After Enron, WorldCom, and a seemingly endless
roster of additional accounting scandals, the
public, and their elected representatives, want
to know what has happened to ethics in accounting.
Has the profession become less ethical, or have
the recent economic downturn and related bankruptcies
simply brought to light ethically questionable
practices that have been going on for a long time?
What can we do to stem the tide? Similar questions
have been raised approximately every ten years,
whenever the economy slumps and bankruptcies,
often accompanied by financial fraud, increase.
Every decade, when financial frauds of enormous
proportions are exposed, questions are also raised
about accounting education. Are we not teaching
our students enough ethics? Can ethics be taught?
If so, how do we best teach ethics to accounting
students?
The purpose of this paper is to advocate that
professionalism, as well as ethics, be taught
in accounting curricula and that ethics be addressed
at three levels: the macro (level of society),
the firm, and the micro (level of the individual).
In addition, at the end of the paper the reader
is given a web site where s/he may obtain a recent
paper that summarizes the literature related to
ethics in accounting education and categorizes
that literature using a model of moral decision
making.
Professionalism:
What is a profession, and what makes it different
from other for-profit endeavors? Sociologists
tell us that professions share certain attributes
including expertise, monopoly, public interest,
and self-regulation. The relationship between
these a profession and society is depicted in
the diagram below:
________________________________________________________________
Attributes of a Profession
A Profession Offers: Society Offers:
Expertise
Monopoly
Public Interest
(Code of Ethics)
Self-Regulation Self-Regulation
(A Duty) (A Privilege)
________________________________________________________________
Expertise, or special knowledge, is acquired through
higher education and extensive training. The knowledge
is of an academic, theoretic nature. Hence, professionals
sell advice, not things. The expertise is also
characterized by the fact that it requires professional
judgment, not just technical skills. If answers
could always be found by reference to written
materials, such as laws, codes, or detailed standards,
the individual would be technician, not a professional.
Society is generally happy to have experts in
its midst because the expertise helps make society,
or some of its members, better off. But society
does not want non-experts claiming to possess
the expertise and mislead the general public.
For example, the public would be ill served if
anyone were allowed to hang out a shingle saying
“Brain surgery-cheap.” Hence, society
requires that individuals prove they have acquired
the appropriate expertise, usually through extensive
examinations, and then society grants a monopoly,
or license, to the experts. Only licensees may
practice the expertise.
But society now becomes nervous. Knowledge is
power. A small group of experts possess certain
knowledge and society gives them even more power
by granting them a monopoly. How does society
know the power will be used to benefit, not harm
it? Power in the hands of a few can bring harm
to the many. In response to society’s fears,
every profession promises to use its expertise
and monopoly power in the public interest. This
public interest promise is the heart of professionalism.
Without it, a group of experts are not a profession.
The profession codifies what it means for its
members to act in the public interest in a code
of ethics. Hence, every profession has a code
of ethics.
But, inevitably, some members of the profession
will not follow the code of ethics. Society deems
professionals, themselves, to be best suited to
recognize and weed out these “bad apples.”
So society grants the privilege of self-regulation
to the profession if and only if the profession
takes it seriously, as a duty. If society believes
the profession is not doing a good job at self-regulation,
it will take back the privilege, usually by increasing
legislation and litigation.
This classic model of professionalism sets the
stage for students and demonstrates why professional
ethics are so important. To teach students about
ethics is just an intellectual exercise in decision-making
(albeit in a moral context). But a discussion
of professionalism helps to give students pride
in something bigger than themselves, and helps
them understand why ethics are at the heart of
being a professional. It can help answer the question,
“why should I be ethical?”
Three levels of ethics:
Accounting academics know that their students
will not become accounting experts after one course
in accounting. Students must be exposed to accounting
concepts repeatedly before they are able to internalize
those concepts and use them to solve problems.
The AICPA’s Code of Professional Conduct,
“Due Care” principle, states: “A
member should observe the profession’s technical
and ethical standards…” Hence, members
are required to be ethical experts as well as
technical experts. But students will not achieve
ethical expertise through a single exposure to
ethical concepts, any more than they will become
technical experts by a single exposure to accounting
concepts. As accounting academics we owe it to
our students, to the profession of accounting,
and to society at large to truly educate our students
in accounting ethics. I believe this means that
the entire accounting curriculum must be examined
and revised to make sure it includes coverage
of ethics at the macro, firm, and micro levels,
in a systematic, thorough way.
The macro level:
Students today cannot escape hearing references
in the financial press and classroom to such watershed
events as the bankruptcy of Enron, the demise
of Arthur Andersen, or the enactment of the Sarbanes-Oxley
Act of 2002 (Sarbox). How do we help them put
these events into an historical perspective; especially
one that emphasizes recent changes in the accounting
profession?
