ETHICS FOR ACCOUNTANTS Delta Publishing Company 1 Copyright  2008 by DELTA PUBLISHING COMPANY P.O. Box 5332, Los Alamitos, CA 90721-5332 All rights reserved. No part of this course may be reproduced in any form or by any means, without permission in writing from the publisher. 2 TABLE OF CONTENTS Chapter 1 Ethics And Ethical Reasoning Chapter 2 AICPA Ethics Chapter 3 Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management for Certified Managerial Accountants (CMA) and the Certified In Financial Management (CFM) Glossary 3 CHAPTER 1 ETHICS AND ETHICAL REASONING LEARNING OBJECTIVES: After studying this chapter you will be able to: 1. Define ethics. 2. Differentiate between amoral and ethical values. 3. List and characterize two systems of ethics. 4. Differentiate between legal versus ethical codes. 5. Discuss the development of law and ethics. 6. List examples of philosophers who contributed to the development of ethics. 7. State how culture, motivation, and power affect business ethics. 8. Describe what is meant by business ethics. 9. List and identify myths about business ethics. 10. Explain how to develop ethics management programs. Ethics is the ―science of morals‖. A moral is an accepted rule or standard of human behavior. The understanding of ―accepted‖ is ―accepted by society‖, and accepted only insofar as the behavior in question being behavior that affects others in the society, even if only indirectly. The implication of this definition is therefore that private actions that have no impact on others are a matter for personal morality, which is not of business or organizational concern. However, the distinction between personal morality and business morality may not always be so clearly defined. This is because individuals bring personal values to their jobs and to the real or perceived problems of moral choice that confront them at work. Moral choices sometimes must be made because of tensions within individuals, between individuals, or between individuals and what they believe to be the values that drive their organizations. Furthermore, business organizations do not operate in a social vacuum. Because of the ways business organizations can and do affect the lives and livelihoods of society at large, some would argue that business organizations are kind of ―moral agents‖ in society. Therefore managers and general public alike often wrestle with defining exactly what constitutes the ethical way of doing business, and what constitutes proper constraints on individual self-interests, and by whom shall these constraints be imposed. A further complexity results from the fact that businesses are increasingly becoming global in nature. Different countries have or seem to have vastly different customs and values. Understanding and assessing whether and how these different cultural and ethical conflicts should be taken into account is often most difficult. 4 ATTITUDE TO ETHICS AMORAL: Condone any actions that contribute to the corporate aim. Getting away with it is the key. No set of values other than greed. LEGALISTIC: Obey the letter of the law but not the spirit of it, especially if it conflicts with profits. Ethics ignored until it becomes a problem RESPONSIVE: Take the view that there is something to gain from ethical behavior, Using ethics as a tool to attain corporate aim. EMERGING: Ethical values becoming part of the culture. Codes of ethics being action documents, and likely to contain statements reflecting core value, ETHICAL: Total ethical profile. Everything done is ethical, and the right thing always done by everyone. The ideal. In general, a key focus of ethics is the concept of integrity (or honesty). Integrity in broad terms will imply that no business-persons in the course of their business functions should be party to the falsification of any facts or information or make any statement which knowingly is misleading, false or deceptive in a material particular. Another major focus of ethics is professional competence and due care, which implies that business professionals should always perform their functions in accordance with law and regulations. In other words, business transactions and professional functions should not be undertaken unless one possesses the required competence and technical skills. A more controversial focus is the area of freedom from conflicts of interests. The preferred position of many is that one should always avoid concurrent involvement in any business, occupation or activity, which might result in the compromising of integrity, objectivity and independence of decision making. ETHICAL SYSTEMS Utilitarianism (teleological ethics) The promotion that the best long-term interest of everyone concerned should be the moral standard: one should take those actions that lead to the greatest balance of good versus bad consequences Deontology (Kantian ethics) It deals with the concept of duty and the rightness of acts. It emphasizes maxims, duties, rules, and principles that are so important that they should be followed whatever the consequences. 