Some fundamental concepts of professional ethics for accounting

1. Some fundamental concepts of professional ethics for accounting Michael Pakaluk

2. What is the best approach to accounting ethics? The “Methods of Ethics” approach is rejected. (Not timeless, but originating in late 19th c., due to Henry Sidgwick.) A more ‘classical’ approach is advocated (Plato, Aristotle)

3. Methods of Ethics Approach • Distinguish ethical theories • Deduce different practical conclusions from the different theories • Students left with picking a theory (based presumably on some balance between appeal of theory and appeal of practical implications)

4. Objections to this approach 1. This could not capture what is distinctive about accounting ethics; it would tell us, rather, only what it means to act well as regards general morality, for someone who happens to be an accountant. (For instance, that someone happens to be an accountant does not change the fact that, as a human being, he should not steal.)

5. 2. What counts as a correct procedure for deciding ethical questions is extremely controversial, and yet what constitutes ethical conduct for an accountant, at least in broad outline, is not controversial. Thus, in the area of accounting ethics, it would be desirable to build upon matters of agreement rather than introduce additional reasons for disagreement (i.e. above and beyond those already present in the interpretation or assessment of the facts of a difficult case).

6. 3. The fact that one begins deliberation about accounting ethics with a presentation of ‘methods of ethical decision’ suggests that ethical deliberation should depend upon the prior choice of an ethical system. But this presupposition seems mistaken for two reasons, one theoretical and the other pedagogical.

7. Theoretical objection By hypothesis it would need to be a (so far) non-ethical person who engaged in this selection of an ethical system, and yet one wonders what criteria a non-ethical person would use for such a choice (that there exists a valid argument from considerations of pure rationality to a system of morality, as some philosophers have held, seems problematic and is in any case very controversial), and how could we have confidence in the system thus chosen?

8. Pedagogical objection Since, for someone who has not yet chosen an ethical system, it looks as though only interest could provide the motive for a choice, this way of setting up the problem encourages the thought that, in general, interest dictates the selection of an ethical rationale for one’s decision—but this is exactly the outlook that one needs to reject in the context of accounting ethics (desired results determine the selection or application of the rules).

9. Making explicit what is implicit For these considerations it seems best to see whether there are ethical principles already implicit in the practice of accounting, which accountants who practice with integrity are already committed to, and then a primary task of accounting ethics would be to make these principles explicit.

10. The “Ergon Principle” A good instance of kind K is that which has those traits, or ‘virtues’, which enable it to carry out well the distinctive work of a thing of kind K. The distinctive work of a kind of thing, in turn, is understood to be some useful or productive thing that a member of that kind can alone achieve, or can achieve better than any other kind of thing.

11. The “Principle of Associations” Persons cooperate to form an association when there is something that each wishes to achieve, but which each cannot achieve at all, or cannot easily achieve, working on his own.

12. The most important questions for accounting ethics I. What is the distinctive task (ergon) of an accountant? II. What are the raison d’etre and lawlike common goal of a professional body of accountants? That is, why do accountants form professional organizations in the first place, and in what way is the practice of accountancy as a consequence qualified by the ‘law’ of a professional body?

13. Evidence for the distinctive task of accountants Appeal to authorities; reflection on accounting itself. Authorities: Professional associations Regulatory entitities Practitioners

14. FASB Statement of Accounting Concepts No. 1 Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. The information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence.

15. In a “highly developed exchange economy … [m]ost goods and services are exchanged for money or claims to money” (n. 10); the “[p]roduction and marketing of goods and services often involve long, continuous, or intricate processes that require large amounts of capital”; this productive activity, furthermore, “is carried on through investor-owned business enterprises” (n. 11); and, on the one hand, management is accountable to these “investor-owners” (n. 12), whereas, on the other hand, investors aim to be “effective” in “allocating scare resources among competing uses” (n. 16).

16. Implicit in the Statement is the view that the distinctive task of an accountant in the precise sense is to provide information that may be relied upon by present and potential investors and creditors, who cannot themselves directly obtain that information.

