Ethical Judgment;

A Necessity or a Choice?

Submitted by:

Antonette Abana Babaran

Ranzel R. Belan
Reymart T. Conciso
Jemima Dela Cruz
Eadrianne Lei De Leon
Julio Ceazer Sedano

Date Submitted:

May 16, 2019

 Ethical Judgment; a Necessity or a Choice?

Accounting is often referred to as the language of business because it facilitates the communication

of the financial position and performance of a company to the different users. It is a mode of expressing

the results of business operation in order for sound economic decisions to be made. There are many users,

both internal and external, of the financial statements of an entity like the management, investors, lenders,

creditors and the public. Due to these various users, it is very important that the financial reporting provides

a fair presentation of the financial position of the company and that the company is disclosing all important

financial information they are required to. Accountants, auditors and other financial preparers are required

to conform in accordance with the existing standards and principles as they take into account all the relevant

information when offering their services.

As a response to the development of the creation of value in society, compliance with ethical

standards became a requirement in every business organization. Accountants and auditors shall observe

and apply ethical principles in presenting information clearly reflecting the exact same results of the

operation of the company. This would be of great benefit to be able to present efficient and effective

services to the employers and customers that it will not cause the public to have doubts regarding the

financial statements being disclosed in which to base decisions.

Unfortunately, many companies and businesses do not perceive the substance of ethics. Many

established ethical conduct where every professional who fails to conform in accordance with the existing

standards will be summoned, bring to trial and even pay a penalty but still accounting scandals occur

throughout the world. Why do professionals still have the gut to commit unethical judgment despite

knowing or being aware of the essence of ethics? This is a question that needs to have a sincere answer.

People are not inherently unethical. There’s no such thing. The problem is people are unaware of

the fact that nearly everything they do has an ethical dimension. Living within the lines of this dimension

is a need. Crossing beyond, however, is a choice.

 Ethics is an inclusive subject that covers all aspects of human’s life. In an article entitled “Business

Accounting Ethics”; Katherine Smith and L. Murphy Smith explain that the main reason for ethical

guidelines is not to provide an exact solution to every problem, but to aid in the decision- making process.

An established set of guidelines provides an accounting professional with a compass to direct him toward

ethical behavior.

“Numbers don’t lie.” This is a cliché. And this is also untrue. Numbers are only as truthful as

finance professionals, like accountants, interpret and report them to be. Such is the conundrum of

accounting ethics. Accounting ethics is primarily a field of applied ethics and is part of business ethics. It is

an example of professional ethics discussed above. Specific responsibilities of accountants are expressed in

the various codes of ethics established by the major organizations such as the American institute of Certified

Public Accountants. The AICPA Code of Professional Conduct outlines an accountant’s responsibilities

towards public interest and emphasizes integrity, objectivity and due care. Many organizations also publish

their own guidelines.

The effects of ethical behavior in accounting is far reaching in the economy. Every business entity

has an accounting professional provide information at some point in the organization’s life cycle.

Accountants deal with the intimate financial details of individuals and organizations. Some have the ability

to execute million dollar transactions, and others assist with safeguarding retirement funds of cab drivers

and social workers. Ethical codes are the fundamental principles that accounting professionals choose to

abide by to enhance their profession, maintain public trust and demonstrate honesty and fairness. While

most unethical practices boost the company’s status in the short- run, it will harm the business, as well as

the industry in the long run. Many negative consequences can result from poor ethics in accounting

practices. The first result is generally a lag in business. Accounting firms rely heavily on word of mouth for

promotion, and it’s all too easy for a few bad stories to sway prospective clients. There can also be serious

repercussions for those who are found to be violating legal codes and standards for their jurisdiction.

With this said, no one will disagree that ethical behavior is necessary in the accounting profession,

as the consequences of unethical behavior by accountants can be disastrous for the companies concerned,

as well as for the accountants themselves.

