Ethics Chapter 2

Transparency

"Integrity is doing the right thing, even when no one is watching." (C. S. Lewis) - Research shows that if people feel that they are not being watched, they will tend to act less ethically. - A greater # of people will try to get away with wrongdoing if they feel they won't get caught

Social & Organizational Pressures

(Matousek) says 2 of most common pressures where well-intentioned people make poor ethical choices are: 1. tendencies to be overly obedient to authority 2. to conform excessively to ethical judgments & actions of peers. important to follow superiors' instructions In accounting, especially if they're seen as being ethical - bu desire to please authority can bias one's outlook reporting issues, suspend one's own ethical judgment about right vs. wrong, and bend to wishes of a superior.

Moral Judgment (Reasoning)

(Prescriptive) individual's ethical cognition of what "ideally" ought to be done to resolve ethical dilemma - reflects cognitive understanding of an ethical situation as measured by one's level of moral development. - judgment must be made about a morally justifiable course of action after outlining possible lines of action - relates to developing moral reasoning abilities over time. Kohlberg believed that people engage in more complex reasoning as they progress up the stages and become less self-centered and develop broader definitions of morality

incrementalism (Kahneman & Tversky)

(the slippery slope) may influence the behavior of even well-intentioned people who find themselves in times where ethical corners are being cut - can be difficult to notice gradual changes in one's environment so that cutting corners grow until violations of the law occur

Rushworth Kidder's Ethical Issues/Paradigms

- acknowledges that ethical issues can be "disorderly and sometimes downright confusing." - argues that there is an underlying structure to the ethical decision-making process - They can arise suddenly, create complex issues, and have unexpected consequences. - suggests that nine steps or checkpoints can help bring order to otherwise confusing ethical issues. What follows is a brief summary of the major points.

Why do many business and accounting decisions have ethical challenge?

- bc of the impacts of those decisions - bc of the fact that outcomes are likely to affect stakeholders in different ways - also bc they will express different ethical values

Situational Factors

- can influence ethical decision making & the actor may not even be aware of the effect - Studies show that when people are under time pressure, they will often act less ethically than in situations when they are not. - ppl won't realize the impact that time pressure has on their decision making & actions, but impact is still there

Social Contract (Snoeyenbos, Almeder & Humber)

- commitment to serve the public interest is the bedrock of the accounting profession. - professional discharges obligation by operating with high standards of expertise & integrity. - when standards aren't maintained, social contract is broken, & society may decide to limit the role or the autonomy of the profession.

Cognitive Dissonance (Leon Festinger, 1956)

- inconsistency b/t our thoughts, beliefs, or attitudes & our behavior creates the need to resolve contradictory or conflicting beliefs, values, and perceptions - occurs when we're "attached" to attitudes or beliefs, bc they have emotional significance or onsequences for our self-concept or sense of coherence about how the world works - suggests that we have an inner drive to hold all our attitudes and beliefs in harmony and avoid disharmony. When there is inconsistency between attitudes or behaviors (dissonance), some- thing must change to eliminate the dissonance. Festinger posits that dissonance can be reduced in one of three ways: (1) change one or more of the attitudes, behavior, or beliefs so as to make the relationship between the two elements a consonant one; (2) acquire new information that outweighs the dissonant beliefs; or (3) reduce the importance of the cognitions (beliefs, attitudes).22

Sexual Harassment

- is unwelcome behavior of a sexual nature that is severe, pervasive, or persistent enough to create a hostile or intimidating work environment. - allegations & its relation to bystander effect show an environment where treating women (or men) equally might be dependent on if they're willing to accept sexual overtones & other threatening behavior. - can create belief that recipient won't be treated == or have same opportunities unless they give in to sex advs Issues of equality, equity, and fairness are front and center when men (or women) with power & influence use it to extract favors from lower of same or other sex. - implies a "quid pro quo"—something for something

Inclusion

- often defined in the context of a society that leaves no one behind --> society where cultural, economic, social, & political life of all people/ groups can take part. - overrides differences of race, gender, class, generation, geography - ensures equality of opportunity, as well as capability of all members of the society to determine an agreed set of social institutions that govern social interaction

Ethnocentrism

- perception that "our way" is normal and preferred and that other ways are somehow inferior - here, the world revolves around our group - our values & beliefs become standard against which to judge the rest of the world. - 'us v them' mentality that is pervasive in most societies. - Having national pride or being affiliated with religious group is natural and there is nothing wrong with that. - problem comes from tendency to inaccurately believe that our group is better than any other without taking time to thoroughly analyze whether beliefs are valid.

