As we noted in Chapter One, ethical scandals in the accounting profession abound. Besides those mentioned, there were others. In March 2009, David Friehling, Bernard Madoff’s auditor, was arrested by federal prosecutors on charges of fraud, allegedly for signing off on fraudulent financial statements:

Lev Dassin, acting U.S. attorney for the Southern District of New York, said … Mr. Friehling conducted sham audits that allowed Mr. Madoff to perpetuate the fraud. Mr. Dassin said that, by falsely certifying that he audited financial statements for Bernard L. Madoff Investment Securities LLC, Mr. Friehling “helped foster the illusion that Mr. Madoff legitimately invested his clients’ money.”¹

If we go back to the beginning of the millennia we see still more. In January 2000, the New York Times reported that the SEC found that partners and employees at PricewaterhouseCoopers routinely violated rules forbidding their ownership of stock in companies they were auditing. The investigation identified 8,064 violations at the firm, which dismissed five partners.²

SEC scrutiny of auditing practices came “after a series of high‐profile corporate accounting frauds that auditors missed at companies, including Cendant, Sunbeam, and Livent. Public shareholders lost hundreds of millions of dollars in these cases, and confidence in accountants was shaken.”³

And, of course, there is this well‐known Enron/Andersen scandal. In October of 2001 Enron took a $1.1 billion charge related to write‐downs of investments some of which was attributed to partnerships run by Andrew Fastow the chief financial officer. In December Enron filed for bankruptcy in the biggest bankruptcy case in history in a New York bankruptcy court. According to Nanette Byrnes, it was a “huge case”:

… A $50 billion bankruptcy, $32 billion lost in market cap, and employee retirement accounts drained of more than $1 billion. The lapses and conflicts on the part of Enron’s auditor Arthur Andersen are equally glaring. Andersen had been Enron’s outside auditor since the 1980s, but in the mid‐1990s, the firm was given another assignment: to conduct Enron’s internal audits as well.

For working both sides of the street, Andersen was rewarded richly. In 2000, the firm earned $25 million in audit fees from Enron, and another $27 million in consulting fees and other work.⁴

In 2005, KPMG was indicted for promoting abusive tax shelters. The Department of Justice and the Internal Revenue Service on August 29, 2005, reported as follows:

KPMG LLP (KPMG) has admitted to criminal wrongdoing and agreed to pay $456 million in fines, restitution, and penalties as part of an agreement to defer prosecution of the firm.⁵

Later, there were troubles with BDO Seidman:

In 2007, the CPA firm BDO Seidman LLP was found “grossly negligent by a Florida jury for failing to find fraud in an audit that resulted in costing a Portuguese Bank $170 million. The verdict opens up the opportunity for the bank to pursue punitive damages that could exceed $500 million.⁶

Seven people, including the former chief executive and chairman of accounting firm BDO Seidman LLP, were charged criminally in an allegedly fraudulent tax‐shelter scheme that generated billions of dollars in false tax losses for clients.⁷ In July 2009 the PCAOB (Public Company Accounting Oversight Board) said that BDO Seidman had trouble testing revenue‐recognition controls and that Grant Thornton LLP did not adequately identify GAAP errors.⁸

The PCAOB report highlighted several deficiencies tied to what it said were failures by BDO to perform audit procedures, or perform them sufficiently. According to the report, the shortcomings were usually based on a lack of documentation and persuasive evidence to back up audit opinions. For example, the board said, BDO did not test the operating effectiveness of technology systems that a client used to aggregate revenue totals for its financial statements. The systems were used by the client company for billing and transaction‐processing purposes.⁹

BDO was not alone.

On August 16, 2007, a year‐long Audit Committee investigation of Dell accounting issues found that executives wrongfully manipulated accruals and account balances, often to meet Wall Street quarterly financial expectations in prior years. The probe was headed by an outside law firm, Willkie Farr & Gallagher of New York, and involved an outside accounting firm, KPMG. More than 5 million documents were examined during the probe.¹⁰

And in January 2009, the New York Times reported this fraudulent activity:

In December 2008, Satyam, India’s fourth largest computer software services outsourcer, revealed that its former chairman, CEO, and founder, B. Ramalinga Raju, wrote a four‐page letter to the Bombay Stock Exchange, confessing that he orchestrated a massive accounting scam and kept it alive for at least 5 years. In the letter, Raju admitted that he created at least $1 billion in fraudulent cash entries on the company’s books that went undetected for years. … Many experts cast partial blame for the scandal on Satyam’s auditor Price Waterhouse India, because the fraud went undetected for so many years.¹¹

But these were not the only cases: under “accounting scandals” in Wikipedia, there is a list, as of this writing, of 49 ethical irregularities since 2002 (a list by no means complete), involving the auditing companies of Arthur Andersen, Deloitte‐Touche, Ernst & Young, Friehling and Horowitz, Grant Thornton, KPMG, and Pricewaterhouse Coopers.¹²

To what extent each of the accounting firms is culpable, we will leave to the courts and the PCAOB to determine. For our purposes, these cases indicate the necessity to scrutinize ethical behavior in accounting. Indeed, the Sarbanes–Oxley Act mandates the PCAOB to establish ethical standards.

