As professional people increasingly under public scrutiny, accountants find themselves exposed to complex ethical issues. There are many ethical issues with which accountants struggle and points to ethical systems as tools that can be used to solve ethical dilemmas. By understanding the rational methods by which ethical issues may be examined, the professional accountant is better prepared to cope with complex ethical situations that are likely to arise in the professional working environment (Badawi, 2002). Clearly, those who remain members of the profession in good standing achieve many benefits, including income and public recognition. These things are rewards for the achievement and maintenance of high standards. The esteem that derives from membership in an elite group makes professional status desirable.
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Utilitarianism is referred to by some as the consequentialist ethical theory. It is expressed in the form that asserts that people should always act so as to produce the greatest ratio of good to evil for everyone (Smart and Williams, 1990). This has great appeal in the area of welfare economics and does not differ dramatically from the philosophies and beliefs of Keynes, Pareto, and Pigou; some might even include Marx in this category. As with Pigou, the utilitarians believe that when choosing between two actions, the one that produces the greatest net happiness should be the one chosen (Mill, 2002). Where most of them disagree with one another is in the area of how this principle should be applied. There are also several stated weaknesses in this concept. It ignores actions that appear to be wrong in themselves; it espouses the concept that the end justifies the means; the principles may come into conflict with that of justice seems to associate justice with efficiency rather than fair play); and it is extremely difficult to formulate and establish satisfactory rules of application.
Utilitarianism manifests itself in two major forms. The stronger of the two is so-called act-utilitarianism. Under this system, the moral agent considers the consequences of only the action under consideration. The second system is called rule-utilitarianism (Smart and Williams 1990). Here the moral agent considers a set of rules by which life should be lived. The basis of accepting or rejecting a rule is whether the consequences of everyone following the rule will result in the maximum probable good consequences. Rule-utilitarianism may be regarded as a weaker form of utilitarianism than act-utilitarianism. A rule-utilitarian, when confronted with a situation in which he believes that abiding by the rule will not in the present case be most beneficial, will simply modify the rule (Mill, 2002).
Most accountants are already familiar with a system that acts very much like utilitarianism: cost/benefit analysis. In the cost/benefit system the accountant/manager attempts to balance the probable costs of taking a particular course of action with the probable benefits to be derived. Most accountants realize that cost/benefit analysis becomes more and more sticky as the analysis moves away from measurability in terms of dollars. Measurement of benefits has been particularly problematic (Weinstein, 2008). Nevertheless, cost/benefit analysis appeared prominently in the accounting literature in arguments about an ethical issue of interest to the profession: social responsibility accounting. Writers on this subject have attempted to balance the costs of companies reporting on their adherence to social responsibility with the costs of not doing so. A second, more practical criticism centers around the difficulty of defining the probable benefits, called “utility,” and somehow summing them. Great disagreement may be generated over which consequences are in fact “good,” which consequences should receive greater or lesser weight, and what probability should be assigned to different future consequences (Goodin, 1995). Modern critics of utilitarianism also note that ultimately utilitarianism must seek non-utilitarian answers on assigning boundaries and values around the measurement of activities and values associated with the calculation of utilitarian systems. All these matters serve to cause what appears to be an exceptionally practical system to become less and less practical (Weinstein, 2008).
Deontological ethics as an approach to resolving moral issues is also known as rule-based morality. The approach considers an action as morally right if it conforms with a proper moral rule. An action that violates the rule but results in beneficial actions is still considered wrong (Darwall, 2002). The sources of the rule could be either theological in the sense that the actions are stipulated as moral by a religion, or societal in the sense that they are the result of a social consensus as to whether they are right or wrong. The deontological perspective has its share of critics. With respect to Kant’s ideas, moralists have pointed out that both the categorical imperative and the practical imperative can clash with human welfare and even prescribe actions that lead to human suffering. For example, the strict Kantian would tell the truth to the police man, reasoning that the action of telling a lie is wrong per se and that any perceived consequences should not be considered (Bentham, 2000). Ross’s point of view is less vulnerable to this criticism but is subject to the weakness of answering the question of the source of the prima facie duties and whether there might be more prima facie duties. In other words, the moral agent might reasonably ask why she should accept Ross’s duties as her own. On the other hand, the deontological view concentrates upon the action itself. The thrust for the moral agent is to do his duty. Out of this comes rights for both himself and for others in society. Finally, the goal of a more ethical society is reached because in the ideal everyone is doing his duty (Darwall, 2002).
The focus upon the differences between the two systems often obscures the fact that much of the time the two views will lead to the same decision with respect to an ethical issue (Voiculescu, 1990), Critics consider a modern day phenomenon, sexual abuse of moral duties, and discover how the seemingly opposite views of ethics can and do arrive at the same conclusion with respect to the ethics involved. Both utilitarianism and deontologism may be criticized in that neither seems to by itself describe the “ethics” found in today’s society (Salzman, 1993). Perhaps this may be explained by the fact that most of us are not ethical theorists, and we therefore borrow portions of our ethical responses from both major systems. Another possibility is that another system may better describe the reality of ethics (Lippert-rasmussen, 2005).
