Acknowledgements

Acknowledgements The case study in unit 7 is loosely based on the Independence Education Toolkit from the American Accounting Association. Professor Georg Lind, University of Konstanz, Germany. IFAC Deloitte IASPlus

If working on this ethics module has made you want to learn more about the topic, we suggest the following book: Avinash D. Persuad and John Plender. Ethics and Finance - Finding a moral compass in business today. Longtail Publishing Ltd. ISBN 0-9552186-2-4 ISBN 978-0-9552186-2-0 The ACCA website has a section about ethics with content and links to organisations and articles: http://www.accaglobal.com/members/professionalstandards/ethics/ The International Accounting Education Standards Board’s Ethics Education Toolkit is now available free-of-charge in a new downloadable version. The toolkit is designed to support IFAC members, associates, and accounting educators in developing high quality ethics education training programs for professional accountants and accounting students worldwide. It features a range of case studies and supporting notes, presentations, video clips, and other teaching materials. The questionnaire that you have just completed was developed especially for this Professional Ethics module by Prof. Lind and his team from the University of Konstanz in Germany. Prof. Lind is known for developing a standard test called the Moral Judgment Test (MJT) which is a rigorous and scientifically validated psychological test that has been taken by thousands of people around the world.

The MJT is based on the works of the psychologists Jean Piaget and Lawrence Kohlberg. In the 1930s, Piaget studied moral development by observing children playing games. He argued that morality is not only about good moral intentions but involves the development of fundamental cognitive capacities, or schemata of action, by individuals as they grow. Inspired by the work of Piaget, Lawrence Kohlberg elaborated the notion of moral judgment competence beginning in the 1950s. Kohlberg argued that moral reasoning developed through stages of different moral orientations. You will read about these stages in the next unit. Building on Piaget’s work and the earlier theoretical developments proposed by Kohlberg, Prof. Lind from the University of Konstanz developed a Dual Aspect Theory of moral reasoning. ACADEMIC REFERENCES

Kohlberg, L. (1981). Essays in moral development: The philosophy of moral development (Vol. 1). San Francisco: Harper & Row. Kohlberg, L., & Candee, D. (1984). On the relationship of moral judgment to moral action. In W. M. Kurtines & J. L. Gewirtz (Eds.), Morality, moral behavior, and moral development (pp. 52–73). New York: Wiley. Lind, G., in press. The meaning and measurement of moral judgment competence revisited - A dual-aspect model. In: D. Fasko & W. Willis, Eds., Contemporary Philosophical and Psychological Perspectives on Moral Development and Education. Cresskill. NJ: Hampton Press. Piaget, J. (1965). The moral judgment of the child. New York: The Free Press. (Original work published 1932)

Ethics is a branch of philosophy that studies the difference between right and wrong. As professional accountants, you will have many opportunities to choose between right and wrong. And as you have seen in the business press, making the wrong choice can lead to serious consequences including corporate failure, loss of reputation, fines, and even jail sentences. PERSPECTIVES ON ETHICS

In very broad terms, there are three ways of looking at ethics that have developed over time: rules conformance, good intentions, and competence. One way of thinking about ethics is in terms of conformity to rules. From this perspective, ethics is understood as a list of things to do and to not do. Sometimes the list gets very long and complicated and needs to be interpreted by a whole institution of people. The ethical person, from this perspective, is the one who conforms to the rules. A second way of thinking about ethics is in terms of good intentions. From this perspective, a behaviour is considered ethical if it is based on good intentions. Good behaviour then follows from good thinking. The third perspective thinks of ethics in terms of competence. From this perspective, the ethical person is one who can make decisions based on principles and then act on them. This perspective is thought of as looking at competence, because ethics is thought of in terms of an ability rather than an attitude. Over centuries of philosophical debate, ethics has developed several schools of thought. In other words, philosophers and others have developed different ethical theories, different ways of thinking about ‘doing the right thing.’ These theories reflect scholarly differences between professional philosophers, but they also reflect differences in style of moral reasoning that can be observed in everyday moral reflection. As a professional accountant working with people, it will be important for you to become aware of your own ethical way of thinking, and to understand that other people may think about doing the right thing in a different way from you. Some of the better known ways of thinking about ethics follow, in no particular order.

