CH 1- ETHICAL REASONING. IMPLICATIONS FOR ACCOUNTING

The Golden Rule (or the Platinum Rule)

-"Do unto others as you would them do unto you" -Universality in World Religions -Buddhism -Christianity -Confucianism -Hinduism -Islam -Judaism -Taoism -Zoroastrianism

Responsibility

-Accountable for what we do and who we are -Reflect on alternative courses of action using ethical principles -Act diligently -Due Care Test: -Reasonable person would conclude one acted with level of care expected in the circumstance

Categorical Imperatives

-Act so that you can will the maxim (principle or rule of conduct) of your action to become a universal law -It is an imperative because it must be obeyed and is categorical because it is unconditional and absolute -A rational principal or moral law is for everyone to follow including you -An action is ethically correct if and only if the maxim be that corresponds to the action can be consistently followed by all (universalized) -You are not to be an exception -Everyone is morally equal and ought to be treated with respect and dignity and no one ought to be used merely as a means or instrument to bring about consequences that benefit the user -It is not justifiable to use someone or exploit someone to make society better Examples: -Employers should not exploit employees. Healthy relationship as an end but benefits the employees in knowledge and salary -False advertising: deceiving customers -Ethical reasoning for justice, fairness, dignity, and rights are deontological in inspiration -(in Kantian ethics) an unconditional moral obligation which is binding in all circumstances and is not dependent on a person's inclination or purpose. -a moral law that is unconditional or absolute for all agents, the validity or claim of which does not depend on any ulterior motive or end.

Virtue Ethics

-Addresses the question not of what one should do so much as the question of what one should be or become -Aristotle: one should be in an "activity in accord with virtue." Habit forming -A person should live up to their their potential -Potential is determined by goals, purpose or determined end -Agent centered -Focuses on character or integrity of the moral actor and looks to moral communities -Greek philosophers - Plato and Aristotle Less emphasis on learning rules, more on principles (GAAP vs. IFRS) -Cardinal virtues: -wisdom -courage -temperance -justice -Other Important Virtues: -fortitude -generosity -self-respect -good temper -sincerity -avoid vices too! -Stress importance of developing good habits of character -only method where ethical reasoning methods--"virtues"--(internal traits of character"--apply both the the *decision maker* and the decision -judgements are made not by applying rules, but by possessing those traits that enable the decision maker to act for the good of others -similar to Principles of AICPA Code and IMA standards -virtues may conflict, requiring choices to be made

Enlightened Egoism

-Alexis de Tocqueville -Moral concept: self-interest rightly understood -pursue self-interest to maximize general prosperity -allow for the well-being of others in pursuing one's own self-interest -considers well-being of others within the scope of deciding on a course of action based on self-interest -Help achieve some ultimate goal for self -Self-interest remains paramount -interests of others are subservient to self-interest -for example, (blank) may abide by professional codes of ethics, avoid cheating on taxes, and create safe working environments. They do not do so because their actions benefit others, but because they help them achieve some ultimate goal for the egoist, such as advancement within the firm

Classic Greek (Virtue ethics)

-Aristotle, Plato, Socrates -virtues: develop ethical character traits -develop moral and intellectual virtues -human excellence/a life of virtue

Ethical Values

-Basic and fundamental beliefs that guide or motivate our attitudes or actions -Does acting in one's own best interests preclude acting in the best interests of others?

Act Utilitarianism

-Bentham, Mill -moral action: greatest good for the greatest number -make decisions that produce the best consequences for oneself and others -maximize well-being for all concerned -Examines the specific action itself versus rule -Sets aside the rule only if increase in net utility to all stakeholders -evaluate whether the intended *Action* provides the greatest net benefits

Citizenship

-Civic virtues and duties: -Prescribe how we ought to behave as part of a community -To be a good citizen: -Obey the laws -Be informed of the issues -Volunteer in your community -Vote in elections

Respect

-Civility -Courtesy -Decency -Dignity -Autonomy -Tolerance -Acceptance

Rights Theory

-Considers "rights" of stakeholders and related duties to them -Treats people as an end and not merely as a means to an end -each of us have a worth or dignity that must be respected -universality perspective: would i want others to act in a similar manner for similar reasons in this situation?

