Embracing Ethics and Morality
Stephens, William, Vance, Carol A., Pettegrew, Loyd S., The CPA Journal
An Analytic Essay for the Accounting Profession
In this era after the financial and accounting failures of Enron, WorldCom, AOL, Global Crossing, Tyco, Lehman Brothers, Washington Mutual, and AIG, the discusión concerning the root causes of such failures must be redoubled - and the accounting profession stands at the center of this discourse. Were the failures due to incompetent accounting and auditing practices? Did the profession provide inadequate accounting and auditing rules for a complex business environment? Was there too much emphasis on short-term results and performance rewards at the expense of sound accounting principles? Could the failures have resulted from the profession's reluctance to take responsibility for detecting fraud? Or was it simply what baseball philosopher Yogi Berra once said when asked to explain his team's lack of success, "We made too many wrong mistakes" (Yogi- It Ain't Over, Md3ww-W&, 1989)?
In this article, the authors join analysts like Paul F. Williams and submit that the underlying explanation for these accounting failures was a moral and ethical problem and that to ignore this underlying issue is to seriously miss the point ("You Reap What You Sow: The Ethical Discourse of Professional Accounting," Critical Perspectives on Accounting, voL 5, no. 1, pp. 995-1001, 2004). If the accounting profession is willing to settle for a rules-based approach of legislative fixes, without looking at a failed moral and ethical underpinning, any efforts to regain a preeminent professional status will fail. The authors offer a prescription that the accounting profession can use to regain its moral foundation and reestablish ethical practices.
Reasons for Decline
The etiology of the profession' s problems is more systemic than the factors that many analysts have cited - such as the growing pains from the expansion of consulting over auditing, the emerging demands of revenue growth (Patrick T. Kelly and Christine E. Earley, 'Leadership and Organizational Culture: Lessons Learned from Arthur Andersen," Accounting in the Public Interest, vol. 9, no. 1, pp. 129-147, 2009; Stephen A. Zeff, "How the U.S. Accounting Profession Got Where It Is Today: Part I," Accounting Horizons, vol. 17, pp. 189-205, September 2003; Stephen A. Zeff, 'How the U.S. Accounting Profession Got Where It Is Today: Part ?," Accounting Horizons, vol. 17, pp. 267-286, December 2003), the cognitive development and socialization of new accountants into the profession (Lawrence A. Ponemon, "Ethical Judgments in Accounting: A Cognitive-Developmental Perspective," Criticai Perspectives on Accounting, vol. 1, pp. 191-215, 1990; Lawrence A. Ponemon, "Ethical Reasoning and Selection Socialization in Accounting," Accounting Organization and Society, vol. 17, pp. 239-258, 2006), and the change in the educational foundation of accounting from principles-based to rules-based standards (Terri L. Heron and David L. Gilbertson, "Ethical Principles vs. Ethical Rules: The Moderating Effect of Moral Development on Audit Independence Judgments," Business Ethics Quarterly, vol. 14, no. 3, pp. 499-523, 2004; David Satava, Cam Caldwell, and Linda Richards, "Ethics and the Auditing Culture: Rethinking the Foundation of Accounting and Auditing," Journal of Business Ethics, vol. 64, pp. 271-284, 2006; Paul F. Williams, "Accounting and the Moral Order: Justice, Accounting, and Legitimate Moral Order," Accounting in the Public Interest, vol. 2, no. 1, pp. 1-21, 2002).
The authors argue that the decline in ethics is largely cultural and appears to be as closely associated with a failing system of morality as it is with the profession's ethical rules. The discussion below is divided into two sections that contend that 1) the attitudes and behaviors of today's youth toward ethics and morality are an important detriment to the profession doing the right thing both now and the future, and 2) in the profession should adopt a morality-based approach to the development of its ethical codes and standairis. The authors' analysis and recommendations are abetted by Lawrence Kohlberg' s moral stage theory (The Psychology of Moral Development: The Nature and Validity of Moral Stages, Harper & Row, 1984).
