Module 2 Flashcards
(17 cards)
Moral lntent and Values
Does everyone have the same moral values?
- Moral intent is the critical component of ethical decision making as we have to select among alternatives.
- One usually acts in accordance with his/her values in weighing pros and cons. Values are impacted by those of the groups one belongs to.
Everyone does not have the same moral values. One’s moral values are based on one’s own environment and the family and other groups they belong to. Moral values are developed and changing over time and determines how someone develops their moral intention in assessing the pros and cons in selecting from available alternatives.
Cognitive Development Approach
- Cognitive Development: Thought process followed in one’s moral development.
- Affects an Individual’s ability to make reasoned judgments about moral matters.
- Decisions are made based on the decision maker’s moral intent & values.
- Even persons who generally act morally, can rationalize (minimizing negative impact on others) doing something unethical.
Cognitive development generally explains why more experienced accountants and auditors generally do a better job at analyzing the positive and negative impacts on others from various alternatives being considered. Unfortunately, this cognitive development allows explains why accountants and auditors sometimes select alternatives with negative impacts on others by “rationalizing” that the impact is marginal or only temporary.
Cognitive Development Approach
Kohlberg’s Stages of Moral Development
Lawrence Kohlberg Identified 3 levels of moral reasoning and 6 stages of moral development :
Kohlberg’s philosophy regarding moral reasoning is similar to the philosophies of others as one’s moral values expand from primary concern for oneself to considering the concerns and impact of our actions on others. This is an evolutionary process as one becomes more satisfied with what one already has to satisfy their basic personal needs and strive for more respect from their peers and society as a whole.
Topic 2.2: Cognitive Development Approach
Level 1 - Preconventional
Ethical Rules are seen as something externally imposed. Individual is very self-centered and only considers impact on self.
Stage 1 – Obedience to rules to avoid punishment. More likely to violate rules if punishment risks are low (value or likelihood).
Stage 2 – Satisfying one’s own needs (egoism); follow rules only if they satisfy one’s needs or results in benefits.
According to studies reviewed by the Association of Certified Fraud Examiners:
- 1/3 of us will steal given any opportunity
- 1/3 may steal with opportunity and a perceived or actual need
- 1/3 will never steal.
Although this data might be hard to believe, if we also factor in materiality, it is easier to accept that 2/3 of us might take or steal items of cash or small amounts.
The pre-conventional stages go beyond theft or stealing to include doing things to gain an advantage over another, which may or may not result in a direct or immediate personal gain to the individual. For example, employees many times do what their supervisor or manager asks even though the action might harm another, such as a customer or a competitor, because they do not want to be fired or they want to be perceived as a team player or be considered for a promotion later. Chapter 2 of the textbook has an example of this involving decisions and participation in bribing foreign government officials to gain business.
Cognitive Development Approach
Level 2 - Conventional
Individual becomes aware of the interests of others and one’s duty to society. Personal responsibility is an important consideration in decision-making.
Stage 3 – Fairness to others; commitment to loyalty in relationships. (Best Interest of Others)
Stage 4 – Law and order; one’s duty to society, respect for authority, maintaining social order. (Best Interest of Society)
Level 2 stages reveals a more caring attitude for decision makers. Decisions factor in how various alternatives being considered might impact others. At stage 4, the decision maker also considers whether alternatives would also be negative on the values or concerns of society, such as alternatives with varying impact on how one’s country is perceived in the world (foreign official bribing) or impact on the environment.
Cognitive Development Approach
Level 2 - Conventional: Accountants’ Ethical Behavior
- Accounting profession has professional standards & codes of conduct to encourage ethical behavior.
- These standards, an individual’s attitudes and beliefs and ethical reasoning capacity influence professional judgment and ethical decision making.
- Post conventional reasoning is the ethical position to take even though it may go against corporate culture of loyalty or “go along to get along”.
Cognitive Development Approach.
Level 2 - Conventional: Empirical Studies
Studies have shown that:
- Ethical reasoning may be an important determinant of professional judgment.
- Unethical and dysfunctional audit behavior may be systematically related to the auditor’s level of ethical reasoning.
- Ethical reasoning may be an important cognitive characteristic that may affect individual judgment and behavior under a wide array of conditions and events in professional practice.
Cognitive Development Approach
Level 3 - Post-conventional
Individual recognizes there must be a society-wide basis for cooperation. Orientation to principles that shape the laws & systems a society has.
Stage 5 – Social contracts; upholding the basic rights, values, and legal contracts of society; weighs the pros & cons of the alternatives.
Stage 6 – Universal ethical principles that everyone should follow; Probably rare. May go beyond laws, regulations and rules.
For accounting and auditing ethical decisions, development is heavily impacted by experience and ability to see the big picture to identify all of the stakeholders and how each might be impacted by each alternative being considered. For individuals at the stages in Kohlberg’s level 3, the key is that they hold principles dear and see moral principles as important for society. These individuals are not forced to do the right thing because of rules, laws or regulations, but because it is the right thing to do. They also see the rules, laws or regulations as minimum standards.
