Vous êtes sur la page 1sur 16

1

Running Head: ETHICS AND ACCOUNTING

Ethics and Accounting in the United States: The Current and Future Relationship
Gwendolyn Hartung
Shippensburg University

ETHICS AND ACCOUNTING

Executive Summary
Accounting relies heavily on ethics. The United States currently uses generally accepted
accounting principles (GAAP) and the Code of Professional Conduct set by theAmerican
Institute of Certified Public Accountants to govern accountants. The Code of Professional
Conduct is actually based on virtue ethics, although most people in the business world tend to
use the consequentialist or deontological theories to approach ethics. While the basis on virtue
ethics is interesting, some people propose that the best ethical approach is actually a combination
of consequentialist, deontological, and virtue ethics. Over the years, as people have tried to
create standards and rules for accounting, they have recognized problems with the current
generally accepted accounting principles (GAAP) in the United States. There has been a push
towards International Financial Reporting Standards (IFRS), especially after recent accounting
scandals and the implementation of Sarbanes-Oxley. However, some people believe that IFRS
convergence will not solve the United States problems, but rather increase the ethical challenges
that accountants will face, and that total international accounting standards may not be feasible
due to cultural differences.

ETHICS AND ACCOUNTING

Accounting is a profession which encounters a variety of ethical dilemmas. As such, it is


necessary for accountants to be able to know how to recognize and deal with ethical issues. In
the United States, accountants focus primarily on complying with the generally accepted
accounting principles (GAAP). However, GAAP is defined as a dynamic set of both broad and
specific guidelines that companies should follow when measuring and reporting the information
in their financial statements and related notes (Spiceland, Sepe, & Nelson, 2013, p. 8). In other
words, GAAP is the rules and guidelines accountants follow when creating financial statements
and doing their jobs. There is no specific focus on ethics in GAAP, rather the focus is on the
methods used by accountants to complete their jobs. According to Neill, Stovall, and Jinkerson
(2005) the accounting industry has historically been considered to be self-regulated, with the
American Institute of Certified Public Accountants (AICPA) creating a national voluntary code
of conduct, the Code of Professional Conduct (CPC). The question now is whether this code of
conduct and GAAP are adequate following accounting scandals, such as those of Enron and
Arthur Anderson, which have shaken the governments and the publics confidence in the
accounting industrys ability to regulate its members (Neill et al. 2005).
Moriarity stated the AICPA Code of Professional Conduct actually began as the Code of
Professional Ethics in 1962, and after several revisions became the current CPC in 1988 (as cited
in Neill et al., 2005, p. 102). Even after going through several revisions over the years, there are
still some who critique the CPC, claiming that it contains weaknesses, and that the CPC exists to
be self-serving. Neill et al. (2005) claimed that the real reason the profession has promulgated a
CPC is to maintain the aura that members of the profession are ethical (p. 102). They supported
their claim by stating:

ETHICS AND ACCOUNTING

[E]ach of the accounting industry voluntary codes of conduct have described


characteristics that competent and ethical CPAs should possess, rather than providing a
means to assess the actual quality of accounting services that an individual CPA or public
accounting firm performs for the benefit of his/her client and for the public. (Neill et al.,
2005, p. 103)
In other words, the AICPAs CPC seems to care more about whether the members are
perceived as ethical, than if they are accurately and ethically performing their duties. This is
shown by the fact that the Code of Professional Conduct does not provide a way to determine if
an AICPA member is behaving ethically, but instead places most of its focus on the
characteristics of the members (Neill et al., 2005). Take for example auditors: Article 4 of the
CPC speaks to the concept of objectivity and independence, requiring that in fact and appearance
members of the AICPA should be independent of their clients, but there is no instruction to
determine if the audit opinion (the product of the audit) is bias-free and also independent (Neill
et al., 2005). Spalding, Jr. and Oddo (2011) further supported the claim that not enough
emphasis is placed on ethics by stating that although the AICPA CPC is made of a set of rules
and a set of principles, the bylaws of the AICPA require members adhere to the rules, but not
the principles (p. 50). Even though the CPC requires periodic peer reviews, they assess whether
GAAP has been consistently, and not whether there has been compliance with the CPC (Neill et
al. 2005). Bennett et al. (2006) also stated that the U.S. accounting standards focus on the
importance of GAAP, although GAAP may not always give a fair presentation of the facts, if
people twist the rules to their favor. While I agree that this is a problem, I and others believe that
ethical focus should not just be on compliance with rules.

