EthicalDecisionsinAccounting

AlfonsoOddo
NiagaraUniversity

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EthicalDecisionsinAccounting

LearningObjectives

Afterstudyingthismoduleyoushouldbeableto:

1. Understandtheimportanceofethics
2. Knowthehistoryofethicsinaccounting
3. Incorporateethicsintoyourdecisionprocess
4. Knowethicalstandardsforaccountingprofessionals
5. UnderstandethicalimplicationsoftheU.S.transitiontoIFRS
6. Appreciatelessonslearnedfromrecentbusinessscandals

22010JohnWileyandSons,Inc.


SECTION1TheImportanceofEthics

Ethics is an important part of your accounting education and it will play an increasingly
important role in all aspects of your professional life. This module is intended to give you an
overview of the study of ethics. It is a starting point for the discussion of ethics that will
continuethroughoutallofyouraccountingstudies.Wewillbeginwithadefinitionofethicsand
then review some ethical theories that provide a framework for developing ethical standards
for accounting students and professionals. Finally, we will discuss why ethics is important to
youasyouprepareforacareerinaccounting.

DefinitionofEthics

Whatexactlyisethics?AccordingtoWebstersDictionaryethicsisadisciplinedealingwith
good and evil and moral duty, and with moral principles and practice. Accounting ethics
basically involves applying moral principles to accounting and business decisions. Business
ethics is a more general form of applied ethics that relates moral principles to business
situations. Business ethics examines behavior toward the outside world considering ethical
principlesandbusinesscodesofethics.

Simplyput,ethicsisdoingtherightthing.Itisnoteasytodefineethicsbecauseethicscan
bedifferentfordifferentpeople.Youhaveyourownpersonalvaluesandthesevaluesarevery
importantinthedecisionsyoumake.Whenyouareinbusinessyouwillberequiredtofollow
codes of conduct that are established by your company and by any professional associations
thatyoubelongto.Followingtheethicalstandardsoftheseorganizationsisimportant,butyou
shouldalwaysbringyourownpersonalvaluesintoyourbusinessmodel.

EthicalTheories

Philosophers have developed many theories to provide a framework for making ethical
business decisions. These theories provide a point of reference for developing codes of
conductforcompaniesandprofessionalassociations.Mostethicalcodesinbusinessarebased
onthefollowingmoraltheories:
Rightstheory.Themoralchoiceisthechoicethatbestprotectsandrespectsthemoral
rights of those involved with a decision. This theory suggests that humans have a
dignitythatisbasedontheirhumannatureandtheirabilitytofreelychoosewhatthey
dowiththeirlives.Thereforetheyhavearighttobetreatedasendsandnotmerelyas
meanstootherends.

Utilitariantheory.Theethicalactionistheactionthatprovidesthemostgoodordoes
theleastharm.Theethicalbusinessactionistheonethatproducesthegreatestgood
and does the least harm for all who are affected business stakeholders such as
customers,employees,shareholders,thecommunity,andtheenvironment.
3

Common good theory. The relationships of society are the basis of ethical reasoning
and respect and compassion for others is the basis for moral decisions. This theory
addressesthecommonconditionsthatareimportanttothewelfareofeveryone.

Virtue theory. Ethical actions should be consistent with ideal virtues that provide for
the full development of humanity. Honesty, courage, compassion, generosity,
tolerance, love, fidelity, integrity, fairness, selfcontrol, and prudence are examples of
virtues.

Fairnesstheory.Ethicalactionstreatallhumanbeingsfairlybasedonsomestandard
thatisdefensible.Wemightpaypeoplemore,basedonthedifficultyoftheirworkor
thegreateramountthattheycontributetoacompany.

ImportanceofEthics

Information provided by accountants and auditors is relied upon by people who make
decisionsaboutcompaniesandorganizations.Forexample,ifyouareconsideringbuyingstock
in a company you need accurate and reliable information upon which you can base your
decision. Lenders such as banks and financial institutions need reliable information to
determine if they will loan money to companies. Government agencies such as the Internal
Revenue Service collect taxes based on the financial information provided by companies.
People rely on the accountants who prepare financial reports. Knowledge of ethics will help
youtomakegooddecisionsthatwillgiveproperinformationtothosewhorelyonyou.With
properinformation,betterdecisionswillbemade.

Businessdecisionscanaffectmanypeopleorstakeholders.Forexample,whenyoumakea
decisionforyourcompanyitcanaffecttheownersandemployeesofthecompany,bankswho
provide resources to the company, customersof the company, and people in the community
wherethecompanyislocated.Inadditiontotheeffectofyourdecisionontheprofitsofthe
company,yourdecisionmayalsohaveothernonfinancialfactorsthathaveimportanteffects
onstakeholders.Whatifyouwereconsideringtwoalternativeprojectsforyourcompany:(1)a
projectthatwouldmakesignificantprofitforyourcompanyandalsopollutetheenvironment
with harmful chemicals; (2) another project that would earn less profit but would have no
negative effects on the environment and would not harm any stakeholders. Which project
wouldyouchoose?

Shouldnonpecuniaryfactorsenterintothedecisionprocess?Ifyouconsiderfactorsthatare
notfiscalonlyinnature,thenhowdoyoumeasurethem?Often,themostimportantfactorsin
a decision are the ones that cannot be easily measured. Because some things cannot be
measuredeasily,however,doesnotmeanthatweshouldnotconsidertheminourdecisions.
42010JohnWileyandSons,Inc.

Thatisthemainpointabouttheimportanceofethicsinaccountinganawarenessthatethics
is an important part of business decisions. We often use the costbenefit decision model to
evaluatebusinessprojects.Welistthecostsononesideandthebenefitsontheothersideand
the greater number often decides the project. If the benefits are greater than the costs we
accepttheproject;ifthecostsexceedthebenefitstheprojectisrejected.Wheredoesethics
fitintotheprocess?

Ethical issues deserve aplace in the costbenefit

model.Itisreallyquitesimpleyouconsiderthe
possible costs and benefits of ethical issues and
place them on the scale along with other costs
and benefits. Because ethical issues often are
difficultorimpossibletomeasuredoesnotmean
that they are not important or that they should
notbeconsideredinthedecision.Amoreethical
decisionislikelytoresultifethicalfactorsareat
least brought into the picture when making
business decisions. Again, awareness of the
ethical implications of business decisions is the
keytogoodbusinessdecisions.