WHAT IS ETHICS?

OUR DUTY TO OTHERS

One way to think about ethics is to acknowledge that there are things that someone just does not do, as part of a duty to others. A limitation of this principle is that you have to decide what those things are that someone should not do. At least one philosopher (Immanuel Kant) has defined those duties by saying ‘act according to principles that everyone could follow.’ For example, if you disobey traffic lights, you should consider what would happen if everyone did so. The point is that we should recognise everyone as equals, and not assume that the rules are any different for ourselves than they are for other people. As an accounting example, a professional accountant would not deliberately issue false or inaccurate financial statements. If everyone did so, no statements could be trusted and as a consequence not only would the profession be brought into disrepute, but all financial statements would have no value to their users. Ultimately the need for accountants and for financial reports would be called into question.

CONSEQUENCES

Another way of thinking about ethics is based on thinking about the consequences to different people. Briefly, consequentialism encourages you to make decisions based on the consequences — both positive and negative — for those involved. This category of thinking is the branch of ethics known as utilitarianism. This states that an action is right if it leads to the most good outcomes and the least bad outcomes for the greatest number of people. One limitation of thinking about ethics in terms of consequences is that you have to agree on what sorts of consequences matter: for example, should you be trying to promote pleasure and avoid causing pain, or should you instead focus on promoting people’s actual well-being, regardless of whether doing so makes them happy? A modern application of this point of view is the cost-benefit analysis, which involves assigning monetary values to the costs and benefits of an action and seeing how they add up. This practice is often used in evaluating new projects.

As an accounting example, an accountant thinking in terms of consequences would prepare ‘true and fair’ financial statements because doing so would bring the most benefit to the greatest number of people. In other words, stakeholders inside and outside the organisation would be able to make more informed decisions as a result. VIRTUE THEORY

In virtue theory, the emphasis is on deciding what sort of person one should try to be, and to define the virtues such a person would embody. You decide what makes a good person, instead of what makes a good action, and act accordingly. One limitation of this way of thinking is that what constitutes a virtue must be agreed upon, and it can vary by culture and over time. For example, the qualities of good financial reports were once considered to be completeness, historical accuracy, reliability and strict adherence to the legal form in disclosing business transactions. More recently, the qualities of good financial reports have come to be relevance for decision-making, reference to a wider conceptual framework, and presenting the economic substance of business transactions. As an accounting example of the use of virtue theory, in deciding whether to agree to a client’s request to use a questionable method for valuing inventory, an accountant would ask, ‘What would a conscientious accountant do in such a situation? What would one of my respected mentors do?’ SOCIAL CONTRACT THEORY

The social contract theory of ethics advises you to think about ethics as embodying a set of rules agreed upon by reasonable people to bring order to social living. So when making an ethical decision you ask

yourself, ‘What rule would reasonable, unbiased people agree to?’ You then follow such rules, regardless of whether they benefit you in particular situations. One criticism of this theory points out that the agreement referred to by social contract theory is entirely imaginary. Why consider yourself bound by an agreement that never happened? An accounting example of social contract thinking might be seen in a situation where an accountant has to decide between loyalty to a client and candid assessment of financial statements. Both of those options involve important social values. Thinking in social contract terms, the accountant might ask, ‘What sort of rule for balancing these values would unbiased people agree to?’ CONFUCIAN ETHICS

Confucian ethics seeks to provide harmonious relationships within society, the family, and the individual. Looking within yourself and learning from experienced people are seen as the main roads to wisdom and self-harmony. The emphasis on experience leads to respect and reverence for the past, the aged, and for one’s ancestors. One of the criticisms of this model is that in a society where relationships are considered more important than the laws themselves, corruption and nepotism may be tolerated. As an accounting example, in deciding whether to agree to a client’s request to use a questionable method for valuing inventory, an accountant thinking in Confucian terms might consider agreeing to it because doing so would cause harmony with the client.