As we have shown, there are numerous stories about questionable or “unethical” behavior by accountants. This is not to say that all accountants or accounting firms act unethically. By and large, we believe, most act honorably most of the time, or the entire structure would collapse. However, stories such as the ones above are an indication that there is a need for greater ethical sensitivity and ethical behavior in the accounting profession. During the past quarter century, more attention has been directed to ethics and morals and on the need to apply ethical principles in business. But what is ethics? How do ethics apply to business in general, and to accounting in particular?

What is Ethics?

The remainder of this chapter will focus on the nature and dimensions of ethics and morality and on their application to accounting practices and the accounting profession.

The words “ethics” and “morals” have a number of meanings. Webster’s Collegiate Dictionary gives four basic meanings of the word “ethics”:

• the discipline dealing with what is good and bad and with moral duty and obligation;
• a set of moral principles or values;
• a theory or system of moral values;
• the principles of conduct governing an individual or group.

Ethics, in all its forms, is concerned with right or wrong, good or bad. It is either a set of principles held by an individual or group or the discipline that studies those ethical principles. The task of that discipline is the analysis and evaluation of human actions and practices. For example, according to some people or groups, assisted suicide is ethically acceptable. The discipline of ethics examines what “assisted suicide” means (analysis) and what reasons can be given in support of or against the practice (evaluation).

Ethics: The Intellectual Enterprise

Every person has an ethical set of beliefs or ethical principles. For example, most people have some belief about whether practices such as euthanasia, abortion, capital punishment, and adultery are good or bad, right or wrong, acceptable or unacceptable. Most people think cheating and stealing are wrong, promises ought to be kept, and so forth. Each of these opinions constitutes a moral belief. If you were to write down what you believe about each of those actions or practices, that would constitute part of your ethic. One purpose of this chapter is to help you examine your own ethical beliefs.

To begin, we will look at the structure of an ethical belief. Every ethical belief contains two elements. It has what logicians call a subject and a predicate. A subject is what the belief is about. Usual subjects in ethics are actions or practices such as capital punishment, adultery, lying, and so forth. A predicate is what is said about the subject. “Wrong,” of course, is an ethical predicate. So are such terms as “unfair,” “unjust,” “bad,” “good,” “should be done,” “the right thing to do,” and so on. Hence, for the person who believes that assisted suicide is wrong, “assisted suicide” is the subject of the belief and “wrong” is the ethical predicate. In the judgment (judgment here simply means the expression of our beliefs) “cooking the books is wrong,” “cooking the books” is an action or practice. The subject of an ethical belief is usually an action or practice, but sometimes is a system or institution.

Actions

Human actions are the primary subject matter of our ethical judgments. By human action, we mean behavior or activity that is deliberate – that is, an action about which a person deliberates and freely chooses to perform. People deliberate about actions over which they have control and consequently are held responsible for those actions. We don’t hold animals responsible for their actions, because there is no evidence that they do things “deliberately” in the same way that humans can and do.

Not all deliberate human actions, however, have ethical import. The action must have a certain gravitas. We can deliberately decide to wear a red rather than a blue tie, or to eat mashed potatoes with our fingers instead of a fork. But these are not actions with ethical impact. There are guidelines regarding what kind of tie goes with what and whether to eat potatoes with our fingers, but these are rules of fashion or etiquette, not ethical rules. The deliberate actions we designate as “ethical” or “unethical” are usually actions that benefit or harm other people or ourselves in some serious way.

Social Practices, Institutions, and Systems

Human actions are not the only subject matter for ethics. Besides actions, ethics examines and evaluates social practices. Whereas actions are individual activities, such as John’s stealing in a specific situation, a social practice is a class of individual actions. When we say, “stealing is wrong,” we are evaluating a social practice and not a specific action. Thus, John’s individual act of stealing is an instance of the general practice of stealing. Insider trading is a general practice. Tom’s action of using insider information to buy a specific stock is an individual action, which is an instance of the general practice of using inside information.