Not all decisions use the cost benefit model. Some decisions involve choosing different
courses of action, such as recording accounting transactions when different alternatives are
availableundergenerallyacceptedaccountingprinciples.Youwillneedtochoosethecorrect
actionaccordingtothecircumstancesinvolved,andnotbasedsolelyontheamountofprofit
your company can make. As the U.S. moves toward adopting international accounting
standards,theaccountingguidancewillbebasedmoreonprinciplesthanonspecificrules.The
useofjudgmentwilllikelyplayamoreprominentroleinmakingaccountingchoicesandethical
principleswillplayanevenmoreimportantroleinbusinessdecisions.

DiscussionQuestions

1. Soonyouwillgraduatefromcollegeandgetajob.Whatethicalcodesofconductwill
you have to follow? How will your personal values affect your business decisions?
Whatpenaltiesarethereforfailuretofollowethicalstandards?

2. Look at the ethical standards of the AICPA or the IMA included in section 4 of this
module.Whatprincipleswillguideyouinmakingaccountingchoices?

SECTION2TheHistoryofEthicsinAccounting

In the wake of recent, highprofile accounting scandals, you might think that ethics is a
relativelynewtopictothefieldofaccounting.Actually,ethicshasbeenanimportantpartof
accounting since methods of keeping financial records gained momentum in the thirteenth
5

century.Acodeofethicsnowappliestoallaccountingprofessionalsandethicshasbecomean
integralfeatureofaccountingeducation.

BriefHistoryofEthicsinAccounting

Luca Pacioli, an Italian mathematician and Franciscan friar, described a method of keeping
financialaccountsin1494whenhepublishedhisfirstbookSummadeArithmetica,Geometria,
Proportioni, et Proportionalita (translated everything about arithmetic, geometry, and
proportions).Inthisbookhewroteaboutmanytopics,includingthefirsteverdoubleentry
bookkeeping system, cost accounting and accounting ethics. Over the years, ethical
standards have been developed by many different professional associations, government
agencies,andprivatecompanies.Theseorganizationscreatedethicalcodesofconductwhich
their members or employees are expected to follow when they perform their professional
work.

Animportantorganizationintheearlydevelopmentofaccountingethicalstandardswasthe
American Association of Public Accountants (AAPA) which was created in 1887. During that
year,accountingbecameaprofession,oragroupofpeoplewhosemembersmustmeetcertain
standardstoengageinthepracticeofaccounting.In1907,theAAPAincorporatedprofessional
ethics into its membership rules. However, membership in the AAPA was voluntary and
thereforetheethicalstandardsoftheAAPAcouldnotbeenforcedonawidespreadbasis.The
AAPA was later renamed to the American Institute of Certified Public Accountants (AICPA).
ThecodeofethicsoftheAICPAisamajorforceinappliedaccountingethicsintodaysbusiness
world. The ethical standards of the AICPA are fully described in Section 4 of this module
Ethical Standards for Accounting Professionals. Members of the AICPA are Certified Public
Accountants(CPAs)whomustcomplywiththeAICPAsethicalstandards.Noncompliancecould
resultinlosingalicensetopracticeasaCPA.

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EthicsintheAccountingProfession

In the middle of the twentieth century the Commission on Standards of Education and
ExperienceforCertifiedPublicAccountantsidentifiedsevencharacteristicsofaprofession:
1. Aspecializedbodyofknowledge
2. Aformaleducationprocesstoacquirethespecializedbodyofknowledge
3. Astandardofprofessionalqualificationstoentertheprofession
4. Astandardofconduct
5. Recognitionofstatus
6. Anacceptanceofsocialresponsibility
7. Anorganizationdevotedtotheadvancementofthesocialresponsibility

Characteristic 4requiring a standard of conduct and characteristic 6accepting social

responsibility, relate most directly to accounting ethics. What standards of conduct should
accountants follow and what is the social responsibility accountants have toward the public
they serve? Standards of conduct and accounting codes of ethics as developed by current
professional accounting organizations are more fully addressed in section 4 of this module
Ethical Standards for Accounting Professionals. A professional must accept a moral
responsibility to act in the best interests of the public. This means that business must look
beyondprofitstothecommongoodandbesurenottoharmthepublicgood.

The purpose of business is to make a profit, but profit should not be the only motive for
business. Adam Smith maintained that business should seek a profit within the ethical
principles of justice and fairness. Therefore, a business professional must protect the public
interestwhilepursuingtheprofitmotive.Manywouldarguethatactinginthebestinterestof
the public is also in the best interest of the company. In other words, ethics is good for
business and makes the companysuccessfuleven as the company looks out for the common
good.

EthicsinAccountingEducation

Colleges and universities in the U.S. have included ethics in their curricula since Harvard
UniversitywasfoundedastheoldestinstitutionofhigherlearningintheUnitedStates.Many
collegessincethenhaveincludedethicscoursesintheirliberalartsprograms.Inthe1980s,
however, applied accounting ethics really gained momentum and many colleges in the U.S.
startedincorporatingethicsintoaccountingandbusinessclasses.Thisincorporationofethics
intobusinessandaccountingiscalledappliedethicsbecausetheethicalprincipleslearnedin
thephilosophyclassesisappliedtopracticalaccountingsituationsinaccountingclasses.With
applied ethics, students get to add a new dimension to their business decision processsoft
ethicalissuesinadditiontothehardnumberstraditionallyusedtoevaluatebusinessprojects.

DiscussionQuestions

1. Some argue that ethics cannot be taught in college because students have already
formedtheirvalueswhentheycometocollege.Doyouthinkethicsshouldbeincluded
intheaccountingcurriculumincollegesanduniversities?

2. Doyoufeelthatgoodethicalbehaviorisgoodforcompanyprofits?Describeasituation
in which making a decision in the interest of the public good would increase the
profitabilityofabusinessinthelongrun.

SECTION3EthicsintheDecisionProcess

Whileyouareincollegestudyingaccountingyouwillneedtodevelopathinkingprocessthat
will guide you in making business decisions. When you graduate from college and enter the
accountingprofessionyouwillusetheknowledgeyoulearnedincollegetohelpyourcompany
be successful and to create a better society. Learning accounting is not just about learning
numbers,butalsoaboutlearningtomakegooddecisions.