Level 3—Postconventional

- person recognizes there must be a society-wide basis for cooperation --> orientation to principles that shape laws/role systems a society may have (principled moral) Stage 5: Social Contract - individual is motivated by upholding legal contracts, basic rights, & values of society - person recognizes in some cases that legal & moral points of view may conflict so try to base decisions by rationalizing benefits & harms to society. Stage 6: Universal Ethical Principles (rarely occurred) - person believes that right & wrong are determined by universal ethical principles that everyone should follow - person believes there's inalienable rights(laws & social agreements) that are valid bc they rest on premise of universality -- not bc of a society's laws/customs - If a law conflicts with an ethical principle, then an individual should act in accordance with the principle.

Theories About Other People

- sadly, people have a tendency to think of themselves & groups they belong to /share their beliefs with as better than those they don't belong to (could be based on factors like race, religion, nationality, political affiliation) - Business today operates in a global environment rich in diversity with people who speak different languages, have different customs, mores, cultural beliefs, religious beliefs, laws, and accepted ways of behavior. --> important to understand role stereotypes play in DM, as we hope to avoid their negative manifestations. - In business, these unconscious beliefs can be seen through discriminatory hiring/promotion practices/ favoritism (white vs employees of color, men vs women)

Rest's 4-Component Model of Ethical Decision Making

- says ethical actions aren't the outcome of a single, unitary decision process, but result from a combo of various cognitive structures & psychological processes - idea that behavior is related to level of moral develop. - describes cognitive processes that one uses in ethical decision making --> depicts how one 1st identifies an ethical dilemma & then continues through to his moral motivation and finally finds courage to behave ethically. - all components must be present before action is taken - built by working backward (started with taking ethical action- then found steps that produce that behavior)

Theories About the World

- says we tend to blame people for events, rather than their work environment, policies & procedures - leads to problems being framed inaccurately & can lead to decisions that don't fix/may exacerbate problem - important to take time to see how a problem is framed to maximize the probability of finding a solution for it - tending to simplify complex issues to make DM easier --> can lead to underestimating risk & making poor decisions by ignoring low-probability events - failing to identify all stakeholders impacted; ignoring the possibility public will find out; not thinking about long-term consequences; - undervaluing magnitude of the consequences in total

Bystander Effect

- tendency to not report incidents of wrong doing one may witness bc they believe (hope) others will report it. - greater # of people there, less incidents of assistance - we take our cues from others' behavior, bc after all, it's less stress & hassle to assume others will intervene - can happen in accounting when fraud occurs & those who know don't report it bc they think others will do it *** Failing to report fraud violates INTEGRITY principle in the AICPA Code -- accountant can't turn a blind eye to wrongdoing that affects accuracy & reliability of F/S

Reasons, arguments or rationalization we face when speaking out against unethical practice (Gentile)

1. Expected or Standard Practice: "Everyone does this, so it's really standard practice. It's even expected." 2. Materiality: "The impact of this action is not material. It doesn't really hurt anyone." 3. Locus of Responsibility: "This is not my responsibility; I'm just following orders here." 4. Locus of Loyalty: "I know this isn't quite fair to the customer, but I don't want to hurt my reports/team/ boss/company." ** Isolated Incident: "This is a one-time request; you won't be asked to do it again." **

Ace Manufacturing: Integrated Ethical Decision-Making Process

1. Identify ethical & professional issues (ethical sensitive) - Ethical & professional issues in this case (GAAP/GAAS) - Who are the stakeholders - Which ethical/professional standards apply? 2. Identify & evaluate alternative courses of action (ethical judgment). - What can and cannot be done in resolving the conflict under professional standards? What legal issues exist? - Ethical reasoning methods that apply to help reason through alternatives (rights, utilitarianism, justice, virtue) 3. Reflect on the moral intensity of the situation & virtues that enable ethical action to occur (ethical intent). - Magnitude of consequences if specific actions taken - Anyone's rights are at stake & how they manifest in DM - Consider how virtues motivate ethical actions. - Evaluate social & org pressures & its effect on DM 4. Take action (ethical behavior). - Decide on course of action consistent with prof obligs - How virtue supports turning ethical intent into action? - Steps to take to strengthen my position & argument? - How to counter reasons/rationalize; who for support? **REFLECTION: follows after decision has been made. What was outcome? How will it affect my approach to ethical decision making? How can I do better in future?