Ethics

-Deals with how we *should* act, not how people do in fact act -often end up as a formal set of rules, such as business ethics, and may vary greatly from situation to situation -they typically cut across society and cultural differences because the congregation of people from which they spring does -based on a common need for promoting proper behavior within a group -"Have the courage to say "No". Have the courage to face the truth. Do the right thing because it is right. These are the magic keys to living your life with integrity" -"What you believe ALWAYS results in what you do" -Accepted standards of behavior -Practices of those in a profession -Expectations of society -The discipline dealing with what is good and bad, with moral duty and obligation -a: A set of moral principles; a theory or system of moral values b: The principles of conduct governing an individual or a group <professional> c: A guiding philosophy d: consciousness of moral importance -A set of moral issues or aspects (as rightness)

Deontology

-Derived from Greek meaning duty -Moral norms establish basis for action -Based on rights of individuals and motivation rather than consequences -the normative ethical theory that the morality of an action should be based on whether that action itself is right or wrong under a series of rules, rather than based on the consequences of the action -an ethical theory that uses rules to distinguish right from wrong. It places particular emphasis on the relationship between duty and the morality of human actions. -Concerned with means rather than end result -Focuses on duties or moral obligations MOTIVATING a decision or action, rather than consequences -Your action should become a "Universal" Law -(blankists), such as 18th century philosopher Immanuel Kant, analyzed ethical concerns on the basis of duties and obligations, not consequences -Emphasizes practical reason and rational choice -Deliberation precede choice of action: -reason -thought -voluntary -ends do not justify the means -moral philosophies that focus on the rights of individuals and on the intentions associated with a particular behavior rather than on its consequences -believe that moral norms establish the basis for action -differs from rule-utilitarianism because the moral norms (or rules) are based on reason, not outcomes -The difference is that utilitarianism does not include moral motive (duty) -Kant's theory about a person acting with inclination or desire: he/she is not acting morally -fundamental to the theory is the idea that equal respect must be given to all persons -in other words, individuals have certain inherent rights and I, the decision maker, have a duty (obligation, commitment, or responsibility) to respect those rights -rights theory -moral principle: categorical imperative/universality -satisfying duties to oneself and others -treat humanist as an end in itself not a means to an end -relies on moral absolutes--no exceptions; need to resolve conflicting rights -An example is the belief that killing someone is wrong, even if it was in self-defense.

Caring

-Empathy - the essence of (blank) -Ability to understand -Sensitive -Concern about the feelings of others -(blank) and empathy support each other, enabling a person to put themselves in another's place -Essential to ethical decision making

Ethical Dilemmas

-Ethical dilemma - reasons for doing something and reasons for not doing it -Fairness over harm -Benefits over fairness -Examples: -Accounting- Harm public; Loyalty to firm -Drug Testing: Prevent harm, Privacy rights

Value Ethics in Accounting

-Ethical obligations to clients, employers, government and public at large -Perform services: -Without bias -Avoid conflicts of interests -Independence -integrity -Have the goal to respond truthfully as possible -But which of these virtues accountants are called upon to develop or utilize becomes an important question -Loyalty is a virtue, but can we as a accountants be obligated to our clients to be loyal when doing a job for them? Who do we affect? What are the consequences? -An accountant should benefit others and avoid harming others -Essential characteristic for CPA -Learn to be ethical: -by practice -exercising virtues -enable to lead life of excellence -Let it be habit forming: -You are what you repeatedly do. Therefore, excellence, character and integrity out to be a habit, not an act.

Teleology

-Greek for "end" or "purpose" -an act is considered morally right or acceptable if it produces some desired result such as pleasure, the realization of self-interest, fame, utility, wealth, and so on -assess the moral worth of behavior by looking at its consequences, and thus moral philosophers often refer to these theories as *consequentialism* -consequentialism is a theory about outcomes, not notices or intentions -a reason or explanation for something as a function of its end, purpose, or goal. -For example, a (blank) explanation of why forks have prongs is that this design helps humans eat certain foods; stabbing food to help humans eat is what forks are for -two important (blank) philosophies are egoism and utilitarianism

Is the Action Good for Me?