A Report Card on the Next Generation
If the accounting profession is to set a standard of ethical behavior for others to follow, then its leadership must be dedicated to achieving that goal. To acquire people with this quality, the profession must attract a core of individuals with a passion for becoming leaders who are honest, trustworthy, and of high personal integrity. But looking to the profession's long-term prospects, there is little reason to be encouraged by the generation of leaders that will come from the youth of today. Unfortunately, there exists little evidence that today's youth have values about ethical behavior that are consistent with the profession's needs.
In 2008, the Josephson Institute surveyed 30,000 American high-school students on their attitudes toward ethics and morality and released its "Report Card on the Ethics of American Youth" with the following headline: "Survey of Teens Reveals Entrenched Habits of Dishonesty - Stealing, Lying and Cheating Rates Climb to Alarming Rates." The survey reported that -
* 64% of high-school students have cheated on atest in school one or moie times,
* 82% have copied someone else's homework for school,
* 82% have lied to a parent about something significant,
* 30% have stolen something from a store,
* 65% have lied to a teacher, and
* 26% said they weren't perfectly honest in answering the questions on the survey.
Given that more than one in four highschool students admitted to not answering some of the survey questions truthfully-presumably, because of social expectations-the authors expect the evidence of dishonesty to be understated by at least this amount Furthermore, over 92% of those surveyed said they were satisfied with their personal ethics and character, which strongly suggests that today's youth has a view of ethics that is far different from what the accounting profession needs to turn the ethical corner.
Another study forecasts an even bleaker future for a profession that must depend on today's generation. In 1999, Marianne M. Jennings published a study of young people between the ages of 18 and 34 who were asked the following question: "Are there absolute standards for morals and ethics or does everything depend on the situation?"
Jennings reported that "Seventy-nine percent in the 18-34 age group said the standard did not exist and that the situation should always dictate behavior. Three percent said they were not sure." Jennings concluded that "if this poll is correct, 82 percent of all students believe that right and wrong are relative terms and that morality is a ridiculous concept. This is the den of lions into which I walk every day. It is called the modern American classroom" ("The Real Generation Gap: Attitudes and Education of Generation X," Executive Speeches, vol. 13, no. 4, pp. 20-26).
In a more recent article, Carol A. Vanee and William Stephens analyzed the strengths and weaknesses of this new generation of accounting majors and pointed to this deficiency in ethics as a significant threat to the future of the accounting profession ('How Does the New Generation of Accounting Majors Measure Up: Observations from the Ivory Tower," The CPA Journal, pp. 6-13, November 2010).
In a USA Today article, "Advice from the Top: Words of Wisdom for Graduates," Deloitte & Touche CEO Jim Quigley commented, "Nearly half of all teens say they would act unethically to get ahead or make more money if they knew for sure they would not get caught. I find this troubling and would advise any graduate to make ethical behavior the cornerstone of their career" (May 21, 2007).
A 2009 study by Deloitte & Touche indicated that a large number of teens possess a troubling contradiction in their ethical readiness for the workforce: While 80% boasted of their confidence in being prepared to make ethical decisions in the future, many freely admitted to unethical behavior in the present. Only 25% said they would be 'Very likely" to reveal knowledge of unethical behavior in the workplace.
Unfortunately, these are not isolated cases. Students realize that they will not be held accountable for their misdeeds. Parents will rarely accept the possibility that their children did something wrong. Even when their children fully admit to an unethical act, parents typically fail to see it as deserving any meaningful punishment. School administrators and school boards too often bow to the pressure and strong-armed tactics of parents, undermining a teacher's authority, credibility, and ability to dole out punishment for classroom misdeeds. This often leads to many wonderful teachers deciding to simply look the other way or leave the profession altogether. With no accountability for unethical actions, students realize that they can cheat with impunity and, thus, come to believe that cheating is an acceptable activity.
As a result, students later enter the professions such as accounting having developed their personal integrity within an ethical vacuum, thinking that if they cheat, it is unlikely they will be caught. If they are caught, they believe that the punishment - if any - will be minor. And if sharper punishment is imposed, it will most likely be reversed. Consider such an individual 20 years later, in a high-level accounting position, having to make a decision about an accounting standard that could ruin careers and impact millions of dollars on the bottom line. Add to that the fact that management is almost always evaluated, financially rewarded, and promoted based on short-term profits and not on upholding ethical standards.