5 In defining law and ethics and their relationship to each other it is necessary to distinguish between moral and legal rights and duties. Morally, a person's rights consist of claims that he can justly make to the conditions of well-being; his duties consist of what he can justly contribute to well being. Legal rights and duties - that is, claims and obligations enforceable at law - may or may not be fully in harmony with prevalent moral opinion systems in which law and ethics and religion are closely interwoven. The impact of moral opinion on law varies with the type of political structure and influence on public opinion. In free societies the ultimate justification of law is that it serves moral ends. But the dependence of law on moral principles must not be taken to imply that there is a set of moral principles which can be lain down for guidance. However, most free societies are coming to be more or less consistent in principles that draw the line between law and morals. The task of ethics becomes two-fold: to bring out what is involved in the notion of a principle or norm of action and to recognize ideals that serve as agencies of guidance and control. A number of consistent principles recognized in modern society are the individual, responsibility and equity. The end of law is to secure the greatest possible general individual self-assertion. In the Judeo-Christian ethic responsibility is a given: the best ordering of human society in which the individual may come to full manhood and satisfying existence. On the basis of equitable doctrine we can say confidently that morality is inseparable from the legal order; that right and wrong is part of the legal order. DEFINITIONS ETHICS: Ethics are standards of professional conduct and business practices adhered to by professionals in order to enhance their profession and maximize idealism, justice and fairness when dealing with the public, clients and other members of their profession (Merriam Webster). LAWS: Laws are bodies of rules governing members of a community, state, organization, professional, etc ... and enforced by authority or compelling legislation (Merriam Webster). LETTER vs. SPIRIT OF THE LAW: Being lawful is adhering to the letter of the law by following/obeying the rules and regulations. Being ethical is adhering to the spirit of the law or following you conscience or best moral judgment. MORAL VALUES: Ethics in real estate deals with the law, rules, and regulations but has very little to say abut ethics and moral values. The subject is of such great importance in today's society, yet, it is only hinted at in the literature of real estate topics on law and ethics. There are things of deadly earnest that can only be safely mentioned under ―cover of a joke." Ethics is one of those deadly earnest things. 6 Webster's Seventh New College Dictionary defines ethics as the principles of conduct governing an individual or group or a system of moral values. Moral is further defined as synonym of ethical meaning capable of right and wrong action when pertaining to an agency. CULTURAL DIVERSITY: In our society the laws, rules, and regulations may be clear-cut but the interpretation, application and implementation are cloudy at best, especially, in a culturally diverse society. The religions and philosophies of the world speak most elegantly of the nature of ethics. The combining of the two systems or codes, the legal codes and moral codes, can try the patience of the wisest sages let alone of a realtor. The writers of past and present literature mirror the dilemma of ethical/moral conduct. Jules Renard stated "in morals always do as others do; in art never." While Ernest Hemingway stated "What is moral is what you feel good about after". Or "Character is like a tree and reputation is like a shadow. The shadow is what we think of it; the tree is the real thing." Anon. SEPARATION: Ethics seems to be separated from the law like the state has been separated from the church by the First Amendment's establishment clause, "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; etc....‖ And yet, to explore the relationship between law and ethics we must look at the roots of our legal and ethical codes of conduct. The Greek, Roman and British empires have established our legal foundations while the great religions of our time Christianity, Judaism, Buddhism, Islamism, Hinduism, etc... have nurtured our moral foundations. Any attempt to separate the moral precepts of the great religions from modern day ethics would be amoral at its best and immoral at its worst. We can catch the gist of the dilemma between law and ethics in Lillian Hellman's saying: "cynicism is an unpleasant way of saying the truth". Ethics may not be fashionable today but as Lewis Mumford once stated, "trend is not destiny" and as Arthur C Clark further stated, "a faith that cannot survive collision with the truth is not worth many regrets." ETHNIC ROOTS: The ethical value system of Real Estate Associations, for