EthicsinAccountingEducation

How can you incorporate ethical decisionmaking when you study accounting? Many
organizations exist that provide guidance to universities regarding how to incorporate ethics
into accounting education programs. In addition, there are many tools students can use to
solveanethicaldilemma.Someethicstoolswithlinkstogoodwebsitesareprovidedatthe
endofthissection.Themainwayyoucanbringethicsintoyourdecisionprocess,however,is
simplytobeawareofethicalissuesinaccountingsituationsandtoconsidertheseethicalissues
aspartofyourdecisionmodel.

The need for ethics in education is apparent in light of recent highprofile business fraud
cases.IntheUnitedStates,theAmericanAssemblyofCollegiateSchoolsofBusiness(AACSB)
istheaccreditingbodyforbusinessschools.AACSBmakestheeducationstandardsforbusiness
schools, and the AACSB standards do include ethics. Because ethical values differ among
countriesandcultures,thereisnouniversallyacceptedcodeofethics.Nonetheless,thereare
basic ethical principles that cross international borders, and International Federation of
Accountants(IFAC)hasattemptedtoprovidesomeguidanceforteachingethicsinallcountries.

International Education Standards (IES) prescribe standards of generally accepted ethical

principlesintheeducationofaccountingstudents.Thestandardsexpressthebenchmarksthat
youareexpectedtomeetinyouraccountingeducationprogram.Theyestablishtheessential
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elementsofthecontentandprocessofeducationanddevelopmentatalevelthatisaimedat
gaining international recognition, acceptance and application. The standards cannot legally
overridelocallawsandregulationsbutwillprovideanauthoritativereferenceforinformingand
influencinglocalregulatorsregardinggenerallyacceptedethicalprinciples.

The International Accounting Education Standards Board (IAESB) recognizes the wide
diversityofculture,language,andeducational,legal,andsocialsystemsinthecountriesofthe
member bodies and of the variety of functions performed by accountants. Therefore, each
individualmemberbodywilldeterminethedetailedrequirementsoftheeducationprograms.
InternationalEducationStandardsforProfessionalAccountantsareintendedtoestablishonly
the essential elements on which ethical principles for all professional accountants and
accountingstudentsshouldbebased.

The IAESB has issued eight International Education Standards. These standards cover the
entry requirements for accounting education programs, as well as the experience and
continuing professional development requirements you will be required to follow when you
becomeanaccountingprofessional:

InternationalEducationStandards(IES)
IES1: EntryRequirementstoaProgramofProfessionalAccountingEducation
IES2: ContentofProfessionalAccountingEducationPrograms
IES3: ProfessionalSkills
IES4: ProfessionalValuesEthicsandAttitudes
IES5: PracticalExperienceRequirements
IES6: AssessmentofProfessionalCapabilitiesandCompetence
IES7: Continuing Professional Development: A Program of Lifelong Learning and Continuing
DevelopmentofProfessionalCompetence
IES8: CompetenceRequirementsforAuditProfessionals

IES4prescribestheprofessionalvalues,ethicsandattitudesyoushouldacquireduringyour
education program. The aim of this standard is to ensure that you are equipped with the
appropriateprofessionalvalues,ethics,andattitudestofunctionasaprofessionalaccountant.
IFAC recognizes that the accountancy profession throughout the world operates in
environments with different cultures and regulatory requirements. IFAC has, nevertheless,
establishedaninternationalCodeofEthicsforProfessionalAccountants.Professionalvalues,
ethicsandattitudesrelatedirectlytoIFACsmissiontodevelopandenhancetheprofessionto
enableittoprovideservicesofconsistentlyhighqualityinthepublicinterest.

IES4requiresthatuniversityaccountingprogramsshouldprovideyouwithaframeworkof
professionalvalues,ethics,andattitudesforexercisingprofessionaljudgmentandforactingin
anethicalmannerthatisinthebestinterestofsocietyandtheprofession.Therequiredvalues,
ethics,andattitudesofprofessionalaccountantsincludeacommitmenttocomplywithlocal
codesofethicswhichshouldbeinconformitywiththeIFACCodeofEthics.Thecoverageof
ethicsinaccountingeducationprogramsshouldinclude:
thenatureofethics
differencesofrulesbasedandprinciplesbasedapproachestoethics
compliancewithfundamentalethicalprinciples
professionalbehaviorandcompliancewithtechnicalstandards
conceptsofindependence,accountability,andpublicexpectations
socialresponsibility
ethicsandlaw
consequencesofunethicalbehaviortotheindividual,theprofession,andtosociety
ethicsinrelationtobusinessandgoodgovernance
whistleblowing,conflictsofinterest,ethicaldilemmasandtheirresolution

IES 4 recommends that the presentation of ethics may be treated, at least initially, as a
separate subject in the accounting program. As you progress through your accounting
curriculum and gain a wider knowledge of other subjects,your business curriculum will likely
integratethevarioustopicscoveredinotherbusinesscourses.Thiswillencourageyoutolook
forthepossibleethicalimplicationsofproblemsbeingdiscussedinyouraccountingclassesand
inotherbusinessclassesyouaretaking.

As an accounting professional you will also need to understand relevant codes of ethics.
YoucanstudyethicalstandardsforaccountingprofessionalsusingtheAICPAcodeofethicsand
theIMAethicalstandards.Youalsocanexaminetheethicalstandardsofotherprofessionsand
discuss other potential approaches for ethical standards in the accountancy profession. You
know from your own accounting education program that you often learn best when you are
activelyinvolvedlearningprocess,usingtechniquessuchas:
casestudies
roleplaying
discussionofselectedreadingsandvideos
analysisofreallifebusinesssituationsinvolvingethicaldilemmas
discussionofdisciplinarypronouncementsandfindings
seminarsusingspeakerswithexperienceincorporateorprofessionaldecisionmaking

Suchactivelearningstrategiesgiveyouagreaterawarenessoftheethicalimplicationsand
potential conflicts that may arise from having to make difficult accounting decisions. It is
importantforyoutolearnfromyourethicalexperiences.Youshouldconsideranexperience,

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whatwentwell,whatdidnotwork,andwhatapproachmaybetakeninthefutureinsimilar
circumstances.Inthisway,youwilldevelopadecisionmodelforethicalaccountingchoices.
All accounting professional associations have codes of ethics that you will be required to
follow.Unfortunately,fraudandethicallapsespersistinthebusinessworld.Whatcanyoudo
toimproveethicalbehavior?Awarenessofethicalissuesandabusinessdecisionmodelthat
incorporatesethicswillhelpyoutoapplyethicsinyourbusinessdecisions.Justasyoulearnto
applyfinancialmodelsinyourbusinessdecisions,youcanalsolearnethicalmodelsandapply
them to business decisions. When you practice ethical situations in your accounting and
businessclassesincollegeyouwillbebetterpreparedtomakegoodethicaldecisionsafteryou
graduateandentertheaccountingprofession.

