Why are we here? A curious phenomenon: professionals who are required by law to take (introductory) classes in ethics on a regular basis. as if there were a presumption of a lack of ethics! why just these professionals?
The obvious answer “This is a result of legislation in the wake of major scandals.” (Enron, WorldCom, etc.) But: If that’s all it is, this would be misguided: “Punishing” the many for the sins of a few These high-profile scandals are out of the ordinary A classic case of regulatory over-reaction
No: There are persistent and entirely general problems The first: persistent conflict between the high ideal and purpose of accounting, and its actual circumstances in business; together with a sense that this conflict cannot be resolved by law, regulation, rules.
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The high ideals and purpose of accounting “In the context of the decentralized economies that are now widely believed to serve the interests and aspirations of citizens of democracies in the 21st century, the role of investors (capitalists) is an important one. “Success for absentee investors is critical to the continuing contribution of capital and capital markets to the welfare of those citizens. Information on enterprise success is a key link between suppliers of capital (household savers) and business enterprises employing that capital. “When accountants (including auditors) fail to provide investors with reliable information that is relevant to their capital allocation decisions, investors and all citizens with stakes in the success of the economic system suffer.” George Staubus
… in conflict with the actual circumstances of accounting “It is apparent that auditors are not paid for [by investors], and are not motivated to meet investors’ objectives. The problem with this arrangement is illustrated by auditors’ customary terminology: they refer to the enterprise being audited and/or its top management as the ‘client’. But if the system is to serve the American economic system as described in the previous section of this paper, auditing must serve the investing public and treat it as the client.” “In simple terms, management uses owners’ money to hire auditors to provide a stamp of approval on management’s reports on its own performance to owners.” “The auditor is in an awkward position. He makes his living by pleasing management, but his societal justification requires serving investors.”
People look to ‘ethics’ for the answer to this structural problem True enough, there is plenty of regulation! But it is sensed that regulation, laws, and rules are intrusive, inadequate, and self- defeating. Intrusive: imposed ‘from without’ Inadequate: can’t cover all cases or be effective ‘when no one is watching’ Self-defeating: the ‘crowding out effect’, extrinsic motivation replaces intrinsic
Regulation can actually be counter- productive It suggests that the bare minimum is acceptable; that the legal=the ideal. When extrinsic motivation is increased, intrinsic motivation sometimes decreases (“crowding out effect”). E.g. higher pay may lead to worse performance.
The “crowding out effect” In countries where most blood is supplied for free, offering money for donations can reduce total supply (Upton 1973). When citizens in Switzerland were asked whether they would agree to have a nuclear waste respository in their community, 50% agreed, but when this was proposed with compensation, as a quid-pro-quo, acceptance dropped to 25%. (Frey and Oberholzer-Gee 1997)
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Regulation as presupposing and therefore encouraging a “governance of crooks” “The reactions of Principal Agent theorists and politicians to the malpractices and excessive compensations of top management by intensifying monitoring and sanctioning tend to worse the very problems they are designed to solve. The apparent remedy raises the incentives of managers and other employees to take advantage of the very firm they are supposed to care about. The conditions leading to a ‘governance of crooks’ have to be taken into account.” (Osterloh and Frey)
An axiom of management theory also. Any measure of activity contributing to the goal of an organization will be imperfect; thus there will be occasions in which to satisfy (succeed according to) the measure will be at odds with what actually benefits the organization. To proliferate imperfect measures risks proliferating such choices. “It follows, then, that in general it is impossible to have a system of evaluation and incentives, a set of standard procedures, budgetary targets, close monitoring, or any other formal system that can always guarantee that the results of actions by individuals will be ethical or in the best interest of the organization. Formal systems are not only incapable of doing the fine tuning needed for that purpose, but often they can be at the origin of unethical behavior on the part of executives.” (Rosanas and Vellila)
Summary of the first reason Regulation and rules are inadequate in dealing with the persistent problem of the circumstances of auditing. (Auditors are not paid by those whose interests they are supposed to represent.)
Second reason: The history of accounting as a profession Basic issue: Accounting is a profession, but one which lacks the lengthy history of the traditional professions (law, medicine, theology). Ethics is meant to substitute for the lack of guidance from history, tradition, and entrenched social practices.
But What is a Profession? There are two accounts of what a profession is: Sociological- Six Criteria Philosophical- Incommensurability
Sociological Attributes of a Profession 1. "[they] involve essentially intellectual operations with large individual responsibility;" 2. "they derive their raw material from science and learning;" 3. "this material they work up to a practical and definite end;" 4. "they possess an educationally communicable technique;" 5. "they tend to self-organization;" 6. "they are becoming increasingly altruistic in motivation."
Some more Sociological Criteria Professions conform to a standard of professional qualifications governing admission. They maintain certain standards of conduct. They have a recognized status. They are constituted by associations devoted to the advancement of the social obligations of the profession. They have a distinctive culture, involving customs, traditions, and symbols.
Philosophical Attributes of a Profession Distinguish commensurable from incommensurable goods. Identify “honorable goods”, not commensurable with market goods. A profession (unlike a business) dedicated to providing an honorable good.