-If an action is beneficial to oneself, then it is a good reason to do it -What is good? -That which fulfills basic human needs is good (Maslow?) -Material needs -Social needs -Need for meaningful activity

Have I Made a Commitment, Implied or Explicit?

-If promises were made, they ought to be kept -A good reason for an action is that you have promised/committed yourself or your company -Any lasting relationships rests on implied promises and expectations of guaranteed behavior

Is the Action Good or Harmful for Society?

-If we are thinking ethically, we also think about everyone that might be affected, and not just ourselves

Questions to Ask to Justify any Action: The Basis of Ethical Theory

-Is the action good for me? -Is the action good or harmful for society? -Is the action fair or just? -Does the action violate anyone's rights? -Have I made a commitment, implied or explicit?

Utilitarianism

-Jeremy Bentham and James Mill - main philosophers -idea that the goal of society should be to bring about the greatest happiness for the greatest number of people -Consider impartially the interests of all persons affected by an action and pick the greater benefit -evaluates consequences of actions (harms and benefits) to stakeholders -can be difficult to assign values to harms and benefits -Impossible to foresee all consequences -Consequences difficult to measure

Weaknesses of Procedure

-Justifying bad actions, rationalizing that the end justifies the means -Deciding what counts as good -Problem of illicit means (Main Criticism): -letting the ends justify the means even if the means are immoral like falsifying financial statements to secure a bank loan

Is the Action Just or Fair?

-Principle of Justice -The same (equals) should be treated the same (equally) -Does this mean that un-equals should be treated as unequal? -How does it affect others

Moral Philosophy

-Principles or rules that people use to decide what is right or wrong -Moral perspectives in the form of abstract principles that guide decision making -Philosophies help deal with moral dilemmas that have no right or wrong answers -No single philosophy is accepted by everyone -Friedman: "one and only one social responsibility of business..." is what? -Smith: Invisible hand of the marketplace -Kant: Some things are just right -Universal virtues (The Golden Rule)(The Platinum Rule) -Self interest (Egoism) -Ends or outcomes - greatest good for greatest number (Teleology) -Concerned with duty or means of achieving goal rather than consequences (Deontology) -Leading a virtuous life (Aristotle, Virtue Ethics) -Six Pillars of Wisdom

Ethical Decision-Making Framework (EDM)

-Purpose: -Designed to enhance ethical reasoning -How: -Identification and analysis of key issues -Approaches to combining & applying in a practical setting -Frame the ethical issue -What does it assess? -Consequences for net benefit or cost -Rights and duties affected -Fairness -Motivation or virtues expected

Justice

-Rawls -moral principles: liberty principle, difference principle -fair treatment: treats equals, equally; unequals, unequally -emphasizes eights, fairness, and equality -those with equal claims to justice should be treated equally; those with unequal claims should be treated unequally -can be difficult to determine the criteria to distinguish equal from unequal -liberty principle: provides for basic and universal respect for persons as a minimum standard for all just institutions -but while all persons may be morally equal, we also know that in the "real world" there are significant differences between individuals that under conditions of liberty will lead to social and economic inequalities -difference principle: permits such inequalities and even suggests that it will be to the advantage of all (similar to the utility principle), but only if they meet the two specific conditions -thus principles are not straggly egalitarian, but they are not laissez-faire either

Does the Action Violate Anyone's Rights?

-Rights: -Entitled to be treated a certain way -Rights to things no one has to provide for us, things we already have ( Life, Liberty and the Pursuit of Happiness) -Right to have something provided -If an action treats people fairly and does not violate any of their rights, is there any reason not to perform this action?

Criticisms of Categorical Imperatives and Deontology

-Sets a high standard, hard ethic to follow -If there are conflicts of rights, then eventually deontologists will have to give priority to considerations of consequences -Does not provide clear guidelines for deciding what is right and wrong when two or more moral laws conflict

Utilitarianism vs. Egoism

-Similarity: they both justify whether an action is ethical by whether or not it will result in good consequences for someone -Difference: Utilitarianism focuses on getting the best for the most people and Egoism focuses on the best for oneself

Why Do We Teach Ethics?