Howcanaccountingprofessionalsincorporateethicalthinkingintotheirbusinessdecisions?
Accountants are good at working with numbers, but they need to look beyond the numbers
when evaluating business projects. Ethical issues often are not easily measureable in dollars
buttheirimpactonaccountingandbusinessdecisionsmaybesignificantandveryimportant.
The first step in the process is to be aware that there may be some ethical issues that could
affectyourdecision.Again,awarenessisthekey.Whenyoubringethicalconsiderationsinto
the decision process then at least you are considering the possible ethical implications for
peoplewhomaybeaffectedbythedecisionyoumake.

Accountingprofessionals who areCPAs must fulfill continuing education requirements to

maintaintheirCPAlicense.Continuingeducationinethicsisrequiredinmoststates.ManyCPA
firmsandlargecompanieshaveethicsspecialiststoprovidetrainingandserveasresourcesto
addressethicalissues.

EthicsTools

Whataresometoolsthatyoucanuserightnowasanaccountingstudenttohelpyousolve
ethicaldilemmasanddevelopaprocessformakingethicallygooddecisions?Onetoolmightbe
tofollowadefinedsetofstepsinmakinganethicaldecision.TheMarkkulaCenterforApplied
EthicsatSantaClaraUniversitysuggeststhefollowingprocessformakinganethicaldecision:
Recognizeanethicalissue
Getthefacts
Evaluatealternativeactions
Makeadecisionandtestit
Actandreflectontheoutcome

There are also many web sites with resources that will help you learn and apply ethical
principles.Herearesomewebsitesyoucanreviewthroughoutyouraccountingcareer:
EthicsToolkit
www.ethics.org/page/ethicstoolkit

CyberStudents
www.scu.edu/ethicscenter/cydent

11

Toolbox,Quiz,andMore
http://cba.lmu.edu/academicprograms/centers/ethicsandbusiness/toolbox.htm
AFrameworkforThinkingEthically
http://www.scu.edu/ethics/practicing/decision/framework.html

EthicsCases
www.scu.edu/ethics/practicing/focusareas/cases.cfm?fam=BUSI

DiscussionQuestions

1. As an accounting student, how are ethical issues addressed in your accounting

curriculum?Howcanyouincludeethicalissuesinacostbenefitdecisionmodel?

2. Howshouldethicalissuesbeconsideredinmakingbusinessdecisions?Inotherwords,
becauseethicalfactorsoftencannotbemeasured,howwouldyouevaluatetheeffectof
ethicalissueswhenyouaremakingabusinessdecision?

SECTION4EthicalStandardsforAccountingProfessionals

Havingdiscussedtheimportanceandhistoryofethicsinaccountingandsomeethicaltheories
thatformthebasisofaccountingethics,wenowturnourattentiontotheethicalstandardsof
professional organizations. These are the rules that you will need to follow as an accounting
professional. We will start with a preview of professional associations of public accountants
and management accountants. Then we will look at the American Institute of Certified
Professional Accountants Code of Professional Ethics and the Institute of Management
Accountantsstatementofethicalprofessionalpractice.

ProfessionalAssociations

Asanaccountingprofessionalyouwillbelongtoaprofessionalaccountingassociationsuch
as the American Institute of Certified Professional Accountants (AICPA) or the Institute of
ManagementAccountants(IMA).Professionalaccountingorganizationshavecodesofethics
thatyouwillberequiredtofollowasamemberofthatorganization.Violationsofethicalcodes
canresultindisciplinaryaction,lossofyourprofessionallicense,andpossiblelegalprosecution.
In addition to the national accounting organizations, states also have licensing bodies and
professionalassociationsthathavecodesofethicalconduct.TheNationalAssociationofState
BoardsofAccountancy(NASBA)promotesethicalstandardsthroughitsCenterforPublicTrust,
www.centerforpublictrust.org. Of course, in addition to the ethical standards of professional
associations, you also will be required to follow your companys code of ethics and your
personalvaluesystem.
AICPACodeofProfessionalConduct

Itisimportanttoknowthatfollowingethicalstandardsdoesnotmeansimplyfollowingthe
law.Youneedtodistinguishbetweenethicalstandardsandlegalrules.AsaCPAwhenyou
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acceptmembershipintheAICPAyouassumeanobligationofselfdisciplineaboveandbeyond
therequirementsoflawsandregulations.

TheCodeofProfessionalConductoftheAICPAconsistsoftwosections(1)thePrinciples
and (2) the Rules. The Principles provide the framework for the Rules, which govern the
performanceofprofessionalservicesbymembers.

Principles
The six principles of the AICPA code express the profession's recognition of its
responsibilitiestothepublic,toclients,andtocolleagues.
1. ResponsibilitiesIncarryingouttheirresponsibilitiesasprofessionals,membersshould
exercisesensitiveprofessionalandmoraljudgmentsinalltheiractivities.
2. Thepublicinterest Members should accept the obligation to act in a way that will
3.
4.

5.
6.

serve the public interest, honor the public trust, and demonstrate commitment to
professionalism.
Integrity To maintain and broaden public confidence, members should perform all
professional responsibilities with the highest sense of integrity.
Objectivityandindependence A member should maintain objectivity and be free of
conflicts of interest in discharging professional responsibilities. A member in public
practice should be independent in fact and appearance when providing auditing and
other attestation services.
DuecareA member should observe the profession's technical and ethical standards,
strive continually to improve competence and the quality of services, and discharge
professional responsibility to the best of the member's ability.
Scope and nature of services A member in public practice should observe the
Principles of the Code of Professional Conduct in determining the scope and nature of
services to be provided.

