ETHICS

A 2-hour CPE Presentation for The AASHTO Audit Conference

July 26, 2011

By You and Me!

Rick Crosser, CPA: Chair & Professor of Accounting

• Ph.D. dissertation had a conceptual framework based in social-psychology:– Cheating, Deterrence Theory, Penalties (in a tax

context)

• 1989 – 1994 facilitated graduate course,– Accounting Ethics & Professional Conduct

• 2007 sabbatical – Certificate in Business Ethics (UNM)– Designed & launched @ Metro State an undergrad

ethics course

• CCEP (Certified Compliance & Ethics Professional) 2009

New Stuff • for 2010-11 Reporting period for CPAs

– 4 hours of ethics will be required among the 80 hours (no more than 2 hours may be Colorado Rules and Regulations)

– Old Categories A and B go away– Only 16/80 hours can be professional

development• Ethics is included in Accounting Area• No limit, just a 4-hour minimum every 2 years

• CMAs, CFEs, CIAs remain @ 2 hours/year

More New Stuff• For CPAs, Colorado is now

“Substantially Equivalent” to other states (July 2010); 150-hour state– Full implementation 1/1/2015 to certify – Same rules to sit for exam

• To Certify– BS/BA (in any discipline)– 150 minimum semester hours of credit

Course Requirements for Certification

– 27 hours upper division ACC hours (+ 6 hours of principles courses) = 33• 6 hours of auditing/assurance courses• 3 hours of accounting ethics

– 27 hours business courses• 3 hours of communications, i.e. accounting and

/or business communications

Master of Professional Accountancy Program

• 30 Semester hours of graduate courses• Required courses (12 hours)

– Accounting Ethics– Fraud Awareness (qualifies for “audit”)– Accounting Communications & Research– Accounting Theory

• Electives (18 hours)– Fraud/Forensic track– Tax track– Accounting & Auditing track

Today’s Agenda

1. What is Ethics?– Describe the meaning of ethical behavior!– Do not comment, yet.

2. Can ethics be taught? …or learned? Kohlberg studies; James Rest and the DIT; What really happened at Enron? … or Qwest, or

WorldCom, or Parmalat, or Tyco, or ??

3. What are the barriers to ethical behavior?

Your First Exercise

On a piece of paper please write your answer to ONE of the following:

1. Define “ethics” ….or2. What is ethical behavior?

Please do not talk or discuss, yet.

If -- Through Life’s Experiences You Obtain Adequate Moral Fiber

• Then you are prepared for ethical situations in which you are confronted.

• So, with the proper inputs……– outcomes are predictable. – But there are many barriers.

• “In any moment of decision, the best thing you can do is the right thing.”

Theodore Roosevelt

Can Ethics Be Taught? • Do not comment, yet.• …just reflect.

Consider Taking a Wine-Tasting Course

• What if the course was pure textbook and lecture?

• You would have to imagine how the wines taste, but not actually taste them.

Ethics – Your First Dilemma

A light rail train is barreling down the tracks and is about to jump the tracks and hit a small

group of people standing on a waiting platform.

A Magic Button

The holder of the button is instantly given the power to press the button and the light rail train will not hit

the group of people.

However, There Are Other Consequences

• ONE Person - • Instead of the Group - • Is hit by the train.

• What Do You Do?

What Are the Alternatives?

• Push the Button– Save the Group– At the Expense of One

• Don’t Push the Button– Lose the Group

• Pass the Button– Now it’s not your problem

Who are the Stakeholders?

• That is, who is/are affected by the Alternative Actions?

The Dirty Hands Problem

• Choices are hard and can be painful.• Utilitarian – Outcomes with the highest

benefit or least harm for the greatest number. (Jeremy Bentham & John Stuart Mill)

• Immanuel Kant – Utilitarian approaches or philosophies are all right, but not at the expense of humans.

Back to the Question: What is “Ethics?”…or, “Ethical

Behavior?”

• Accepted standards of behavior• Practices of those in a profession• Laws • Expectations of society

What are the Expectations of Society?