Examples of honorable goods and professions Health: medicine Justice: law Knowledge: professors Salvation: theologians and ministers Trust: accountants
An important corollary The payment received by an accountant insofar as he or she is providing the honorable good of trust has the character of an honorarium or stipend. Strictly speaking, it cannot be conceived of as a payment in kind, because the good provided is incommensurable with money.
The resulting dilemma Accountancy has the high calling that every profession has—perhaps a higher calling insofar as it may claim to be ‘more altruistic’. But it lacks the history and clear understanding of itself which are possessed by law, medicine, and theology. Thus, the line between profession and business is easy to blur. “Ethics” is thought to be able to remedy this.
A third problematic: uniformity versus particular judgment The task of accounting: to declare the truth about the financial condition of an enterprise, thus providing the conditions of trust necessary for a market economy.
Note the emphasis on truth “ 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.” Charles Waldo Haskins
“ But the 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.” Charles Waldo Haskins
“ 1. The written records, the accounts of business transactions, in a vast number of cases were imperfectly, inaccurately or fraudulently stated. And many still are. Consequently the public accountant’s first duty was to fight figures. 2. It is astounding how many relevant figures may be omitted from records of business transactions, how many debits find their way to the credit side of ledgers, and how many debits are entirely omitted—so that public accountants must find facts. 3. The third compelling reason for the employment of public accountants, and much the most important, is his duty, after fighting the figures and finding the facts, to assemble the figures and the facts and to tell the truth about them, with clarity, conciseness and intelligence so that he who runs may read.” Robert H. Montgomery
“ Eternal vigilance is the price of accounting as well as of liberty. And so I see very little change from year to year in the more important attributes of the public accountant. For more than 48 of the 50 years under review I have intimately known the leaders of the profession in this country and in England and Scotland. Then, they were fearless seekers for the truth. Fifty years ago, poor as they were, no power on earth could have swerved them from their search. Nearly fifty years later, as I look into the faces of my brothers in our profession from far and near, from the ends of the earth, I see in these new faces the same proud determination, the same courage, the same stubbornness, the same men I saw nearly fifty years ago. And to those who are not here I extend a grateful prayer. I don’t want to have anything to do with supermen. I want men in the profession with simple minds and indomitable courage to seek and tell the truth.” Robert H. Montgomery
Telling the truth requires a background of truthful statement There can be no truth-telling about businesses and accounts, without uniform standards, to allow comparisons (‘vertical’, ‘horizontal’, between enterprises, and across times). But particulars are so varied, that the truth cannot be captured by any system of rules, however complete.
Orientation to the truth is a matter of good character, or “ethics” This orientation to find and tell the truth in each case, even if this means departing from rules or interpreting them appropriately, requires a good orientation in the practitioner—good character. It must come from within, because it cannot come from without (the rules). “Ethics” is thought to be relevant to this.
Fourth reason: The role of a ‘watchdog’, in a context where money is at play Money—especially large sums—provides a constant temptation to act solely in one’s own self-interest, even if this is in disregard of one’s obligations towards other. Greed: the motive to act in this way. Greediness: a trait of character by which one commonly acts in this way.
In this context, the accountant is declared a ‘watchdog’ “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.” (U.S. v. Arthur Young)
Not that responsibility for the integrity does not rest with others also! Management– obviously! Accounting professors FASB
The responsibility of accounting professors “Academics, shielded by the academic freedom custom and by their protected source of income, might be the ‘low-cost producers’ of reform-oriented activity. We can understand the pressures on corporate accountants to resist reforms favoring the public interest and we know the pressures auditors are under from their fee-paying clients under extant arrangements. They see reform activity as very costly—if they think of it at all. They would be high-cost producers, so it is understandable that they do not enter that market. If reform is to come from within the broad accounting profession, rather than from government regulatory agencies, it must come from academia, according to this view. Academics should take positions on issues in which they believe, such as a theory of investor-oriented accounting, the auditor bias problem, or inequities in tax laws, and write and speak on those positions as if we were confident of the prospects for success. What do we have to lose? Is it not our duty?” George Staubus
Three ethical failures of FASB (Staubus) Allowing too much weight to corporate interests and politicians when seeking input as regards proposed standards. (The views of investors should be paramount.) Cooperating with corporate management’s desire for ‘bright line’ standards, and a cookbook approach to accounting, rather than taking the lead in promoting principles-based accounting. Failure over its lifetime of 30 years to achieve the standardization of accounting methods that it was charged with achieving (e.g. depreciation and inventory methods).
Nonetheless, accountants are ‘watchdogs’ To be a reliable ‘watchdog’ where large sums of money are involved—and thus constant temptations to greed and greediness—requires a steadfast devotion to duty and principle (truth) which, again, comes from within. This is a matter of good character, good culture in the firm, good professionalism, and “ethics”.
Recapitulation: Four enduring reasons for “ethics courses” 1. Accountants are not paid by those whose interests they are supposed to represent, and regulation cannot solve this. 2. Accountancy is a profession, which lacks the history, tradition, and self-understanding of the traditional profession. 3. Accountants must state the truth in a way adequate to particular circumstances—they need an inner orientation to the truth. 4. Accountants must serve as ‘watchdogs’ and thus be especially able to resist greed and greediness.
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