The Routledge Handbook of Accounting Ethics

Eileen Z. Taylor, Paul F. Williams, Eileen Z. Taylor, Paul F. Williams

• Publisher: Routledge
• Year: 2020
• Print ISBN: 9781138591967
• eBook ISBN: 9780429954252
• Edition: 1
• Topic: Business
• Subtopic: Accounting
• Index: Business

The perspective of this book is to present "ethics" as a conversation about how we decide what is good or bad, right or wrong. It is a collection of conversations employed by educators to assist accounting students in developing their understanding of accounting's ethical aspects and to help them develop into critical thinkers who consider the ethical complexities of the function of accounting in human society.

Because we are social beings, ethics is a central human concern, since it involves determining the ethicality of human actions and their effect on other individuals, as well as determining the collective societal acceptance or rejection of an action. Thus, the book's primary goal is to call attention to the intersectionality of accounting and ethics and to encourage students and researchers to consider the ethical implications of accounting decisions. The book contains a diversity of perspectives within which discussions of accountants' and accounting's ethical responsibilities may occur. The contributing authors were deliberately chosen for their diverse perspectives on whence moral guidance for accounting may come. Each chapter stands on its own and represents the thinking of its authors. The book is not a primer on correct behavior for accountants but a place where educators may spur the conversation along.

PART I

Historical perspectives on business and accounting ethics

1
HISTORY OF PROFESSIONAL ACCOUNTING ETHICS

Diane H. Roberts

Overview

The aim of this chapter is to examine the historical background to contemporary accounting ethics. The separation of management and ownership created a need for owners to have reliable, accurate and honest information about the performance of the entities they owned. This gave rise to a need for accountants to provide such data. Ethical development of the accounting profession (codes and regulations) tended to be reactive rather than proactive, with each new accounting fraud or scandal providing the impetus for a response to reassure stakeholders of accounting practitioners’ bona fides and commitment to providing high quality services. Early in their professionalization, accountants held that the character of the individual accountant was the safeguard for investors. Character is an overtly moral or principles-based concept based on the individual’s core internal traits and is a personal internally evaluated characteristic. However, the McKesson & Robbins fraud in December 1938 demonstrated the fallacy of that approach, and the ethics narrative of character was replaced with a scientific or technique ethics narrative. Technique is an objective scientific or rules-based concept in which specialized knowledge or expertise is used on behalf of the public. Both character and technique are necessary for accountants to serve the public interest; however, only science and technique are externally observable. Ethics codes are a technique-based listing of canons of behavior and a component of the quest for professional status. Public accountants were the first accountants to professionalize but were followed by management accountants and other emerging credential and status-seeking subsets of accounting personnel.¹

Ethics in business

Early business noneconomic activities could be termed corporate social responsibility practices rather than business ethics (Husted 2015). Religious beliefs were the foundation of US business ethics (McMahon 1999). Professions in the United States from 1750 to 1900 were limited to clergy, medicine, and the law (Haber 1991) and did not include accounting. (For a review of historical studies on religion and accounting, see Cordery 2015.)

Medieval Catholic theology viewed trade as morally suspect; however, Protestantism regarded being both an ethical person and a financial success as possible to achieve (Vogel 1991a). In the 17th century, Protestant or Calvinist tenets commanded adherents to labor diligently and emphasized predestination (one’s fate determined by God when born) and signs of electness (being selected by God for success). The common good was held to be more important than an individual’s self-interest (Gerde, Goldsby, and Shepard 2007). In the 18th century, Protestant teachings minimized predestination and allowed fulfillment of economic self-interest. The Protestant ethic aided in legitimating capitalism by positing that being good is a requirement but not a guarantee for market success (Vogel 1991a).

The market is the mechanism by which capitalism allows an individual to achieve financial success by creating goods and services that improve the consumer’s situation (Vogel 1991a). Wealth was considered divine favor, and business people/merchants were to be trustees for the public good. These two ideas combined to motivate merchants toward good deeds and led to the “divine right of businessmen” that appeared with the industrial revolution (McMahon 1999). Advocates of big business and social Darwinism (only the fittest should survive in business) considered progress was only the result of long work, self-discipline and savings, the “middle class virtues.” (See McCloskey 2006 for a discussion of virtues and capitalism’s success.)