In the 1970s, for example, the economy experienced
a downturn, accompanied by a rash of bankruptcies:
Equity Funding, Penn Central, Four Seasons Nursing
Homes, etc. In addition, the press disclosed illegal
and improper payments by some large and prestigious
corporations. The public cry, “where were
the auditors?” could be heard all the way
to Washington. In 1976 Congressman John Moss (D-Calif.)
issued a report advocating regulatory reform that,
among other things, called for the following:
• Uniform accounting principles should be
prescribed by the SEC
• Auditors should attest to the quality
of internal controls
• Corporate Boards of Directors should have
a majority of members unrelated to management.
Within a year Senator Lee Metcalf (D-Mont.) issued
a staff report calling for even greater reforms,
including the following:
• The federal government should directly
establish financial accounting standards
• The federal government should specifically
prohibit direct or indirect representation of
clients’ interests and performance of non-accounting
management advisory services by auditors for their
public or private clients.
The AICPA formed the Commission on Auditors’
Responsibilities (Cohen Commission) in response
to the same factors that resulted in congressional
investigations of the profession. The Cohen Commission
addressed the “expectations gap” between
what the public expects and what auditors understand
their role to be relative to the finding of financial
fraud. The Cohen Commission, like the Moss report,
recommended that management report on their companies’
internal control systems and auditors should report
on whether or not they agree with managements’
assessment of internal controls. The commission
also asserted that audits should be designed to
provide reasonable assurance that the financial
statements are not affected by material fraud.
The 1980s were deja vu all over again. A rash
of bankruptcies (ESM Government Securities, Penn
Square Bank, continental Illinois, etc.) and the
melt-down of the savings and loan industry spurred
governmental investigations. Congressmen John
Dingell (D-Mich.), Wyden (D-Oregon), and Brooks
(D-Texas) all investigated different aspects of
the accounting profession and made various recommendations.
The profession again responded by formulating
a prestigious commission, the Treadway Commission,
which investigated fraudulent financial reporting
and made its own recommendation. One recommendation
made by the commission was that accounting educators
include more ethics in accounting curricula.
Early in the 1990s the Public Oversight Board
(POB) issued a comprehensive report, titled “In
the Pubic Interest,” on issues confronting
the profession. The report contained extensive
recommendations to enhance self-regulation. Soon
after the report was issued, however, Walter Schuetze,
chief accountant at the SEC, gave a scathing speech
at an AICPA conference. He was particularly critical
of auditors who do not stand up to their clients
on financial accounting and reporting issues,
and went so far as to call auditors “cheerleaders
for their clients.” In response, the POB
appointed an “Advisory Panel on Auditor
Independence,” and that panel issued a report
titled “Strengthening the Professionalism
of the Independent Auditor.” The primary
recommendations of the advisory panel were as
follows:
• The Board of Directors, not management,
is the audit “client”
• Auditors should express to the Audit Committee
their independent judgments about the appropriateness,
not just acceptability, of the accounting principles
used and the clarity of financial disclosures
• The Audit Committee should hear directly
from the auditors whether managements’ choices
of accounting principles are conservative, moderate,
or extreme
• The auditors should meet with the Audit
Committee at least annually without management
present.
In the mid 1990s the Government Accounting Office
(GAO) issued a comprehensive report, requested
by Congressman Dingell, titled “The Accounting
Profession: Major Issues, Progress, and Concerns.”
Its stated purpose was to identify major recommendations
from 1972 to 1995 and identify unresolved issues.
The report identified the following issues as
unresolved:
• Auditor independence
• Responsibility for detecting fraud
• Reporting on internal controls
• Public participation in standard setting
• Timeliness and relevance of accounting
standards
• Maintaining independence of the FASB.
The remainder of the decade saw an intense effort
on the part of the SEC to strengthen auditors’
independence and to strengthen audit committees
of boards of directors.
If students have a sense of the historical trends
facing the profession and observe the development
of major themes (e.g., expectations gap, consulting
for audit clients, role of audit committees) they
will understand why the Sarbanes-Oxley Act of
2002 (Sarbox) focused on the issues it did. Much
of the content of Sarbox had been debated in the
halls of congress for three decades. As a result
of Sarbox, the accounting profession has lost
much of its power to self-regulate. Some would
say the profession itself, as a collective, has
lost its ethical moorings.
The level of the firm:
In addition to macro, or global ethical issues,
accountants and their ethical decisions are affected
by the structures, systems, and culture within
which they work. Students are not well educated
if they leave the university ignorant of the power
of corporate culture, especially the tone at the
top, in shaping attitudes, belief systems, and
behaviors. Case studies may be a particularly
useful tool to convey different corporate cultures.
