Professional Development Course

Emerging Ethical Challenges for CPAs (Plenary session from Beyond Financial Reporting Conference)

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EMERGING ETHICAL CHALLENGES FOR CPAs

Michael McDonald, PhDProfessor Emeritus of Applied EthicsUniversity of British Columbia

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A word about “challenges”

• “Challenges” = “difficulties” plus “opportunities”!

• Risk/Reward, Pain/Gain, threats/opportunities, negatives/positives

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Challenges just another way of saying, difficulties, obstacles, negatives?

Today’s challenges

1. ”Digestion challenge” – post-lunch talk2. “Absorption challenge” – full morning plus full

morning of presentations

3. “Fear of ethics challenge” – just platitudes and rules?

4. “PD credit challenge” – is it on the exam?

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Focal point – side / edge of the desk

• Take on additional responsibilities beyond our normal responsibilities

• Requires extending our skill sets

• In new and unmapped terrain

Raises two questions1. What are the opportunities and threats?

2. What are our strengths and weaknesses?

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Common situation for talented & valued individuals

Today’s talk

I. Establish ethical reference points

II. Describe common side/edge of the desk situations

III. Identify ethical opportunities, threats, & safeguards

IV. Conclusion & discussion

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I. Ethical reference points

• Also to dispel common myths about ethics• Ethics just a matter of gut reactions

• Ethics is always the “voice of no”

• Ethics “an optional add-on” in professional & business life

• Relation to professional standards

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My aim to facilitate ethical thought & action

Ethics

A. We want to interact with each other

B. Our standards of acceptable behaviour, ideals and values

C. Plus appropriate ways of settling disagreements• Ethics has both personal & organizational sides

P.S. “ethical” & “moral” used interchangeably

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Is about the terms on which

Ethics: where from, where to

1. Where from• Instinctive

• Social environment or mores: mainly caught rather than taught

2. But we also acquire critical skills• Learning from our and others’ experiences

• Reasoning

3. Two dimensions• Descriptive – the “is” side – what we actually do

• Evaluative – the “ought” side – what we should do

4. Accounting parallels

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The deciding vote

• Ethics should have the final word

• But take into account all relevant factors

• Technical accounting standards

• Business and financial

• Legal

• Social

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In other words, doing the right thing is not just an option but an imperative!

Moral behaviour

1. Ability to recognize a situation as having a moral component

2. Ability to make a judgment as to which action is right, fair, just, appropriate

3. Commitment to morally appropriate action4. Possession of appropriate personal qualities

(perseverance, courage) to carry out morally appropriate actions

James Rest

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Moral sensitivity – first component

• Recognizing a situation as having a moral component• Requires “awareness” + “responsiveness”

• “Ethical blindness” & blind spots • Conflicts of interest

• Seeing only business aspects, missing ethical dimensions

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Rationalizations

• Standard practice – “Everybody does it”

• Materiality – “It doesn’t really hurt anyone”

• Authority – “Just following orders” and “If I don’t do it someone else will”

• Distancing – “Someone else’s responsibility”

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The psychology of rationalization is a powerful cause of ethical blindness:

Rationalizations

• Loyalty – “I know its against the rules but I don’t want to hurt my client, company or friend”

• Isolated incident - “Its just this once, it won’t happen again”

• Tunnel vision – “Only doing my job”

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Moral judgement – second component

• Ability to make a judgement as to which alternative action is right, fair, just and most appropriate

• Respects stakeholders, professional and general ethical obligations

• Requires professional skepticism, including the ability to set aside one’s own self-interest

• Threats include bias, selective choice of evidence or standards, or jumping to conclusions

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Making a moral judgement

1. Identify the problem

2. Specify feasible alternatives

3. Use relevant decision making criteria to assess the alternatives

4. Propose and test possible resolutions of the problem

5. Make a decision, live with it and learn from it

* Michael McDonald, Ethical Decision Making Framework (Version 5.2)

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Five step decision making guide*

Moral judgement – threats & safeguards

1. Identifying only part of the moral problem

2. Missing feasible alternatives; only considering unrealistic options

3. Missing important ethical criteria from professional and general moral standards

4. Not stress testing possible alternative solutions; failure to use a sensitivity analysis

5. Failure to learn from ethical successes and failures

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Moral motivation – third component

• The desire and intention to put moral judgement into action

• Making a real commitment

• Deeds, not just words

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Moral character – fourth component

• Forms the moral muscle to act ethically

• Requires strength building exercises

• ”Caught” rather than “taught”

• Role models

• Organizational culture

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Possession of appropriate personal qualities (perseverance, courage) to carry out ethically appropriate actions

Four component model of morality

Moral Sensitivity

Moral Judgement

Moral Motivation

Moral Character19

James Rest

Organizational dimensions

• Is the organization morally sensitive?