Rules
ThebylawsoftheAmericanInstituteofCertifiedPublicAccountantsrequireitsmembersto
adheretotheRulesoftheCodeofProfessionalConduct. Membersmustbepreparedto
justifydeparturesfromtheseRules.
Rule 101Independence. A member in public practice shall be independent in the
performance of professional services as required by standards promulgated by bodies
designatedbytheAICPA.
Rule102Integrityandobjectivity.Intheperformanceofanyprofessionalservice,a
membershallmaintainobjectivityandintegrity,shallbefreeofconflictsofinterest,and
shallnotknowinglymisrepresentfactsorsubordinatehisorherjudgmenttoothers.
Rule 201General standards. A member shall comply with the general standards of
professional competence, due professional care, planning and supervision, and
sufficientrelevantdata.
Rule 202Compliance with standards. A member who performs auditing, review,
compilation, management consulting, tax, or other professional services shall comply
withstandardspromulgatedbybodiesdesignatedbytheAICPA.

13

Rule 203Accounting principles. Prohibits a member from expressing an unqualified

opiniononfinancialstatementsthatcontainamaterialdeparturefromGAAP.
Rule 301Confidential client information. A member in public practice shall not
discloseanyconfidentialclientinformationwithoutthespecificconsentoftheclient.
Rule302Contingentfees.Amembershallnotchargeafeeonconditionthatnofee
willbechargedunlessaspecificfindingorresultisattained.
Rule501Actsdiscreditable.Amembershallnotcommitanactdiscreditabletothe
profession.
Rule 502Advertising and other forms of solicitation. A member in public practice
shallnotseektoobtainclientsbyadvertisingorotherformsofsolicitationinamanner
thatisfalse,misleading,ordeceptive.Solicitationbytheuseofcoercion,overreaching,
orharassingconductisprohibited.
Rule 503Commissions and referral fees. A member shall not for a commission
recommendorrefertoaclientanyproductorservicewhenthememberalsoperforms
anauditforthatclient.
Rule505Formoforganizationandname.Amembermaypracticepublicaccounting
only in a form of organization permitted by law or regulation whose characteristics
conformtoresolutionsoftheAICPA.

IMAStatementofEthicalProfessionalPractice

The IMA ethical standards are based on the overall principles of honesty, fairness,
objectivity, and responsibility. Members must act in accordance with these principles and
encourageothersintheirorganizationtodoso.BasedontheseprinciplestheIMArequiresits
memberstoadheretothefollowingethicalstandards:

Competence
1. Maintain an appropriate level of professional expertise by continually developing
knowledgeandskills.
2. Performprofessionaldutiesinaccordancewithrelevantlaws,regulations,andtechnical
standards.
3. Provide decision support information and recommendations that are accurate, clear,
concise,andtimely.
4. Recognize and communicate professional limitations or other constraints that would
precluderesponsiblejudgmentorsuccessfulperformanceofanactivity.

Confidentiality
1. Keepinformationconfidentialexceptwhendisclosureisauthorizedorlegallyrequired.
2. Inform all relevant parties regarding appropriate use of confidential information.
Monitorsubordinates'activitiestoensurecompliance.
3. Refrainfromusingconfidentialinformationforunethicalorillegaladvantage.

Integrity

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1. Mitigateactualconflictsofinterest;regularlycommunicatewithbusinessassociatesto
avoidapparentconflictsofinterest.Adviseallpartiesofanypotentialconflicts.
2. Refrainfromengaginginanyconductthatwouldprejudicecarryingoutdutiesethically.
3. Abstainfromengaginginorsupportinganyactivitythatmightdiscredittheprofession.

Credibility
1. Communicateinformationfairlyandobjectively.
2. Disclose all relevant information that could reasonably be expected to influence an
intendeduser'sunderstandingofthereports,analyses,orrecommendations.
3. Disclosedelaysordeficienciesininformation,timeliness,processing,orinternalcontrols
inconformancewithorganizationpolicyand/orapplicablelaw.

WhenyouencounteranethicaldilemmatheIMArecommendsthefollowingprocedureto
resolvetheethicalissue:

1. Discuss the issue with your immediate supervisor except when it appears that the
supervisor is involved. In that case, present the issue to the next level. If you cannot
achieveasatisfactoryresolution,submittheissuetothenextmanagementlevel.Ifyour
immediatesuperioristhechiefexecutiveofficerorequivalent,theacceptablereviewing
authoritymaybeagroupsuchastheauditcommittee,executivecommittee,boardof
directors, board of trustees, or owners. Contact with levels above the immediate
superiorshouldbeinitiatedonlywithyoursuperior'sknowledge,assumingheorsheis
not involved. Communication of such problems to authorities or individuals not
employed or engaged by the organization is not considered appropriate, unless you
believethereisaclearviolationofthelaw.

2. ClarifyrelevantethicalissuesbyinitiatingaconfidentialdiscussionwithanIMAEthics
Counselororotherimpartialadvisortoobtainabetterunderstandingofpossible
coursesofaction.

3. Consult your own attorney as to legal obligations and rights concerning the ethical
conflict.
EthicsonProfessionalExaminations

Whenyougraduatefromcollegeyoumaytakeaprofessionalcertificationexamsuchasthe
CPA or CMA. Ethics is covered on most professional exams including the CPA exam and the
CMAexam.Forexample,ethicsandprofessionalandlegalresponsibilitiesareincludedinthe
Regulation section of the CPA exam, accounting for 15% to 20% of the exam content. The
topicsincludecodesofprofessionalconduct,independence,ethicsintaxpractice,licensingand
disciplinary systems, legal responsibilities, and privileged communications and confidentiality.
You will most likely cover these topics in your accounting and law classes, and you should
considertakingaprofessionalCPAreviewcoursetobetterprepareyoufortheCPAexam.

15

TheCMAexamalsoincludescoverageofethics.ThenewtwopartformatoftheCMAexam
includesethicalprinciplesandpracticalconsiderationsonbothPart1andPart2oftheexam.
InPart1oftheexam,ethicsistestedfromtheperspectiveoftheindividual,andPart2ofthe
examaddressesethicalissuesfromtheperspectiveofbusinessandaccountingorganizations.
Professionalethicsmakesup5%oftheexamcontentinPart1andanother5%ofthecontentin
Part2oftheCMAexam.

DiscussionQuestions

1. DiscussthesimilaritiesanddifferencesbetweentheAICPACodeofProfessionalConduct
andtheIMAStatementofEthicalProfessionalPractice.

2. Asanaccountingprofessionalyouwillbeguidedbyacodeofconductforthecompany
orfirmyouworkfor,andalsobytheethicalcodesofprofessionalassociationsyouarea
member of. Discuss any potential conflicts between the codes and how you would
resolvethem.

