Transcript Some fundamental concepts of professional ethics for

Some fundamental concepts of
professional ethics for
accounting
Michael Pakaluk
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)
Methods of Ethics Approach
1.
2.
3.
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)
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.)
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).
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.
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?
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).
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.
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.
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.
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?
Evidence for the distinctive task of
accountants
Appeal to authorities; reflection on accounting
itself.
Authorities:
Professional associations
Regulatory entitities
Practitioners
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.
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 “investorowners” (n. 12), whereas, on the other hand,
investors aim to be “effective” in “allocating scare
resources among competing uses” (n. 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.
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.
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.
Reflections on the nature of accountancy
itself
-- e.g. FASB Statement of
Financial Accounting Concepts, no. 2,
“Qualitative Concepts of Accounting
Information”.
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).
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.
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?
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). “
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.
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.
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?
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’?
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?
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’?
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?
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?