Deloitte Surveys & 4 Different Definitions

1. Inclusion: Respect for & appreciation of differences in demographics (race, ethnicity, gender, age, national origin, disability, sex) and/or non-demographic characteristics (religion, experiences, work habits) 2. Stereotype-biased bias: Attitudes or generalized beliefs about people that affect understanding, actions, and decisions, such as assuming one group of people are more intelligent or hard working than other groups. 3. Inclusive: Embracing all people; making all people feel valued and they belong in their organization. 4. Inclusion initiatives: Efforts to help all people feel that they are valued and belong in their organization

4 determinations in testing right vs. wrong issues

1. Legal test. If lawbreaking is involved (i.e., fraudulent financial statements), then the problem becomes a legal mat- ter, not a moral one 2. Smell test relies on intuition. If you have an uneasy feeling about the decision or course of action, chances are it involves right-versus-wrong issues. 3. Front-page test: how you'd feel if your decision made it to the front page of local newspaper. If you feel uncomfy about it, then consider another alternative 4. Mom test: how you would feel if your mother or some other important role model was aware of your choice. If you feel queasy, then maybe reconsider

Kidder's Ethical Checkpoints

1. Recognize that there's a moral issue - acknowledge that issue deserves attention & moral questions exist 2. Determine actor. (involvement v responsibility) - as parts of big communities, we're apart of ethical issues 3. Gather the relevant facts --> Adequate, accurate, & current info to make effective decisions of all kinds 4. Test for right-vs-wrong issues. 5. Test for right-vs-right paradigms. If issue doesn't involve wrong behavior, it can pit 2 important (+) values 6. Apply ethical standards and perspectives - which ethical principle is most relevant/ useful to specific issue 7. Look for a 3rd way. Compromise to reveal a new alt, develop creative solution., product of moral imagination 8. Make decision. maybe tired from wrestling, lack cour. 9. Revisit & reflect on the decision

Four additional cognitive shortcomings (Drumwright)

1. The Tangible & the Abstract. When people make ethically tinged decisions, they tend to consider immediate and tangible factors at the expense of more removed and abstract factors (i.e., System 1 thinking). 2. Loss Aversion. ppl's tendency to detest losses even more than they enjoy gains so that they make more immoral decisions to avoid what they perceive to be a potential loss 3. Framing: ppl's tendency to make different decisions based upon how a question is framed so that other factors are framed as more important than ethical standards .4 Overconfidence. ppl's tendency to believe that they are more ethical than they actually are, which can cause them to make decisions with serious ethical implications without proper reflection.

4 models: for when an issue likely pits 2 important positive values against each other.

1. Truth-telling vs. loyalty to others & institutions 2. Personal needs vs. needs of the community 3. ST benefits vs. LT-term negative consequences 4. Justice vs. mercy. - When an ethical dilemma pits two core values against each other, a determination should be made whether they are in conflict with one another in this situation.

Moral Sensitivity (Recognition)

1st step in moral behavior requires the individual to interpret the situation as moral - w/o being able to recognize that one's actions affect welfare of others, it'd be virtually impossible to make the most ethical decision when faced w/moral dilemma.

Moral Focus (Motivation)

After deciding on a best course of action, decision makers must be focused on taking moral action & follow through with ethical decision making. - shows one's willingness to place ethical values ahead of nonethical values that relate to self-interest - influences intention to comply/ not w/ ethical judgment in resolving ethical dilemma - one can be overwhelmed by pressures that may overpower ethical intentions bc of personal costs. - co's should create ethically rewarding environments to increase this; add policies that ease reporting unethical behavior, prevent retaliation, & make org culture ethical

System 1 thinking

Automatic, fast, little or no effort, no sense of voluntary control - fast, automatic, effortless, and emotional decision processes; on the other hand, - (Walter) dominant role of in this system of decision making is evidenced by the fact that children (babies) have a basic moral sense that is ingrained into their brains before they are taught morality by their parents and society. - can lead to snap decisions that make it harder to resolve an ethical dilemma in a morally appropriate way - can happen bc you lack important info about decision, don't notice available info, or face time/cost constraints - You don't have the time or inclination; you fail to see the dangers of deciding too quickly.

Equity

DIFFERENT TREATMENT - leads to fairness and justice - giving people with different backgrounds same treatment and opportunities // = opportunity that fit a person's circumstances and abilities - may mean giving a group of people different access to resources, as with disabled individuals who deserve special access for entry or different testing procedures in the classroom. In the workplace, it means to provide accommodations as needed. TRACK RUNNERS EX: - having starting positions be staggered so runners in outer lanes have an equal chance to win competition.