SECTION5TheU.S.TransitiontoIFRS

IntheprevioussectionwepresentedtheethicalcodesoftheAICPAandtheIMA.Thesearethe
ethicalstandardsofthemajoraccountingassociationsintheUnitedStates.Overthenextfew
years, the United States will move toward the adoption of International Financial Reporting
Standards(IFRS).InthissectionwewilltakealookathowthistransitiontoIFRSmayaffect
ethical standards of accounting in the U.S. We will start by looking at countries that have
alreadyadoptedIFRS,andthendiscussthedifference betweenstandardsthatarerulebased
and standards that based on principles. Finally, we will look at another code of ethics
developedbytheInternationalFederationofAccountants(IFAC)andtheimplicationsthismay
haveforaccountingstudentsandaccountingprofessionalswhentheU.S.adoptsIFRS.

CountriesUsingIFRS

Asof2010,about120countrieshaveadoptedIFRS,includingallcountriesintheEuropean
Union. What has been theirexperience, what ethical issues have they faced, what are some
advantages and disadvantages, and how has the IFRS principlesbased system worked for
them? Because IFRS provides general guidance based on broad principles, accountants are
allowed more flexibility to properly report financial transactions according to the unique
circumstances that may apply. Rather than having to follow specific rules that may not fit
exactlytoaparticularsituation,accountantscanusemorejudgmenttodecidethebestwayto
accountforatransaction.Theprinciplesbasedsystemreliesmoreonthesubstanceandintent
ofatransactionthanonpreciserulesthatmustbefollowed.

Rulesbasedvs.principlesbased

162010JohnWileyandSons,Inc.

As you can see from the previous section, the ethical standards of U.S. organizations are
largely based on detailed rules of conduct (rulesbased). The global business community is
convergingtowardacommonsetofinternationalaccountingstandards.Whilemanycountries
have already adopted International Financial Reporting Standards (IFRS), some countries,
including the United States, still require national accounting standards. Most countries that
havenotyetadoptedIFRShavemadeacommitmenttoadoptIFRSinthenearfuture.

Whatimplicationswillinternationalaccountingstandardshaveforglobalaccountingethics?
Standard setting organizations in more than 100 countries have adopted the International
Federation of Accountants' (IFAC) Code of Ethics for Professional Accountants, while others
are in the process of converging with the code. The code applies to professionals in public
practice, business, academia and government. The IFAC code uses a conceptual framework
(principlesbased) approach to evaluate circumstances that may raise ethical issues. As an
accountantyouwillidentifyandanalyzethreatstoyourindependenceandapplyappropriate
measuresthateliminatethosethreatsorreducethethreatstoanacceptablelevel.TheIFAC
codeaddressesmanyofthesameareasastheAICPAcode,suchasobjectivity,independence,
duecareandconfidentiality.

TheIFACcodehasbecomemorerelevantforU.S.accountantsandaccountingstudentsas
business has become increasingly global and as the American Institute of Certified Public
Accountants(AICPA)hasbeguntheprocessofconvergingitsCodeofProfessionalConductwith
theIFACguidance.IFACrequiresthatitsmemberbodiesagreetohavestandardsofconduct
thatarenotlessstringentthanthoseofIFAC.

IFACCode
TheIFACcodeofethicsrequiresyoutoadheretofivefundamentalprinciples:
Integrity A professional accountant should be straightforward and honest in
performingprofessionalservices.
Objectivity A professional accountant should not allow bias, conflict of interest or
undueinfluenceofotherstooverrideprofessionalorbusinessjudgments.
Professional Competence and Due Care A professional accountant has a continuing
dutytomaintainprofessionalknowledgeandskillatthelevelrequiredtoensurethata
client or employer receives competent professional service based on current
developments.Aprofessionalaccountantshouldactdiligentlyandinaccordancewith
applicabletechnicalandprofessionalstandardswhenprovidingprofessionalservices.

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Confidentiality A professional accountant should respect the confidentiality of

information acquired as a result of professional and business relationships and should
notdiscloseanysuchinformationtothirdpartieswithoutproperandspecificauthority
unlessthereisalegalorprofessionalrightordutytodisclose.Confidentialinformation
acquired as a result of professional and business relationships should not be used for
thepersonaladvantageoftheprofessionalaccountantorthirdparties.
ProfessionalBehaviorAprofessionalaccountantshouldcomplywithrelevantlawsand
regulationsandshouldavoidanyactionthatdiscreditstheprofession.

TheIFACcodewasrevisedinJuly2009.TherevisedCode,whichiseffectiveonJanuary1,
2011,includesthefollowingchangestostrengthenindependencerequirements:
Extending the independence requirements for audits of listed entities to all public
interestentities
Requiring a cooling off period before certain members of the firm can join public
interestauditclientsincertainspecifiedpositions
Extendingpartnerrotationrequirementstoallkeyauditpartners
Strengtheningsomeoftheprovisionsrelatedtotheprovisionofnonassuranceservices
toauditclients
Requiringapreorpostissuancereviewiftotalfeesfromapublicinterestauditclient
exceed15%ofthetotalfeesofthefirmfortwoconsecutiveyears
Prohibitingkeyauditpartnersfrombeingevaluatedonorcompensatedforsellingnon
assuranceservicestotheirauditclients

The revised code maintains the principlesbased approach supplemented by detailed

requirementswherenecessary,resultinginacodethatisflexibleenoughtoaddressthediverse
circumstancesencounteredbyprofessionalaccountants.Theprinciplesbasedapproachshould
alsohelptofacilitateglobalconvergence.

ConceptualFramework

So what does this mean to you and how can it help you to make better ethical decisions
whenyoubecomeanaccountant?Theprinciplesbasedsystemusesaconceptualapproachto
helpyouevaluatesituationsthatyoumaybeinvolvedinsoyoucanmakegooddecisions.You
willbaseyourdecisionsonfundamentalethicalprinciplesandusethe conceptualframework
modeltoevaluateandeliminateanythreatstotheethicalprinciples.

