Decision Making in Accounting

Chapter 2
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 Agenda
• To discuss a general decision making model

• To understand the role of accounting standards in

supporting the technical decisions of the accountant.

• To consider what is meant by an ethics of duty and an

ethics of virtue?

• To describe problem solving resources for accounting

decisions.

• To present the decision making model.

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 How Do People Make Decisions Under
Conditions of Uncertainty?
1. A decision starts with a goal or a purpose…for example, how
can I improve my lifestyle?

2. Decisions involve options, with choices to make…I have

money for a car or a new apartment to improve my lifestyle.

3. How does each option meet my goal…does having a car or a

new apartment improve my lifestyle more?

4. I choose one of the alternatives and then I act.

5. I purchase a car or find a new apartment.

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 The Goal of Accounting
• To make decisions about the information
available they can decide whether to provide
resources to the entity. to existing and potential
investors, lenders, and other creditors so

• The decisions made by outsiders include buying,

selling, or holding equity and debt instruments
and providing or settling loans and other forms
of credit (The Conceptual Framework).

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 The Accounting Decisions Involve
1. A goal – to provide useful information to outsiders.
2. Identifying alternatives - which may involve
various accounting standards and principles.
3. An evaluation of the options - based on whether
they comply with the accounting standards and
whether the option provides high quality
information to outsiders.
4. A choice - about the financial reporting needed in
the situation and then the implementation of the
action to carry out the decision.

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 The Qualitative Characteristics of
Information
• The Conceptual Framework lists two factors that are
necessary for high quality information:
(1) information must be relevant and
(2) the information must faithfully represent the economic event
reported.

• Relevant information predicts or confirms.

• Information that is faithfully represented reports the

economic phenomenon in an accurate way (if a
transaction is reported as operating revenue, it meets the
definition of operating revenue.)
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What is the Ethics of Duty and the Ethics
of Virtue?
• The ethics of duty is the accountant’s responsibility
to make technical decisions by following the rules
set forth in the accounting standards.

• The ethics of virtue is the accountant’s obligation

to identify and deal with moral issues that arise in
the decision making process. These ethical
obligations are set forth in the professional codes of
conduct and the principle sections of the accounting
standards.
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 What is Ethics?
• The inquiry into human action that offers rational arguments on how
people ought to behave in specific circumstances and conduct
themselves over the long term.

• Ethics is reasoned reflection on how one ought to judge right from

wrong, choose good over evil, and decide to do good for others rather
than doing harm.

• Ethics is the use of logic and reason to distinguish right from wrong
and to choose to do good rather than bad.

• Ethics involves decision making and the use of logic and reason to
determine what is good in a situation.

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 What is the Role of Moral Philosophy in
Accounting Ethics?
• There is no reason for accountant’s ethical reasoning to “start
from scratch”.

• The discussion within moral philosophy can support ethics

decision making in the special domain of accounting.

• This chapter introduces several philosophical ethics traditions; a

later chapter will expand on this discussion.
•
• The purpose of introducing philosophical traditions is to provide
tools to assist the accountant in his or her own ethics decision
making.
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Four Philosophical Traditions

1. Teleology
2. Deontology
3. Virtue ethics
4. Social contract theory

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Elements Common to Ethics Reasoning

1. Each tradition considers the decision maker to be a “moral

agent” – a person who decides how to act in particular
situations as well as how to conduct themselves over a long
period of time.

– Moral agents find themselves caught up in confusing circumstances

where moral issues arise and they face dilemmas where it is difficult
to tell whether an action is right or wrong , helpful to others or
harmful.

– In a dilemma, confusion may be so great that finding good reasons

to do one thing may conflict with other good reasons to do
something else.

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Elements Common to Ethics Reasoning
2. Moral agents have a number of resources for
their ethics decision making.
- Character traits including intellectual abilities and
moral aptitudes, natural talents and learned skills,
and emotional and intuitive qualities.
- Virtues gained through experience, formed by habit

- Resources external to the individual

- Values to be admired.
- Social and institutional patterns of decision making.
- Systems of rewards and punishments.
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Elements Common to Ethics Reasoning

3. Each tradition of moral philosophy calls

for an account of the consequences of the
decision.

