Chapter 1

Ethical Reasoning:
Implications for Accounting

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 Ethical Reasoning
Ethical dilemma: Betty Vinson, how a genuinely good
person can get caught up in fraud.
Ethical blind spots refers to the gap between who you
want to be and who you actually are.
Organizational goals, rewards, compliance systems, and
informal pressures all contribute to ethical fading.

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 Integrity: The Basis for Ethics in Accounting
Integrity:
• Meaning on principle.
• Traces back to Socrates, Plato and Aristotle.
• Is the foundational virtue of the ancient Greek philosophy of
virtue.
• Helps withstand pressures to subordinate judgment.
• Is a “must have” for accountants.

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 Religious and Philosophical Foundations of
Ethics
A version of the Golden Rule appears in each of the
world’s religions.
Ethics can be traced back to ancient Greek philosophy.
• “What is the best sort of life for human beings to live?”
• Greeks believed the ultimate goal of happiness was to attain
some objectively good status: the life of excellence.

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 Ethics, Morals, Values
Ethics, derived from the Greek word ethikos (character),
deals with the concepts of right and wrong; standards of
how people ought to act.
Morals, derived from the Latin word moralis, deals with
manners, morals, character.
Values are basic and fundamental beliefs that guide or
motivate attitudes or actions.

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 What is Ethics?
Ethics describes the way people ought to act:
• Accepted standards of behavior.
• Practices of those in a profession.
• Laws.
• Expectations of society.
Gaa and Thorne.
• Ethics is the actions of people in situations where these
actions have effects on the welfare of both oneself and on
others.

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 Ethics: Norms and Values, and Law
Norms:
• Ethical decision-making entails following norms of behavior.
• Does not describe the way people do act (descriptive).
• Deals with the way people should act
(prescriptive/normative).
Values:
• Basic beliefs that guide or motivate attitudes or actions.
• Values of a profession (for example, Accounting) are
embedded in codes of ethics.
• “Golden Rule” prescribes that we should treat others the
way we want to be treated.
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 Ethics and the Law
The Law:
• Being ethical is not the same as following the law.
• Existence of specific laws prohibiting certain
behaviors will not stop a person who is unethical
from violating those laws.
• Laws create a minimum set of standards that ethical
people usually go beyond.

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 Norms, Values, and the Law:
The Gray Area
When facts are unclear and legal issues are uncertain,
consider the following:
• Established standards of ethical behavior.
• Moral philosophies.
Gray Area/Unclear Rules.
Willingness to take action not in ones own self-interest.
• Look beyond self-interest and consider all perspectives
involved.
• Process followed to decide on a course of action is more
important than achieving the end goal.
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 Moral Relativism
View that ethical statements vary from person to
person.
Each statement is equally valid.
No one’s opinion of right versus wrong is better than
another’s.
There is no ultimate standard of good or evil.
Morals are based on one’s culture, religion, place and
time where they occur.

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 Ethical Relativism
If correct, there can be no common framework to
resolve any moral disputes between different societies.
Theory is rejected by most ethicists.
Societies may differ in their application of fundamental
moral principles but agree on the principles.

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 Situation Ethics
Theory that recognizes the existence of certain principles
but questions whether they should be strictly applied or
used as guidelines in a particular situation.
Circumstances around ethical dilemma should influence
decision making process.
Problem: it can be used to rationalize actions such as
cheating.
• University of North Carolina.
• Harvard.

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 Social Networkers and Workplace Ethics
Ethics Resource Center survey on employees using social
networking on the job.
Discussing company information online.
Active social networkers are unusually vulnerable to risks.
• Witness more misconduct.
• Experience more retaliation as a result when reported.
Training and ongoing commitment to an ethical culture
can mitigate the risks presented by social networking at
work.

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 Six Pillars of Character
Trustworthiness.
Respect.
Responsibility.
Fairness.
Caring.
Citizenship.