ETHICS AND ACCOUNTING

When focus is on compliance with rules, the cognitive moral development of employees
has difficulty evolving past the conventional level. According to Trevino and Nelson (2014), at
the conventional level, [w]hats ethically right is explained in terms of living up to roles and the
expectations of relevant others, fulfilling duties and obligations, and following rules and laws
(p. 78). At the postconventional (or principled) level, people are more capable of making
decisions autonomously, and are guided by the ethical principles of justice and rights (Trevino
& Nelson, 2014, p. 79) instead of solely by laws. It makes sense to me for a nation to want
people to think at the postconventional level rather than the conventional level, because laws and
rules can be wrong or can have loopholes, which would open the doorway to unethical behavior.
Because the postconventional level of cognitive moral development is focused on principles of
justice and rights, postconventional thinkers would be likely to use deontological theories or
virtue ethics as opposed to consequentialist theories. Consequentialist theories focus on the
consequences of a persons action (Trevino & Nelson, 2014). On the other hand, people who use
the deontological theories base their decisions about whats right and wrong on broad, abstract
universal ethical principles or values (Trevino & Nelson, 2014, p. 42). Virtue ethics, while
similar to deontological theories, focus on an individuals integrity rather than the act (Trevino &
Nelson, 2014). As such, we can see that the AICPAs current CPC actually follows virtue ethics
by placing its focus on the members rather than their acts. Thus, while it may seem that the CPC
does not place much focus on ethics, it is actually based on one of three approaches to ethical
decision making.
The problem is that it seems to rely only on virtue ethics, while Whetstone (2001)
suggested that the best approach to ethics is to incorporate all three approaches (consequentialist
theories, deontological theories, and virtue ethics) into business rather than choosing just one.

ETHICS AND ACCOUNTING

Whetstone (2001) defined a virtue as a qualitative characteristic, generally considered part of a


persons character, something within the person, although neither materially nor biologically
identifiablecloser to an internal value, something of the spiritual essence of the person (p.
104). He goes on to explain that by adding virtue ethics to consequentialist and deontological
approaches, businesses make ethics more personal, as opposed to the tendency of
consequentialist and deontological approaches to be impersonal (Whetstone, 2001). Arjoon
(2000) also wrote of virtue ethics in business, and stated:
Virtue theory offers a more appealing, practical, unified and comprehensive theory of
ethics in business than traditional approaches. It grounds morality in facts about human
nature, concentrates on habits and long-term goals, extends beyond actions to comprise
wants, goals, likes and dislikes, and, in general what sort of person one is and aims to be.
Traditional theories on business ethics attempt to ground morality in subjective
preference or in abstract principles of reasons and focus in decision making directed by
principles and rules. (p. 173)
By combining all three approaches, there is a more rounded approach to ethics, with personal
touches and a focus on both the consequences of your actions and your obligations, or as
Whetstone (2001) stated, a focus on cognitive decision making of individual acts
simultaneously with the deliberate process of developing the moral character of actors (p. 106).
I agree that this is the best approach to business ethics, because not only does it enable a person
to use cognitive processes to make ethical decisions, it also helps a person to develop into an
ethical person, who will hopefully be able to think past the laws and rules and make decisions by
themselves. Also, Arjoon (2000) stated that virtues are fundamental in that claims about other
moral concepts are either reducible to underlying claims about virtues or justified on their basis

ETHICS AND ACCOUNTING

(p. 162). This is evidenced by the fact that deontological theories are based on broad, abstract
universal ethical principles or values (Trevino & Nelson, 2014, p. 42), which may be classified
as virtues, depending on the definition used. Consequentialist theories can also be traced back to
virtue ethics, because the focus on the consequences of actions and tell you to choose the action
or decision that will do the most societal good, which could be considered to be based on a
virtue.
Business ethics in general focus on nine ethical issues, according to a study done by
Gaumnitz and Lere (2002): confidentiality; honesty and integrity; responsibilities to
employers/clients; obligations to the profession; independence and/or objectivity; legal and/or
technical compliance; discreditable or harmful acts; social values; and ethical conflict resolution,
all of which relate to accounting. However, after the accounting scandals in the early 2000s and
the implementation of Sarbanes-Oxley, accounting and other business organizations created
and/or revised their codes of ethics, resulting in a significant difference between the codes of
ethics before and after Sarbanes-Oxley (Canary & Jennings, 2008). A study done by Canary and
Jennings (2008) determined that most of the difference was in the terms used, rather than the
themes of the codes of ethics, concluding that after Sarbanes-Oxley more compliance-related
themes emerg[ed] (p. 275). This, along with evidence presented earlier in this paper, indicates
that the United State uses more rules-based accounting. For many years, there has been a push to
move the United States towards more principles-based accounting. Anthony (1963) defined
principles as broad, general statements which serve as guides for solving specific problems;
they are not detailed instructions (p. 100). Currently, accounting standards are considered to be
rules-based (Bennett, Bradbury, & Prangnell, 2006; Nobes, 2005; Spalding, Jr. & Oddo, 2011;
Verschoor, 2010). However, there is some question as to how valid that statement is.

