Accounting Ethics Accounting Ethics, Second Edition. Ronald Duska, Brenda Shay Duska, and Julie Ragatz © 2011 John Wiley & Sons, Ltd. Published 2011 by John Wiley & Sons, Ltd. ISBN: 978-1-405-19613-0 Foundations of Business Ethics Series editors: W. Michael Hoffman and Robert E. Frederick Written by an assembly of the most distinguished fi gures in business ethics, the Foundations of Business Ethics series aims to explain and assess the fundamental issues that motivate interest in each of the main subjects of contemporary research. In addition to a general introduction to business ethics, individual volumes cover key ethical issues in management, marketing, fi nance, accounting, and computing. The books, which are complementary yet complete in themselves, allow instructors maximum fl exibility in the design and presentation of course materials without sacrifi cing either depth of coverage or the discipline - based focus of many business courses. The volumes can be used separately or in combination with anthologies and case studies, depending on the needs and interests of the instructors and students. 1 John R. Boatright, Ethics in Finance , second edition 2 Ronald Duska, Brenda Shay Duska, and Julie Ragatz, Accounting Ethics , second edition 3 Richard T. De George, The Ethics of Information Technology and Business 4 Patricia H. Werhane and Tara J. Radin with Norman E. Bowie, Employment and Employee Rights 5 Norman E. Bowie with Patricia H. Werhane, Management Ethics 6 Lisa H. Newton, Business Ethics and the Natural Environment 7 Kenneth E. Goodpaster, Conscience and Corporate Culture 8 George G. Brenkert, Marketing Ethics Forthcoming Denis Arnold, Ethics of Global Business Accounting Ethics SECOND EDITION Ronald Duska The Center for Ethics in Financial Services The American College Brenda Shay Duska Del Pizzo & Associates Julie Ragatz The Center for Ethics in Financial Services The American College A John Wiley & Sons, Ltd., Publication This edition fi rst published 2011 © 2011 Ronald Duska, Brenda Shay Duska, and Julie Ragatz Blackwell Publishing was acquired by John Wiley & Sons in February 2007. Blackwell’s publishing program has been merged with Wiley’s global Scientifi c, Technical, and Medical business to form Wiley-Blackwell. 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If professional advice or other expert assistance is required, the services of a competent professional should be sought. Library of Congress Cataloging-in-Publication Data Duska, Ronald F., 1937- Accounting ethics / Ronald Duska, Brenda Shay Duska, Julie Ragatz. – 2nd ed. p. cm. – (Foundations of business ethics) Includes bibliographical references and index. ISBN 978-1-4051-9613-0 (pbk. : alk. paper) 1. Accountants–Professional ethics. 2. Accounting–Moral and ethical aspects. I. Duska, Brenda Shay. II. Ragatz, Julie. III. Title. HF5625.15.D87 2011 174'.9657–dc22 2010042189 A catalogue record for this book is available from the British Library. This book is published in the following electronic formats: ePDFs 9781444395884; Wiley Online Library 9781444395907; ePub 9781444395891 Set in 10.5/12.5 pt Minion by Toppan Best-set Premedia Limited 1 2011 To : Elizabeth Catherine Duska and Catherine Shay A daughter and mother who put up with tax seasons and manuscript deadlines, and whose Irish eyes and smiles bring joy and love to our lives without ever holding us to account for the cost to them of our writing this book. Table of Contents Acknowledgments x Preface xii Introduction 1 1 The Nature of Accounting and the Chief Ethical Diffi culty: True Disclosure 9 I The Nature of Accounting 10 II Ethics of Disclosure 14 III The Financial Statement 17 IV Roles an Accountant can Fulfi ll 20 V Development of Explicit Accounting Standards and Regulations 22 VI The Sarbanes–Oxley Act (SOX) 27 VII Recent Scandals that Provoked More Regulation 29 VIII Conclusions 30 2 Ethical Behavior in Accounting: What Is Ethics? 31 I What Is Ethics? 34 II Ethics: The Intellectual Enterprise 35 III Actions 35 IV Social Practices, Institutions, and Systems 36 V Why Study Ethics? 