Module 1 Flashcards
(30 cards)
Statement of Ethical Professional Practice
Principles
HFOR
- IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility.
- Members shall act in accordance with these principles and shall encourage others within their organizations to adhere to them.
- The institute of Management Accountants, the IMA, is a professional organization for accountants and other financial professionals working in business and they offer a certification called a Certified Management Accountant, or a CMA, that requires both passing a long exam and having relevant work experience like CPAs. Their members and all CMAs are required to adhere to the IMA ethical code of conduct called the Statement of Ethical Professional Practice.
There are also 4 detailed ethical Standards that guide member conduct and address
- Competence
- Confidentiality
- Integrity
- Credibility
Competence
Regarding the standard on Competence, Each IMA member has a responsibility to:
- Maintain an appropriate level of professional expertise by continually developing knowledge and skills,
- Perform professional duties in accordance with relevant laws, regulations, and technical standards,
- Provide decision support information and recommendations that are accurate, clear, concise, and timely and
- Recognize and communicate professional limitations or other constraints that would preclude judgment or successful performance of an activity.
So, from an ethical standpoint, the requirement is that members must maintain abilities to effectively perform the tasks they are assigned by their employer
Confidentiality
The IMA standard on Confidentiality states that “Each IMA member has a responsibility to:
- Keep information confidential except when disclosure is authorized or legally mandated,
- Inform all relevant parties regarding appropriate use of confidential information, along with monitoring the activities of subordinates to ensure compliance
- Refrain from using confidential information for unethical or illegal advantage
Many IMA members and other accountants frequently have access to confidential information that could be used by competitors of their employer or by the accountant to gain an advantage or realize personal gain. At times use of such information can be deemed illegal, as in the case of insider trading.
For #3, the word “refrain” does appear to require something less than what might be ideal or even expected by those who rely on the work of IMA members.
Integrity
The IMA standard on Integrity states that “Each IMA member has a responsibility to:
- Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest, while advising all parties of any potential conflicts,
- Refrain from engaging in any conduct that would prejudice carrying out duties ethically and
- Abstain from engaging in or supporting any activity that might discredit the profession.
For #2, the word “refrain” does appear to require something less than what might be ideal or even expected by those who rely on the work of IMA members.
Credibility
The IMA standard on Credibility states that “Each IMA member has a responsibility to:
- Communicate information fairly and objectively.,
- Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations of the member and
- Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.
Foundations of Ethics
EMVN
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Ethics: derived from the Greek word ethikos (character), deals with the concepts of right and wrong; standards of how people ought to act.
- Norms, Values, and The Law
- Morals: derived from the Latin word moralis, deals with manners, morals, character.
- Values: basic and fundamental beliefs that guide or motivate attitudes or actions.
- Norms: what local society & culture accepts.
Ethics or ethical behavior represents how people should act and is based on moral values one establishes during their upbringing and can be influenced by fundamental or religious beliefs or teaching or norms established by the society they are a part of. As a result, ethics can varying somewhat among countries, segments of countries or even industries in terms of what is considered acceptable behavior.
The Golden Rule
A version of the Golden Rule appears in each of the world’s religions.
Ethics can be traced back to ancient Greek philosophy.
- “What is the best sort of life for human beings to live?”
- Greeks believed the ultimate goal of happiness was to attain some objectively good status: the life of excellence.
Virtually every religion has a version of the Golden Rule, which generally means that one should treat others like he or she would like to be treated and is viewed as a foundation for good codes of ethical behavior that many well-run organizations establish for guiding employee conduct and decision making.
Foundations of Ethics
Impacts
- How we define what’s right & what’s wrong.
- How we value self interest (prestige, power, wealth).
- How we value interest of others (honesty, trust, reputation).
- Professional, license-based and organization codes of conduct set minimum standards.
Moral values and norms considered acceptable can all impact decisions individuals make from an ethical standpoint. These can define what is specifically acceptable or not acceptable, which can be reduced to writing as in laws, regulations and code of conduct.
However, one factor which at times can have the greatest impact on ethical decisions is how one values their own self interest versus the interest of other stakeholder in the outcome of decisions made by accountants and auditors.
When we look at professional, licensed-based, like for licensed CPAs, and employer organizational codes of conduct, we must always realize that these generally establish “minimum” standards, which at times can be seen as somewhat detrimental to the individual’s self interest, but beneficial to others.