Behavioral Ethics

Emphasizes the need to consider how individuals actually make decisions, rather than how they would make decisions in an ideal world analyzing how people actually behave when confronted with ethical dilemmas - approach to ethics that helps understand & explain moral/ immoral behavior in systematic ways - whether behaviors are viewed legally or ethically, we hold individuals accountable for behaviors & choices, bc they should've known better - even if we agree on what someone should ethically do, our judgment is often clouded by factors that lead us to act against our intuition of what good sense dictates.

Diversity

Encompasses acceptance & respect. - treat each person as unique & recognize individual difs - understanding one other & moving beyond tolerance to embracing/celebrating dimensions of individuality. - workforce: similarities & differences among employees (dimesions) molded together to produce best outcome.

Equity, Diversity, and Inclusion (EDI)

Giving each person the same opportunity - accepting people from different races, genders, religions, & nationalities - inviting those who have been historically locked-out of society to come in - these policies should promote ethical behavior & tear down biases that can influence fair treatment of all ppl

Cognitive Development Approach

Kohlberg --> ppl develop from childhood to adulthood through sequential & hierarchical series of cognitive stages that characterize how they think about ethical dil - Moral reasoning processes become more complex & sophisticated with development. - HI stages rely upon cognitive operations that aren't available to individuals at lower stages, - HI stages thought to be "morally better" bc they're consistent with philosophical theories of justice & rights. help understand how people may internalize moral standards & apply critically to resolve ethical conflicts

System 2 thinking

Reflective thinking that is slow, deliberate, and conscious. Often less charged with emotions. - slower, conscious, effortful, explicit, and a more reasoned decision process. - "conscious, reasoning self that has beliefs, makes choices and decides what to think about and what to do." - can provide a more systematic analysis that enables comprehensible judgment, clearer reasons, and a more justifiable and defensible action than otherwise would have been the case.

Kohlberg's 3 responses

Response A (Preconventional) presents a rather uncomplicated approach to moral problems. - Choices made based on wants of the individual decision maker (egoism). Response B (Conventional): actions should be motivated by good intentions (i.e., end justifies means) Response C (Postconventional) societywide perspective is used in decision making. Law is the key in making moral decisions

Equality

SAME TREATMENT Means having the same rights, social status, etc. Equality aims to ensure that everyone gets the same things in order to enjoy full, healthy lives. Like equity, equality aims to promote fairness and justice, but it can only work if everyone starts from the same place and needs the same things. TRACK RUNNERS EX: treating runners the same way; having them start at the same place on the track. - may seem fair at first, but then see that those starting from inside have an advantage over runners outside lanes bc the distance they have to travel is shorter. - starting at the same place - doesn't result in fairness.

Theories About Ourselves

Tendency to overestimate our positive attributes & underestimate our weaknesses. - some people develop a hindsight bias --> believe they're more capable than they actually are; tendency to view events as more predictable than they really are. --> can create a superiority bias whereby executives become overconfident in their abilities & make decisions based on incomplete or inaccurate info -. best decisions surrounding complex matters are made through consultation & inclusion of other POV Our awareness of situations that create bias is important in the audit function. Auditors need to under- stand how they might utilize their understanding of biases to improve their ethical decision making.

Group Think (Asch)

Tendency to yield to group pressure, even when people know the majority view is incorrect - the greater the number of people in the majority, the more likely those in the minority change their view to conform with the majority - speaks to an unconscious need for approval and avoidance of conflict within the groups we belong. - can result in individual group members not sharing concerns they may have about the consequences a decision may have, & can lead to making poor decisions

how to align ethical behavior with ethical intent?

Through exercise of virtue - rules can't be made to fit all situations; may be unclear or nonexistent, so professional judgment is necessary for decisions to be made in accordance with the values of profession as embodied in its codes of conduct. Professional judgment requires technical competence, & also depends on auditors' ethics and virtues

Kohlberg's stages of moral development

UNIVERSAL !! 6 developmental stages of moral reasoning that form the basis of ethical behavior: LEVEL 1 --> pre-conventional (1ST - obedience & punishment orientation & 2ND -self-interest orientation) LEVEL 2 --> conventional - (3RD: interpersonal accord & conformity & 4TH: authority & social-order maintaining) LEVEL 3 --> post-convential (5TH: social contract orientation & 6TH: universal ethical principles - suggests people continue to change decision priorities (+ values/ ethical behavior) over time & with additional education/experience - in business, an individual's moral development can be influenced by corporate culture * ethics training *

Daniel Kahneman

an Israeli psychologist and Nobel prize winning behavioral economist - points out that our minds have 2 distinct modes of decision making --> System 1 & 2 thinking - says we identify with System 2, but that System 1 is really in charge bc it "effortlessly originates impressions & feelings that are the main sources of the explicit beliefs and deliberate choices of System 2."