Businesses in the 1800s had informal family ethics based on the religious beliefs of the founder (Knouse, Hill, and Hamilton 2007). Business ethics lost its connection to religion and property by 1890, and contracts became the underlying principles (McMahon 1999). The industrial revolution and the replacement of people with machinery in factories removed the personal and individualism characteristics of early business ethics (McMahon 1999). The robber barons of the late 1800s followed business precepts that emphasized self-glorification and obtained power for personal ends. Backlash toward their business practices led to establishment of the Interstate Commerce Commission in 1886 and the Sherman Antitrust Act in 1890.

Significant external events affect business codes of ethics immediately (Knouse, Hill, and Hamilton 2007). As the influence of the stakeholders changes the focus of company behavior, the financial reporting regarding that behavior changes (Morf et al. 2013). Disclosures of social responsibility topics in annual reports in the 1900s were for internal audiences of employees. Information added as the 20th century progressed was directed at external stakeholders such as shareholders, customers, and regulatory authorities (Morf et al. 2013).

The manager’s role was redefined as business size increased and ownership dispersed across many stockholders. Managers were guardians or stewards of the company’s resources (Knouse, Hill, and Hamilton 2007). Professionalization of management followed World War II and focus on profits moved business toward value-free procedures and methods. Companies developed rule-based ethics codes to implement compliance with government regulation.

When Harvard Business School wanted to educate students in 1924 about the moral impact of business and technology on society, the initial approach was a history course to place business into social culture (Ciulla 2011). Academic interest in business ethics as a discipline started in 1957 with publication of Herbert Johnston’s comprehensive college textbook. The 1963 publication of Business and Society by J. W. McGuire was the beginning of formal business and society study. In the period between these two books, the reputation of US business was sullied by price fixing in the electrical industry. Illegal and unethical business practices were demonstrated to be pervasive, changing the positive reputation large business had achieved by supplying the war effort in World War II and rebuilding Europe and Japan under the Marshall Plan. Baumhart’s (1961) seminal survey of business executives and managers found extensive unethical behavior. The article influenced government, trade associations, universities, and churches to attempt to improve business ethics. Practical concerns during this period were safe working conditions, expense accounts, trade secrets, conflicts of interest, and hiring practices (McMahon 1999).

Social issues in business were part of the broader 1960s era of rebellion against authority and a strong antibusiness attitude as young people opposed the military-industrial establishment (De George 1987). Business schools began to include social issues as course and research topics (see Abend 2013 for a survey of early business ethics topics in universities). The 1964 Civil Rights Act and the social legislation that followed altered the focus of business ethics from the individual businessperson to corporate activity as a whole.

In the 1970s and 1980s, the public perception of business was one of company excess and multiple disasters involving companies’ behavior occurred, including the Three Mile Island nuclear reactor meltdown; the Union Carbide factory explosion in Bhopal, India; and Nestlé’s Latin American marketing of breast milk substitutes. Morals and values were once again considered appropriate business attributes (Knouse, Hill, and Hamilton 2007). Companies attempted to develop a nonreligious culture of ethics to achieve coherence with the social values of the time. Business ethics became secularized, with less focus on individual character, as most activity takes place through organizations (Vogel 1991b).

Environmental issues became prominent when Rachel Carson (Carson 1962) wrote Silent Spring about the dangers of pesticides in the environment and testified before Congress. President Nixon’s executive order transferred 15 units of four agencies to create the Environmental Protection Agency (EPA) in 1970. Companies were legally responsible for the environmental harm they caused.

The Foreign Corrupt Practices Act (FCPA) was passed in 1977 in response to bribes paid by corporations to foreign officials (Badua 2015). The FCPA both prohibited payment of bribes and required maintenance of sufficient accounting records and internal controls. The importance of internal audit increased as a business function with the passage of the FCPA (Burns, Greenspan, and Harwell 1994), and the professionalism of internal auditors improved.