Foundations of Ethics
Ethical Relativism
- Theory that holds that morality is relative to the norms of one’s culture.
- If correct, there can be no common framework to resolve any moral disputes between different societies.
- Theory is rejected by most ethicists.
- Societies may differ in their application of fundamental moral principles but agree on the principles.
Most societies have very similar overall moral principles that broadly define what is right and wrong, but might vary their application under certain circumstances, such as when organizations are impacted rather than individuals. So, what’s ethical in business and in personal life might vary.
For example, in the U.S. the Foreign Corrupt Practices Act (FCPA) is a good example makes it illegal to pay a foreign government official a bribe to sell products or services, whereas, such payments may be deemed acceptable as individuals may not be seen as harmed by such payments.
In some societies, the severity of bad behavior may be as more serious than in other societies. The example in textbook of public caning for graffiti and chewing gum in some societies or countries is viewed as relatively minor offenses in other societies or countries as they impact “society” as a whole and not individuals.
Foundations of Ethics
Situation Ethics
- This theory recognizes the existence of certain principles but questions whether they should be strictly applied or used as guidelines based on the particular situation.
Problem: An individual can rationalize actions such as cheating or the indifference that probably occurred at Penn State.
The Six Pillars
The Josephson Institute of Ethics identified six Pillars of Character that are considered the foundation of personal values to guide decision making.
These are:
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- Trustworthiness
- Respect
- Responsibility
- Fairness
- Caring
- Citizenship
According to the Institute, all of these attributes are generally required for making ethically sound decisions when facing ethical dilemmas.
Why do people make ethical decisions?
Why do people make decisions that are ethical? Generally for one of 2 reasons:
- They believe it is the appropriate thing to do based on sound personal values (character).
- They believe the risks are too high to not make a different decision. Risks are a combination of the probability of getting caught and the significance of any penalty if caught.
The good reason is that they believe it is the appropriate thing to do based on their personal values
The wrong reason is that they fear that making an unethical decision poses too great of a risk to them personally.
Generally, acting ethically means minimizing consideration of self interest or benefit if that would UNFAIRLY affect another in a negative way.
Since some people will not always act ethically because of self-interest, we have internal controls, auditors regulatory enforcers.
The Six Pillars
Responsibility
Pillar #3 is Responsibility and means the ability to reflect on alternative courses of action, persevere and carry out moral action diligently.
In auditing and legal situations, this is frequently called the exercise of due professional care or due diligence, which generally means doing what a reasonable, prudent person would do in the circumstances. One can also consider how such a person would view an alternative course of action you are considering.
Sometimes, the concept of responsibility also includes being accountable for one’s actions.
The Six Pillars
Trustworthiness
The 1st pillar, Trustworthiness, means being honest, acting with integrity, being reliable, and exercising loyalty in dealing with others.
Honesty includes not only telling the truth, but full disclosure and NOT withholding information another needs. (When some people are being audited, they adopt the principle of not answering any question an auditor does not ask. The AICPA Code of Processional Conduct specifically requires accountants not to mislead auditors.
Integrity means acting in accordance with one’s moral values and norms, as we discussed earlier.
Reliability means that individuals should keep their promises and commitments.
Loyalty includes protection of confidential information. Sometimes loyalty can over-shadow the other components and allow someone to rationalize doing something that is NOT ethical.
At times, individuals see Whistleblowing (either internally or externally) as contradictory to loyalty, but is required by many codes of ethical conduct of employers and professional organizations like the AICPA. See Exhibit 1.3 in the textbook.
The Six Pillars
Respect
The golden rule encompasses respect for others through notions such as civility, courtesy, decency, dignity, autonomy, tolerance and acceptance.
Respect means treating everyone with dignity and fairness.
The degree of respect given to other individuals should only be based on their character and not any other attributes, although in some cultures respect may be given to person based on their position in spite of their character.
The Six Pillars
Fairness
Pillar #4, Fairness, means treating others equally, impartially, and openly without considering one’s own feelings.
For accountants and auditors the most common other individuals that have a stake in our decisions are:
- Investors ( for impact on stock prices)
- Lenders (for the impact on assessing an appropriate interest rate and repayment risk)
- Vendors (for the impact on any credit that is granted)
- Customers (for the impact on pricing products)
- Superiors (for impact on any performance-based compensation & promotions)
- Other employees (for the security of their jobs, pay and retirement plans)
The Six Pillars
Caring
The essence of pillar #5, Caring, is empathy, which is the ability to understand, be sensitive to, and care about the feelings of others.