Cognitive Development Approach
Ethical Domain in Public Accounting & Auditing
Four Key Constituent Groups of CPAs:
- Client Organization (hires and pays for accounting & auditing services)
- CPA Firm (employs the practitioner)
- Accounting Profession & Regulatory Bodies
- General Public (existing & future investors, lenders who rely on the CPA’s work)
Various ethical alternatives may benefit or harm these various groups of stakeholders in different ways and to varying degrees.
Stakeholders could also include client employees as companies with significantly misstated financial statements frequently have layoffs and may file for bankruptcy as faith in the company and its ability to raise working capital is diminishes.
For CPA firms, their reputation can be seriously harmed from poor decisions that negatively affect certain groups. Arthur Andersen is the ultimate example – one of the top CPA s firms in the world went out of business in a very short period of time.
Cognitive Development Approach
Rest’s Model of Morality
- Moral Sensitivity – ability to identify what is moral and amoral for selection of alternatives.
- Moral Judgment – ability to reason through several courses of actions and making the right decision when faced with an ethical dilemma.
- Moral Motivation – influences that affect an individual’s willingness to place ethical values ahead of non-ethical values (e.g., self interest).
- Moral Character – having one’s ethical intentions match actions taken (no rationalization).
Rest’s model of morality identifies the key attributes of individuals who make ethically-sound decisions. Many times, it means making tough decisions, which may negatively impact self interest or pose risks to one’s self interest. For accountants and auditors, this can mean loss of a client or loss of your job.
Many whistleblowers, except those doing it for self interest (such as a reward or share of any proceeds), are displaying moral character, especially if they don’t give up if elevation to one level of management results in no change and they have to take greater risk by elevating a concern to higher management or even outsiders like regulators.
Sherron Watkins at Enron, a VP of Corporate Development, only went to the Chair of the Board of Directors who was previously the CEO.
Cognitive Development Approach.
Libby and Thorne: Virtues Important for Auditing
- Intellectual virtues (esp., integrity, truthfulness, independence, objectivity, dependable, principled, and healthy skepticism) indirectly influence individual’s ability to exercise professional judgment.
- Instrumental virtues (esp. diligence, alertness, carefulness, resourcefulness, consultative, persistence and courage) directly influence individual’s actions.
Cognitive Development Approach
Behavioral Ethics
- Considers how individuals make decisions in the real world versus how they would make decisions in an ideal world.
- Kahneman’s two distinct modes of decision making
- System 1: Intuitive system of processing info; fast, automatic, effortless and emotional decision processes
- System 2: Slower, conscious, effortful, explicit and a more reasoned decision process
Cognitive Development Approach
Ethical Reflection and Decision Making
- A process to organize the various elements of ethical reasoning and professional judgment.
- Evaluate stakeholder interests.
- Analyze the relevant operational and accounting issues.
- Identify alternative courses of action.
- Consciously thinking about and analyzing what one has done (or is doing).
Professional Judgment in Auditing
Standards
Judgment exercised with due care, objectivity and integrity within the framework provided by applicable professional standards, by experienced and knowledgeable people.
There are many areas where professional judgment must be exercised:
- Selecting alternatives available within generally accepted accounting principles.
- Identifying appropriate interpretation of tax laws.
- Assessing risks of financial statements containing a material misstatement.
- Selecting accounts and transactions to audit.
Professional standards requiring the exercise of professional judgment include accounting and auditing standards, as well as ethical standards established by these organizations.
Professional Judgment in Auditing
Generally Accepted Auditing Standards (GAAS)
- Auditors should obtain sufficient & appropriate audit evidence to afford a reasonable basis for an opinion on the client’s financial statements.
- Auditors to exercise due professional care in performing an audit and preparing the report.
Generally accepted auditing standards establishes the minimum expectations for audits of historical financial statements. The AICPA sets the standards for non-public company audits, whereas the Public Company Accounting Oversight Board does so for public companies or “issuers”. Although there are more than two standards, two of the broadest are the ones listed above.
Professional Judgment in Auditing
Do auditors assess client ethical values and decision making?
In assessing whether to accept a new client, or keep an existing one, auditors are required to evaluate the integrity of management. In assessing the risks of a material misstatement, auditors must assess the integrity of management as well as the likelihood fraud or noncompliances with laws or regulations may have occurred. Fraud and noncompliances, especially when significant, can occur from unethical actions by client management.
Topic 2.3: Professional Judgment in Auditing
Professional Skepticism
- An attitude that includes a questioning mind and a critical assessment of audit evidence.
- Auditors cannot assume that client personnel have high moral & ethical values and always make ethically-sound decisions that could impact the client’s financial statement.
- Auditors must always assess the risk of fraud and consider the “Tone at the Top”.
Tone at the Top generally refers to the organizational ethical values actually displayed by management through their actions and can have a significant impact on ethical decisions made by all employees in the organization. Are unethical actions punished or rewarded? At Enron, bending the rules were NOT punished and at times was rewarded. Management actions, as well as written policies, sets the overall ethical environment for the entire organizations.