RULES OF THUMB

In addition to scholarly branches of philosophy, some other ways of looking at right and wrong have developed. The golden rule The classic golden rule is to ‘do unto others as you would have them do unto you.’ In other words, ‘I will not cheat that person because I do not want them to cheat me.’ The golden rule is a simple and useful tool, but it does have some limitations. We don’t really know how babies or animals want to be treated, for example, so the golden rule can’t tell us much about how to treat them. Also, the whole rule is based on your own feelings of how you yourself would want to be treated. But your own needs and preferences might not be typical. For example, the fact that you personally do not value privacy does not mean that you don’t owe others an obligation to respect their privacy. As an accounting example, this rule of thumb could be applied to mean that you disclose all information that may be relevant in financial reports because, if you were the reader of those financial statements, you would expect to receive all the information, and disregard any that is not relevant to you. MIRROR TEST

Another rule of thumb is the mirror test. This is a quick way to evaluate a decision that you are about to make, and reinforces the notion that you are responsible for your own actions. Imagine you’re looking in a mirror and ask yourself: Is it legal?

If it is not legal, don't do it. What will others think? Others meaning a friend, a parent, a spouse, a child, a manager, the media, or someone else whose opinion is particularly important to you. As an accounting example, in deciding whether to agree to a client’s request to use a questionable method for valuing inventory, an accountant thinking in terms of this rule of thumb would consider how a story about this action would look on the front page of the local newspaper.

morality consists of the various principles that guide our decisions, ethics is the careful, methodical, and scholarly study of which principles should guide our actions. For most purposes, the words can be used interchangeably so we can speak of having either ‘ethical obligations’ or ‘moral obligations’. ETHICS AND MATURITY

There is a theory of moral development which says that people move through six stages. This theory was popularised by Lawrence Kohlberg based on his research studies conducted at Harvard’s Center for Moral Education. His theory of moral development was dependent on the thinking of the Swiss psychologist Jean Piaget and the American philosopher John Dewey. These men said that human beings develop philosophically and psychologically in a progressive fashion as they grow up. In stage one, people are concerned with obedience and punishment and the immediate results to themselves. The question they ask themselves is, ‘Will I be punished if I do this?’.

In stage two, people are still concerned about the consequences, but have moved on to thinking about what else is in it for them. They think, ‘You do a favour for me and I’ll do a favour for you.’ In stage three, people begin thinking about their social relationships. They want to be a good person so that they can seek approval from others. In stage four, a functioning society is paramount, and people seek to obey laws and social conventions. If one person violates a law, perhaps everyone would, so there is an obligation to uphold the law. In stage five, people think in terms of inalienable rights and liberties. Laws are seen as embodying social contracts, and such contracts are open to criticism. People at this level are interested not just in what society’s rules are, but in what makes a good society. The theory says that people rarely reach stage six. If they did, they would show respect for universal principles and the demands of individual conscience, acting because it is right, not because it was legal or expected of them. Although this theory of moral development has been criticised for being overly concerned with abstract principles such as justice, and not enough with care, it is still a useful framework for investigating your personal ethics. ETHICS AND THE PROFESSIONS

Historically, most professions like medicine and law had codes of ethics and members were required to swear an oath to uphold those codes, thereby ‘professing’ to a higher standard of responsibility. In modern times, membership of a profession is usually restricted and

regulated by one or more professional associations, and rigorous training and additional schooling is required. Professionals typically proclaim an obligation to society beyond their client relationship, and point to a code of ethics that they follow. So as a professional accountant with a code of ethics, you will form part of a long tradition of people who ‘profess’ to a higher standard of accountability. You will also enjoy a position of trust and responsibility. This is perhaps most obvious in the role accountants play in auditing publicly traded companies. Although the client company pays the bills, your highest obligation is to the public good, and in particular to the investing public that will be relying on the accuracy and integrity of your work. SUMMARY

Morality is a set of rules concerning right and wrong behaviour. Ethics is the branch of philosophy that attempts to provide clear arguments about which moral rules are best and how those rules ought to be interpreted. There are several different ethical theories or frameworks for ethical decision-making, each of which has been advocated by prominent moral philosophers. Some philosophers, for example, advocate thinking about ethics entirely in terms of consequences: what action will produce the best outcomes overall? Others have argued in favour of thinking solely in terms of duties, and absolute principles of behaviour – such as ‘Always tell the truth’ – that could be adhered to by all. Still others have advocated thinking about ethics in terms of hypothetical contracts, asking us to imagine what rules of behaviour reasonable, unbiased people would agree society should live by. And finally, some have argued that we ought not to think about ethics in terms of rules, but rather to think about what kinds of virtues good people embody, and what kinds of people we think it best to emulate.