Stanley Milgram's shock study

experiment that demonstrated our tendency to subjugate our will to authoritative figures. - showed bias of displaying obedience to authority - shows that people have a tendency to follow instructions of those in authority, even when instructions conflict with their own values. - bias can result in a person unconsciously giving more weight to their loyalty to their employer than their own integrity when making a decision as to whether to go along with an unethical request made by that employer

Overconfidence Bias

holding unrealistically positive views of oneself and one's performance - important in accounting bc auditors overconfident in their (conservative) risk assessments about certain areas of the audit may fail to seek additional information to update their knowledge. COST: reluctant to learn about how internal controls work before determining if they work as intended

Level 2—Conventional (Stages 3 & 4)

personal responsibility -->person is aware of others' interests & one's duty to society in decision making Stage 3: Fairness to Others - individual is not only motivated by rules but seeks to do what is in best interests of others (family, peers, work org); there's a commitment to loyalty in relationship Stage 4: Law and Order - behavior emphasizes morality of law - One's duty to society, respect for authority, & maintaining social order is focus of decision making.

Moral Character (Action)

ppl don't always behave in accordance w/ ethical intent - one's ethical acts & intention to act ethically may not be aligned bc of pressures/biases that influence DM - people w/ strong ethical character will be more likely to carry out ethical intentions with ethical action bc they can better withstand any pressures - model says components interact through complicated sequence of "feed-back" & "feed-forward" loops. - one who demonstrates adequacy in one component may not necessarily be adequate in another --> moral failure can occur when any component is deficient

Cognitive development

refers to the thought process followed in one's moral development. - an individual's ability to make reasoned judgments about moral matters develops in stages.

Inalienable Rights

rights that cannot be taken away are universal in nature and consequence.

Cognitive Errors and Self-Serving Biases

shape people's ethical decision-making in ways they often don't notice or understand - people tend to gather, process, or remember info in a way that advances their perceived self-interest and support preexisting views - it's noticeable to see how it might affect others' decisions on ethical matters, but people are nearly blind in perceiving how it might affect themselves - this ethical blindness occurs because we fail to perceive or think about the ethical issues and contextual factors blinds us to right & wrong

Cognitive Biases

systematic errors in thinking that can lead to believing false conclusions, & negatively influence D-M process. Understanding these is an important first step to preventing unethical behavior. (Messick & Bazerman) we have cognitive biases about: 1. the world 2. other people, and 3. ourselves - often compounded by the false belief that the world is more deterministic & controllable than it is. - illusion of control causes us to underestimate risks involved with our decisions. - Memories of past-experiences change to support this erroneous belief.

Level 1: Preconventional (Stages 1 & 2)

the individual is very self-centered. Rules are seen as something external imposed on the self. Stage 1: Obedience to Rules; Avoidance of Punishment - what's right is judged by one's obedience to rules & aut authority. Stage 2: Satisfying One's Own Needs - rules & authority only matter if acting in accordance with them satisfies one's own needs (egoism).

Conformity Bias

the tendency people have to take their cues for ethical behavior from their peers rather than exercising their own independent ethical judgment - people take cues from those around them about proper way to act in all aspects of their lives - observing others in workplace helps new hires learn the culture of the organization and expected behavior. - wants person to conform judgments to those of group - being acculturated into a corporate style without fully recognizing ethical implications of co's practices & using the "everybody else is doing it" excuse as justification

hindsight bias

the tendency to believe, after learning an outcome, that one would have foreseen it - person's believe that they expected a past outcome before it occurred (even when they did not).

Intellectual vs Instrumental Virtues

virtue plays an integral role in the intention to exercise and act of exercising professional judgment INTELLECTUAL - indirectly influence one's intentions to exercise professional judgment (developed over time by gaining knowledge & skills through experiences) - Integrity, truthfulness, independence, objectivity, dependability, being principled, & healthy skepticism - aim a cognitive goods by understanding & pursuing truth; develop good judgment,& gain practical wisdom. INSTRUMENTAL - directly influence an individual's actions. - diligence (due care), being alert, careful, resourceful, consultative, persistent, and courageous.