the most part in America, have derived from Judeo-Christian heritage. Society is a combination of pluralistic and or melting pot societies of diverse religions and cultures - which include Europeans, Hispanic, Blacks, Asians, Africans, among others. Set in this diverse background professional moral conduct appears to be based on a dichotomy of mutually exclusive groups or contradictory groups. While the laws, rules and regulations appear to be uniform codes, the ethics and morals appear to be diverse. In trying to discern a variety of moral/ethical values and codes of conduct we can cite Bertrand Russell: "The most savage controversies are those about matters which there is no good evidence either way." LEGAL vs. MORAL CODE: Fortunately, such is not the case with law and ethics, we can look at critical issues and separate the legal code from the moral code. For example, we can analyze the issue of murder. By law the issue of murder is a felony - a grave crime expressly declared by the 7 common law or by statute. It may be further described as premeditated or first-degree murder or it may be due to negligence or third degree murder. The law in either instance deals with protection and retribution. By ethics, the issue of murder is based on a code of moral judgment like the Ten Commandments, "thou shalt not commit murder." Ethical codes deal with justice and rational behavior. Ethics is a code of moral behavior based on rational acts of behavior with the general good of society as its outcome. RATIONAL ACTS: Further complications arise in understanding how we make moral judgment. Barbara Herman in her soon to be released textbook, The Practice of Moral Judgment, takes a look at the complications that arise when "we try to understand how we make moral judgments in an amoral world." Herman has stated that the 1980's emphasized material wealth --- and preparation for a lucrative profession. Judgments are based on experience and rightness where KANT describes rightness as rational Acts. The "law doesn't ...... have much to say about vast areas of human conduct and relations. Instead, people are guided by a wide variety of values and moral pressures from family, church, and peer groups. The difficulty is that - whatever the nature of your relation to morality - if you are in it for a payoff, it won‘t work.‖ ANALYSIS LAW – ETHICS: The law and ethics of a situation can be analyzed and separated into a cause and effect result. For example: In the style section of Los Angeles Herald Examiner, staff writer Tricia Crane stated in a headline article " No place for the children". The rental housing market, Osumi and others say, goes to elaborate lengths to keep kids out ...... Dick Osumi is in the trenches fighting a system that is becoming increasingly closed to the needs of children....California Landlords are using a loophole to get around the California law prohibiting `Adults only' apartment complexes. "Brian Hembacker, assistant counsel for the California Department of Fair Employment and Housing says over restrictive occupancy standards are being effectively used to create "Adults Only" complexes - despite the fact that they are illegal". The rule of law is clear but even clearer is the ethical issue. THE LEGAL ISSUE: California law prohibiting "Adult Only" apartment complexes. THE VIOLATION: Overly restrictive occupancy standards are being used to illegally bend the law. THE ETHICAL ISSUE: The Los Angeles rental market and California landlords are becoming increasingly callous to the needs of children. THE VIOLATION: The health and safety of children and families with children are in jeopardy. ISSUE FOR A DECADE: The issue has been in the news for almost a decade. TIME staff writer Sharon Rosenhause in an article entitled "LAW BANNING ADULTS ONLY RENTALS TENTATIVELY OK'D", wrote in the Los Angeles Times: Los Angeles City Council backed an ordinance outlawing housing discrimination based on age. Its dramatic impact would be to prohibit ―Adults only‖ apartment rentals. The law would be "healthy for the industry" because 8 landlords "can‘t afford to close people out". In a poll survey reported by Pollster Mervin Field Los Angeles Times stated that "75% in the poll oppose any Adults only apartments". EFFECTIVE ETHICS: To be effective, ethics must be expressed as a set of principles, or values, a standard of conduct by which the individual guides his own behavior and judges that of others. It refers to our conduct, socially and in the business , and in attitude toward others. When one takes advantage of his/her position of trust to the detriment of another party solely for the purpose of one's own gain, we say he is unethical. Professional courtesy and ethics should not stop at those things which have been sanctioned by law. HISTORICAL FOUNDATIONS OF LAW AND ETHICS The great religions of the world gave birth to several concepts that evolved into structural precepts for society. A commonality of precepts evolved with the passing of tribal customs and tribal belief systems