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 Trustworthiness
Trustworthiness: being honest, acting with integrity,
being reliable, and exercising loyalty in dealing with
others.
• Honesty: is the most basic ethical value and means that we
should express the truth as we know it and without
deception.
• Integrity: strength and courage of one’s convictions.
• Reliability: following through with one’s
promises/commitments.
• Loyalty: not violating confidence placed in us.

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 A Word about Whistleblowing
Loyalty requires a commitment to do the right thing for
the right people in the right way (for example, public
interest in accounting).
Loyalty is the one value that should NEVER take
precedence over other values.
Your ethical obligation is to report violations to your
supervisor and up the management chain.
Only in rare situations would external whistleblowing
be appropriate.

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 Respect, Responsibility, and Fairness
Respect: treating every individual with dignity. The
golden rule encompasses respect for others through
notions such as civility, courtesy, decency, dignity,
autonomy, tolerance and acceptance.
Responsibility: the ability to reflect on alternative
courses of action, persevere and carry out moral action
diligently.
Fairness: treating others equally, impartially, and
openly.
• Michael Josephson points out, “fairness implies adherence to
a balanced standard of justice without relevance to one’s
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 Caring and Citizenship
Caring: The essence of caring is empathy. Empathy is
the ability to understand, be sensitive to, and care
about the feelings of others. Caring and empathy
support each other and enable a person to put herself
in the position of another. This is essential to ethical
decision making.
Citizenship: 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 of the issues, volunteer in your community,
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 Reputation
Reputation: overall quality or character in the opinion of
the public towards a person or group or organization. It is
an important factor in many professional fields, including
accounting.
One builds “reputational capital” through favorable
actions informed by ethical behavior.
Takes a long time to build a reputation of trust but not
long at all to tear it down.

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 Modern Moral Philosophies
A few of the philosophies applicable to the study of accounting
ethics include:
Teleology.
• Egoism.
• Enlightened Egoism.
• Rational Egoism.
• Utilitarianism.
Deontology.
• Rights Theory.
• Justice.
Virtue.
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 Egoism, Enlightened Egoism, and Rational
Egoism
Consequences for individual.
“Do the act that promotes the greatest good for
oneself.”
Enlightened egoists.
• Allow for the well-being of others.
• Help achieve some ultimate goal for self.
• Self-interest remains paramount.
Rational egoists.
• Make decisions that promote one’s own self-interest in
accordance with reason.
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 Utilitarianism
Bentham and Mill.
Consider impartially the interests of all persons affected
by an action and pick the greater benefit.
“Greatest good to greatest number.”
Difficulties.
• Impossible to foresee all consequences.
• Consequences difficult to measure.

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 Utilitarian Types
Act-Utilitarian.
• Examines the specific action itself versus rule.
• Sets aside the rule only if increase in net utility to all
stakeholders.
Rule-Utilitarian.
• Basis behavior on rules designed to promote the
greatest utility.
• Maximizes intrinsic value.

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 Deontology
Derived from Greek “deon” meaning duty.
Moral norms establish basis for action.
Based on rights of individuals and motivation rather
than consequences.
Concerned with means rather than end result.
Rights.
Justice.

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 Rights Principles
Hobbes and Locke.
Kant (1724-1804).
Categorical Imperative.
• Motivated by sense of obligation.
• Universality of moral actions.
• People should never be treated as a means only, for example,
a means to an end.
Difficulties.
• Moral Absolutes.
• No clear way to resolve conflicts between moral duties.
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 Justice
John Rawls (1921-2002).
“Original Position” – behind the “veil of ignorance.”
Each permitted the maximum amount of basic liberty
compatible with others.
Social and economic inequalities are allowed only if
benefit all.
• Treat equals (for example, those with equal claims) equally
and unequals (for example, those with differing claims)
unequally.

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 Virtue Ethics 1

Greek philosophers, Plato and Aristotle.