For example, many recent articles and books have
exposed a particularly cut-throat and arrogant
culture at Enron, and others attempt to document
a change in culture at Arthur Andersen over the
past two decades. Those cultures might be contrasted
with that of Johnson & Johnson, where the
corporate “Credo” infuses a sense
of mission and purposefulness, other than greed,
in its employees.
In addition to corporate culture, firm structures,
beginning with governance structures, are powerful
tools in promoting ethical behavior. What are
the proper roles for audit committees? What makes
one audit committee strong and another weak? What
organizational structures make internal auditors
strong or weak?
What systems promote ethical behavior? Reward
systems, in particular, shape behavior. It is
unrealistic to ask employees to act ethically
while rewarding them for enhancing the bottom
line “at any cost.” At Arthur Andersen,
David Duncan, partner in charge of the Enron audit,
had final say with regard to technical accounting
issues, not the technical experts in the firm.
What would have happened to his career and $700,000
salary if he had insisted that Enron consolidate
its special purpose entities and, as a result,
lost the client? He should not have been put in
a position to make that decision. Firm structures
and reward systems can be formed to enhance or
defeat ethical decision- making.
The micro level:
Most ethics courses at the collegiate level focus
on ethics at the level of the individual. In particular,
they concentrate on helping students develop critical
thinking skills in a moral context. Critical thinking
skills, however, are only one component of ethical
behavior. According to James Rest, there are four
components of ethical behavior:
• Ethical sensitivity (spotting the issues)
• Ethical reasoning (thinking it through)
• Ethical motivation (desire to act ethically)
• Ethical behavior (carrying through)
As educators, we must help our students spot
the ethical issues before they become so embroiled
in them that their action choices are limited.
Ethical sensitivity can be enhanced in all accounting
courses by talking about ethical issues germane
to the technical issues being covered. Ethics
cases and problems at the end of textbook chapters
might also be utilized to help enhance ethical
sensitivity.
Ethical reasoning skills can be enhanced in a
number of ways: Philosophy courses, specialized
accounting or business ethics courses, courses
in critical thinking, or even the study of great
literature. The majority of research studies on
ethics education in accounting concentrate on
this component of ethical behavior.
Ethical motivation, the desire to act ethically,
is not a cognitive skill, but accounting academics
still have a role in enhancing it in their students.
In the field of Dentistry, Bebeau has shown that
ethical motivation is enhanced when students identify
with their profession. Hence, developing a sense
of professionalism and enhancing pride in the
profession are powerful motivators. One way to
enhance pride in the profession is to tell stories
about “accounting heroes.” In its
December 30, 2002 issue, Time Magazine featured
three women as “Persons of the Year”:
Cynthia Cooper of WorldCom, Coleen Rowley of the
FBI, and Sherron Watkins of Enron. Two of the
three were accountants.
Exhortation can also be a powerful tool used by
academics to help increase students’ desire
to act ethically. We are sometimes reluctant to
“preach” to students, but we should
not be shy about exhorting them to uphold high
ethical standards and to aspire always to protect
the public interest.
The last component of Rest’s model, ethical
behavior, is beyond our scope as academics. It
requires the fortitude, courage, and strength
of moral character to take the final step and
act ethically. We can, however, help set the stage
for moral behavior by helping students develop
the other three components of the model: ethical
sensitivity, ethical reasoning, and ethical motivation.
Linda Thorne integrated Rest’s four-component
model with virtue ethics theory and used her integrated
model to categorize ethics research in accounting.
Armstrong, Ketz, and Owsen used Thorne’s
integrated model to categorize research in ethics
in accounting education. The Armstrong et al.
paper also reviews the literature relating to
ethics in accounting education.
Conclusion:
Today’s students are tomorrow’s leaders.
The public interest requires leaders of the accounting
profession to understand their unique role as
professionals and to embrace their responsibility
to act in the public interest. But being responsible
leaders does not end with personal ethical choices.
Ethical leaders will also recognize the need to
create organizations where ethical decisions are
not undermined but are supported and encouraged,
even when painful. Leaders of the profession will
also recognize the need to work at a global level,
through professional societies and/or together
with governmental organizations, to create systems
designated to protect and enhance the public interest.
Accounting curricula need to systematically convey
these concepts to students. An example of such
a systematic approach might include the following:
A course in ethics taught by the philosophy department
required of accounting students in the sophomore
or junior year, ethics cases/problems/discussions
in every accounting course, an applied ethics
course in the senior year, taught by accounting
faculty, covering accounting ethics at the micro
and macro levels, and finally a graduate course
in the fifth year, taught by accounting faculty,
covering ethics at the level of the firm.
|