Topic 4

Ethics and Accountability

School of Accounting, RMIT University, Melbourne,

2015

Chapter 4 – Brooks & Dunn – 6th Edition

1
 Describe and understand
 AICPA Decision Tree

 American Accounting Association

(AAA) Model
 Accounting Professional and Ethical

Standards Board (APESB) Model

 Tucker’s 5-question model

2
 Decision-making models provide a
systematic framework to arrive at the
best course of action

 The conventional decision-making

model is based on assumptions of
rationality in seeking the best course of
action, after taking into account all
known variables

3
 First level is concerned with identifying
and clarifying the problem
 Second level outlines the steps to
making an informed decision
 Third level deals with implementing and
evaluating the decision, to assess its
effectiveness
 These three levels involve eight
identifiable steps

4
 Firstly, define the problem

 Accurately defining the real problem

is very important as it establishes the
reasons for making a decision

 And ethical issues are not usually black

or white !

5
 Establish the decision criteria

 work-related issues may rely on

criteria such as company policies

 personal issues may rely on views of

fairness and respect

6
 Weigh the criteria which are not
normally equal in importance

 e.g., compliance with the law is more

important than maximising revenue

 Develop alternative courses of action

 Identify all possible alternatives to

help resolve the problem

7
 Analyse the alternatives

 Need to critically analyse and objectively

evaluate different courses of action

 although personal judgment will

introduce subjectivity

 Select the best alternative

 Choose the alternative that produces the

greatest overall value

8
 Implement the decision

 Sound implementation is as important

as the decision itself

 Evaluate appropriateness of the decision

 Evaluation enables people to learn

from the experience

9
 Accountants spend a great deal of
time making decisions, which can
then used to subsequently evaluate
the accountant's performance

 Few financial scandals involving

accountants are caused by
methodological errors but rather by
errors in judgement, including ethics
failure

10
 Professional judgement is the
process of making a decision that is
carried out with objectivity, integrity
and in recognition of one's
responsibilities to those affected by
the judgement

11
 Ethical decision-making can be defined as
‘the process of identifying a problem,
generating alternatives, and choosing among
them……

 …….. so that the alternatives selected

maximise the most important ethical values
while achieving the intended goal’

12
1. Decisions compliant with the law

2. Decisions consistent with professional

obligations, guided by codes of
conduct

3. Decisions based on moral values and

philosophical reasoning

13
 Ethical decision-making models develop
a systematic approach to making
decisions (BD 178, Figure 4.1)

 They give moral perspectives to the

alternatives, consequences and various
interests

14
 Developed by the AICPA ( American
Institute of CPAs) to help accountants
resolve an ethical issue at work

 Firstly, follow established company

policies if in place

 If not available, discuss with immediate

superior and escalate upwards if
necessary

15
 May take it to the entity’s ethics
committee or the audit committee of the
board

 If issue not resolved, consider whether it

is appropriate to resign

 Refer to page 98 of Dellaportas et al a

diagram of the AICPA ethics decision
tree

16
17
 Conventional decision-making, discussed
earlier, forms the basis of the AAA model

 Difference with the AAA model is that

careful consideration is given to ethical
values and principles

 The aim firstly is to learn as much as

possible about the dilemma

18
 Otherwise key issues may be
overlooked, or a decision may be the
right answer to the wrong problem

 Questions normally asked in this step

include Who? What? Where? When? and
How?

19
 2a List the primary stakeholders

 Identify all affected parties

 2b Define the ethical issues

 Alternative courses of action with

competing interests between the
stakeholders
 These include benefits, harms, rights,
duties, principles and claims

20
 Identify norms, principles and values

 These include standards, rules and

beliefs that guide acceptable and
morally ‘good’ conduct

21
 List the major alternative courses of
action to resolve the problem

 This would include those actions that

require compromise

22
 The decision-maker should pause
and reflect on the values

 Need to determine whether one

value, or combination of values, is
so compelling that the proper
alternative is clear

23
 Each alternative identified in step 4
should be evaluated in terms of its
short, long, positive, and negative
consequences

 Non-quantifiable outcomes must be

weighted and assessed for their
likelihood of occurrence

24
 If a decision is not reached in Step 5,
the decision-maker must balance the
consequences for each course of action
and select an appropriate alternative

25
 The APESB (Accounting Professional and
Ethical Standards Board) has included in the
APES 110 Code of Ethics for Professional
Accountants, further guidance on ethical
decision-making

 Sections 100.16 to 100.21 of the Code,

titled ‘Ethical conflict resolution’ outlines five
steps that should be considered by the
member to resolve a conflict in the
application of fundamental principles

26
 They are as follows (s.100.17):

 relevant facts

 ethical issues involved

 fundamental principles related to the

matter in question, including the
identification of threats to those
principles (fundamental principles and
threats to be covered in later topics)

27
  established internal procedures which
might represent safeguards against
the identified threats; and

 alternative courses of action

 The steps considered in this APESB

model are similar to the steps outlined
in the AAA model

28
 The AAA model is a model of ethical
decision-making applicable to all settings
and not specific to accounting

 However, the APESB model attributes

greater emphasis to the fundamental
principles of professional conduct, threats
and safeguards
 as outlined in the APES 110 Code of
ethics for professional accountants

29
 It is important to note that APES 110
gives considerable detailed guidance on
safeguards that counteract threats
which are ethical in nature

 This is especially so in Section 290 on

Independence – Assurance
Engagements, found in the section on
Application of Framework to Specific
Situations

30
 Over 25 pages are devoted to specific
situations in respect of:

 The provision of assurance services

 The provision of non-assurance services
 Fees and pricing
 Gifts and hospitality
 Actual and threatened litigation

31
 These APES 110 guidelines provide practical
assistance to accounting professionals, both
in practice and in business

 They provide alternative courses of action,

once the fundamental principles have been
identified (including the identification of
threats to those principles), relating to the
ethical situation at hand

32
 If there is a negative response to any one/or
more question(s), the problem should be
reviewed and corrected
 Otherwise, the decision is unethical
 The last question is an optional question
designed to focus on particular issue. This
model is useful in deciding problems without
many externalities and where profit is main
consideration.
33
 Is the decision:

 Profitable?
 Legal?
 Fair?
 Right?
 Going to further sustainable
development? - i.e., is it
environmentally sound?

34
 Ethical decision-making is a function of
individual characteristics and the
environment in which a decision-maker
works and lives

 The greatest influence on a person's

decision-making is one’s personal ethics

35
 The higher one's personal ethics (moral
development), the less dependent that
person is on outside influences and
hence the more that person is likely to
resolve the problem autonomously

 Questionable decisions result from an

environment clouded by pressure and
stress

36
 The extent to which an individual will
make a decision consistent with their
personal values, will depend on how
well they can resist the pressures in the
work environment

37