– The decision maker is asked to evaluate what

happened after the decision and to consider
the results that are linked to the choices made
and the actions taken by the moral agent.

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Now Let Us Consider Four Moral Philosophy Traditions
and How They Might Help Us Make Accounting
Decisions

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 Teleology
• Teleology: it means that an act is considered
morally right or acceptable if it produces some
desired results such as pleasure, the realization of
self-interest, fame, utility, etc.
• Teleologists assess the moral worth of behavior by
looking at its consequences (consequentialism).
• Two important teleological philosophies that
guide decision making:
1. Egoism 2. utilitarianism
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1- Egoism and Enlightened Egoism:
- Egoism defines right or acceptable behavior in terms of its
consequences for the individual.
- Egoists believe that they should make decisions that maximize their
own self-interests which is defined differently by each individual.
- Many believe that egoistic people and companies are inherently
unethical, short-term oriented, and will take advantage of others to
achieve their goals.
- The laissez-faire economic system enables the selfish pursuit of
individual profit. So, regulated marketplace is essential to protect
interests of those affected by individual or companies decision
making.

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2- Utilitarianism

• For a utilitarian, the right answer is the one that

promotes happiness (well-being, satisfaction) for
those affected by the decision.

• The “rightness” of a choice lies in its results or

consequences.

• The decision should add value to society.

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 Utilitarianism
• Individuals within the group should be treated
impartially; the utilitarian decision tolerates no favorites.

• A utilitarian may consider a rule (principles or

accounting standards) as a resource to assist in the
decision making process.

• So, for example, one might ask, “do we want a rule that
says companies can misstate their earnings when
needed to meet analyst forecasts?”

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 Deontology
• For the deontologist, decisions are based on the core principle at
stake in the decision. Deontologists are required to: “Do the right thing
for the right reason”.

• The “rightness” of a decision depends on the moral agent’s moral

principle for the decision. If the decision is made because of the right
moral principle, then the action is right.

• The motive of the moral agent, not the result of his decision, is given
the highest priority.

• The duty of the accountant is to follow the accounting standards when

preparing financial statements. A deontologist might make a decision
based on the principle of “the accountant’s job is to follow the rules”.

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 Virtue Ethics
• Virtue ethics focuses on the “qualities of character”
(instead of moral principles or consequences of
actions) possessed by the moral agent.

• The “rightness” of a decision made by a virtue

ethicist is answered by the question: Is the decision
made by the moral agent what a virtuous person
would do? Does the decision show diligence and
disciplined thinking, did the moral agent resist
temptation and pressures from others to act with
integrity, to show honesty, or to tell the truth?
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 Social Contract Theory
• Social contract theory begins from the position that the moral agent
acts as a citizen within a specific type of society. The society is
formed through the voluntary choices of its citizens. These
individuals form a social contract with one another and each citizen
finds himself obligated to protect the rights of others in the society.

• The “rightness” of a decision for a social contract theorist is based

on whether the decision reflects an explicit awareness of his
social duties. The moral agent is required to explain his actions to
the other members of the society.

• The “decision, dialogue, consensus-building” pattern of this theory

forces the moral agent to recognize that many groups may be
affected by the moral agent’s decision.
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Developing a Decision Model for
Accounting Ethics

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 The Decision Model
• Five stages of the decision process:
– Identification of the problem
– Identification of the problem solving resources available
to us
– Identification of important characteristics of the decision
environment
– Generation and evaluation of decision alternatives
– Judgment and action.

• We will consider each stage of the decision process

in separate chapters of the book.
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Arriving at an Adequate Solution
Our job is to identify the desireable and
possible alternatives that reflect both
technical proficiency and ethical awareness.

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Questions?

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