Ethics also evaluates organizations, institutions, and even social, political, and economic systems. For example, we can evaluate the practices of an organization such as the American Institute of Certified Public Accountants (AICPA), a company such as a Big Four accounting firm like Ernst & Young, the entire accounting profession, or even a system such as our free enterprise economic system, which stresses free market exchange and profit making. Individuals who say, “capitalism is a corrupt system,” are evaluating a system. The recent call for reform in the accounting profession implies that its practices are inadequate and need to be improved. It is, implicitly at least, an ethical judgment.

Why Study Ethics?

Why should an accountant get involved in this study of ethics? Surely, every accountant already has a set of moral beliefs that he or she follows. Even so, there are several reasons for studying ethics:

• First, some moral beliefs an individual holds may not suffice because they are simple beliefs about complex issues. The study of ethics can help the individual sort out these complex issues by seeing what principles operate in those cases.
• Second, in some situations, because of conflicting ethical principles, it may be difficult to determine what to do. In these cases, ethical reasoning can provide insights into how to adjudicate between conflicting principles and can show why certain courses of action are more desirable than others. The study of ethics can help develop ethical reasoning skills.
• Third, individuals may hold some inadequate beliefs or cling to inadequate values. Subjecting those beliefs or values to critical ethical analysis may show their inadequacy. Let’s look at a few examples:
  • At one time, you probably thought certain things were wrong that you now think are okay, and you thought certain things were okay that now seem wrong. In short, you changed your mind about some of your ethical beliefs. Some time ago, for example, many managers believed that it was acceptable to fire someone for little or no justifiable reason. After ethical reflection and examination – which encourages us to become more knowledgeable and conscientious in moral matters – that practice now seems questionable. Although managers have an obligation to stockholders not to retain unneeded employees, don’t the managers have some obligation to those who are fired?
  • In the past, the principle caveat emptor – “Let the buyer beware” – was an acceptable practice. Now, it is generally believed, in many cases, that the manufacturer has the obligation to inform the buyer of potentially harmful defects. Caveat emptor has become caveat vendor – “Let the seller beware.”
  • Years ago, accountants thought it unacceptable to advertise. Today, it is a justifiable practice. It also used to be an accepted belief that an accounting firm fulfills the letter of the law simply by following generally accepted accounting principles (GAAP). Upon ethical reflection, however, does the firm have an ethical obligation to encourage more realistic financial pictures, even if it means going beyond GAAP?
• A fourth and very important reason to study ethics is to understand whether and why our opinions are worth holding. Socrates philosophized that the unexamined life is not worth living. Have you examined your life? As an accountant, what are your basic goals? Are they compatible with other values that you have? If you need to choose between keeping a job and violating your professional responsibilities, what would you do? When your responsibility to family clashes with your responsibility to your job, how do you resolve the conflict?
• A final reason for studying ethics is to identify the basic ethical principles that can be applied to action. These principles should enable you to determine what should be done and to understand why. When you are faced with a decision about what to do in a difficult situation, it is helpful to have a checklist of basic questions or considerations you can apply to help determine what the outcome should be. In engineering, we must learn the principles of construction so that we can apply them to certain activities. In accounting, we must learn the principles of accounting so that we can apply them to specific situations. So, too, in ethics, we must learn the principles of ethics, which govern human behavior, so that we can apply them to the difficult ethical situations we face. Thereby, we can ensure that we have examined the issue adequately, using all the ethical principles available.

The study of ethics can make us aware of the principles to use in determining what we should do in a situation involving ethical matters. Because ethical issues grow ever more complex in an ever more complex world, it behooves us to have a grasp of the underlying structure of ethical reasoning to help us navigate the ethical sea.

A caution is in order at this point: just as some people excel at golf without knowing the principles of a good swing, some people can act ethically without knowing the principles of ethics, or without knowing why an action is ethically “right.” But just as most of us can improve our golf game by learning the principles of a sound swing, it follows that we can improve the ethical decision‐making dimension of our behavior by studying why certain actions and practices are correct. For example, well‐meaning people are often led astray by their intuitions without understanding the concepts that justify those intuitions, or without appreciating the complexity of the situation. If you feel your only responsibility as a businessperson is to make a profit, that simple, yet inadequate, view will blind you to additional responsibilities you have to employees, employers, clients, and others in the community in which you do business. If you feel your responsibility as a management accountant is simply to do what is in the interest of the company, even though it gives a false picture of its financial affairs, you are ignoring other responsibilities.