– What are the standards of behavior? *– What are the accepted practices of a

profession? *

• What is the Code of Ethics of

AASHTO? *

Aristotle (384 BC – 322 BC)

Aristotle’s Virtues

Trustworthiness, benevolence, altruism

Honesty, integrity Impartiality, open-

mindedness Reliability, dependability,

faithfulness

AICPA: Code of Professional Conduct

Principles: Professionalism & exercise

moral judgments, Serve public interest & trust, Integrity, Objectivity & Independence, Due care, Scope & Nature of services.

Rules: (Applicability & Definitions)

Independence, Objectivity, Integrity, & Confidentiality Acts discreditable

Integrity

• Acts of a person with Integrity– Truthfulness– Courage– Sincerity– Honesty

• Courage to stand by principles even in face of pressure

• Virtuous

“Do unto others as you would them do unto you”

Universality in World Religions• Buddhism• Christianity • Confucianism • Hinduism• Islam• Judaism • Taoism• Zoroastrianism

The Golden Rule

Ethics and Morality

• Ethics – derived from Greek meaning custom or character (Ethos - showing moral character)

• Morals – derived from Latin meaning customs, manners, character

• Are “Ethics” and “Morals” the same?

Definitions of “Ethics”

1. the discipline dealing with what is good and bad, with moral duty and obligation.

2. a: set of moral principles; a theory or system of moral values

b: the principles of conduct governing an individual or a group, i.e. professionals

c: a guiding philosophy

d: a consciousness of moral importance • Merriam-Webster Dictionary

The Law

1. Is being “ethical” the same as being legal?

2. Is it possible to be within the law, but not be “ethical?”

Moral Compass versus Ethical Behavior

• ...just me• Morals, or the Moral Compass

represent those beliefs or philosophies that are part of one’s internal being;

• Ethics, or Ethical Behavior represents the actions of one’s life, i.e. what we actually do….– Society for Corporate Compliance & Ethics– …doing is “compliance."

Can Ethics Be Taught?

1.On your sheet of paper, please answer this question.

2.Briefly explain your answer.3.Do not comment, yet.

Kohlberg’s Theory of Moral Reasoning

Lawrence Kohlberg used “Heinz and the Life Saving Drug” situation to determine the reasoning that subjects use to defend her/his position. That is, “how the subjects made decisions.” • Heinz’s wife is dying. • Drug form of radium might save her.• Druggist is charging 10 x the cost.• Heinz can raise only half the price.• Heinz asks the druggist to let him have drug for half

or let him pay later• Druggist refused.• Heinz stole the drug.

1. Should Heinz have done that? 2. Was the theft right or wrong? 3. Was the theft justified?

Kohlberg’s Stages of Moral Reasoning Development:

Six stages (within 3 Levels): from self-oriented thinking…to an abstract principled orientation.

Level 1, external authority for Morality definition **Bad, Bad** …Pre-conventional Morality – deals with selfness.…

Stage 1. Obedience and Punishment orientation - decisions made to avoid punishment. Rules are fixed and absolute.

Stage 2. Self-interest orientation: self-gratification – personal rewards. An individual point of view; how actions serve individual needs. Reciprocity is possible, but only if it serves one’s own interests.

“You scratch my back and I’ll scratch yours.”

Level 2, Social group – Conventional level of Morality

Stage 3. Interpersonal relationships and conformity -

Reasoning process determined by expectations of family and community and approval of others, i.e. role expectation. “Good girl – good boy” orientation; fairness to others

Stage 4. Social-order-maintaining orientation -- one begins to consider a society as a whole…adherence to norms, laws, and behaving in such a way to maintain order. Respect for authority.

Level 3, inner conscience: Post-conventional Morality Orientation

Stage 5. Social contract with Individual Rights orientation – At this stage, people begin to account for the differing values, opinions, and beliefs of other people. Just (fair) rules determined by consensus and are understood they are necessary for maintaining a society. Liberty and fairness.…

Stage 6. Universal ethical principles orientation– Self chosen, internalized ethical principles

– concern for justice, human dignity, and equality - determines moral reasoning process, even if conflicts with laws and rules.