Impact of Ethical Systems on Organizational Culture
The auditor has acted as an impartial judge. A sense of loyalty to others, and to the body politic, means that we must respect the principles of collaboration, especially the deontological dictum never to treat others as means to our own ends. It also means that we must calculate the consequences of our actions with a mind toward maximizing the good for the many, and not just for ourselves. This sense of moral community, of course, is the basis of most organized religions, though one need have no special proclivity toward orthodoxy in order to develop a sense of social responsibility (Badawi, 2002). Though independence and objectivity are basic to accounting practice, the sources of data–and thus the bases for financial intepretation–most often reside with the client. No audit emerges full-blown from the head of an auditor. In scandals such as Sunbelt, clever and creative duplicity of clients certainly contributed to the difficulties. If audits were designed to detect all fraud they would become prohibitively expensive (Sen and Williams, 2002).
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Conflicts of moral duty come in various shapes, sizes, and intensities. We cannot anticipate all such problems. But what such conflicts have in common is both situational and philosophical. By situational we mean that a personal moral dilemma is experienced by the professional accountant. She is faced with a concern and, often, a hardchoice situation. By philosophical we mean that thinking about essentials–goals, purposes, reasons–is ignited by the moral conflict. Confronting ethical dilemmas in professional accounting is a real task. The scenario clearly depicts a conflict between professional responsibilities (auditing activities for the real estate firm) and personal morality (a desire to see that the homelessness problem is solved or, at the very least, does not increase). Principles and duties are at stake and seem irreconcilable. But there are strategies that, if not providing a convenient “way out” of the dilemma, do clarify (and sometimes make public) the conflict at hand (Badawi, 2002).
Codes of Conduct
The AICPA has the most fully developed standards of professional conduct found in accounting. Over the past two decades these standards have received considerable scrutiny from both the public and the courts. The AICPA has been astute in its degree of flexibility in maintaining control over standards while being willing to alter the standards themselves. Codes, and their enforcement, play a strong role in maintaining such public confidence. Accountants have a special reason to desire public support of their endeavors: businesses whose financial statements are audited pay for the accountant’s services. Those who receive and rely upon published financial information must be confident of the independence of the professionals who conducted the audit. Concern about the issues of both independence in fact and independence in appearance is clearly reflected in the current Code of Professional Conduct of the American Institute of Certified Public Accountants (AICPA). Currently this code of ethics consists of two sections – (1) the principles and (2) the rules. The principles are designed to provide a framework for the rules. In turn the rules are designed to govern the performance of professional services by members of the AICPA. With respect to its membership, the AICPA imposes stricter standards upon those who practice as public accountants. Those members must hold to the principle of independence in fact and to the principle of independence in appearance (American Institute of Certified Public Accountants 2008). Members who are not in public practice are required only to adhere to independence in fact. This recognizes that maintaining independence in appearance with one’s employer is impossible. Concerns for both legal and moral results must be built into the system of accounting. The slippery slope will always be there. The drive for success–for individuals and firms – will not dissolve. The only reasonable safeguard is to engender a sense of ethical practice in all professionals. The accountant can, if impelled by conscience or strict adherence to the deontological principle of non-maleficence (or, do no harm), resign from his position and make a public declaration of his resistance to any action that will create more homelessness. There is a long, and honorable, tradition of resistance to injustice (Salzman, 1993).
Our auditor may, upon reflection on the rule of proportionality, quit his job and go to work for reform of the homeless situation. But he may also try to balance professional and personal obligations by taking a more moderate course. For example, urging officers of the real estate firm to read about the abuses of the homeless that are consequences of their gentrification program; arranging meetings among displaced poor people, city officials, and real estate developers for discussion of the problem; establishing a foundation to find alternative and affordable housing for those displaced; and so forth (Salzman, 1993). This balanced approach–some would call it “middle of the road”–is not without difficulties. For this scenario is a complicated one. Surely the real estate firm’s profits are at stake. But the accounting firm’s profits are also at risk (American Institute of Certified Public Accountants 2008). For if the real estate firm, upon hearing this “balanced” advice, fires the accounting firm, no social change may ensue and the accounting firm will lose a client. The consequences for the individual, conscience-stricken auditor may also be personally disastrous: he could be fired (Badawi, 2002).
Either model may be used to attempt to strike a balance between an over-stressed profession and the unreality of a completely “laid back” one. Those who favor a utilitarian approach will want to look at the consequences of different levels of stress. What are the future implications of pathological stress upon the individual accountant, the firm for which he works, the professional community, the business community, and society at large? For example, a CPA laboring under the burden of too much stress could make a bad judgment call on an audit that might in turn cause him to miss a material fraud (American Institute of Certified Public Accountants 2008). The consequences of this would be quite severe to all parties concerned, as many famous audit liability court cases would verify. Again we suggest no simple solution, only the suggestion that those who manage accounting practices analyze the issue intelligently (Bernardi, 2004).