Accounting ethics

Capital market development prompted the need for better accounting methodologies, more accomplished accounting practitioners, and ethical behavior by those practitioners. While the term “business ethics” was deemed a potential oxymoron prior to the start of the 1980s (De George 1987), accountants had been attempting to institute a code of professional ethics for accountants since 1905, because all professions have one. The first issue of the Journal of Accountancy, the house organ of the American Institute of Accountants, included an editorial that announced accounting parity with medicine and law as a learned profession as the publication’s goal (Anon. 1905). Ethical responsibilities of professionals include technical competence in their field and a mindset that they perform their duties proficiently to warrant the public’s trust (Abdolmohammadi and Nixon 1999).²

Medicine is the oldest profession in the United States, with its initial code of ethics established in 1846, prompted by the deregulation of medical practitioners by many states (Backof and Martin 1991). An influx of unqualified doctors produced by diploma mill medical schools created a need for the American Medical Association to enact a code of ethics. The medical profession’s need to distinguish qualified practitioners from quacks paralleled the need for CPAs to distinguish themselves from bookkeepers and uncertified practitioners. As the newest of the professions, accounting was in the process of obtaining regulation through enacting state-by-state CPA legislation (see Edwards 1978 for dates of specific states’ CPA legislation).

The American Bar Association (ABA) and the American Institute of Certified Public Accountants (AICPA) faced similar divisions among their members in response to changing economic and social conditions that created member segments with different attitudes toward professional ethics codes. Contemporaneous with public accounting’s initial ethics code efforts, the ABA’s first ethics code was enacted in 1908 during the US transformation from a rural-based to an urban and industrial society and the arrival of many immigrants to urban areas (Backof and Martin 1991). The emerging corporate wealth produced by this change caused a professional schism between lawyers with national prominence who could exploit these opportunities and small town lawyers. The code of ethics was promoted by established corporate lawyers and prohibited advertising, solicitation, and court supervision of contingent fee agreements. Small town and urban immigrant lawyers had their practice development difficulties increase from these rules. The public interest aspect of the code was a requirement that attorneys represent clients the attorney deemed guilty and let the court determine the verdict.

Accounting was affected by the same social conditions as the law, the transition from a rural to an urban industrial economy and small versus large practitioners. As business size increased and the providers of capital diverged from management (roles performed by different sets of people), there was an increased need for independent financial reporting. Unlike in law, no single national organization was recognized as representing the accounting profession. The development of professional ethics was intertwined with the development of professional accountancy organizations, and there were two schools of thought on the need for a code of professional ethics. The New York-based American Institute of Accountants (AIA) developed formal rules of conduct termed “professional conduct rules” (Carey 1969) and was viewed as East Coast elitist, restricting membership to those who passed the AIA uniform CPA exam regardless of whether the accountant held a CPA certificate (Previts and Merino 1998). The American Society of Certified Public Accountants (ASCPA) did not enact a code of ethics (Edwards 1978). Membership in the ASCPA was open to CPA certificate holders from any state (Previts and Merino 1998) and thus included rural and smaller practitioners as members.

The AICPA adopted its contemporary name in 1957 (Cook 1987) and is the successor to the merger of several prior accounting professional organizations. The organization began in 1887 under the name American Association of Public Accountants (AAPA) and primarily operated in New York City and other urbanized areas (Previts and Merino 1998). A rival national organization, the Federation of Societies of Public Accountants in the United States, was formed in Illinois in 1902 and merged with the AAPA in 1905 (Roberts 1987). In 1916 the name was changed to the Institute of Accountants in the United States of America and then to American Institute of Accountants (AIA) in 1917 (Roberts 1987). In a final successful merger with a rival national organization in 1936, the American Society of CPAs (ASCPA), the AIA consolidated its position as the national voice for US accountants (Montgomery 1936). Throughout this chapter, the name of the professional organization at the date discussed will be used.

Professionalism

Ethics is one part of the quest for profe...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• List of contributors
• Introduction
• Part I Historical perspectives on business and accounting ethics
• Part II Alternative perspectives for thinking about accounting ethics
• Part III Religious perspectives on accounting ethics
• Part IV Topical perspectives on accounting ethics
• Part V Education and accounting ethics
• Part VI Ethical accountants and ethical accounting
• Index