-Society -AICPA -Accounting Profession -CPE

Definition of Ethics

-That branch of philosophy dealing with values relating to human conduct, with respect to the rightness and wrongness of certain actions and to the goodness and badness of the motives and ends of such actions

Legal vs. Ethical

-The main difference between ethical and legal business practices is that the law doesn't fully address all ethical dilemmas that businesses face. Something might be legal, for example, but unethical -Essentially, some business practices are adopted because of the legal requirement that the company behave or act in certain ways -Ethical practices offer a bit more choice. A business doesn't necessarily have to recycle plastics and other materials unless local laws dictate it

Fairness

-Treat others: -equally -impartially -openly -Balance without influence: -According to Josephson, "(blank) implies adherence to a balanced standard of justice without relevance to one's own feelings or inclinations."

Situation Ethics

-a body of ethical thought that takes normative principles--like virtues, natural law, and Kant's categorical imperative that relies on the universality of actions--and generalizes them so that an agent can "make sense" out of one's experience when confronting ethical dilemmas -unlike ethical relativism that denies universal moral principles, claiming the moral codes are strictly subjective, (blank) ethicists recognize the existence of normative principles but question whether they should be applied as strict directives, or, instead, as guidelines that agents should use when determining a course of ethical conduct -takes into account the particular context of an act when evaluating it ethically, rather than judging it according to absolute moral standards.

Rational Egoism

-a particular brand of ethical egoism that claims the promotion of owns own self interest is always in accordance with reason -also called rational selfishness -the principle that an action is rational if and only if it maximizes one's self interest -Rand -moral principle: the virtue of rationality -make decisions that promote ones own interests in accordance with reason

Rule Utilitarianism

-actions that conform the general rules -Bases behavior on rules designed to promote the greatest utility -Action is selected because it is required by the correct moral rules that everyone should follow (tell the truth) -claims that we must choose the action that conforms to the general rule that would have the best consequences -actions are justified by appealing to rules such as "never compromise audit independence" -an action is selected because it is required b the correct moral rules that everyone should follow -select the action that conforms to the correct *moral rule* that produces the greatest net benefits

Ethical Egoism

-claims that the promotion of one's own good is in accordance with morality -ranks the most important duties that bring the highest payoff to oneself -defines "right: behavior by consequences for the decision maker -claims that I morally ought to perform some action if and only if, and because, performing that action maximizes my self-interest -what brings the highest payoff to me will not, necessarily, bring the highest payoff to those helped -not an acceptable standard for decision making in accounting -fails to consider interests of those affected by the decision

Modern Moral Philosophies (Ethical Theories)

-classic greek -deontology (rights theory) -teleology (act utilitarianism and rule utilitarianism) -egoism (rational egoism and enlightened egotism) -justice

Difference between ethics and morals

-ethics and morals relate to "right" and "wrong" conduct -ethics if concerned with how we should live, generally, while morality is about a certain proper subset of how we ought to live -Ethics can be defined as a code of behavior in reference to a group, whether it is a family, community or a nation -Morality, on the other hand, are more personal in nature -ethics leans towards decisions based upon individual character, and the more subjective understanding of right and wrong by individual, whereas moral emphasizes the widely-held communal or societal norms about right and wrong -ehics also refers to rules provided by an external source, such as codes of conduct for a group of professionals (i.e., CPAs), or for those in a particular organization -morals refers to an individual's own principles regarding right and wrong and may be influenced by a religion or societal mores -The connection and the difference between the two can be interpreted in the following manner: -Ethics in a social system referring to a philosophy whereas morality finds application in behavior

Trustworthiness

-honesty: -truth without deception -integrity: -courage of convictions -reliability: -follow through with promises and commitments -loyalty: -keep confidences -never take precedence over honesty and integrity

Utilitarian Procedure

-look at the action -Compute the benefits and harm of the consequences for everyone affected -If the action results in more "happiness" than "unhappiness" for people, then it is justified -Utilitarianism can be thought of as a theory that uses the cost benefit approach -This theory is structured around whether the cost out- weighs the benefits or the benefits out weigh the cost