One might argue that young people will eventually mature into responsible adults who realize the importance of being ethical and understand that ethical people and organizations usually achieve longterm success in the world. By the time they finish college and have been exposed to the importance of ethical behavior, one might suppose that their attitudes will have changed. But there is no evidence of this, and most ethicists agree that an individual's value system has been fully developed by the time he reaches college and that furflier education can do little to change that.
As evidence that such negative attitudes do not change after college, a study of 5,331 graduate students found that 56% of graduate business students admitted to cheating in the past year. Many said they cheated because they believed it was an accepted practice in business. The report stated: "Many graduate business students have work experience where they have been exposed to the 'Get it done at all costs' culture (a situational ethic) still found in many corporate workplaces" (Katherine Mangan, "Study Finds Widespread Cheating in MBA Programs," Chronicle of Higher Education, September 19, 2006).
A Wall Street Journal editorial reported on the unethical behavior of students in the Fuqua School of Business MBA program at Duke University, where 34 firstyear MBA students cheated on a takehome exam, and the university either suspended or failed all of them Reaction from the cheaters came from two directions. Some felt that "it's a dog-eat-dog world," and is no different from the professional world they will enter. Others argued that cheating is simply the "postmodern leadership style ... an inventive person who gets things done" ("Their Cheatin' Hearts," May 11, 2007, p. WIl).
Can Teaching Ethics in Accounting Help?
While ethicists say that an individual's value system has been fully developed by the time she reaches college, and further education can do little to bring about change, most accounting programs include accounting and auditing ethics in their curricula, whether in stand-alone courses or integrated into a number of other courses.
Recent data suggest that ethics training at school or work may not be the panacea some would have hoped. In a comprehensive review of modern education, Charles Murray points to a "moral void" in educational curricula and values (including college) where the prevailing orthodoxy emphasizes being nice rather than being good (Real Education: Four Simple Truths for Bringing America's Schools Back to Reality, Three Rivers Press, 2008). Murray stated: "Instead, if they have gone to a typical college, they have imbibed the reigning ethical doctrine of contemporary academia: nonjudgmentalism. They have been taught not just that they should be tolerant of different ways of living, but that it is wrong to make judgments about the relative merit of different ways of living." But education needs to teach a renewed sense of professional ethics in accounting if it is to somehow overcome this distorted view of nonjudgmentalism.
Analyzing the Profession's Low Standard
People perform unethical acts for a variety of reasons. Kohlberg classified cognitive frameworks giving rise to ethical behavior into six categories, which are described as the six stages (or levels) of moral reasoning ("The Claim to Moral Adequacy of a Highest Stage of Moral Judgment," Journal of Philosophy, vol. 70, pp. 630-646, 1973; The Philosophy of Moral Development: Essays on Moral Development, Harper & Row, 1981; and Kohlberg 1984). Kohlberg's system derived from his passionate belief that moral reasoning involved both an individual and communal sense of what constitutes the right behavior (Susan Ellen Henry, "What Happens When We Use Kohlberg? His Trouble Functionalism and the Potential of Pragmatism," Educational Theory, vol. 51, pp. 259-269, 2001). As one moves from stage one to stage six, the explanations for ethical behavior progress from the quite practical and selfish to a concern for others and a decision to do the right thing simply because "it's the right thing to do."
Kohlberg's six stages of moral reasoning are as follows:
* Stage one: being ethical for fear of being caught or punished
* Stage two: being ethical out of concern for one's self-interest
* Stage three: being ethical because of peer pressure to do so
* Stage four: being ethical because it's the rule, regulation, law, or standard
* Stage five: being ethical out of concern for the good of others, because of a sense of social responsibility
* Stage six: being ethical out of a concern for the moral principle involved and knowing that it's simply the right thing to do.
