Our academic experts are ready and waiting to assist with any writing project you may have. VAT Registration No: 842417633. A Forensic Audit is a detailed audit of a company's records to be used in a court of law in a legal proceeding. For our purposes, we only focus on the so-called cardinal virtues first proposed by Plato: courage, temperance, justice, and prudence. In these complex cases, Kant provided no guidance as to how one would go about making a moral decision. In the case of accounting, accountants must show courage to ensure that accounting treatments are not misleading. Ethical Theories Definition: The Ethics is the branch of philosophy that deals with the principles of morality and the well-defined standards of right and wrong that prescribe the human character and conduct in terms of obligations, rights, rules, benefit to society, fairness, etc. There have been three major criticisms of utilitarianism as a basis for ethical decision-making (Flower 2010; McPhail and Walters 2009). Pakaluk and Cheffers (2011) describe three different subclasses of prudent judgments: enduring, occasional, and particular. Independence in appearance, however, is more subjective. (McPhail and Walters 2009) This is similar to Kant’s position regarding a moral person having a good will. Accountants, lawyers, and finance professionals are all involved. This is mainly because these theories represent opinions from people who seek guidance as they attempt to make decisions. There are always threats and situations that can reduce the level of independence. The last problem can best be demonstrated by the example of the first person, in our two-person society, deriving a great deal of pleasure by torturing the second person. Do you have a 2:1 degree or higher? In this section of the paper, we limit our discussion to three ethical theories that have been frequently applied in accounting and business: consequentialism, deontology, and virtue ethics. Furthermore, it is possible to over emphasize one virtue to the detriment of another. The utilitarianism approach requires that you decide what course of action needs to be done and evaluate the outcomes of each action. This is the idea that, as an auditor, you must be totally objective and must be without ties to or relationships with the client since that could potentially impair your judgment and impair the overall course of the audit work. From an accounting education perspective, students should be made aware of it, but the other two schools of thought should be emphasized. In the first two cases, the problem is with regards to the allocation of resources. Consequently, Aristotle developed the idea of the mean where a moral person would keep the emphasis on each virtue in the middle between the potential extreme values. Virtue ethics is one of the oldest schools of ethical thought. Furthermore, there has been much written about the business and accounting application of ethical theories. A prudent or wise individual is an individual that has the ability to evaluate which things are truly important in life and those that are not. The third cardinal virtue suggested by Plato is justice. Virtue ethicists believe that a moral person tends to do the right thing. Furthermore, having business and accounting decision-makers attempt to place themselves into Rawls’ original position behind a veil of ignorance to become an impartial spectator could enable them to better appreciate the ramifications of different business and accounting practices. There are four major ethical theories: deontology (or duty), utilitarianism, rights, and virtue. However, in this case, consequentialism has been used to justify abhorrent things such as torture and slavery. Several accounting organizations have codes of ethics governing the behavior of their members. Approximately half of the people (or at least those surveyed) believe that business is unethi… In an attempt to advance the deontological position, Rawls (1999) created a set of ethical constructs that is useful in assuring compliance with Kant’s categorical imperative and, even though he did not seem to be aware of Smith’s impartial spectator, provides a way to operationalize the impartial spectator. Ethical Behavior in Accounting: Ethical Theory. Generally, the major ethical drivers of accounting are an appropriate practice and a good standard of professionalism. That is, the decision maker is behind a veil of ignorance. 48% disagreed. Here are a few ethical theories to whet your appetite: Virtue […] Kant felt that the underlying requirement for ethical decision-making was what he called a good will. For instance, both the American Institute of Certified Public Accountants and the Institute of Management Accountants have formulated such codes. Egoism creates complications because there are going to be times within your career when you are not the best person to help a client. These three core statements are intricately of individuals and entities. Practically speaking, you could consider using this imperative to develop the rules that would form the basis for a rule utilitarianism based approach to ethics. Both of these types deal with merit. For example, it is possible for someone to have an extreme value of courage. Free resources to assist you with your university studies! The term deontology is derived from the Greek deon, “duty,” and logos, “science.”. From our perspective, both businesspersons and accountants should be concerned about both forms of justice. Start now! Let’s take a closer look at some of these important rules. That is, there is no general rule to follow; only a calculation that shows the greatest “utility” for the act being considered. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs. Del Pizzo & Associates, USA. • Recognize issues in accounting that have ethical implications. From an ethical perspective, how do consequentialist-based theories help us determine the rightness or wrongness of a decision? An individual possesses this virtue if in his or her “relations with others [he or she] formulates and embraces the correct ideal of equality, and does so habitually, as a kind of second nature, and with a solid persistenceâ€¦” (Pakaluk and Cheffers 2011, p. 87) There are two basic types of justice: jurisprudence and distributive. Given the rule-driven approach that is popular in accounting practice today, it is not surprising that rule utilitarianism is popular among accountants. These three core statements are intricately. Based on the above description of consequentialism, deontology, and virtue ethics, the authors believe that a combination of deontology and virtue ethics makes the most sense on which to base ethical decision-making in accounting. Two well-known frameworks of ethical system theories are utilitarian and the deontological. Kant’s only suggestion is a reference to Smith’s impartial spectator (Smith 1790). â€¦ However each person is completely ignorant of the position that he would hold in societyâ€¦” (Flower 2010, p. 37). One of the key rules set out by professional accounting bodies in