 But why is it that news regarding companies manipulating data in unethical ways involving fraud,

embezzlement or falsifying information, are prevalent worldwide? Despite all the professional

organizations for accountants and their efforts to promote ethical behavior, unethical conduct continues.

For example, firms where fraud is prevalent tend to have old and vague old of conduct, little enforcement,

and bad training programs (Ponemon et al. 1999, 91). Good training is vital in helping people to understand

how to put the rues of code into effect. Accountants must be able to understand the code before they apply

it to their work. If a code is outdated, it may lack credibility. If parts of the code no longer apply, people

are more likely to dismiss the entire code. Another important item to remember is that a company’s decree

does not always reflect the reality of the entity (Calhoun et al. 1993, 3). The norm in a company may be to

disregard the code.

Another overriding problem with ethics is hypocrisy (Calhoun et al 1999, 40). The code may simply

be a formality, and the rules are not actually followed. To gain credibility, a firm must follow the cliché,

practice what you preach. Top management must set an example and follow through in a code of ethics in

order for it to be successful. Many business professionals believe this is a singular solution to unethical

behavior. A firm’s code should reflect customer and employee moral values, which can, at times, be

conflicting with one another (Donaldson and Werhane 1999, 168). If parts of the code conflicts, the

credibility of the code declines, and it becomes more likely that the code will not be followed in its entirety.

A survey conducted by Calhoun, and Wolitzer in 1999 revealed that often fraud occurred in public

accounting firms that did not have code of ethics.

Since unethical practices are widespread, some might respond by saying that this sort of behavior

is quite harmless. But is it really? What sort of message does such behavior give about prevailing values of

an organization? How easy is it to accept an avowal of honesty from a person who is habitually deceitful

for the sake of minor personal convenience? Most huge fraud cases didn’t start that big. It came from

repeated minor acts. As said, there is no such thing us inherently ethical. It is the continuous crossing

beyond the ethical dimension, even a step or two. When piled up, accountants usually realize it too late…

when they’re too deep, and when they’ve reached that far. This is where it becomes a choice; to cross or

not?
 Some people take a similar line when it comes to filling in a tax return, or when producing financial

statements or when trying to do a cost benefit analysis that compares product safety with cost of

production, retrenchments with increased dividends to shareholders. Practical concerns and pragmatic

considerations can make one relatively blind when it comes to spotting ethical issues that arise.

The reason for mentioning these cases is to demonstrate how even simple forms of behavior are

loaded worth ethical significance. This ceases to be any kind of mystery once it is realized that ethics is all

about answering a very fundamental question, namely, “What ought one to do?” As you will appreciate,

this ancient question is an immensely practical one that admits a manner of answers. There are a million

ways to answer such question but at least one is common- a fundamental agreement that persons ought to

be valued as ends in themselves and not simply as means to help realize the ends of others.

It is easy to say that accountants will follow the rules if the consequences are tolerable. It is easy to

be firm with your principles when you are not torn between two situations that may harm the company or

you. This is where the choice becomes harder. Usually, it is manifested in accountants facing ethical

dilemmas. An ethical dilemma or an ethical paradox is a decision- making problem between two possible

moral imperatives, neither of which is unambiguously acceptable of preferable. The complexity arises out

of the situational conflict in which obeying one would result in transgressing another.

Most accountants enter the industry with a clear intent and a firm principle. But most of them loses

their stand when faced with these ethical dilemmas.

They are walking a thin line between living and lying.

Accountants are becoming more vulnerable towards unethical practices because they are torn

between two unwanted situations. The burden for public companies to succeed at high levels may place

undue stress and pressure on accountants creating financial statements. The ethical issue for these

accountants becomes maintaining true reporting of company assets, liabilities and equity without giving in

to the pressure placed on them by management or corporate officers. Unethical accountants could easily

alter company financial records and maneuver numbers to paint false pictures o company successes.