ETHICS AND ACCOUNTING

According to a study done by Bennett et al. (2006), in which they chose a standard each
from the U.S., IFRS, and New Zealand and compared them, they found that the U.S. standard,
which is perceived to be rules-based, actually has the least number of rules relative to purported
principles-based standards [and] is supported by more references to accounting principles (p.
195). They concluded that U.S. standards may be perceived as rules-based because of
differences in drafting, with U.S. standards providing a set of rules and international standards
providing a general definition followed by examples and guidance (Bennett et al., 2006, p.
199). Schipper stated that U.S. rules are often based on principles (as cited in Nobes, 2005, p.
25), which indicates that defining U.S. standards as rules-based and not principles-based is a
poor reflection of the actual standards. However, Nobes (2005) does suggest that some U.S.
accounting standards could be improved by basing them on better principles than ones already
used, and changing those rules that arent based on principles so that they do have a principle
foundation, or just using a principle instead of rules.
For the purposes of this paper, I will refer to U.S. standards as rules-based, putting aside
the debate over whether this is true and agreeing with the general consensus. The push for a
move towards a more principles-based accounting standard has resulted in talks on converging
U.S. GAAP with International Financial Reporting Standards (IFRS). According to Spiceland et
al. (2013), a principles-based approach to standard setting emphasizes using professional
judgment, as opposed to following a list of rules, when choosing how to account for a
transaction (p. 17). Some say that the focus on professional judgment lessens the number of
rules that can be avoided and increases the likelihood of using an appropriate accounting
treatment, while others say that the lack of rules creates more possibilities for misuse, because
individuals can use different principles to justify their approach (Spiceland et al., 2013).

ETHICS AND ACCOUNTING

Anthony (1963) stated that [a]ll accountants abhor the idea that any person or organization
should prescribe a detailed manual of rules for handling every type of transaction (p. 100).
While I dont think that Anthony should be able to speak for all accountant, I do agree that it
would likely be very troublesome and in fact almost impossible for anyone to write a manual of
rules for every type of transaction. It is for this reason that accounting need principles, and some
of the more vague principles should be clarified with rules.
The convergence of GAAP and IFRS has been talked about for many years now, and not
always because of the desire for more principles-based accounting standards. In 1974,
Cummings wrote about the possibility of world accounting principles instead of GAAP, due to
increased multinational corporations and international transactions, and the trouble deciphering
foreign financial statements. Barker (2003) claimed that [a] shift toward global reporting
standards is now inevitable (p. 24). He went on to state that while U.S. standards will change in
some cases, in others it will be international practice that will conform to U.S. standards (Barker,
2003). The actual convergence of GAAP and IFRS has been a very slow process. However, the
result expected by the Financial Accounting Standards Board (FASB) and International
Accounting Standards Board (IASB) is simpler, more transparent, principles-based accounting
by companies globally (p. 25). One of the main goals of the convergence of GAAP and IFRS is
improved comparability of financial statements (Verschoor, 2010). A large critique of the IFRS
convergence it that accountants would likely face more ethical challenges than ever before under
IFRS (Verschoor, 2010). Bennett et al. (2006) Verschoor (2010) both agree that the U.S. is an
environment that has a high level of litigation, and that as such accountants rely on rules to
defend their own or their clients actions in court. IFRS requires more professional judgment to
apply principles rather than reliance on rules, and may allow accountant to use weaker