It is easiest to achieve when one tries to see impact of various alternatives on others rather than the impact on them personally.
Caring and empathy support each other and enable a person to put him/herself in the position of another. This is essential to ethical decision making to avoid focus on self interest.
The Six Pillars
Citizenship
Pillar #6, Citizenship, asks one to take actions that benefits their society as a whole and once again is aiming to diminish the value of self-interest in making decisions that could impact others.
An important part of good citizenship is to obey the laws, be informed of the issues, volunteer in your community, and vote in elections.
AICPA’s Code of Professional Conduct
Four Components:
- Principles
- These principles identify the broad areas of a CPA’s responsibilities to the public, their clients, the profession as well as other CPAs and provide the framework for the Rules, which govern the performance of professional services by members. The principles also explain why a code of professional conduct is essential for the accounting and auditing proffession.
- Responsibilities
- Public Interest
- Integrity
- Objectivity and Independence
- Due Care
- Nature and Scope of Services
- These principles identify the broad areas of a CPA’s responsibilities to the public, their clients, the profession as well as other CPAs and provide the framework for the Rules, which govern the performance of professional services by members. The principles also explain why a code of professional conduct is essential for the accounting and auditing proffession.
- Rules
- The rules represent the primary content of the AICPA Code of Professional Conduct and includes specific behavior and relationships that are considered unethical and which CPAs are to avoid or just not engage in.
- 101 Independence
- 102 Integrity and Objectivity
- 201 General Standards
- 202 Compliance with Standards
- 203 Accounting Principles
- 301 Confidential Client Information
- 302 Contingent Fees
- 501 Acts Discreditable
- 502 Advertising and Other Forms of Solicitation
- 503 Commissions & Referral Fees
- 505 Form of Organization and Name
- The rules represent the primary content of the AICPA Code of Professional Conduct and includes specific behavior and relationships that are considered unethical and which CPAs are to avoid or just not engage in.
- Interpretations
- Ethical Rulings
Modern Moral Philosophies
Self interest vs. Interest of Others
A few of the philosophies applicable to the study of accounting ethics include:
- Teleology
- Egoism
- Enlightened Egoism
- Utilitarianism
- Deontology
- Rights Theory
- Justice
- Virtue
Exhibit 1.4 in the textbook identifies and explains various philosophies that researchers have found explain why different people do not make the same decisions when faced with ethical dilemmas.
The primary distinction among these different philosophies for accountants and auditors is whether decisions are primarily based on self interest or the interests of other stakeholders. Decision makers in accounting and auditing are at different levels in making decisions when faced with ethical dilemmas.
Egosim and Enlightened Egoism
- Consequences for individual
- “Do act that promotes the greatest for oneself.”
- Enlightened egoists
- Allow for the well-being of others
- Help achieve some ultimate goal for self
- Self-interest remains paramount
Egoism and enlightened egoism place the greatest emphasis in decision making on self interest.
Although we all consider the impact of various alternatives we are considering on ourselves, it should not be the primary emphasis if we want to make ethically sound decisions.
Utilitarianism
- Bentham and Mill
- Consider impartially the interests of all persons affected by an action and pick the greater benefit.
- “Greatest good to greatest number”
- Difficulties
- Impossible to foresee all consequences
- Consequences difficult to measure
- Types
- Act-Utilitarian
- Rule-Utilitarian
Utilitarianism decision making considers the interests of others and is considered a higher level of ethical decision making, but factors in the consequences of various alternatives being considered, which may not always result in ethically sound decisions.
It factors in the consequences of various alternatives being considered, which may not always result in the most ethically sound decisions as it may NOT place adequate consideration on the impact to each interest group.
Deontology
- Derived from Greek meaning duty
- Moral norms establish basis for action.
- Based on rights of individuals and motivation rather than consequences
- Concerned with means rather than end result
Immanuel Kant
- Rights Theory
- Motivated by sense of obligation
- Universality of moral actions
- People should never be a means only
- Justice
- Each permitted the maximum amount of basic liberty compatible with others.
- Social and economic inequalities are allowed only if benefit all.
Deontology is still a higher level of decision making based primarily on the rights of various stakeholders in decisions and that all stakeholders should see that they are getting equal justice.
Under this moral philosophy all stakeholders should see that they are getting equal justice or treatment.