17. Charles Waldo Haskins Questions and cross-questionings, of owners, of stockholders, of directors, of presidents, are often to be answered as supplementary to the report; the answer must be intelligent, ready, and never resentful. These gentlemen desire truth and nothing else; it belongs to the spirit of professional Accountancy to seek out and reveal to them the truth. [T]he ideal conception of its true mission by the profession itself—a conception from within and not dependent upon extraneous exigencies— places Accountancy far outside the pale of all ordinary callings, and sets it upon a platform of its own as a learned profession, self-impelled to culture, to moral enlargement, and to scientific attainment; it lays a basis of confidence for every business enterprise that in professional Accountancy there is a self-centered soul of economic truth.

18. U.S. v Arthur Young By certifying the public reports that collectively depict a corporation’s financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public. This ‘public watchdog’ function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust.

19. Reflections on the nature of accountancy itself-- e.g. FASB Statement ofFinancial Accounting Concepts, no. 2, “Qualitative Concepts of AccountingInformation”.

20. If alternative accounting methods could be given points for each ingredient of usefulness to in a particular situation, it would be an easy matter to add up each method’s points and select the one (subject to its cost) that scored highest—so long, of course, as there were some general agreement on the scoring system and how points were to be awarded. There are some who seem to harbor the hope that somewhere waiting to be discovered there is a comprehensive scoring system that can provide a universal criterion for making accounting choices. Unfortunately, neither the Board nor anyone else has such a system at the present time, and there is little probability that one will be forthcoming in the foreseeable future. Consequently, those who must choose among alternatives are forced to fall back on human judgment to evaluate the relative merits of competing methods (para. 10).

21. FASB goes on to identify and explain the concepts of relevance, reliability, comparability, materiality, and cost-effectiveness. FASB indirectly defines the distinctive task of an accountant: someone who is capable of exercising judgment in order to compile, present, and evaluate financial information about an enterprise which realizes in an appropriate way these qualitative characteristics, or ideals (= attest) This spells out more concretely what is meant by ‘truth’ in the definition we earlier gave.

22. Why do accountants organize themselves into a professional body? What can accountants/auditors do in common which cannot be achieved by each working on his/her own?

23. Why a profession (and not a business)? “Professionals need to confer with one another in order to improve and perfect their professional judgment (professional development); they need to clarify publicly, through a public ‘profession’, the ideal of truthfulness to which they adhere (public standing); and, because of the difficulty of adhering to this ideal, they need to set standards for themselves and remove members who in some serious way fail to adhere to the ideal (quality control). “

24. Fill out the ‘ergon’ of accountants, adding this social element of professionalism: Cooperating with other like professionals in the truthful presentation, in observance of the qualitative characteristics of accounting, of the financial condition of an enterprise, for an altruistic purpose, viz. so that others may rely on this for their serious purposes.

25. From this one may ‘deduce’ and discuss the ‘virtues’ of an accountant. Objectivity Independence Due diligence Integrity --rethought not as high-level rules, but as traits of practitioners.

26. Questions which naturally arise: Exactly how many ‘virtues’ of an accountant are there, and which of these are more fundamental, and which are less so? Which virtues are derivative or actually species (special cases) of some more comprehensive virtue?

27. How are the virtues of an accountant acquired, and how are they fostered and preserved in the culture of a firm? How important for these purposes is classroom instruction? What are the roles of ‘mentoring’, examples, and ‘stories’?

28. To what extent are the virtues of an accountant dependent upon, or ‘grafted upon’, the virtues that someone has as a human being? Is it possible to be a bad human being, and lack important human virtues, and yet nonetheless have all of the virtues of an accountant?

29. Can a consideration of the ‘virtues’ of an accountant help to decide which among various codes of ethical conduct is preferable, when these codes differ? For instance, can it shed light on whether international and European formulations are preferable to U.S. formulations, and, if so, why? Also, can a reflection on the underlying virtues lead to a simplification or at least rationalization of the unwieldy rules governing ‘independence’?

30. To what extent can reflection on the ‘virtues’ (and ‘vices’) which pertain to accountants as professionals lead to useful reflections about the causes and prevention of accounting scandals?

31. What difference does it make—and is the difference important—when case studies are thought about not in terms of ‘rules and principles’ solely, but also as cases in which an accountant’s ‘virtues’ might be exemplified?