ACCT600

Ethics in Business and Accounting

Week 2 Part 2

Outline

Overview:

q Intersection of accounting, law, and ethics.

q The decision making process and justice.

q Justice (Procedural and distributive).

q Utilitarianism, Rawls, and Libertarianism.

q Implication of the justice concept for accountants.

1. Accounting, Law, and Ethics

AREA 1 = Accounting activities not covered by law or ethics.

(e.g.: Asset accounts are coded as “1000” in the chart of accounts).

AREA 2 = Laws having nothing to do with accounting or ethics.

(e.g.: Driving on right side of road).

AREA 3 = Ethical prohibitions having nothing to do with accounting and are not illegal.

(e.g.: Lying to spouse).

AREA 4 = Rules and regulations that practioners and firms must follow.

(e.g.: Cash Flow Statements are required for publicly-traded firm financial reporting per FASB Codification Standards as amended in 2012).

AREA 5 = Ethical decision making in accounting. ß FOCUS FOR TONIGHT

(e.g.: Concepts of justice as it impacts practical ethical decision making).

AREA 6 = Ethical prohibitions as prescribed by law, having no accounting component.

(e.g.: It is illegal and unethical to kill others).

AREA 7 = Intersection of accounting, law, and ethics.

Problematic when the law says one thing, accounting says another, and ethics says something else.

(e.g.: Expensing stock options or reporting as note disclosure).

2. Accounting and Ethics: Justice

3. Justice

§ “People are not always beneficent and there are scarce resources [trade-offs]” – David Hume

§ ‘Equals should be treated equally, and unequals unequally’- Aristotle

§ Justice factors into ethics in accounting because it drives and provides rationale for balancing self-interest vs. the interest of others.

§ Components of Justice:

o Fairness

o Equality

o Desert

o Rights

4. Types of Justice

§ Procedural Justice – Deals with administration (fair and transparent).

§ Distributive Justice – Deals with rival principles of distribution (Trade-offs).

o Each according to equal share.

o Each according to individual need.

o Each according to personal effort.

o Each according to social contribution.

o Each according to merit.

5. Utilitarianism, Rawls, and Libertarianism.

§ Utilitarianism = Maximize the greater good (Imposed regulation).

§ Libertarianism = Liberty, property, individual rights (Self regulation).

§ Rawl’s Theory = Hybrid of utilitarianism and libertarianism.

§ Rawl’s Theory = Hybrid approach.

o Hypothetical Contract

§ Original position.

§ Veil of Ignorance

o Maximin Approach

Problem #1: Accounting, Law, and Ethics (SCROLL DOWN FOR ANSWERS)

Instructions: Based on the model appearing on pages 1 -2, identify which of the seven areas each scenario would occupy.

1. Cynthia Cooper of WorldCom, faced a situation where she was privy to improper journal entries and financial reporting which fraudulently inflated the earnings of the firm. She had to decide whether to report the malfeasance or not.

2. The preferred abbreviation of the term “debit” is “DR.”

3. The speed limit in a school zone is 25 mph.

4. The SEC stipulated that periodic financial reporting, in terms of time intervals less than one year are required. Therefore, unaudited 10Q’s are required by all publicly-traded firms.

5. Refusing to meet with your classmate for a study session, after you promised to meet them.

6. In governmental accounting, financial statements must be prepared under two methods of accounting, simultaneously (“Dual track approach” per GASB 34).

Problem #1: Accounting, Law, and Ethics (SCROLL DOWN FOR ANSWERS)

Instructions: Based on the model appearing on pages 1 -2, identify which of the seven areas each scenario would occupy.

1. Cynthia Cooper of WorldCom, faced a situation where she was privy to improper journal entries and financial reporting which fraudulently inflated the earnings of the firm. She had to decide whether to report the malfeasance or not.

IF THE LAW REQUIRES HER TO SAY SOMETHING: AREA 7

IF THE LAW DID NOT REQUIRE HER TO SAY SOMETHING: AREA 5

2. The preferred abbreviation of the term “debit” is “DR.”

AREA 1

3. The speed limit in a school zone is 25 mph.

A SPEED LIMIT MAKES IT SAFER FOR THE COMMUNITY

AREA = 6

4. The SEC stipulated that periodic financial reporting, in terms of time intervals less than one year are required. Therefore, unaudited 10Q’s are required by all publicly-traded firms.

AREA = 4

5. Refusing to meet with your classmate for a study session, after you promised to meet them.

NOT KEEPING YOUR PROMISE IS WRONG.

AREA = 3

6. In governmental accounting, financial statements must be prepared under two methods of accounting, simultaneously (“Dual track approach” per GASB 34).

“DUAL TRACK” IS A REPORTING PREFERENCE REQUIRED UNDER THE LAW.

AREA = 4