Being Ethical: How to Determine What to Do

Accountants have a number of ethical responsibilities – to themselves, their families, their profession, and the clients and company for which they work. But what is the accountant’s basic responsibility as an accountant? To begin with, let’s suggest a simple answer: accountants should do their job! That’s the ethical thing to do, and we will show why a little later. For now, suffice it to say that accountants implicitly promise to do their job when they enter the profession, and promises should be kept. Doing your job encompasses various specific responsibilities. These responsibilities are spelled out in the job description, the employee handbook, the managerial guidebook, the company’s code of conduct, and/or finally, the profession’s code of conduct or ethics. Thus, a professional code of ethics and/or a job description sets the standards. For example, the AICPA code of ethics clearly mandates certain types of behavior in its six principles, as follows:

1. Responsibilities: In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities.
2. The Public Interest: Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism.
3. Integrity: To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.
4. Objectivity and Independence: A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.
5. Due Care: A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability.
6. Scope and Nature of Services: A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided.

Later in the book, we will examine the broad‐reaching principles of this code more thoroughly. At this point, however, let’s briefly address the first and second principles.

According to the first principle, members should “exercise sensitive professional and moral judgments in all their activities.” What is involved in sensitive judgment? What factors lead to making ethical judgments? If we can determine how moral judgments are constructed, we can discover ways to justify our moral beliefs – ways to ascertain the right answer (or most adequate answer possible) about what to do in particularly difficult situations. Ethics gives us a powerful tool to adjudicate ethical conflicts and resolve ethical issues.

The belief that “people should do their jobs” is probably in your set of moral beliefs. But why is that the right thing to do? Why should people do their jobs? Should they do them under any and every circumstance, even when it is not beneficial to them? The second principle stipulates that member should “accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism.” Does that mean that accountants need to place their family’s interests below those of the public? If the accountant has obligations both to a client and to a family member, does the accountant necessarily have to place the public’s interest first? Further, what should the accountant do when the interests of the company – say, the need for more business – conflict with the needs of the client or the public?

Thus, even if we agree that people should do their jobs, there are occasions when doing so is problematic. There can be conflicts within the job; there can also be conflicts between the job, the profession, and the individual’s personal life. What do we do in those cases? What standards can we use to adjudicate such conflicts? How can we tell what standards are acceptable, what actions are acceptable, what practices are acceptable? Moreover, how does the study of ethics help to answer these questions?

Recall that ethics involves the analysis and evaluation of moral beliefs or judgments. Let us expand on that definition. We noted that analysis of a moral belief or judgment might involve determining what one of the words in the belief or judgment means. For example, when the third AICPA principle above charges members to “perform all professional responsibilities with the highest sense of integrity,” what does “integrity” mean exactly? The code suggests asking, “Am I doing what a person of integrity would do?” But how are we to know what integrity itself demands? Hence, analysis of a moral belief involves determining precisely what that belief is asserting – whether the action under scrutiny is an action that a person of integrity would perform.

After analysis, we can move to evaluation, a determination of whether the belief is correct. Many people think that moral beliefs are subjective. They think that merely holding a moral belief is sufficient to make it correct. They might say, “Well that’s your opinion, so I guess it’s true for you.” This attitude, however, has no room for evaluating beliefs. It simply accepts anyone’s belief as correct. But if simply holding a belief, however pernicious, makes it correct, then Hitler’s belief that the Jews should be annihilated, the slave owner’s belief that slavery is justified, and the infant sacrificer’s belief that infanticide is acceptable would be correct. That is intolerable.

But how are we to evaluate beliefs? How can we tell if a moral belief is correct, what a person of integrity would do, or whether our judgment is sensitive enough? Moral judgments are not like factual judgments, which express beliefs about the way things are. Consequently, moral beliefs cannot be verified or justified the way factual beliefs can be. “The earth is a sphere” is a factual belief. We can justify that belief through observation and scientific theorizing. “It’s raining” can be verified simply by looking outdoors. “Light rays bend when they travel around the sun” can be verified through informed speculation using a hypothetical deductive method. But we cannot justify or verify moral beliefs that way. Moral beliefs involve values and values can’t be seen or touched; they also involve emotions, desires, and subjective preferences. That’s why many people conclude that each individual’s belief is “true” for that individual. Everyone must judge, but sometimes those judgments are correct and sometimes incorrect. How are we to evaluate them? In many cases, we have a perfectly straightforward procedure for evaluating moral beliefs: Ask whether there are any good reasons why a certain action is morally acceptable or any good reasons why it is not.