Ethical Relativism

-the philosophical view that what is right or wrong and good or bad is not absolute but variable and relative, depending on the person, circumstances, or social situation -the theory that holds that morality is relative to the norms of one's culture. That is, whether an action is right or wrong depends on the moral norms of the society in which it is practiced. The same action may be morally right in one society but be morally wrong in another. -slavery is a good example -what's right for you may not be what's right for me -what's right for my culture won't necessarily be what's right for your culture -no moral principals are true for all people at all times and in all places

Cultural Relativism

-the practice of judging a culture by its own standards -the ability to understand a culture on its own terms and not to make judgments using the standards of one's own culture. The goal of this is promote understanding of cultural practices that are not typically part of one's own culture. -one cannot fully understand certain actions or customs without also understanding the culture from which those actions are derived

Egoism

-the tendency to see things in relation to oneself; self-centeredness -Consequences for individual -Always acting in one's own interest -Does this action or behavior benefit me and my goals? -Promotes selfishness -"Do the act that promotes the greatest good for oneself" -believe that they should make decisions that maximize their own self-interest, which is defined differently by each individual -Selfishness vs. self interest: -Pursuing goals and dreams in the name of self interest is considered "good" -Pursuing these items at the expense of others is considered "bad" -many people and companies believe these people are inherently unethical -Is considered wrong in many societies -Formal objections- (blank) is incompatible with many human activities: -Advice-giving: how can an (blankist) give advice to another person? -Building friendships: how can an egoist be considered a "friend"? -Being an agent for another (dispute resolution)

Moral Relativism

-the view that moral or ethical statements, which vary from person to person, are all equally valid and no one's opinion of right and wrong is actually better than any others -The view that there is no absolute or universal moral law or truth, resulting in a morality determined by cultural factors or personal preference.

The Six Pillars of Character

-trustworthiness -respect -responsibility -fairness -caring -citizenship -reputation

Values and Ethics

-values are basic and fundamental beliefs that guide or motivate attitudes or actions -in accounting, the values of the profession are embedded in its codes of ethics that guide the actions of accountants and auditors in meeting their professional responsibilities -in accounting, the values of the profession include independence, integrity, objectivity, professional skepticism and due care -they define what it means to be a professional and provide a framework for the enforceable rules of professional conduct that are designed to serve the public interest above all else -values are concerned with how a person behaves in certain situations and is predicted on personal beliefs that may or may not be ethical, whereas ethics is concerned with how a moral person should behave to act in tan ethical manner -the Golden Rule is best seen as a consistency principle, in that we should not act one way toward others but have a desire to be treated differently in a similar situation -in other words, it would be wrong to think that separate standards of behavior exist to guide our personal lives but that a different standard (a lower one) exists

The Moral Point of View

-when the rules are unclear, an ethical person looks beyond his/her own self-interest and evaluates the interest of the stakeholders potentially affected by the action or decision -ethical decision making requires that a decision maker be willing, at least sometimes, to take an action that may not be in his/her best interest

Newman's Six Things for Succeeding in Business

1. Be Honest -with yourself -with clients/customers -with co-workers and supervisors 2. When you make a mistake -go to your supervisor and tell them you made an error (include details) -offer a solution 3. Do the hard thing first 4. At work -if you are the worker--make your boss look good -if you are the boss--fight for your people (promotions/raises) 5. Life and family are more important than work 6. Have fun

Bad Character Traits

Always known as vices: -cowardice -insensibility -injustice -vanity -jealousy

Virtue and Ethical Obligations of CPAs

Aristotle's Virtues: -Trustworthiness, benevolence & altruism -Honesty & integrity -Impartiality & open-mindedness -Reliability, dependability & faithfulness -Trustworthiness Ethical Standards for CPAs: -Integrity -Truthfulness & non-deception -Objectivity & independence -Loyalty (confidentiality) -Due care (competence and prudence)

Public Expectations

CPAs are expected to: -Serve the Public interest by establishing trust and ensuring it in all their actions -Understand the role of trust in internal controls, accountability and governance which provide direction to a firm's activities -Display a level of professional skepticism and duty that should enable them to recognize the red flags of ethical dilemmas and problems and to report them or remediate them

Which of the following is NOT a universal hypernorm

a) honesty b) fairness c) predictability d) compassion e) ALL OF THE ABOVE ARE UNIVERSAL HYPERNORMS