and be able to resist their own desire for personal gain. There are many
cases where financial transactions continue to be inaccurately stated, such as essential figures
left out of statements and debits listed on the ledger's credit side or not listed at all.
Accountants need to be sleuths and find such errors and then tell the truth about them.
Oversight Board
Although the accounting profession has overall been recognized for its excellent work, such
instances as Enron tarnish the whole field. The Public Company Accounting Oversight Board
(PCAOB) was created to develop auditing standards with ethics rules and quality control for
accounting firms.
Hiring Practices
Accounting firms must set high criteria in hiring and training practices of new personnel,
especially courses on ethics and professional responsibility. In the past not enough emphasis
Page 17

had been placed on ethics issues. In addition to checking a candidate's references, the
accounting employer needs to clearly discuss the importance of ethics in job interviews.
Larger accounting firms may want to consider having one person who specifically oversees
ethics and accountability. Nearly all states require that certified public accountants must take
continuing education courses to keep their licenses, yet only a handful of states mandate
ethics training.

Ethics and professionalism

One of the elements that many believe distinguishes a profession from other occupations is
the acceptance by its members of a responsibility for the interests of those it serves. A high
standard of ethical behaviour is expected of those engaged in a profession. These standards
often are articulated in a code of ethics. For example, law and medicine are professions that
have their own codes of professional ethics. These codes provide guidance and rules to
members in the performance of their professional responsibilities.
Public accounting has achieved widespread recognition as a profession. The AICPA, the
national organization of professional certified public accountants, has its own Code of
Professional Conduct which prescribes the ethical conduct members should strive to achieve.
Similarly, the Institute of Management Accountants (IMA) the primary national
organization of accountants working in industry and government has its own code of ethics,
as does the Institute of Internal Auditors the national organization of accountants providing
internal auditing services for their own organizations.


Ethical codes are informative and helpful. However, the motivation to behave ethically must
come from within oneself and not just from the fear of penalties for violating professional
Page 18

codes. Presented below is a sequence of steps that provide a framework for analyzing ethical
issues. These steps can help you apply your own sense of right and wrong to ethical

Step 1.

Determine the facts of the situation. This involves determining the who, what, where,
when, and how.

Step 2.

Identify the ethical issue and the stakeholders. Stakeholders may include shareholders,
creditors, management, employees, and the community.

Step 3.

Identify the values related to the situation. For example, in some situations
confidentiality may be an important value that may conflict with the right to know.

Step 4.

Specify the alternative courses of action.

Step 5.

Evaluate the courses of action specified in step 4 in terms of their consistency with the
values identified in step 3. This step may or may not lead to a suggested course of

Step 6.

Identify the consequences of each possible course of action. If step 5 does not provide
a course of action, assess the consequences of each possible course of action for all of
the stakeholders involved.

Step 7.

Make your decision and take any indicated action.

Ethical behavior is difficult for any researcher to measure and analyze, especially in real-life
situations. Results are often imprecise due to the challenges inherent in quantifying what is
ethical and what is not. Much of the work done is theoretical, and involves either creating or
applying ethics models. To draw conclusions from ethics research, due to the many variables
Page 19

involved, researchers must rely on judgment and assumptions as they study an individuals
actions, reactions and reasoning for the individuals behavior. Nonetheless, the conclusions
drawn and models proposed in ethics research provide valuable insights into ethical behavior,
and it is an important area of academic research.

Page 20