Fraudulent financial reporting is one of the nost common issue out there. This may lead to short term

prosperity but may later lead to the downfall of the company. When deciding, there is a continuous trade
off between risks and rewards. Their obligation is to report the clients’ financial situation accurately. Failing

to do so can lead them to court cases- civil or criminal liability, bringing their careers to a sudden stop. On

the other hand they also have a living to make, bills to pay and families to feed. The fear of losing their jobs

or clientele gets into their nerves. At the end of the day, they are at the crossroads choosing between the

extremes; to hold on to their integrity, and save themselves from losing their careers, or just play along and

save themselves from losing their jobs. It’s a constant battle. A thin line between living and lying exists.

With a great amount of pressure, you just never know when you’ve crossed the line and how far you have

reached. After all, they have plates to fill.

They often have two choices: Be bullied or be blinded?

Over the past two decades, ethical dilemmas are increasing dramatically. Most of these starts with

the management itself. The accountant may be unaware but once he’s seen it firsthand, then this is where

the trouble starts. Knowledge is the beginning of bad faith. While it is an ethical accountant’s duty to report

such violations, the dilemma arises in the ramifications of the reporting. After witnessing fraudulent acts,

the question “should I blow the whistle?” comes in mind. Here, the accountant often faces a real risk of

backlash, intimidation and a reputation as a troublemaker. This reputation can be a career breaker. Once

he tells on them, being left out or bullied is what scares him. Government review of company’s financial

records and the bad press caused by an accounting scandal could cause the company’s rapid decline and

may lead to the layoff of thousands of employees. Executives and corporate officers could also face criminal

prosecution, leading to heavy fines and prison time. To give chance to its client, and to save his reputation

as well, the accountant usually turns a blind eye. So they often choose between two things; be bullied or be

blind?

They sometimes choose the flip side of actively misrepresenting numbers; the omission.

When handed with figures and information that may possibly cast a shadow over the company,

unethical accountants opt to ignore such things. Psychologically, it might feel easier to remain silent than

lie and intentionally misstate numbers. Its equivalent of a child choosing between outright lying to her

parents or sneaking behind their back for them to be happily unaware of the bad behavior. At the end of

the day, both are equally wrong.

 An investor who buys into your company without knowing the potential problem isn’t in a position

to assess the risks accurately. An accountant telling you what you want to hear can leave gaps in the

management information you need to run the company effectively. Incomplete information, when handed

to users, is dangerous. Especially when the information not disclosed is so significant, it may start a spark

and lead to a series of problems.

When personal interest prevails, ethical issues start.

Greed in the business and finance world leads to shaving ethical boundaries and stepping around

safeguards in the name of making more money. This is the other side of fraudulent financial reporting.

While other accountants commit fraudulent acts because they think they have no choice, other accountatnts

do it because it's their choice. Fraud resulting from greed is clearly one of the most common problem out

there. An ethical accountant should never let his personal interest get in the way of his duties and

responsibilities in making financial statements truthful. An accountant who keeps his eyes on his own bank

account more than his company’s balance sheet becomes a liability to the company and may cause real

accounting valuations.

In an actual case of fraud of WorldCom, a telecommunication company experienced a rapid growth

in the 1990s primarily due to several large acquisitions. WolrdCom and Sprint Corp agreed to merge in

1999; however, in 2002 the merge was blocked by regulators in both the U.S. and Europe out of fears the

company was becoming too large (foxnews.com). At the height of the company’s success, WorldCom stock

was trading above $64 per share(money.cnn.com). However, the company’s steady growth and profits came

to a halt when fraudulent financial reporting was eventually uncovered. It was discovered that WorldCom

had made a several transfer that were not in accordance with generally accepted accounting principles, or

U.S. GAAP(money.cnn.com). Considering it was top management and accounting personnel of WorldCom

who perpetrated the fraud, opportunity definitely existed. These individuals simply had to override the

internal controls in place in order to commit the fraud. The rationalization most likely used by the

perpetrators was that it was a one time thing and they would make up for it in the future, so there was no

need to hurt investors now if things were going to turn around soon. Another case of fraud was Tyco

