Ethical Reasoning: Implications for Accounting
If you are an egoist, you might conclude that it is in your best interests to go along with the firm’s position to support the client’s presumed interests. After all, you do not want to lose your job. An enlightened egoist would consider the interests of others, including the investors and creditors, but still might reason that it is in her long-run interests to go along with the firm’s position to support the client because she may not advance within the firm unless she is perceived to be a “team player.”
Utilitarianism Utilitarians follow a relatively straightforward method for deciding the morally correct course of action for any particular situation. First, they identify the various courses of action that they could perform. Second, they determine the utility of the consequences of all possible alternatives and then select the one that results in the greatest net benefit. In other words, they identify all the foreseeable benefits and harms (consequences) that could result from each course of action for those affected by the action would result from each course of action for those affected by the action of the decision maker,, and then choose the course of action that provides the greatest benefits after the costs have been taken into account. 57 Given its emphasis on evaluating the benefits and harms of alternatives on stakeholders, utilitarianism requires that people look beyond self-interest to consider impartially the interest of all persons affected by their actions.
The utilitarian theory was first formulated in the eighteenth century by the English writer Jeremy Bentham (1748–1832) and later refined by John Stuart Mill (1806–1873). Bentham sought an objective basis that would provide a publicly acceptable norm for determining what kinds of laws England should enact. He believed that the most promising way to reach an agreement was to choose the policy that would bring about the greatest net benefits to society once the harms had been taken into account. His motto became “the greatest good for the greatest number.” Over the years, the principle of utilitarianism has been expanded and refined so that today, there are many different variations of the principle. Modern utilitarians often describe benefits and harms in terms of satisfaction of personal preferences or in purely economic terms of monetary benefits over monetary costs. 58
Utilitarians differ in their views about the kind of question we ought to ask ourselves when making an ethical decision. Some believe the proper question is: What effect will my doing this action in this situation have on the general balance of good over evil? If lying would produce the best consequences in a particular situation, we ought to lie. 59 These act-utilitarians examine the specific action itself, rather than the general rules governing the action, to assess whether it will result in the greatest utility. For example, a rule such as “don’t subordinate judgment” would serve only as a general guide for an act-utilitarian. If the overall effect of giving in to the client’s demands brings net utility to all the stakehold- ers, then the rule is set aside.
Rule-utilitarians, on the other hand, claim that we must choose the action that conforms to the general rule that would have the best consequences. For the rule-utilitarian, actions are justified by appealing to rules such as “don’t subordinate judgment.” According to the rule-utilitarian, an action is selected because it is required by the correct moral rules that everyone should follow. The correct moral rules are those that maximize intrinsic value and minimize intrinsic disvalue. For example, a rule such as “don’t deceive” (an element of truthfulness) might be interpreted as requiring the full disclosure of the possibility that the client will not collect on a material, $1 million receivable. A rule-utilitarian might reason that the long-term effects of deceiving the users of financial statements are a breakdown of the trust that exists between the users and preparers and auditors of financial information.
In other words, we must ask ourselves: What effect would everyone’s doing this kind of action (subordination of judgment) have on the general balance of good over evil? So, for
min622IX_ch01_001-053.indd 24min622IX_ch01_001-053.indd 24 30/08/13 4:22 PM30/08/13 4:22 PM
Chapter 1 Ethical Reasoning: Implications for Accounting 25
example, the rule “to always tell the truth” in general promotes the good of everyone and therefore should always be followed, even if lying would produce the best consequences in certain situations. Notwithstanding differences between act- and rule-utilitarians, most hold to the general principle that morality must depend on balancing the beneficial and harmful consequences of conduct. 60
While utilitarianism is a very popular ethical theory, there are some difficulties in rely- ing on it as a sole method for moral decision making because the utilitarian calculation requires that we assign values to the benefits and harms resulting from our actions. But it is often difficult, if not impossible, to measure and compare the values of certain benefits and costs. Let’s go back to our receivables example. It would be difficult to quantify the possible effects of going along with the client. How can a utilitarian measure the costs to the company of possibly having to write off a potential bad debt after the fact, including possible higher interest rates to borrow money in the future because of a decline in liquid- ity? What is the cost to one’s reputation for failing to disclose an event at a point in time that might have affected the analysis of financial results? On the other hand, how can we measure the benefits to the company of not recording the allowance? Does it mean the stock price will rise and, if so, by how much?
Deontology The term deontology is derived from the Greek word deon, meaning “duty.” Deontology refers to moral philosophies that focus on the rights of individuals and on the intentions associated with a particular behavior, rather than on its consequences. Deontologists believe that moral norms establish the basis for action. Deontology differs from rule-utilitarianism in that the moral norms (or rules) are based on reason, not outcomes. Fundamental to deontological theory is the idea that equal respect must be given to all persons. 61 In other words, individuals have certain inherent rights and I, as the decision maker, have a duty (obligation, commitment, or responsibility) to respect those rights.