Consider the following example. Imagine you are a teenager who has a very important date. You want to impress your date by showing up in a classy car. Your father has a Jaguar. You ask your father if you can borrow the Jaguar on Friday. He says, “Sure, no problem.” Friday arrives, and when you request the car keys, your father says, “No, you can’t have the car.” How would you respond? Possibly with disbelief. You might say, “But you promised,” or you might ask, “Why not?” If your father thinks (believes) he is not obligated to give you the car, either the belief itself is not justified (correct), or he needs to justify it.

Suppose he answers your “Why not?” with “I don’t feel like it.” You wouldn’t accept that as a good reason. That’s no reason. You would probably remind him that he had promised you the car. Promises, after all, are made precisely because people might not feel like doing what they’ve said. If people always felt like doing what they said they’d do, we wouldn’t need promises. Your father’s justification, therefore – that he won’t give you the car because he doesn’t feel like it – carries no weight. He, like everyone else, is expected to overcome his feelings and honor his commitments. Imagine if we all did whatever we felt like. Human institutions would collapse – a spouse could wake up one morning and declare, “I don’t feel like being married today.” At any rate, your father, if he believes he has no obligation to give you the car simply because he doesn’t feel like it has gotten it wrong. His belief is incorrect.

But there might be a way he is correct. Suppose you ask, “Why not?” and he says, “Because the brakes failed on my way home, and there was no time to get them fixed.” This is a perfectly good reason for not giving you the car – for his not keeping his promise. Furthermore, his beliefs that he is not obliged under those circumstances to keep his promise, that he is obliged not to keep it, and that you are obliged to let him out of it are justified.

This example illustrates how moral beliefs are evaluated as correct or incorrect. The beliefs can be justified if there are good reasons for accepting them. Good reasons justify moral beliefs in the way that observations justify factual beliefs. Furthermore, these good reasons form the basis of ethical principles and are at the core of ethical theory.

What characterizes a good reason is based on precepts of common morality that we learned growing up: Do good. Don’t harm. Don’t lie. Don’t cheat. Don’t steal. Be fair. Respect others. Treat others as you would wish be treated yourself. Follow your conscience. Keep your promises or your word. Thus, if someone falsifies an expense account, we agree that what the person did was wrong because it constitutes lying or stealing. Likewise, we agree that what the father in the example above did, in not loaning the car to his child because the father didn’t feel like it, was wrong because he didn’t keep his promise.

There are two kinds of reasons to justify our moral beliefs: reasons that validate doing something and those that validate not doing something. It is much harder to take a positive course of action than to prohibit a course of action, because taking a positive action opens up an indefinite number of options. It is much clearer to prohibit an action, for if we know that an action will harm another, we need only to avoid it. Often, therefore, we are clear about what we should not do (negative injunctions) but not clear about what we should do (affirmative duties).

What are some of the good reasons for doing something? A very good reason for doing anything is that the action is good for you, that it is in your interest or benefits you. Another good reason is that the action is good for or benefits society. Other good reasons are that the action is just or fair, or because it is something you promised to do – as long as what you promised to do will not bring harm to someone. There are also reasons for not doing something, and they are the more common rules of morality. We should not do something because doing so would harm people or use people – we should not cheat, lie, or steal. We should not do something that harms others or ourselves – we should not be unjust or unfair; we should not break promises.

Let’s see how those reasons work when we apply them to the belief we discussed earlier: “People should do their jobs.” Why should people do their jobs? In the first place, doing the job usually benefits the person, by giving him or her a salary and meaningful work. Thus, doing the job is good for that individual. In the second place, because the division of labor provides the most efficient way for society to operate, a job is a necessary cog in the wheel of progress, and doing it will benefit society. Finally, in taking a job, the individual makes at least an implicit promise to do it; promises should be kept.

Questions to Ask to Justify an Action: The Basis of Ethical Theory

Thus we see that the way to justify an action is to examine the reasons for and against it. One way to examine those reasons is to ask several basic questions. We will now consider these questions.

Is the Action Good for Me?

Obviously, if a certain action benefits an individual or is good for that person, that is a good reason for doing it. As we saw, a good reason for working is that it provides us with the wherewithal to live and, ideally, to engage in a fulfilling activity. There is a great deal of emphasis today on the importance of meaningful work. But what is meaningful work if it is not work that is beneficial to the person? We have a need to be creative and productive, and meaningful work will help us fulfill that need. Hence, it is good for us.