Many different factors affect ethical reasoning, including age, sex, religion, and professional affiliations. It is preferable that your ethical decisions be based on good reasoning and careful consideration of the relevant laws and principles, but it is also necessary to be aware of the various personal factors affecting your own decision-making, and those of other people. WHAT IS ETHICS?

REVIEW - TRUE OR FALSE TEST

You scored 9 correct out of a possible 11 .

Question 1: 'Do unto others as you would have them do unto you' is often called 'The Golden Rule'. The correct answer is - True Strictly speaking, this is a rule of thumb and not an ethical school of thought. You answered: True Question 2: Social contract theory is a branch of contract law. The correct answer is - False Social contract theory is a branch of philosophical ethical theory. It concerns idealized hypothetical agreements, not the actual agreements with which contract law is concerned. You answered: False Question 3: Ethics is a branch of science. The correct answer is - False Ethics is a branch of philosophy. The word philosophy comes from a Greek word which means 'love of wisdom.' Science, on the other hand, is a way of acquiring knowledge through experiments and the body of knowledge that has been acquired in that way. Branches of science include biology, chemistry, and physics.

You answered: True Question 4: In the Confucian model of ethics, the emphasis is on maintaining harmony. The correct answer is - True In the Confucian model of the world, the emphasis is on harmonious relationships, and the different duties arising from one to another. The five main relationships are father and son; ruler and subject; husband and wife; elder and younger brother; and between friends. You answered: True Question 5: Thinking of ethics in terms of 'competence' means thinking about ethics in terms of having the appropriate attitude. The correct answer is - False Thinking about ethics in terms of competence involves thinking in terms of the skills and capacities required to understand and act upon ethical principles. From this perspective, we are less concerned about intentions and attitudes, and more concerned with appropriate performance. You answered: False Question 6: Utilitarianism is a branch of ethics that recommends actions that produce the most pleasure and the least pain for the greatest number. The correct answer is - True Utilitarianism is a branch of ethics based on thinking about the consequences of your actions on different people. In particular, utilitarianism says that you should seek to promote positive consequences and avoid negative consequences, for all concerned. You answered: True Question 7: Virtue theory is concerned with determining the sort of person you should try to be, rather than what rules you should follow. The correct answer is - True Virtue theory reframes ethics in a way that encourages us to think less about rules and principles for decisions, and more about what sorts of personality traits are ethically worthy. Virtue theory suggests that instead of asking 'Is this truthful?' we should ask 'Is this answer consistent with me being the kind of honest person I ought to be?'

You answered: True Question 8: The data on ethics and gender indicates that men are not capable of thinking about ethics in terms of 'care.' The correct answer is - False The data on ethics and gender does indicate that, on average, in certain countries, men and women think slightly differently about ethics. Men tend to focus more on rules and general principles, and women tend to focus more on care and specific relationships. But the data does not support the idea that either style of ethical thinking is unique to either men or women. You answered: False Question 9: Philosophers agree on what constitutes right and wrong. The correct answer is - False Over centuries, ethics has developed several schools of thought about 'doing the right thing.' These theories reflect scholarly differences between professional philosophers, but they also reflect differences in style of moral reasoning that can be observed in everyday moral reflection. You answered: True Question 10: A cost-benefit analysis is an example of utilitarianism. The correct answer is - True A cost-benefit analysis considers the consequences to different people. You answered: True Question 11: A professional is free to follow their own personal ethics. The correct answer is - False A professional has an obligation to society at large and must follow the code of conduct of their profession. You answered: False The objective of this unit is to introduce you to the two major approaches to solving ethical dilemmas: one based on rules, and one based on principles. ACCA follows a principles-based approach, and that is the approach we recommend that you take as a professional accountant.