Less emphasis on learning rules.
Stress importance of developing good habits of
character.
Cardinal virtues.
• Wisdom.
• Courage.
• Temperance.
• Justice.

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 Virtue Ethics 2

Other Important Virtues.

• Fortitude.
• Generosity.
• Self-respect.
• Good temper.
• Sincerity.
Bad Character Traits, also known as Vices.
• Cowardice.
• Insensitivity.
• Injustice.
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 Virtues in Accounting Practice
Ethical obligations to clients, employers, government,
and public at large.
Perform services.
• Without bias.
• Avoid conflicts of interests.
• Independence.
• Integrity.

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 Acting with Integrity
Act out of moral principle, not expediency.
Never let loyalty cloud good judgment and ethical
decision-making.
Have the courage to stand by your convictions in
accordance with the public service ideal of the accounting
profession.

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 Moral Point of View
Emphasizes practical reason and rational choice.
Deliberation precedes choice of action.
• Reason.
• Thought.
• Voluntary.
Ends do not justify the means.
At least some times we should be willing to act in the
best interests of others and set aside self-interest and
the interests of an employer or a client.

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 Accounting and the Public Interest
Honoring public trust.
Acting with integrity in performance of professional
services.
Being independent of clients.
Making decisions objectively.
Exercising due care in the performance of services and
professional skepticism.

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 AICPA Code of Conduct
The code is divided into two sections:
• Principles: are aspirational statements that form the
foundation for the Code’s enforceable Rules of Professional
Conduct. Principles are expectations but are not legally
binding. The principles of professional conduct include:
• Responsibilities.
• Public Interest.
• Integrity.
• Objectivity and Independence.
• Due Care.
• Nature and Scope of Services.
• Rules: enforceable applications of the Principles.
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 Overriding Responsibility of CPAs
Exercise sensitive professional and moral judgments in
all activities.
Recognize the primacy of a CPA’s responsibility to the
public as the way to best serve the clients’ and
employers’ interest.
Continued improvement in the level of competency and
quality of services.

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 Virtue, Character, and CPA Obligations
Aristotle’s Virtues
• Trustworthiness,
benevolence, altruism.
• Honesty, integrity.
• Impartiality, open-
mindedness.
• Reliability, dependability,
faithfulness.
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Ethical Standards for CPAs
• Integrity.
• Truthfulness, non-
deception.
• Objectivity, independence.
• Loyalty (confidentiality).
• Due care (competence and
prudence).
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 Institute of Management Accountants
(IMA)
Principles. Standards.
• Honesty. • Confidence.

• Fairness. • Confidentiality.

• Objectivity. • Integrity.

• Responsibility. • Credibility.
Resolution of Ethical Conduct.
• Discuss issue with immediate supervisor or higher authority.
• Clarify ethical issues with an IMA Ethics Counselor or other
impartial advisor.
• Consult attorney.
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 3D Printing Case Study
Privately held company started after a successful
Kickstarter campaign.
CEO wishes to secure a $10 million bank loan.
Issue: recording revenue for $200,000 sale when
shipment will occur after year-end cut-off date.

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 DigitPrint
IMA Standards.
• Integrity, inform higher level of management, seek outside
counsel.
Utilitarianism.
• Greatest benefit to the public, company, and employees would
be to delay recording revenue.
Rights Theory.
• Investors have ethical right to receive accurate financial
information.
Justice.
• Virtue of integrity and not subordinate judgment.
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 What to DO?
Attempt to counteract Kyle’s statements about being a
team player.
Take concerns to the Board of Directors.
If needed approach external auditors or regulatory
agencies.

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 Concluding Thoughts
In accounting, integrity is its own reward because it
builds trust in client relationships and helps honor the
public trust that is the foundation of the accounting
profession.
Heroes in accounting do exist: brave people have spoken
out about irregularities in their organizations.

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 Videos on Cases
Harvard Cheating Scandal.
• (Continued).

The Ethics Quiz.

• (Continued).

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