On the other hand, if an action harms the individual, that is a good reason for not doing it. People frequently equate ethical behavior with actions that are detrimental to them and hesitate to defend actions that are beneficial. That is a mistake. A healthy self‐interest is a good thing. If you don’t care about your own benefit, who will?

However, several caveats are necessary here. What is beneficial to someone is not necessarily what that person wants or desires. Our wants and desires are a mixed bag. For example, I want the piece of cake, but it is not good for me because I need to lose weight. We must clarify what we mean by good. For our purposes, let’s say that something that fulfills basic human needs is good, although there may also be other things that are good.

As human beings, we have several levels of need corresponding to several dimensions of human nature. There are material needs that fulfill the bodily dimension – needs for food, shelter, and clothing. Beyond that, because human beings are social, there are needs relating to other people, as in friendship. These are the needs to fulfill the social dimension. Finally, because human beings are potential producers, there is a need for purposeful projects, goals, and actions – in short, meaningful activity. These are the needs that fulfill the active dimension.

To fulfill these material, social, and creative needs is an important reason for performing an action, and in some cases, we can justify our belief that an action is good simply by showing it is good for us in those ways. But there are more questions.

Is the Action Good or Harmful for Society?

The second question to ask of any action is whether or not it is going to be good for society. When we think ethically, we don’t usually stop at considering the benefit of the action for ourselves, but we go further and consider its benefits for everyone affected. After all, not every action performed in the world affects us directly. You may recall that in 1982, capsules in some Tylenol bottles were poisoned, several deaths resulted, and Johnson & Johnson pulled the defective Tylenol from the shelves. If neither I nor anyone else I knew used Tylenol, then whether or not Johnson & Johnson recalled the product really didn’t affect me. Therefore, that action was neither good nor bad for me. From a detached, objective point of view, however, I can see that it was a good thing to do, because removing the defective product from the shelves prevented harm to those who might have used it. Simply, if a good reason for doing an action is that it benefits me, then that’s true for everyone, so the more people benefited the better. Of course, when the action benefits society but harms me, there is a problem, but we will return to that shortly.

Is the Action Fair or Just?

A third question to ask is whether or not the action is fair. When you were a child, your mother probably served you a piece of cake numerous times. But suppose you had a brother and sister and your mother gave all of you pieces of cake, but the one she gave you was smaller than the pieces she gave your siblings. Wouldn’t you think (even though you might be afraid to admit it) that she was being unfair?

The principle of justice, which all of us recognize, is that the same (equals) should be treated the same (equally). There is often disagreement about whom and what are equal, but unless there is some relevant difference, all persons should be treated equally. Therefore, if there is no relevant difference between you and your siblings, you should all receive roughly the same size piece of cake. If it is your sister’s birthday, however, you are not equal in all relevant respects; her birthday creates a good reason for her to get a larger piece.

This notion of fairness gives rise to another reason for or against a course of action: entitlement. To be entitled to something means that the person has a right to it and that the person’s rights should be respected. We turn now to the next question.

Does the Action Violate Anyone’s Rights?

To the extent that all humans are equal, they are entitled to be treated in a certain way. The principle of equal justice gives us a right to be treated equally. A word about rights (entitlements): There are two kinds of rights – negative and positive. Negative rights are rights to things that no one has to provide for us, that we already have, and that are to be respected and not taken away, such as a right to life, a right to liberty, and, some would argue, a right to property.

Take the right to liberty: If we are equal to others, by what right can they restrict our liberty? Why is their liberty more important than ours? The right to liberty is essential in a free market system because free exchange is key to efficient market transactions. Deceptive advertising and coercive marketing practices are condemned because removing information that is necessary for informed consent violates the consumer’s liberty. Further, government regulations are often objectionable because they interfere with the business entrepreneur’s liberty to do business.

Whereas a negative right is intrinsic, a positive right is an entitlement in which something must be provided – a right to recipience (to receive something). A child has a positive right to be educated. But that means someone has the obligation to provide that education. We would normally think it is the parent or some other provider supplied by the parent, such as a school. We see, then, that for every positive right, there is a corresponding obligation. If, however, there is not someone with the capability and responsibility to provide something, it is futile to claim a right of recipience. In a society without health care services, for example, it makes no sense to claim a right to adequate health care. Who is obligated to provide it? (Note: Even if there is adequate health care, it is still necessary to specify whose responsibility it is to provide it.) Similarly, in a society with insufficient jobs, it makes no sense to claim a right to employment. Who is obligated to provide it?