Philosophers claim that rights and duties are correlative. That is, my rights establish your duties and my duties correspond to the rights of others. The deontological tradition focuses on duties, which can be thought of as establishing the ethical limits of my behavior. From my perspective, duties are what I owe to others. Other people have certain claims on my behavior; in other words, they have certain rights against me. 62
As with utilitarians, deontologists may be divided into those who focus on moral rules and those who focus on the nature of the acts themselves. In act deontology, principles are or should be applied by individuals to each unique circumstance allowing for some space in deciding the right thing to do. Rule deontologists believe that general moral principles determine the relationship between the basic rights of the individual and a set of rules governing conduct. It is particularly appropriate to the accounting profession, where the Principles of the AICPA Code support the rights of investors and creditors for accurate and reliable financial information and the duty of CPAs to act in accordance with the profes- sion’s rules of conduct. In this book, we adopt the rule deontological perspective when evaluating rights theories as a method of moral reasoning. Rule deontologists believe that conformity to general moral principles based on logic determines ethicalness. Examples include Kant’s categorical imperative, discussed next, and the Golden Rule of the Judeo- Christian tradition: “Do unto others as you would have them do unto you.” Unlike act deontologists, who hold that actions are the proper basis on which to judge morality or ethicalness and treat rules only as guidelines in the decision-making process, rule deontolo- gists argue there are some things we should never do. 63 Similarly, unlike act-utilitarians, rule deontologists argue that some actions would be wrong regardless of utilitarian benefits. For example, rule deontologists would consider it wrong for someone who has no money to steal bread, because it violates the right of the storeowner to gain from his hard work
min622IX_ch01_001-053.indd 25min622IX_ch01_001-053.indd 25 09/08/13 4:46 PM09/08/13 4:46 PM
26 Chapter 1 Ethical Reasoning: Implications for Accounting
baking and selling the bread. This is the dilemma in the classic novel Les Misérables by Victor Hugo. The main character, Jean Valjean, serves a 19-year sentence at hard labor for stealing a loaf of bread to feed his starving family.
Rights Principles A right is a justified claim on others. For example, if I have a right to freedom, then I have a justified claim to be left alone by others. Turned around, I can say that others have a duty or responsibility to leave me alone. 64 In accounting, because investors and creditors have a right to accurate and complete financial information, I have the duty to ensure that the financial statements “present fairly” the financial position, results of operations, and changes in cash flows.
Formulations of rights theories first appeared in the seventeenth century in writings of Thomas Hobbes and John Locke. One of the most important and influential interpretations of moral rights is based on the work of Immanuel Kant (1724–1804), an eighteenth-century philosopher. Kant maintained that each of us has a worth or dignity that must be respected. This dignity makes it wrong for others to abuse us or to use us against our will. Kant expressed this idea as a moral principle: Humanity must always be treated as an end, not merely as a means. To treat a person as a mere means is to use her to advance one’s own interest. But to treat a person as an end is to respect that person’s dignity by allowing each the freedom to choose for himself. 65
An important contribution of Kantian philosophy is the so-called categorical impera- tive: “Act only according to that maxim by which you can at the same time will that it should become universal law.” 66 The “maxim” of our acts can be thought of as the inten- tion behind our acts. The maxim answers the question: What am I doing, and why? In other words, moral intention is a prerequisite to ethical action, as we discuss more fully in the next chapter.
Kant tells us that we should act only according to those maxims that could be uni- versally accepted and acted on. For example, Kant believed that truth telling could be made a universal law, but lying could not. If we all lied whenever it suited us, rational communication would be impossible. Thus, lying is unethical. Imagine if every company falsified its financial statements. It would be impossible to evaluate the financial results of one company accurately over time and in comparison to other companies. The financial markets might ultimately collapse because reported results were meaningless, or even misleading. This condition of universality, not unlike the Golden Rule, prohibits us from giving our own personal point of view special status over the point of view of others. It is a strong requirement of impartiality and equality for ethics. 67
One problem with deontological theory is that it relies on moral absolutes—absolute principles and absolute conclusions. Kant believed that a moral rule must function without exception. The notions of rights and duties are completely separate from the consequences of one’s actions. This could lead to making decisions that might adhere to one’s moral rights and another’s attendant duties to those rights, but which also produce disastrous consequences for other people. For example, imagine if you were the person hiding Anne Frank and her family in the attic of your home and the Nazis came banging at the door and demanded, “Do you know where the Franks are?” Now, a strict application of rights theory requires that you tell the truth to the Nazi soldiers.