36 VI Being Ethical: How to Determine What to Do 38 VII Questions to Ask to Justify An Action: The Basis of Ethical Theory 42 VIII Using the Reasons 46 IX Ethical Dilemmas 47 X Some Classic Moral Dilemmas 48 viii Table of Contents 3 Ethical Behavior in Accounting: Ethical Theory 51 I Egoism 52 II Utilitarianism 57 III Kant and Deontology 61 IV Deontological Ethics 62 V The First Formula of the Categorical Imperative 64 VI The Second Formula of the Categorical Imperative 65 VII Virtue Ethics 66 4 Accounting as a Profession: Characteristics of a Profession 69 5 Accounting Codes of Conduct 77 I AICPA Professional Code of Conduct 79 II Code Principles 80 III Criticisms of the Code of Conduct 92 6 The Rules of the Code of Conduct 93 I Section 100 – Independence, Integrity, and Objectivity 94 II Section 200 – General Standards Accounting Principles 99 III Section 300 – Responsibilities to Clients 102 IV Section 400 – Responsibilities to Colleagues 103 V Section 500 – Other Responsibilities and Practices 103 7 The Auditing Function 109 I The Ethics of Public Accounting 113 II Trust 115 III The Auditor’s Responsibility to the Public 116 IV The Auditor’s Basic Responsibilities 118 V Independence 122 VI Independence Risk 127 VII Professional Skepticism 131 VIII Reasonable Assurance 133 8 The Ethics of Managerial Accounting 135 I Reasons Used to Justify Unethical Behaviors 140 II Blowing the Whistle 144 9 The Ethics of Tax Accounting 151 10 Ethics Applied to the Accounting Firm 167 I Accounting as a Business 169 II The Social Responsibility of Business 170 Table of Contents ix III Good Ethics is Good Business 175 IV Ethical Responsibilities of Accounting Firms 177 V The Accounting Profession in Crisis 177 Afterword: Current Debates on Accounting Issues 185 I Fair Value and Principles vs. Rules 185 II Fair Value Accounting 189 III Arguments For and Against the Fair Value Approach 193 IV Summary 198 V Principles vs. Rules 199 VI Introduction 199 VII Isn’t GAAP Already Principles Based? 200 VIII An Example: The Continental Vending Case 204 IX Recent Developments of “Present Fairly” 206 X A Better Question 207 XI Argument for a Rules Based Approach 208 XII What Would a Principles Based Approach Look Like? The True and Fair Override 211 XIII Argument for a Principles Based Approach 212 XIV Conclusion 215 Appendix A: Summary of Sarbanes–Oxley Act of 2002 217 Appendix B: The IMA Code of Conduct for Management Accountants 230 Index 233 Acknowledgments First Edition When Mike Hoffman and Bob Frederick fi rst suggested a book on account- ing ethics the names of all the people more qualifi ed came to mind. However, what better challenge for a business ethicist than to tackle the fi eld his wife dealt with in her day to day work, and who better to work with than an accountant with integrity who has no time for cutting corners. Against the advice of those who counseled against spouses writing a book together, we plunged in where angels fear to tread. It has been a fruitful opportunity, both of us learning more and more about the other ’ s enterprises. So we are grate- ful to both Mike and Bob for the opportunity, and trust the endeavor has worthwhile fruit. We would also like to thank Beth Remmes for her constant attention, not to mention gentle prodding, which helped us get on with the work when the tedium got the better of us. Thanks also to Patricia Werhane, Norm Bowie and Jim Mitchell for their input and encouragement. They should not in any way be held accountable for the shortcomings of this book. Gratitude is also called for toward the American College, Sam Weese its president, and Gary Stone and Walt Woerheide, who allowed us to use some of my time in the completion of this work. Finally we are grateful to Jack Del Pizzo of Del Pizzo & Associates for his insights, encouragement and general knowledge of accounting prac- tices, which he was happy to share during the making of this book. Second Edition First and foremost we want to express special gratitude to Sara Taylor, the assistant director of the American College Center for Ethics in the Financial Services, for all the help in editing, reading, advising and sorting out the vari- Acknowledgments xi ous details of the book.