At any rate, if an action treats people fairly and does not violate their rights, there is no reason not to perform it. Conversely, if an action treats someone unfairly and/or violates the person’s rights, there is reason not to do it.

Have I Made a Commitment, Implied or Explicit?

Another question to ask in justifying an action deals with relationships: Do I have a commitment? The answer indicates whether or not any implicit promises to act in a certain way were made. If so, those promises ought to be kept. Thus, if the answer to the question “Did I promise to do this?” is “Yes,” there is a good reason to perform the action.

People are promise‐makers. It is one aspect that distinguishes us from the rest of the animal kingdom, and our social structure could not function otherwise. Any lasting relationship rests on promises and the expectation of guaranteed behavior in spite of future contingencies. Customers expect to reap the benefits an insurance ad promises; they do not expect to be cheated because they didn’t read the small print. Human beings need to make and depend on long‐term commitments. As a professor, I commit myself to teaching a certain number of classes at a certain time for a certain duration. My commitment extends into the future and binds me to a course of action.

Thus, if you make a commitment, you have a good reason for doing something. But there is a caveat: Should you honor your commitment if doing so causes harm? Suppose you borrow a gun from your neighbor and promise to return it when he asks. Should you return it, as promised, if he asks for it in order to shoot someone? Clearly, in this case, the harm that would result from honoring your commitment outweighs your responsibility to keep that promise.

Using the Reasons

Let’s examine how to use these reasons to justify an action. If I am planning to produce some commodity that brings a profit to the company, earns a commission for me, benefits society, does not treat anyone unfairly, or does not violate a promise or commitment, there are nothing but good reasons to do it. Suppose, however, that I am contemplating falsely declaring profits in a financial statement developed for a merger. The merger does not benefit my company, its executives, or the general society; my action is deceptive and hence unfair, and it violates the relationship of trust my corporation has with the community. In this scenario, there are nothing but good reasons against performing the action. (This assumes that you believe your fraud will not be detected and that you will benefit from it. If you know you’ll get caught, that gives you still another good reason not to do it.)

Thus, we have a decision‐making procedure. Ask yourself the questions of common morality. If there are good reasons to perform the action – for example, it benefits you, it is beneficial to society, it is just, and it fulfills a commitment – then do it. If the opposite is true – the action does not benefit you, it is not beneficial to society or me, it is unjust, and it breaks a commitment – then don’t do it. Let’s look at examples of two different actions: first, getting an education and second, abusing cocaine.

Presumably, getting an education is beneficial to you because it fulfills you in a number of ways. Moreover, it is presumed in this society that the more people who are educated, the better the society will be. Thus, if you get an education, not only will you benefit, but society will also benefit. If, in attaining the education, you need not violate any commitments and no one is unfairly deprived because of your education – that is, you are not using up someone else’s spot, or you are not attending college while your twin brother is employed in a menial job to help finance your education – the action does not violate fairness and commitments. It is a prima facie example of an action that should be done. In fact, you would be hard pressed to justify not getting an education under those circumstances. What valid reasons could you give?

Right now, you are reading this chapter, an action that can be described as getting an education. Ask yourself why you are doing it. Most likely, you will answer that it benefits you by enabling you to learn, to pass a course, or to help you in some other way. The action of learning this material can also make you a more productive and, ideally, more ethical employee; hence, your company, family, and society will all benefit. Let’s assume you are taking this action at no one’s expense – that is, studying this text is not interfering with your personal responsibilities and is not putting anyone else at a disadvantage. If all the above are true, then you have very good reasons to pursue this action. Taking this course in ethics is a justified action.

Suppose, however, that you just hate taking this course even though you recognize the value of getting an education. In this case, you are torn between doing something you don’t like that may be good for you, and giving in to your likes and dislikes, which may be bad for you. But can conceding to your likes and dislikes ever be good for you? As we pointed out earlier, we should not confuse what benefits us with what we desire, want, or like. Nevertheless, sometimes getting what we want can be beneficial (a higher‐paying job, for example) and doing what we hate may be harmful (taking the subway in a crime‐ridden area). At times, we may also need to defer pleasure (eating that ice cream sundae) or suffer pain (getting a flu shot) for some long‐range benefit. There are also times when we need to pursue pleasure in life.

Now let’s consider our other example – abusing cocaine. Is abusing cocaine good for you? Unquestionably not. Is it good for society? Absolutely not. It lowers productivity, increases medical costs, raises crime rates, and undermines society. Is it fair or just? Certainly not. Although the action itself of taking cocaine may not involve unfairness or injustice, it can lead to unfair or unjust actions, such as not fulfilling your commitments or ignoring your responsibilities. In this example, then, we have a proposed action that has no good reasons to support it. It is a prima facie case of something we should not do.