Kohlberg's research later concluded that stage four is the highest level achieved by a majority of the young people in his study when they took an ethical action. This supported the position that many people do the right thing for no better reason than a law, rule, or requirement tells them to do so. Kohlberg contended that most people do not typically rise to levels in which they consider the welfare of others, in stage five, or the moral principle, in stage six (Kohlberg 1984).
What happens when CPAs face an ethical dilemma and there is little risk of punishment (stage one); long hours, familial sacrifices, and inadequate rewards given (stage two); a lack of peer pressure, given the crush to get the job done (stage three); or a gray area concerning the proper application of an accounting or auditing principle (stage four)? Such situations offer little justification for acting ethically when stages five and six are not part of one's prior socialization.
When the authors discussed these six stages of ethical reasoning in an accounting classroom, the vast majority of accounting students in upper-level classes conformed to Kohlberg's conclusion. Although some students felt that the highest level achieved by most people was lower than stage four, very few demonstrated the moral reasoning of stages five or six.
If stage four is indeed the highest level considered by most accountants making ethical decisions, then this helps explain why codes of ethics are often ineffective for organizations and professional groups. Most large companies and professional groups, such as the AICPA and the American Bar Association, have codes of ethics. Most of these codes rely on a set of iules for achieving ethical behavior. And yet, violations of these codes seem to have been an integral part of many business failures. One example is the AICPA's failure to issue a public objection to Timothy Geithner's nomination to Treasury Secretary for failed timely tax compliance. The AICPA defaulted to a situational ethic that was politically expethent but morally the wrong thing to do when it gave Geithner a pass, rather than holding him to a higher standard as a financial expert. When a culture becomes dysfunctional (i.e., permissive of lawlessness), leadership is needed to direct individuals back to a more ethical position (Kelly and Barley 2009, pp. 143-144). The authors believe that we, as a profession, have forgotten that we must adhere to the moral principle of the rules and not just to the letter of the rules. The line exists not for us to stand on but, rather, to stand far behind.
In the aforementioned USA Today article, Quigley admonished, "The question is not 'Will I get caught?' or even 'Is it legal?' To be successful in business and life, we must follow the higher standard of, 'Is it right?' In my view, the people who follow this standard live richer, fuller lives and achieve success that lasts." In essence, Quigley is saying that the fifth and sixth levels of ethical reasoning are what we should all be following.
Admittedly, everyone, no matter how noble or honorable, at times might only do the right thing because of fear, selfishness, peer pressure, or some standard or law. To think that most people never rise above stage four, however, is to sadly realize that these same people probably have little desire, courage, or instinct to strive to reach stages five or six. How can any profession ever be ethical, if many or most of its members do not strive to do the right thing for the right reasons?
Ethics and Morality in Accounting
The term "ethics," although defined in several different ways, is almost always closely linked with morality - and "moral" is the one word common to all the following definitions:
* "The study of morals in human behavior" (Oxford English Reference Dictionary, 2002);
* "The study of standards of conduct and moral judgments" (Webster, 2002);
* "A set of moral principles: a theory or system of moral values" (MerriatnWebster, 2003);
* "The philosophy of morals" (American Heritage Dictionary, 1969);
* "The science of morals" (Oxford College Dictionary, 2007).
In his address as the new AICPA chair, S. Scott Voynich did his best to lay down what was expected to be the new moral imperative for accounting: "When I speak about our core values, I always put competence in the middle - integrity, competence, and objectivity. I do this because I believe integrity and objectivity are the strengths that hold up and give life to our competence. . . . Integrity, by definition, is key to our profession. Integrity: a rigid adherence to a code of behavior. We are expected to live by a code of ethics which serves as the North Star for all of our activities" ("Integrity in Action: AICPA Inaugural Speech to AICPA Convention," October 21, 2003, see www.journalof accountancy.com/Issues/2004/Jan/ lntegrityInActioahtm). Despite his admonition, some of the biggest and most prestigious accounting firms in the world continue to behave badly, turning a blind eye to the moral bases of the profession (Michael Rapoport, "Role of Auditors in Crisis Gets Look," Wall Street Journal, December 23, 2010).