For the market to produce an efficient level of output, the private marginal benefit must equal the social marginal benefit and the private marginal cost must equal the social marginal cost (American Institute of Certified Public Accountants 2008). “Critics underline that with respect to both conditions, sources of market failure such as imperfect information, consumer ignorance, external economies and diseconomies, and monopoly render the market allocation unlikely to result in an efficient level of output. The failure of the market to provide an efficient and equitable level of output for most of the social issues requires some form of governmental intervention either by directly providing the good or service, by regulating the market, and/or by imposing a system of taxation/subsidization” (Donaldson et al. 2002, p. 54).
Opponents of social responsibility accounting argue in an analytical rather than descriptive fashion. That is, they approach the entire issue from the standpoint of cost/benefit analysis (Salzman, 1993). Most accountants are quite comfortable with this type of analysis. Cost/benefit analysis is a concept that is deeply rooted in utilitarian ethics. In this analysis the utility defined–that is, the good we maximize – is material wealth expressed in terms of dollars. Simply stated, we sum the cost of an action and compare it with the sum of the economic benefits expressed in financial terms. Under a utilitarian criterion we should undertake a project where the economic benefits exceed the costs (Duska and Duska, 2002).
A careful analysis of the social responsibility accounting issue on this utilitarian ground provides disappointing results for its proponents. From the standpoint of the corporation, the costs of placing any new accounting system into place are substantial (American Institute of Certified Public Accountants 2008). Here the company must consider more than the immediate costs of designing and implementing such an accounting system. Also included should be the possible consequences (costs) of publicly reporting the company’s actions in the social responsibility arena. An honest reporting of these matters could bring consequences that are not in the best interests of the owners or managers of the corporation (Voiculescu, 1990). These might come in the form of possible calls for increased government action in the affairs of the company, possible action against the company from special interest groups, or lawsuits from parties who believe they have sustained injury from the company’s actions. Moreover, these costs of implementing social responsibility accounting are fairly easy to measure using conventional business forecasting methods (Salzman, 1993).
Against these costs we should weigh the benefits of social responsibility accounting. Here we run into problems, particularly as far as the accountant is concerned. Accounting tends to deal with information that is specific in nature. Within accounting certain types of information are sanctioned as real and true. Accountants therefore focus their attention upon this type of information to the exclusion of other kinds. The benefits of reporting social responsibility information fall into a category of information that is not currently sanctioned by accounting (Voiculescu, 1990). Much of the benefit of ethical behavior is not obviously financial in nature. Accountants are therefore understandably uncomfortable with attempts to measure this information, let alone report upon it. The benefits of going through this effort are therefore elusive and difficult to express in financial terms. By way of example, let’s return to the Genesee Cable Company. Certainly utilitarian arguments may be made to reject Teresa’s plan to schedule Casual’s programming. In the long run the public, in perceiving that Genesee is a company that keeps its promises and is concerned with community values, will be anxious to have increased business contact with Genesee. In accounting terms we might be tempted to call this goodwill. Yet accountants have recognized the problems associated with measuring goodwill for years. Today this task is not even attempted unless the goodwill is demonstrated by a purchase transaction on the open market (American Institute of Certified Public Accountants, 2008).
These weaknesses of the practical application of utilitarianism readily appear in the use of cost/benefit analysis to assess the usefulness of social responsibility accounting. The weakness of a non-utilitarian principle is encountered in the fact that accounting has traditionally dealt solely with financial information. The ethical benefits in cost/benefit analysis are often difficult to translate into financial terms. Thus, many accountants are uncomfortable entering into this realm. Compounding this are forces in the business community that encourage managers to look to short-term rather than long-term results. A change in the underlying way we view the role of the corporation in society can enable us to more realistically assess not only the need for socially responsible action but also the ways accounting can assist managers and outside readers of accounting reports in the tough choices with respect to these actions.
Accounting profession is inflamed by and depends upon strict ethical rules and principles. Both deontological ethics and utilitarianism determine the main rules of the profession. Information is free from bias toward attaining some desired result or inducing a particular mode of behavior. Critics admit that the accounting ethics is one of the most complex and controversial fields of management based on diverse principles and rules. The professional is expected to “tell it like it is” rather than the way any interest group might or would like to see it. The resulting distribution from all groups will have a wider distribution than in the original distribution. Deontological ethics and utilitarianism are the core of the profession helping employees to determine the right and wrong actions and behave ethically in difficult situations.
- American Institute of Certified Public Accountants. (2006). Code of Professional Conduct.
- Badawi, I.M. (2002). Accounting Codes of Conduct, Violations and Disciplinary Actions. Review of Business, 23 (2), 72-73.
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