One of the differences between the two approaches is that in a rulesbased approach, you look for a rule that prohibits you from doing whatever it is you are considering. In a principles-based approach, you have to think more widely and consider whether or not a principle is being violated or even threatened. In many ways the principles-based approach is more reliable in that if an action is planned, its appropriateness is assessed. If it goes against the principles of professional behaviour and values, then the action should be avoided, even if no rules exist concerning this specific action. Another difference is the onus of responsibility. In a rules-based approach, someone in authority has to create a list of prohibited activities for you to obey. In a principles-based approach, the responsibility is on you, as a professional, to decide if, in each specific case, a principle is being violated. It is difficult to have a written rule that covers every possible situation. Furthermore, in a rules-based approach, people sometimes start looking for loopholes. They look for situations that are not prohibited and use them to their advantage. This is what happens in taxation where tax rules are established but accountants look for loopholes in order to avoid tax. A principles-based framework is a more flexible approach, and can cover new situations that might not have been thought of. It can sometimes seem more difficult, however, because you need to carefully think through every situation.

It is important to put principles into context. You must always obey the laws of your country. Then you must consider the more detailed rules laid down by your governing body (ACCA) regarding a specific situation such as promoting your practice, charging fees, accepting new clients, or handling clients’ monies. Finally, if a particular ethical dilemma is not covered by ACCA’s rules, you must consider the fundamental principles, and whether they might be breached or threatened by the proposed course of action. ACCA’s fundamental principles: 

Integrity



Objectivity



Professional competence and due care



Confidentiality



Professional behaviour

INTEGRITY

What the rulebook says You 'should be straightforward and honest in all professional and business relationships.' In other words Do not lie and do not issue false or misleading information. OBJECTIVITY

What the rulebook says You ‘should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements.’ In other words Your professional and business judgement should be based on fact and on what is in the best interests of stakeholders or others. Judgement should not be based on what is in your own personal interest, or in the interests of those who have power or influence over you. PROFESSIONAL COMPETENCE AND DUE CARE

What the rulebook says You have a continuing duty to ‘maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques’;

and members should ‘act diligently and in accordance with applicable technical and professional standards’ when providing professional services.

In other words Only perform work if you are competent to do so. Keep up to date with accounting matters. Do not forget that as an ACCA member, you will have continuing professional development (CPD) responsibilities – and you must ensure that you are keeping up to date. CONFIDENTIALITY

What the rulebook says You should ‘respect the confidentiality of information acquired as a result of professional and business relationships and not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose’;

and confidential information acquired as a result of professional and business relationships should not be used ‘for the personal advantage of the professional accountant or third parties’.

In other words Do not talk about your clients, or use information that you have learned about them for your personal gain or for the gain of others.

Maintain your silence even after the professional relationship with the client ends. PROFESSIONAL BEHAVIOUR

What the rulebook says You should ‘comply with relevant laws and regulations and avoid any action that discredits the profession’. In other words Be courteous and considerate to people, and always behave so that a ‘reasonable and informed third party’ who knows all the facts would also think you are acting professionally. Review: fundamental principles test You scored 7 correct out of a possible 8. 1. If you did this: Issue a financial statement that you know to be incorrect. You could be violating this fundamental principle: Integrity The principle you thought was being violated was: Integrity 2. If you did this: Act against the interest of a group of stakeholders by complying unquestioningly with an unreasonable request made by a senior colleague, who has power and influence over you. You could be violating this fundamental principle: Objectivity The principle you thought was being violated was: Objectivity 3. If you did this: Repeat insider knowledge that you obtained while working in a client's office.

You could be violating this fundamental principle: Confidentiality The principle you thought was being violated was: Confidentiality 4. If you did this: Place an advertisement in the local paper saying that you've been in business for 20 years, when you have not. You could be violating this fundamental principle: Integrity The principle you thought was being violated was: Professional Behaviour 5. If you did this: Reduce the provision for bad debts for trade receivables without supporting information to validate your action. You could be violating this fundamental principle: Integrity The principle you thought was being violated was: Integrity 6. If you did this: Disclose financial information about a client at a dinner party. You could be violating this fundamental principle: Confidentiality The principle you thought was being violated was: Confidentiality 7. If you did this: Ignore CPD courses offered by ACCA because you studied hard enough as a student. You could be violating this fundamental principle: Professional Competence & Due Care The principle you thought was being violated was: Professional Competence & Due Care 8. If you did this: Encourage your client to avoid paying taxes by helping them to falsify their financial accounts. You could be violating this fundamental principle: Professional Behaviour The principle you thought was being violated was: Professional Behaviour

Because it would be difficult to create a rule for every possible situation that you might encounter, and even more difficult to remember the right rule at the right moment, the Code uses a principles-based approach, and a framework to help you address those principles. The framework is the model from the International Ethics Standards Board for Accountants (IESBA). It consists of a series of steps that you go through when confronted with an ethical dilemma. You should ask and answer these questions in this order: 1.