• Modelled by senior and middle management

• Reflected in organizational structures

• Fostered by an ethical organizational culture

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Rest’s four step model applies to organizations as well as individuals

II. Side of the desk situations

#1 Alice is a real leader in internal audit, so she is asked to take on a leadership role in HR

#2 Mandeep works in finance but is asked by colleagues in sales for help in preparing estimates & interacting with customers

#3 Howard works in a small enterprise where he handles finance and multiple non-accounting tasks

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“Add On” roles & responsibilities

• Having a main occupational role within your professional skill-set &

• Then getting tasked with additional responsibilities that pulls you beyond your professional skill set

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Why this happens

• Organization’s size may lead to multi-tasking demands • The SME

• Unanticipated rapid financial or organizational change • The need to up-size or down-size quickly

• Gaps that need to be covered • Request from colleagues for mentoring in non-accounting

areas

• You spot an interesting way of expanding your skill set

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III. Ethical issues

1. Context

2. Opportunities

3. Threats

4. Safeguards

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Normal accounting context

• Implications of knowingly or negligently making an error in your area of expertise

• Reliance of third parties on your expertise• Higher standards of conduct expected due to your

professional standing• The importance of objectivity and independence

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Ethical implications of being a professional

Side of the desk context

• Still seen by stakeholders as a CPA

• Also may be special ethical standards for the side of the desk context

• Examples: health, human relations, communications, sales, lobbying government

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Working outside the normal accounting context

Opportunities

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• Expanding skill sets

• Bring accounting talents to new areas

• Assist the organization in fulfilling its mission

• Grow as a person and a professional

Threats

• Neglect of responsibilities; over-commitment

• Competence issues

• Conflicts of interest

• Conflicts of roles

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Safeguards – neglect & over-commitment

• Find out what you are getting into

• Guard, manage and prioritize your time and attention

• Have defined responsibilities, including exit options

In short, “Know your limit, play within it”

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Safeguards – competence issues

• Identify the competencies needed for the new side of the desk role

• Heed ethical norms for the side of the desk role

• Do a realistic assessment of what is needed to learn on the job

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Further safeguards

• Be honest – don’t pretend to competences you lack

• Take advantage of opportunities for developing new competences

• Seek advice from trusted advisor and mentors

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Conflicts of interest – threats

• COIs distort professional judgement so we don’t act in the best interests of appropriate stakeholders

• Can be either financial or non-financial • Can be subtle – fly beneath our ethical radar• Can include apparent as well as actual conflicts

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COI safeguards

• How does it look from the outside?

• Sunshine – full disclosure

• Vacating one of the conflicting interests

• Getting appropriate oversight

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Conflicts of Roles - Threats

• Not the same as conflicts of interest

• Role A puts you in conflict with role B

Examples• The internal auditor with an operational role

• Financial controller involved in sales

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Involve conflicting responsibilities

Conflict of roles – safeguards

• Vacate one of the roles at least temporarily

• Establish boundaries

• Delegate to avoid such situations

• Do not compromise your professional responsibilities as a CPA

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Organizational dimensions

• Identify side of the desk situations in your organization

• Specify opportunities and threats

• Put in place safeguards

• Use both“soft” and “hard” safeguards• Hard: rules, enforcement, penalties

• Soft: Incentive structures, mentors, corporate cultures, recruitment and promotion as well as rules, penalties and enforcement

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CPAs in leadership positions

Ethical positives

• Habits of objectivity and independence should help you manage threats successfully

• Draw on your professional organization and colleagues for guidance

• Develop new networks of mentors for the side of the desk roles

• Expanding into side of desk activities can be a positive for you, your organization and society as a whole

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IV. Summing up – you should be able to

1. Understand and be able to use key ethical concepts

2. Identify side of desk situations

3. Recognize their ethical dimensions including threats and opportunities

4. Come up with appropriate safeguards at the individual and organizational level

5. Develop a skill set to deal with the ethical challenges and opportunities in this area

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Discussion

#1 Alice is a real leader in internal audit, so she is asked to take on a leadership role in HR

#2 Mandeep works in finance but is asked by colleagues in sales for help in preparing estimates & interacting with customers

#3 Howard works in a small enterprise where he handles finance and multiple non-accounting tasks

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Your views on three situations

Questions

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