The AICPA must do more than hint at morality as an underlying foundation for accounting ethics. Evidence that the AICPA originally intended to stress morality comes from the prologue to the AICPA's Code of Professional Conduct, originally published in 1973; in that version, it quoted Marcus Aurelius: "A man should be upright, not kept upright." The AICPA seemed to be saying that it is more important to be a moral person than to appear moral. As a natural instinct, an upright person does the right thing because of the moral principle, rather than because he is kept upright by a set of rules or laws, or by another person. At least in 1973, the AICPA embraced a similar moral compass.
In 1999, however, the AICPA deleted this quote from the code. While we don't know the reasons for this change, the AICPA may have no longer thought that the quote was still applicable, necessary, or even relevant. There is reason to believe that the AICPA was not directly implying that ethics are no longer morality-based, because the current code still includes the concept of morality in its discussion of the responsibilities of members: 'In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities" (AICPA Code of Professional Conduct, 1999, p. 4291).
In addition, the concept of morality is closely linked to integrity, the first of the AICPA's five broad concepts of professional conduct. Webster's dictionary defines ethics as the "firm adherence to a code of especially moral or artistic values." Not only is morality an integral part of the definition of this ethical standard, but the definition even seems to stress its importance, with the adjective "especially" (AICPA 1999, p. 4311).
Disassociating Ethics and Morality
Despite the fact that the concepts of morals and morality have always been a part of the AICPA's Code of Professional Conduct, there never seems to have been much emphasis placed on this value in the discussion of developing ethical standards. There is even less reference to morality in the codes of ethics for other accounting professional groups - such as the IMA (Institute of Management Accountants), the NTA (National Tax Association), and the ?? (Institute of Internal Auditors) - where no mention is made at all. On an even broader scale, the discussion of morality in public forums does not receive the attention it deserves, and it is often replaced with other terms like "integrity," as used by Voynich above. The authors believe that by ignoring the essential link between ethics and morality, any treatment of professional codes of ethics for the accounting profession will be seriously flawed.
The authors strongly encourage the AICPA and academia to make it quite clear that accounting professionals must be people of high moral principles who, as a natural result of these principles, conduct their activities in a highly ethical manner - not because of the rule of law, but because it is the right thing to do. Following the current ethical standards-as-practiced for the profession will yield only minimum and mandatory - but not conclusive - ethical behavior. Rather than encouraging members to strive for the highest levels of ethical behavior (stages five and six), the profession seems to be content with its members peaking at level four - doing what is required in order to maintain a license to practice.
The authors believe that any organization's code of ethics would be significantly more valuable if it would embrace the moral principle as an integral paît of its development of ethical standards. This moral principle would move beyond simply espousing values to behaving consistently in a moral way - not just appearing to be moral, but acting morally because it is the right thing to do. While Enron espoused such values in its last annual report, including honesty and truthfulness, Williams has drawn a line in the sand, noting that Enron's behavior and that of Arthur Andersen are truly moral problems (2004, p. 996).
It would be impossible for professional organizations and public CPA firms to develop codes of ethics that consist entirely of subjective moral principles; there must always be objective rules that provide direction, so that people can understand their intended meaning. But that does not preclude the use of basic moral principles within these codes in addition to the elaboration of rules. The former should serve as the foundation for the latter.
Accounting professionals must know what the right thing to do is and then consistently behave that way because, in any situation, it is right. As former Deloitte & Touche CEO James E. Copeland, Jr., has stated, emphasis must be given to the importance of accountants clearly demonstrating moral behavior in their lives, rather than simply avoiding unethical actions. Accounting professionals should actively strive to behave as moral individuals, even when it means taking a stand against situations, actions, ideas, organizations, or powerful people who would sully the profession's reputation. Then, the AICPA's Code of Professional Conduct might once again begin with the quote by Marcus Aurelius. As Kohlberg's sixth moral stage of development demands, accountants must be ethical out of a concern for the moral principles involved and the notion that it's simply the right thing to do.