What is the real issue here?

2.

Are the fundamental principles threatened?

3.

Is the threat significant?

4.

Are there safeguards that can eliminate the threat, or reduce it to an acceptable level?

STEP ONE: WHAT IS THE REAL ISSUE HERE?

Sometimes the real issue is obvious. Sometimes, the issue is not obvious and you have to ask a lot of questions before you find out what the issue really is. As a start, you can ask yourself these questions: 

Is this my problem, or does it belong to someone else?



Is it the real problem or part of a larger one?



Is this a real problem or am I only avoiding a difficult task?



Do I need more information?

STEP TWO: ARE THE FUNDAMENTAL PRINCIPLES THREATENED?

You already know the fundamental principles of:



Integrity



Objectivity



Professional competence and due care



Confidentiality, and



Professional behaviour

Is one or more of these principles being compromised, and in what manner? Sources of threats The threats to these principles can come from a number of different directions. Self-interest threats These come about if you or a close family member stands to gain (or not lose) something from the incident. Usually your integrity or objectivity would be at risk. Self-review threats These may be significant when you are in a position of having to review your own work. This could put your objectivity at risk. Advocacy threats These threats exist if you are promoting a position that compromises your integrity, or promoting a position or opinion to the point that subsequent objectivity may be compromised. Familiarity threats These can arise if you have a close personal relationship with someone and cannot be objective. Several of the fundamental principles may be threatened.

Intimidation threats These can become significant if you put yourself in a position where you could be pressurised by physical or verbal threats, or if there is an implied threat to your career or prospects. For example, you may be bullied into doing work which you are not competent to perform. Any of the principles could suffer under this type of threat. STEP 3: IS THE THREAT SIGNIFICANT?

Determining the significance of a threat depends on the individual situation. Only you or a ‘reasonable and informed third party’ can decide whether the threat is significant. You must always consider what others would make of the position and your actions. The ‘reasonable and informed third party’ is a phrase that is often used in these situations. It is the theoretical voice of reason you would consult to help you gain perspective on an issue.

STEP FOUR: ARE THERE SAFEGUARDS THAT MAY BE PUT IN PLACE?

If a threat is significant, you will want to put safeguards in place or use the ones that already exist. For example, safeguards can range from government regulations and professional standards, to people or policies in your workplace. If you look around, you will see that many safeguards are already in place to help you. First, there are the safeguards created by laws and regulations in your country and by your own accounting profession. These are designed to ensure that all accountants work in line with the fundamental principles, that compliance with the fundamental principles is

regulated, and that sanctions are imposed on those professional accountants who do not comply. The next safeguards are the education and training you undergo before entering the profession and the continuing professional development requirements you face after you qualify as an accountant. This training teaches you current practices and helps keep you up-to-date with accounting standards and regulations. These safeguards can be reinforced by controls established in the work environment. These can include the introduction of organisational ethics policies and procedures and the development of training for all employees to ensure their compliance; strong internal controls; appropriate disciplinary procedures; and a culture that encourages employees to communicate to senior levels about ethical issues without fear of retribution. Finally, there are safeguards you can create for yourself such as complying with continuing professional development requirements; keeping records of contentious issues and how the individual addressed them; using an independent mentor; and using the services of legal advisors and professional bodies. When you make a decision on a course of action you propose to take, you should be able to point to the principle or principles being threatened and the nature of the threat. You should also be able to point to the safeguards in place to reduce the threat to an acceptable level and allow the proposed course of action to go ahead. If you cannot recognise an existing safeguard, or implement an appropriate safeguard, you should refuse to carry out the activity in question.