Theconceptualframeworkhelpsyoutoidentifythreatstofundamentalprinciples,evaluate
the threats, and apply safeguards to eliminate or reduce threats. The conceptual approach
helpsyoutocomplywiththeethicalrequirementsofthecodeandtomeetyourresponsibility
to act in the public interest. Because accounting decisions are often unique, the conceptual
framework approach accommodates many variations in facts and circumstances. Therefore,
182010JohnWileyandSons,Inc.

eventhoughthespecificcircumstancesmayvary,youcanbesurethatyouarefollowingthe
fundamentalethicalprincipleswhenyoumakeaccountingdecisions.

Whenyouidentifythreatstocompliancewithafundamentalprincipleandyoudetermine
that the threats are not at an acceptable level, you can determine whether appropriate
safeguardscanbeappliedtoeliminatethethreatsorreducethemtoanacceptablelevel.You
exerciseprofessionaljudgmentandtakeintoaccountwhetherareasonablethirdpartywould
conclude that the threats can be eliminated and the fundamental principles are not
compromised. You evaluate threats when you know of circumstances that may compromise
compliancewiththefundamentalprinciples.

DiscussionQuestion
1. Internationalfinancialreportingstandardsshouldmakefinancialreportsmoretransparentand
understandable across national borders. Do you think that the move toward international
accountingstandardswillacceleratetheadoptionofglobalethicalprinciples?

SECTION6LessonsLearnedfromBusinessScandals

Whatcanwetakeawayfromallofthis?Wehavelookedatethicsandwhyitisimportantto
accounting students and accounting professionals. We have reviewed the codes of ethical
standards developed in the U.S. and by the International Federation of Accountants. Yet in
spite of all the good work that has been done in the area of business and accounting ethics,
therecontinuestobeinstancesoffraudanddeceptioninviolationoftheseethicalprinciples.
Inthisfinalsectionwewilltrytolearnsomelessonsfrombusinessscandals.Wewillstartwith
adiscussionofsomehighprofilebusinessscandalsthathappenedinrecentyears,andthenwe
will think about some lessons we can learn from the scandals. Finally, we will look at the
SarbanesOxleylegislationthatresultedinresponsetothescandals.

BusinessScandals

Letsstartbylookingatsomebusinessscandalsinrecentyears.Whatexactlyhappened,what
ethicalruleswereviolated,andwhowasaffected?

Enron.ThisscandalinvolvedthegiantenergycompanyEnron.Basicallythecompany
overstateditsrevenuestoshowabetterstockprice.Asyoulearnedinyouraccounting
classes,revenueisrecognizedwhenitisearned.Ifyousellaproductthatyouownyou
recordthefullrevenueandsubtractthecostoftheproducttocomputeyournetprofit.
Ifyouareanagentwhoisjusttransferringaproductthatyoudonotactuallyown,then
you should only record your net fee revenue instead of the total revenue. Enron
recorded the full revenue even though it was an agent in many transactions, thereby
overstatingitsrevenues.So,theaccountingruleofrevenuerecognitionwasnotapplied
19

WorldCom.WorldComwasthesecondlargestphonecompanyintheU.S.afterAT&T.
TheWorldComstoryinvolvedcapitalizingsomecoststhatshouldhavebeenrecordedas
expenses.Whenyoudothisyoumakeyourincomestatementandyourbalancesheet
lookbetterthantheyactuallyare.Assetsareoverstatedandexpensesareunderstated
profits are inflated. WorldCom capitalized the cost of using other companies
communication lines when they should have recorded these line costs as current
expenses. The accounting matching principle was not followed and the accountants
knewthatthewaytheyaccountedforlinecostswasnotcorrect.Theethicalprinciples
ofprofessionalcompetenceandprofessionalbehaviorwereviolated.Stockholderslost
everything,andcreditorslostabout70centsonthedollarforloanstheyhadmadeto
thecompany.

Madoff. Bernard Madoff committed the largest investor fraud ever by an individual,
estimated at about $65 billion. This fraud involved a Ponzi scheme, named after
CharlesPonziwhocommittedthiskindoffraudinthe1920s.Madofftookmoneyfrom
one investor and give it to another investor, calling it profit or return on investment.
But he really was just recycling money and there were no real profits on the
investments. Of course Madoff knew what he was doing so the ethical principles of
honesty and integrity were not followed, and the generally accepted method of
recognizingrevenuewasviolated.Hegotawaywiththisfraudforsometime,butinthe
end,therealprofitswerenotthereandthefraudwasdiscovered.

Savingsandloanscandals.Banksuseinvestorsmoneytomakeloanstootherpeople.
Theygiveareturntoinvestorsandhopetoearnmoreontheloanssotheycanmakea
profit.Butiftheloansarebadthentheinvestorscanlosetheirmoney.Inthe1980s
and1990s,manysavingsandloancompaniesmadebadloansresultinginlossesofover
$150billion,mostofwhichwaspaidforbytaxpayersthroughgovernmentbailouts.The
rootproblemwiththebadloanswastakingtoomuchriskonloansthatpeoplecould
notaffordtorepay.Somearguethatthegovernmentsharessomeoftheblamehereby
backinguptheloansandbailingoutthebanks.Theethicalvaluesofobjectivityanddue
care were not properly followed in evaluating the credit rating of customers who
appliedforloans,andtheaccountingprinciplesofassetmeasurementandconservatism
werenotprudentlyapplied.

Realestatescandals.Thistypeofscandalofteninvolvesoverstatingthevalueofreal
estate to make an unreasonable profit, leaving borrowers and banks with the losses
whenthetruevalueofthepropertyisrevealed.Youlearnedinyouraccountingclasses
aboutmeasuringassetsatfairmarketvalue,butifyouoverstatethevalueofanasset
then somebody will lose when thetrue value of the asset is discovered. For example

202010JohnWileyandSons,Inc.


LessonsLearned

Whatlessonscanwelearnfromtherecentbusinessscandals?Whatethicalprincipleswere
violated and what can be done to lessen the chance of future business scandals? There are
manyfactorsthatcontributedtothehighprofilebusinessscandalssuchasEnron,WorldCom,
Madoff,realestate,andthesavingsandloanfailures.Someofthesefactorsandthelessons
wecanlearnfromthemare:

1. Lackoftoneatthetoplevelsofanorganization.Ethicalbehaviorinbusinessbeginsat
thetopmanagementmustsetanexampleofethicalbehaviorandmakeitknownthat
ethics is important in the organization. The top officials in recent scandals acted
improperly and therefore set a tone indicating that ethics does not matter in the
company. If the top people in an organization feel that ethics is important then
employeeswillfollowtheleadandconsiderethicalissuesintheirbusinessdecisions.