North America is the idea of independence. In this section of the paper, we limit our discussion to three ethical theories that have been frequently applied in accounting and business: consequentialism, deontology, and virtue ethics. Under the matching principle theory, expenses are always reported in the same period, such as a month, quarter or year, and the associated income is recorded. In this case, Flower (2010) describes three sets of problems: expensive tastes, differential needs, and anti-social preferences. From his perspective, an individual with a good will has a sense of moral duty and from this sense of duty individuals will make moral decisions. These three assumptions are simply unrealistic. Kohlberg’s model (based on a cognitive-developmental perspective) assumes three levels of moral development: at the pre-conventional level, moral reasoning is based on rewards and punishments; at the conventional level, moral reasoning is based on group norms; and at the post-conventional level, moral reasoning is based on ideas of universal fairness (Kohlberg, 1958; Thorne, 2000). Asked then to opine on the statement that businesses focus on their own agenda, rather than considering wider society, 75% agreed. Ethics and ethical behavior refer more to general principles such as honesty, integrity, and morals. 1st Jan 1970 Ethical Egoism: The ethical egoism is a teleological theory that posits, an action is good if it produces or is likely to produce results that maximize the person’s self-interest as defined by him, even at the expense of others. Most real-world decisions tend to involve multiple stakeholders and multiple criteria that must be considered at the same time. Consequently, it would preclude business activities such as false advertising, exploitation of employees, and from an accounting perspective, the creation of intentionally misleading transactions and financial statements. According to Bowie (1999, p. 87), “Loosely put, this formulation of the categorical imperative says that you should act as if you were a member of an ideal kingdom of ends in which you were both subject and sovereign at the same time.” This formulation effectively describes a Kantian-based moral community where all stakeholders have equal rights and duties and further, they must follow the same universal laws. Again, this provides us with very little guidance. In some cases, this could lead to the loss of a client or the loss of a job. The three financial statements are the income statement, the balance sheet, and the statement of cash flows. Accounting ethics is an important topic because, as accountants, we are the key personnel who access the financial informationThree Financial StatementsThe three financial statements are the income statement, the balance sheet, and the statement of cash flows. From an accounting perspective, following this formulation would put the accounting profession’s focus back onto the interest of the public instead of limited interest of the client firm and its shareholders. (McPhail and Walters 2009; Pakaluk and Cheffers 2011) One particular form of consequentialism that has found favor in accounting and business is utilitarianism. If the accounting profession had followed this formulation, the vast majority of the accounting scandals may have been avoided. Using this imperative, racism, sexism, slavery, and torture are morally wrong regardless of the outcome. Utilitarians believe that the purpose of morality is to make life better by increasing the amount of good things (such as pleasure and happiness) in the world and decreasing the amount of bad things The task of determining whether utilitarianism is the correct moral theory is complicated because there are different versions of the theory, and its supporters disagree about which version is correct. Independence in fact refers to any factual information such as whether you, as an auditor, own any shares or other investments in the client firm. Knowledge and expertise give them the privilege to exert a certain amount of control, as investors, banks, employees, governing authorities and others rely on their final opinion to feel reassured that financial statements sh… Ethical theory serves as the foundation for ethical solutions to the difficult situations people encounter in life. • Develop the abilities needed to deal with ethical conflicts or dilemmas. This type of reasoning could help explain some of the recent accounting scandals. Utilitarianism tends to support the tyranny of the majority that can lead to the victimization of the minority. Smith wanted decision-makers to imagine being able to objectively evaluate in an impartial manner all criteria associated with a problem. Business owners and managers can use an ethics theory they deem most appropriate for use in their operations. When compared to consequentialism and deontology, virtue ethics is another viable approach on which to base business and accounting ethical decision-making. Given that Rawls assumed that all human beings are self-interested, he felt that the only way that society could be just was to have decision-makers adopt his original position behind the veil of ignorance so that they could indeed become an objective and impartial spectator. Moral intensity describes the magnitude of the moral imperative in an ethical dilemma by identifying six components or attributes of an issue: “magnitude of consequences, social consensus, temporal immediacy, probability of effect, proximity and concentration of effect” (Sweeney and Costello, 2009, p. 77). The primary philosophers behind utilitarianism are Jeremy Bentham and John Stuart Mill. These theories are the utilitarianism and deontological ethics theories. Let’s take a look at some of these threats: Some other rules outlined by professional accounting bodies include the following: Thank you for reading CFI’s guide to accounting ethics. The last two decades saw some of the worst accounting scandals in history. Several often-cited works that are used to examine accounting ethics, and which accounting instructors could benefit from referring to in planning ethics course work, include Kohlberg (1958, 1979) and Rest (1979, 1983, 1986, 1994). Kant defined three formulations of his categorical imperative to aid us in making moral decisions. Consideration of Morals Normative Theory of Ethics in Business Accounting. However, if “Rational Choice Theory is to have value to explain individuals’ behavior in ethical contexts, the theory needs to be expanded to include the achievement of personal values and psychological payoffs in addition to material payoffs” (Roberts, 2010). For example, if we consider a two-person society, it is possible for one person to require a greater allocation of resources to reach the same utility of the second person. Reference this. Prudence, Plato’s fourth virtue, is also known as wisdom. Essentially, following this formulation of the imperative prevents individuals from using coercion or deception when dealing with other stakeholders. 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