Unlike some other professions intent on living by the "1 lth Commandment" of "Don't get caught," the accounting profession must draw a line in the sand by proscribing the moral principles of honesty, character, uprightness, honor, and fairness - not just in appearance, but in action. The AICPA Professional Standards: Code of Professional Conduct and Bylaws could then define each of these moral principles and prescribe how each impacts professional accounting behavior. The code might define honesty as "the quality of telling the truth, being upright and sincere" and follow that definition with this professional standard:
Accountants are expected to demonstrate honesty in all they do in their professional conduct (both in action and intent). They must be upright and sincere in their attempt to never deviate from the truth. They must never be associated with the actuality or appearance of deceit or fraud. Failure to comply with the letter and spirit of this principle is considered a violation of professional ethics.
Naturally, it is also important that each firm, corporation, and professional organization - including the AICPA, the IMA, the Public Company Accounting Oversight Board (PCAOB), and the SEC-^ias its own code of ethics that is based upon moral principles. This code would need to be promoted widely throughout that entity, as well as in the public arena, so that both inside and outside stakeholders would be aware of the entity's willingness to be held accountable for the actions of its constituents. It would also be necessary for top managers (CEOs, managing partners, and directors) to personally and publicly make it clear to all stakeholders, employees, clients, vendors, or investors that they will commit to being personally responsible and held accountable; in essence, they must commit to being role models of the highest ethical practices.
There is evidence indicating that where organizations have codes of ethics and top management serves as appropriate role models for stakeholders, the likelihood of ethical behavior throughout the organization is greatly enhanced. In an unpublished 1988 report by Touche Ross & Co., 'Ethics in American Business," 39% of respondents agreed that the existence of codes of ethical behavior within organizations is extremely effective in promoting ethical behavior. It addition, the report pointed out that 73% of respondents (managing partners, CFOs, and university deans) also strongly agreed that top management plays a significant role in promoting ethical behavior. The study quoted Russell Palmer: "The inescapable fact is that leaders set the moral and ethical tone for the organizations they run." Leaders of companies and organizations should express the expectation that all members and employees must be people of high morals whose behaviors match their words. They must follow up that directive with behavior that matches their words. An action will be evaluated based on what is right or wrong, not whether the rule has simply been followed exactly or the behavior is not illegal.
If the two are considered together alongside a well-developed code of ethics and top management that not only promotes but lives strictly by that code, the likelihood of success will be even greater. But this approach can only work if top management demonstrates that the ethical behavior must, first and foremost, be based on moral principles, and that the reason for acting ethically should exceed Kohlberg's stage four, rather than end at that point.
A Society-Wide Problem
While many factors have contributed to the accounting profession's reputational decline, much of what is wrong in the accounting world can be traced to the ethical morass in all areas of our society. The whole of society, the accounting profession, and every individual must address these problems in terms of the moral failures that have occurred, rather than the rule of law that has been violated. We must continually stress the need to make ethical decisions on the basis of the moral principle, rather than basing it entirely on ambiguously following the rule of law. We then need to be willing to hold people accountable for not doing the right thing.
The reputation of the accounting profession continues to be tarnished by the scandals preceding and continuing into the new millennium. To regain our status as one of the most highly respected professions, we must take the extra step to show both the public and ourselves that we are indeed ethical - and that our ethics are based upon a strict set of moral principles rather than just a long list of rules to which we only adhere in certain situations.
William Stephens, DBA, is a professor emeritus and Carol A. Vanee, CPA, is an instructor, both in the school of accountancy at the University of South Florida, Tampa, Fla, Loyd S. Pettegrew, PhD, is a professor of organizational communication, also at the University of South Florida.…
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Publication information: Article title: Embracing Ethics and Morality. Contributors: Stephens, William - Author, Vance, Carol A. - Author, Pettegrew, Loyd S. - Author. Magazine title: The CPA Journal. Volume: 82. Issue: 1 Publication date: January 2012. Page number: 16+. © New York State Society of Certified Public Accountants Feb 2009. Provided by ProQuest LLC. All Rights Reserved.