ETHICS AND ACCOUNTING

10

accounting principles to authenticate their actions and drive out higher quality principles
(Verschoor, 2010). The cost of litigation may increase due to lawyers being better able to claim
that the increased professional judgment associated with the convergence of IFRS is faulty
(Verschoor, 2010). Another criticism of IFRS convergence is that accountants are likely to face
mounting ethical pressures from their management to develop and follow a rationale for seeing
the financial results of their organization in absolutely the most favorable light (Verschoor,
2010, p. 14), which misrepresents the company and deceives current and potential shareholders,
as well as financial institutions that may provide loans to businesses. While this type of
deception does occur under current GAAP, the worry is that the number of incidences will
increase under IFRS, and is the reason why Verschoor stated that conversion to IFRS principles
may not be in the best interests of the shareowners of U.S. corporations (p. 14). Thorne and
Massey (2011) agree that IFRS will have an impact on accountants professional judgment, in
particular the ethical facet.
In 2011, Canada moved to adopt IFRS, and in the same year Thorne and Massey (2011)
surveyed 215 Canadian accountants, to determine what type of ethical thinking they used (or
which stage of cognitive moral development they were in): pre-conventional, conventional, or
principled. The results of their survey were that about 55% used conventional thinking, 40%
used principled ethical thinking, and about 5% used pre-conventional thinking (Thorne &
Massey, 2011). The results of the survey seem to fit with the way the general population is
divided into the three categories of cognitive moral development, with a small percentage
remaining on the pre-conventional level and a majority being on the conventional level, however
the high percentage of individuals on the principled level is surprising to me, considering that
stage six: universal ethical principles is only theoretical (Trevino & Nelson, 2014). So what does

ETHICS AND ACCOUNTING

11

this survey tell us? A majority of Canadian accountants us conventional thinking, and thus rely
on rules to tell them what to do. For principles-based standards like the IFRS, the goal is to have
most accountants using principled thinking. Thus, those accountants who already use principled
thinking should be encouraged to continue to do so, and those who dont use principled thinking
should be trained, educated, and encouraged to use more principled thinking. This is the case in
all nations that are looking to adopt IFRS, not just in Canada.
Along with the convergence of IFRS, there has been movement towards international
ethical standards for accountants, and a revised Code of Ethics for Professional Accountants, also
known as the IFAC Code, has been released by the International Federation of Accountants
(IFAC) (Clements, Neill, & Stovall, 2009). Unfortunately, the code has not been adapted by
almost 50% of the member organizations (Clements et al., 2009). Clements et al. (2009)
theorized that this is due to differences in culture, specifically power distance, individualism,
masculinity, and uncertainty avoidance. Along with individualism is its opposite, collectivism.
Trevino and Nelson (2014) defined individualism as the extent to which people in a society
think of themselves as autonomous individuals who are responsible primarily to themselves and
their immediate families (p. 403), while collectivism is defined as emphasiz[ing] collective
purposes over personal goals and group harmony over individual achievement (p. 403). Power
distance is the extent to which people in the society accept a hierarchical or unequal distribution
of power in their organizations and in society (Trevino & Nelson, 2014, p. 404). Masculinity
and its opposite femininity are defined by what the culture places importance on. Masculine
cultures place importance on achievement and material success, while feminine cultures place
importance on relationships and the quality of life (Hofstede & Hofstede as cited in Clements et
al., 2009, p. 386-387). Finally, uncertainty avoidance is defined by Hofstede & Hofstede as the

ETHICS AND ACCOUNTING

12

extent to which the members of a culture feel threatened by ambiguous or unknown situations
(as cited by Clements et al., 2009, p. 387). The results of Clements et al.s (2009) study were
that cultures with high individualism and high uncertainty avoidance are less likely to implement
IFAC Code. They further conclude that due to cultural differences throughout the worldit
will be difficult, if not virtually impossible, for the IFAC to expect to gain universal acceptance
of its model code of ethics (Clements et al., 2009, p. 389-390). If cultural differences will
impede the adoption of an international code of ethics, how can we expect IFRS to be accepted
and used in the same way by all? Because IFRS is based on principles, and principles and ethics
have a strong relationship, a principle that might be very important in one culture may be less
important in others. In this way, comparability between companies, a very important function of
financial statements in the U.S., will suffer, and thus shareholders will have difficulty making
decisions about the companies, unless we can find a way to ensure that every nation has ethical
codes that are at least as strict as the IFAC Code.
Ethics and accounting are very closely linked, and will remain so for the foreseeable
future. As the United States attempts to move away from the current rules-based standards of
GAAP to the more principles-based standards of IFRS, there will be many challenges, especially
concerning ethics. Accountants will face increased pressure to find principles, no matter how
weak, to justify presenting companies in the best light, and cultural and personal differences will
make it difficult to have an international code of ethics, resulting in some variance of financial
statements. They will also have to be educated and encouraged to evolve past the conventional
level of cognitive moral development to the postconventional or principled level, so that they are
no long focused on simply complying with rules, but thinking mostly autonomously and making
decisions based on principles. It seems that there could be benefits and negatives associated with

ETHICS AND ACCOUNTING

13

the convergence of IFRS, and we will have to complete further research and wait to determine
whether the benefits will outweigh the negatives or not, and if possible find ways to eliminate the
negatives.