2. Conflict of audit and consulting roles of accounting firms. CPA firms are no longer
permittedtobebothanauditorandaconsultantforacompany.Auditorindependence
is more closely scrutinized under the new regulations that took effect after the
accountingscandals.

3. Responsibilityoftopofficers.Newaccountingregulationsthatwereestablishedafter
thebusinessscandalsrequirethatthetopofficialsofcompaniessignastatementthat
they assume responsibility for the accuracy of the financial statements and for the
internalcontrolsofthecompany.Beforethenewlegislationsomeofficersclaimedthat
they had no knowledge of improper financial activities being conducted by other
employees in the company. Now, it is the responsibility of top management to
responsibilityforandknowledgeofallfinancialmattersofthecompany.

4. Governmentregulationcannotpreventfraud.TheSecurityandExchangeCommission
(SEC)hadextensiveregulationandreportingrequirements,buttherequirementswere
notabletopreventthefraudthatoccurredinrecentbusinessscandals.Whilethefraud
was eventually detected, it was not prevented. Some would question whether
increasinggovernmentregulationisneededinlightoftheinabilityofcurrentregulation
topreventfraud.

21

5. Fraudcanhappenevenwhengoodcontrolsareinplace.Ifsomeoneisinclinedtodo
somethingthatisunethicalorillegal,theymaybeabletogetawaywithitatleastfora
while. Investors and others who rely on financial information should be alert for
unusualorunreasonableinformationwhichmaybeinaccurate.

Havinglearnedsomelessonsfromrecentbusinessscandalswemaybebetterpreparedto
understandhowtheyhappenedandwhatcanbedonetoimprovethesituationinthefuture.
Congresspassednewlegislationinresponsetothelatestroundofbusinessscandals.Themost
important legislation was the SarbanesOxley Act of 2002 which added many regulations for
companies and auditors. This is not the first time that the government has stepped in to
regulate the accounting profession. For example, the Securities and Exchange Commission
(SEC) was established to regulate the stock market after some unethical business practices.
Afterthestockmarketcrashof1929,theSECwascreatedin1934torestorepublicconfidence
inthecapitalmarkets.LetstakealookatthelatestlegislationSarbanesOxley.

SarbanesOxley

AsaresultofthebusinessscandalsCongresschangedtherulesforaccountantsbypassing
theSarbanesOxleylegislation.TheSarbanesOxleyActof2002containsthefollowingsections:
1. PublicCompanyAccountingOversightBoard
2. AuditorIndependence
3. CorporateResponsibility
4. EnhancedFinancialDisclosures
5. AnalystConflictsofInterest
6. CommissionResourcesandAuthority
7. StudiesandReports
8. CorporateandCriminalFraudAccountability
9. WhiteCollarCrimePenaltyEnhancements
10. CorporateTaxReturns
11. CorporateFraudandAccountability

222010JohnWileyandSons,Inc.

ThePublicCompanyAccountingOversightBoard(PCAOB)addedmanynewregulationsfor
companiesthattradestockonthepublicstockexchanges.ThedutiesofthePCAOBareto:

registerpublicaccountingfirmsthatprepareaudit
establishauditing,qualitycontrol,ethics,independence,andotherstandardsrelatingto
thepreparationofauditreports
conductinspectionsofregisteredpublicaccountingfirms
conduct investigations and disciplinary proceedings and impose appropriate sanctions
onregisteredpublicaccountingfirms
promotehighprofessionalstandardsandimprovethequalityofauditservicesoffered
byregisteredpublicaccountingfirms
enforcecompliancewiththisAct
setthebudgetandmanagetheoperationsoftheBoard

TheU.S.SupremeCourtisreviewingtheSarbanesOxleylegislationandmaydecidereduce
the authority of the PCAOB. If any Supreme Court rulings do affect the SarbanesOxley
legislationthenCongresswouldneedtochangetheregulations.Perhapsanoveralllessonfrom
thebusinessscandalsisthatethicalbehaviorcannotbelegislated.Whileethicalstandardsand
effective internal controls can increase the likelihood of ethical behavior, making rules and
regulationscannevercompletelypreventfraud.

DiscussionQuestions

1. InwhatwaysdoyouthinkthePCAOBwillhelptolessenthechanceoffraudulent
businesspractices?HowwouldyouimprovetheSarbanesOxleylegislation?

2. Howcancompaniesimprovetheethicalbehaviorofemployeeswithintheorganization?
Doyouthinkthatethicalbehaviormakesacompanymoresuccessful?

23


Additionalresourcesandreferences

AICPAcodeofethicshttp://www.aicpa.org/about/code/index.htm

IMAcodeofethicshttp://www.imanet.org/about_ethics_statement.asp

IFACcodeofethicshttp://www.ifac.org/ethics/

Businessethicslinkshttp://www.scu.edu/ethics/links/links.cfm?cat=BUSI

StudentCenterforPublicTrust
http://www.centerforpublictrust.org/index.php?option=com_content&view=article&id=114

Ethicaldecisionmakinghttp://www.scu.edu/ethics/practicing/decision/

Improvingprofessionalethics
http://www.nysscpa.org/cpajournal/2004/604/essentials/p58.htm

AGlobalStandardforAccountingEthics,16thAnnualInternationalConferencePromoting
BusinessEthics,NiagaraUniversity,October2830,2009

Ethics,CatholicValues,andProfessionalCodesofEthicsintheBusinessCurriculum,15thAnnual
InternationalConferencePromotingBusinessEthics,St.JohnsUniversity,October2224,2008

EthicsinManagementAccounting,apresentationataconferenceonEthicsandResponsible
LeadershipinBusiness,OdetteSchoolofBusinessandCMAOntario,Windsor,Ontario,Canada,
March7,2008

ApproachestoTeachingEthicsinAccountingEducation,2ndAnnualConferenceoftheBusiness
ResearchConsortiumofWesternNewYork,St.BonaventureUniversity,NY,April2021,2007

EthicsDisclosuresinFinancialReports,13thAnnualInternationalConferencePromoting
BusinessEthics,NiagaraUniversity,NY,October2527,2006

AFrameworkforTeachingBusinessEthics,JournalofBusinessEthics16:293297,Kluwer
AcademicPublishers,theNetherlands,1997

Section3andSection4photocourtesyofwww.istockphoto.com.

242010JohnWileyandSons,Inc.