At What Stage(s) do Accountants Reason?

• Studies in 1990s, accountants reason primarily at stages high 3 and 4

• Implies that a larger percentage of accountants may be overly influenced by

• Peers, superiors, and clients (stage 3)• By rules (stage 4)

How Development Occurs

Discussion, debate, challenges, and questioning of current views.Education.•These are models of reasoning, not beliefs.

Each successive stage represents:

• higher level of reasoning aboutwhat is right and wrong,

and • is indicative of aperson’s ability to reason

more ethically.

Progression - to a next stage

•requires exposure to an environment

•which stimulates moral reasoning.

At what stage is the majority of the population?

James Rest & DIT2

•Accounting graduates resemble the general population more than the average university graduate. • Interventions involving discussions About controversial moral dilemmas

equate to about 4-5 years of natural growth.

Can Ethics be Learned?

• Based on the works of Kohlberg and Rest….– education is the key.

• What are the barriers to ethical behaviors?–Make a note on your paper….

Now, the Milgram Experiment(s)

“Obedience to Authority: An Experimental View”

(1974) Stanley Milgram

First conducted in 1961;19 different

iterations/variations.

Video => in a few minutes

The Experimental Construct• 3 players

E = Experimenter (wears a white/light blue jacket); he knows what is going on. An actor. In the original, this was Stanley Milgram’s role.

T = Teacher (clothing, off-the-street); this person is the subject of the experiment.

L = Learner (hidden behind a wall initially); an actor not really present during the actual experiment. Sounds are tape recorded.

• The purported (false) experiment was to examine if learning improves if punishment (shock) is inflicted.

Results• Before the actual experiment, Yale

students & faculty responded that only 1.2% would inflict maximum voltage..

• ?? % of subjects administered the maximum, 450-volt shock (1961 - 1974)..

• Now the video (2007 ABC News): watch the body language of the subject (Teacher)…What are the subjects saying?

• Conclusions?

Ethics is tougher than you think…

• If it is easy, we wouldn’t have courses!

Decision-Making Processes

• You all have processes in place.• …as individuals and as a group.

• Let’s discover what they are!

$20 – Who gets it? • The $20 sitting here is for one of you –

and only one.

• Your choice of who receives it… may not be contingent on a promise (i.e., NO strings attached).

• Please take the next few minutes together to determine who should get the money, and why….

$20 – Who got it?

• How did you decide?• Is this how you would decide other

business challenges or dilemmas?• Would you have decided differently if

the amount were $1,000?• With regard to your other business

decisions, what might work about the processes you used, and what might not work?

How would you have responded if I had required the “most ethical possible

decision-making process?”

• Now, why are bad decisions made?

Maybe it depends on

– The rules of the game? – http

://www.youtube.com/watch_popup?v=Ahg6qcgoay4&vq=medium#t=46

The moonwalking bear, otherwise known as “in-attentional blindness”• Cell phones can divert attention from drivers.• Airline pilot paying too much attention to

controls, and miss another airplane nearby. • Failure to see key information during a

decision-making process.• Also, “Change Blindness”

– Gradual change over time– Arthur Andersen failed to see all that was

happening at Enron.

Can Ethics be Learned?The actions involved in doing what is right.

1. The level of one’s reasoning matures through challenge and questioning of ones current reasoning. (Kohlberg & Rest)

2. Consider the influence of authority. (Milgram)

3. Peer pressure affects conformity. (Asch)

4. Roles in an organization influences behavior. (Zimbardo)

What really happened at Enron?

• Tone at the Top!

“Earnings can be pliable as putty when a charlatan heads the company reporting them.” -- Warren Buffet

• Influences from authority figures and peers.

What could employees and staff have done to prevent or mitigate?

The End• Thank you!

“Have the courage to say no. Have the courage to face the truth. Do the right thing because it is right. These are the magic keys to living your life with integrity”…….

W. Clement Stone (1902-2002)