and the rise of the great religions of the world. "The monotheistic idea of God unifies and coordinates the spiritual goods of the race. The unity of GOD involves the unity of all classes of men. This is a long step toward equality. The sense of sin became part and parcel of the common consciousness. It is a leveler and equalizer." For the good of the tribal society now becomes for the good of the individual. It must come to pass that a given society, if it is to retain the right to exist, must be continually extending the experience of its best things to men who were at one time outside, the pale of the best. The principle of individuality, once established, draws after it the principal of progress." "If it amounts to this, that wherever you find man, you find the eternal goods, and therefore the highest worth. The scale of market prices for the common man is forever disarranged by the discovery in him of something that is above price." Two of the primary maxims in ethics are the utilitarian rule "Each man is to count for one, nobody for more than one". The second is Kant's--Always treat humanity, whether in yourself or another, as a person, and never as a thing." "The only ground for counting every body as one, and nobody as more than one is the presence in all men of a something or other which possesses such value that existing social forms and economic accumulations cannot bid against it." "The social question is the moral question, first, because its ultimate root is a choice between divergent ideals of the state, that , between different ways of viewing and organizing the total human life in time and space; and secondly, because, as a consequence, the question concerning the worth of the labor turns into the question concerning the worth of the laborer". The history of conscience is the history of the individual where 'conscience' means knowing along with " ...nothing can be good for one man that is not law for all men." 9 SELECT DEVELOPMENT OF LAW AND ETHIC This section will review the historical evolution of law and ethics through select excerpts of legal philosophy from Plato to Hegel. PLATO: Plato maintained that all wrong doing is involuntary and arises from ignorance since right conduct is happiness, and wrong conduct is unhappiness, and no one therefore would willingly choose wrong conduct which would lead to unhappiness. Plato's resolution was to make a distinction between acts which were remediable in damages and acts which require punishment between injury and wrongdoing. If there had been a wrongdoing, the guilty person must not only pay for the injury, but must also be punished,...the court must teach him virtue. Plato endeavored to extend his ideas of code making from the civil to the criminal field, and to devise a penal code based upon rational principles. In the history of jurisprudence, no one has been more fully aware of the necessity of the reign of law for any state which desires to realize the ultimate values of happiness and well-being for its citizens. ARISTOTLE: Aristotle assigned to jurisprudence what must always be its main task, the establishment of a rational legal order for a given society. "Every art and every inquiry and similarly every action and pursuit, is thought to aim at some good; and for this reason the good has rightly been declared to be that at which all things aim." Law may also be a means in the inculcation of established ethical ideals and the promotion of new ones. The precepts of the law are to live honorably, not to hurt another, to give each man his due." He further maintained that the state must train and educate its citizen in the spirit of the law - for there is no merit in the most valuable laws if citizens are not trained and educated early. "If a man is to lead the good life he must practice it a long time." Aristotle left a powerful legacy on the law of property, contract, inheritance, possession, crime and punishment and tort. CICERO: Cicero established a bridgehead between ancient and modern legal thought that was to be dominant in Western thinking. Justice is one; it binds all human society, and is based on one law, which is right reason applied to command and prohibition. Cicero's jurisprudence embraced a humanitarian ideal....that what people have always sought is equality of rights before the law. Laws were invented to speak to all men at all times in one and the same voice. He paved the way for identification of law and morality. ST. THOMAS AQUINAS: "Law is defined by St. Thomas as an ordinance of reason for the common good, made by him who has care of the community, promulgated." His definition is an attempt to embrace all the law, the eternal, the natural as well as the human; there is an effort to include what is regarded as ethically necessary. Law is a rule or measure of Acts whereby one is induced to act or restrained from acting . The elements of law...insist that it is a form of reason, holds that it must be made for the common good, by the guardian of the community, and to teach 10