International Ltd which involves the misappropriation of assets at the hands of two top executives. Tyco
International was founded in 1960 by Arthur J. Rosenburg. The company was originally an investing and

holding company specializing in government and military research. In 1964, the focus of Tyco’s products

charged to the commercial sector and the company became publicly traded (tycofis.co.uk). The Tyco

International fraud scandal was mostly fueled by opportunity and intense greed at the hands of Dennis

Kozlowski and Mark Swartz, but also Mark Belnick. These individuals had the opportunity to swindle

millions from the company and they took full advantage of that for several years before being stopped.

These were the top executives at Tyco so although others knew what was going on, they did not come

forward and stand up against the executives committing fraud. And fraud case of Adelphia

Communications Corporation The 2002 fraud case of Adelphia Communications Corporation involves

both fraudulent financial reporting and misappropriation of assets. This case involves almost exclusively

the founding family of the company perpetrating the fraud. Adelphia was founded by John Rigas in 1952

in Coudersport, Pennsylvania. Adelphia remained entirely in the hands of the Rigas family until 1986, when

the company went public. By that time, Adelphia had 370 full-time worker and over 250,000 subscribers.

Another issue here is the access of accountants to confidential information. Having access is one

thing, but using that privilege inappropriately or for your own sake, is already an ethical issue. Failure to

protect sensitive information, whether due to negligence or intentional spill, may give a significant

advantage to one over the other. A typical example is the “insider trading”. The sharing of confidential

information regarding the upcoming growth or drop in the company’s stock price to outsiders, leads to a

breach of confidentiality.

Looking at the cases above, accountant usually make wrong decisions with the thought that “if it’s

necessary, it’s ethical.” With the pressure passed onto them, they usually forget that it’s the other way

around. If it’s ethical, then it’s necessary. And this has been the principle of most successful companies out

there, who value ethics, as well as people. Another mistake in deciding is the “false necessity trap”. They

tend to fall into the trap because they overestimate the cost of doing the right thing and underestimate the

cost of failing to do so.

Mistakes in ethical judgments are usually hidden behind a cloak. What they think is right, may not

be. One example is the belief that if it is legal and permissible, then it’s proper. This substitutes legal
requirements for personal moral judgment. This alternative does not embrace the full range of ethical

obligations, especially for those involved in upholding the public trust. Ethical people often choose to do

less than what is maximally allowable but more than what is minimally acceptable. The “it’s part of the job”

reasoning also plays a big part on why accountants make unethical decisions. Conscientious people who

want to do their jobs well often compartmentalize ethics into two categories: private and job- related.

Fundamentally decent people may often feel justified doing things at work that they know to be wrong in

other contexts. Some accountants also think that what they are doing is for a good cause, even if it’s morally

unacceptable. This is a seductive rationale that loosens interpretations of deception, concealment, conflicts

of interest, favoritism, and violations of established rules and procedures.

Others justify their unethical judgment by merely reasoning out that everybody else is doing it. This

is a false ‘safety in numbers” rationale that confuses cultural, organizational, or occupational behaviors and

customs as ethical norms. Another wrong reasoning is when accountants feel overworked and underpaid,

they think to themselves that minor “perks” are nothing more than fair compensation for services rendered.

Lastly, the promise to oneself that he can still be objective despite unethical practices, is a rationalization

that ignores the fact that a loss of objectivity always prevents perception of the loss of objectivity. It also

underestimate the subtle ways in which gratitude, friendship, anticipation of future favors and the like affect

judgment.

Ethical dimension surrounds each and every practicing accountant. One minute, they are firmly

standing inside, the next minute, they are ready to cross. Due to different interventions in the practice,

accountants usually forget ethics and do what is needed for the job. The borderline of the dimension is

where the hardest decisions are made. So, is ethical judgment a necessity or a choice?

One thing’s for sure. Living firm within the dimension is a need. Crossing beyond is a choice.

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An analysis of fraud