ETHICS AND ACCOUNTING

14

References
Anthony, R. N. (1963). Showdown on accounting principles. Harvard Business Review, 41(3),
99-106. Retrieved from http://search.ebscohost.com/login.aspx?
direct=true&db=buh&AN=6774805&site=bsi-live
Arjoon, S. (2000). Virtue theory as a dynamic theory of business. Journal of Business Ethics,
28(2), 159-178. Retrieved from http://search.ebscohost.com/login.aspx?
direct=true&db=buh&AN=12250011&site=bsi-live
Barker, R. G. (2003). Global accounting is coming. Harvard Business Review, 81(4), 24-25.
Retrieved from http://search.ebscohost.com/login.aspx?
direct=true&db=buh&AN=9489025&site=bsi-live
Bennett, B., Bradbury, M., & Prangnell, H. (2006). Rules, principles and judgments in
accounting standards. Abacus, 42(2), 189-204. doi:10.1111/j.1467-6281.2006.00197.x
Canary, H., & Jennings, M. (2008). Principles and influence in codes of ethics: A centering
resonance analysis comparing pre- and post-Sarbanes-Oxley codes of ethics. Journal of
Business Ethics, 80(2), 263-278. doi:10.1007/s10551-007-9417-1
Clements, C., Neill, J., & Stovall, O. (2009). The impact of cultural differences on the
convergence of international accounting codes of ethics. Journal of Business Ethics, 90,
383-391. doi: 10.1007/s10551-010-0417-1
Cummings, J. P. (1974). Moving from GAAP to WAP. Harvard Business Review, 52(2), 6-7.
Retrieved from http://search.ebscohost.com/login.aspx?
direct=true&db=buh&AN=3867140&site=bsi-live
Gaumnitz, B. R., & Lere, J. C. (2002). Contents of codes of ethics of professional business
organizations in the United States. Journal of Business Ethics, 35(1), 35-49. Retrieved

ETHICS AND ACCOUNTING

15

from http://search.ebscohost.com/login.aspx?
direct=true&db=buh&AN=12129400&site=bsi-live
Neill, J. D., Stovall, O. S., & Jinkerson, D. L. (2005). A critical analysis of the accounting
industry's voluntary code of conduct. Journal of Business Ethics, 59(1/2), 101-108.
doi:10.1007/s10551-005-3398-8
Nobes, C. W. (2005). Rules-based standards and the lack of principles in accounting. Accounting
Horizons, 19(1), 25-34. Retrieved from http://search.ebscohost.com/login.aspx?
direct=true&db=buh&AN=16677235&site=bsi-live
Spalding, Jr., A. D., & Oddo, A. (2011). Its time for principles-based accounting ethics. Journal
of Business Ethics, 99, 49-59. doi: 10.1007/s10551-011-1166-5
Spiceland, J. D., Sepe, J. F., & Nelson, M. W. (2013). Intermediate accounting (7th ed.). New
York, NY: McGraw-Hill/Irwin.
Thorne, L., & Massey, D. (2011). Ethics and the accountant. CMA Magazine (1926-4550), 85(1),
30-31. Retrieved from http://search.ebscohost.com/login.aspx?
direct=true&db=buh&AN=60303996&site=bsi-live
Trevino, L. K., & Nelson, K. A. (2014). Managing business ethics: Straight talk about how to do
it right (6th ed.). Hoboken, NJ: Wiley.
Verschoor, C. C. (2010). IFRS would escalate ethical challenges for accountants. Strategic
Finance, 92(1), 13-18. Retrieved from http://search.ebscohost.com/login.aspx?
direct=true&db=buh&AN=51883182&site=bsi-live
Whetstone, J. T. (2001). How virtue fits within business ethics. Journal of Business Ethics, 33(2),
101-114. Retrieved from http://search.ebscohost.com/login.aspx?
direct=true&db=buh&AN=5440159&site=bsi-live

ETHICS AND ACCOUNTING

16