Ethical Dilemmas

Responses to the questions above give reasons that justify or do not justify an action. You don’t have to take an ethics course to ask those questions. The answers provide the principles of “ethical theory.” Ethical theories establish the foundation for all ethical rules or judgments.

It is important to note that no ethical theory would be necessary if the actions to take in all cases were clear‐cut. The examples above show that there are many situations in which the action to take is perfectly clear. Suppose, however, the action is not clear. Assume that by taking this ethics course, you could not keep a promise to your children to go on vacation this spring. In that case, taking the course might benefit you but be unfair to your children. Thus, circumstances can alter the appraisal of an action. In situations like this, when there are reasons for doing something and reasons for not doing it, we are faced with an ethical dilemma. An ethical dilemma is a problem that arises when a reason to act in a certain way is offset by a reason not to act that way. To resolve these dilemmas, ethicists rely on what they consider the primary ethical principle underlying the action. Thus, when faced with a conflict, ethicists who give precedence to rights or fairness over harm fall into one camp, and those who give precedence to benefits over rights or fairness fall into an opposing camp. For example, drug testing may prevent harm – a good reason for doing it – but it may violate a right to privacy – a good reason for not doing it. Blowing the whistle on a firm’s fraudulent accounting procedures may prevent harm as well as fulfill the accountant’s responsibility to the general public, but it might violate the accountant’s sense of loyalty to the company. For those who give precedence to harm considerations, there is a reason to blow the whistle. For those who give precedence to rights considerations, there is a reason not to do so.

Thus, ethical dilemmas occur when there is a conflict of reasons, and ethical theories arise to resolve dilemmas. Each rival ethical theory maintains that when there is a conflict of reasons, there is an overriding reason that takes precedence over all other reasons. That reason is articulated in the principle that expresses the theory. Those who appeal to fairness and rights over consequences are called deontologists. Those who appeal to consequences over fairness and rights are called consequentialists. Let us look at a classic dilemma to see how ethical theories are involved in its solution.

Some Classic Moral Dilemmas

The story of Jean Valjean in Victor Hugo’s Les Misérables is a classic moral dilemma. Valjean, an ex‐prisoner living under an assumed name, has been in violation of parole for years and is being hunted relentlessly by a police officer named Javert. Javert, passionately committed to upholding the law, is obsessed with tracking Valjean down and has reason to suspect that Monsieur Madeleine – the mayor of a small French town and owner/manager of the town factory – is the prisoner he seeks. To entrap Valjean (Madeleine), Javert lets it be known that an innocent vagrant is about to be identified as Valjean. Valjean realizes that if he does not reveal his true identity, an innocent man will go to prison in his stead. What should Valjean do? It certainly won’t benefit him to go to prison; nor will it benefit the town that depends on his managerial and governing skills. On the other hand, it is not fair that an innocent vagrant should suffer in place of Valjean.

This is an example of a classic dilemma, the stuff that makes great drama. It presents a situation in which whatever action is taken, something is wrong and something is right – a “damned if you do and damned if you don’t” scenario. In Valjean’s case, doing what benefits society is unfair, and doing what is fair harms society.

Another example of a dilemma is President Harry Truman’s decision whether or not to drop the atomic bomb on Hiroshima and Nagasaki. Defenders of the action believe that losing 80,000 lives by dropping the bombs is justified because it saved approximately 3 million lives that would have been lost if Japan had been invaded. Those who condemn the action believe that no matter what the consequences, the action was immoral and unjust because it involved taking innocent lives.

There are dilemmas in accounting, too, although not as dramatic. Suppose as company controller, you need a large influx of cash to develop and market a new product that will keep the company afloat. You may be able get a bank loan, but not if you report the current inventory on the now‐outmoded product at its true value. If you fudge the numbers and misrepresent the company’s financial health, you can get the loan and keep the company going. Here, again, is a situation in which being honest and preserving your integrity (not fudging the numbers) outweighs the positive consequences of benefiting a large number of people (getting the bank loan).

As noted earlier, ethical dilemmas give rise to ethical theory, which is the focus of Chapter 3.

Discussion Questions

1. What is the difference between actions, practices, institutions, and systems?
2. Why study ethics?
3. What is involved in ethical analysis?
4. What are the four reasons to use to evaluate the ethics of an action?
5. What is an ethical dilemma?
6. Give an example of an ethical dilemma you might encounter in accounting.

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