Integrity: The Basis of Accounting (Mintz)According to Mintz, integrity is a fundamental trait of character that enables a CPA to withstand client and competitive pressures that might otherwise lead to the subordination of judgement. A person of integrity will act out of moral principle and not expediency (brings the most benefits).

Integrity means that a person acts on principle – a conviction that there is a right way to act when faced with an ethical dilemma.

Golden Rule: Do unto others as you would wish them to do unto you

Integrity means to have the courage to stand by your principles even in the fact of pressure to bow to the demands of others. EthicsEthics deals with well-based standards of how people ought to act, does not describe the way people actually act (prescriptive, not descriptive)

Values and EthicsValues: Basic and fundamental beliefs that guide or motivate attitudes or actions. Values are concerned with how

a person behaves in certain situations and is predicated on personal beliefs that may or may not be ethical

Ethics: Concerned with how a moral person should behave to act in an ethical manner

Law Versus Ethics- Although ethical people always try to be law-abiding there may be instances where their senses of ethics tells

them it is best not to follow the law (car crash going over yellow line)

Law and Ethical Obligation- A person of goodwill honors and respects the rules and laws and is willing to go beyond them when

circumstances warrant. Such people do not need rules and laws to guide their actions- The existence of specific laws prohibiting certain behaviors will not stop a person who is unethical from violating

those laws- Laws create a minimum set of standards and they cannot cover every situation a person might encounter- Ethical people often do less than is permitted by the law and more than is required- Questions to ask:

o What does the law require of me?o What do ethical standards of behavior demand of meo How should I act to conform both?

The Gray Area- When rules are unclear, an ethical person looks beyond his/her own self-interest and evaluates the interest of

stakeholders potentially affected by the action or decision- Ends justify the means if one’s goals are good and noble and the means we use to achieve them are also good

and noble

Ethical Relativism- The philosophical view that what is right or wrong and good or bad is not absolute, but variable and relative,

depending on the person, circumstances, or social situation- Holds that morality is relative to the norms of one’s culture- What is right or wrong depends on the moral norms of the society in which it is practiced- Most ethicists reject ethical relativism arguing that while moral practices may differ the fundamental moral

principles underlying these practices do not- Societies may differ in their application of fundamental moral principles, but agree on the principles

Situation Ethics- A body of ethical thought that takes normative principles – like virtues, natural law, and Kant’s categorical

imperative that relies on the universality of actions – and generalizes them so that an agent can “make sense” out of one’s experience when confronting ethical dilemmas

- Unlike ethical relativism that denies universal moral principles, situational ethicists recognize the existence of normative principles, but question whether they should be applied as strict directives or instead, as guidelines

- “Should these norms, as generalizations about what is desired, be regarded as intrinsically valid and universally obliging of all human beings?”

- “What in some times and in some places is ethical can be in other times and other places unethical”Cultural Values (Geert Hofstede)

- Individualism (IDV) focuses on the degree that society reinforces individual or collective achievement and interpersonal relationships

o High IDV – Individualist societies (look after themselves and their direct family) – US, UK (Higher probability of whistleblowing)

o Low IDV – collectivist societies (people belong in groups and take care of them in exchange for loyalty) – Japan, China (More prone to covering up)

- Uncertainty Avoidance (UAI) describes the tolerance for uncertainty and ambiguity within societyo High UAI – low tolerance of uncertainty and ambiguity (Likely to institute laws, rules, regulations and

controls to reduce uncertainty) – Russiao Low UAI – more tolerance of uncertainty and ambiguity and a variety of opinions (UK, US)

- Power Distance Index (PDI) – focuses on the degree of equality between people in the societyo High PDI – indicates inequalities of wealth and power (China, Russia)o Low PDI – indicates equality of wealth and power (Germany, US, UK)

- Long Term Orientation (LTO) vs Short Term Orientation (STO)o LTO – reflect the values of long0term commitment and respect for tradition (China, Japan)o STO – change can occur more rapidly (US, UK)

- Masculinity (MAS) – reflects masculism vs feminism

Six Pillars of Character (Josephson)- the six pillars that provide a foundation to guide ethical decision making1. Trustworthiness

a. Honestyi. Should express the truth as we know it and without deceptionii. Accounting = full disclosure principle

b. Integrityi. To have the courage to stick to one’s convictionsii. Staying true to one’s word and values, morals, and code of ethics

c. Reliabilityi. The moral duty to follow through with our actionsii. Avoiding bad-faith excuses and unwise commitments

d. Loyaltyi. Requires that friends not violate the confidence we place in themii. CPA – should not report to police if a fraud is found, instead to contact firm employer (Ethical

obligation of client loyalty)iii. Bring to supervisor Bring to higher up, and if nothing is done, seek legal advice

2. Respecta. All people should be treated with dignity, the ethical duty to hold all people in high esteem and treat

everyone with respect regardless of their circumstances3. Responsibility

a. Our capacity to reason and our freedom to choose makes us morally responsible for our actions and decisions.

b. We are accountable for what we do and who we arec. A responsible person carefully reflects on alternative courses of action using ethical principlesd. Acts diligently and preserves in carrying out moral actione. Due diligence in professional expectations – CPA

4. Fairnessa. Treats others equally, impartially and openlyb. Implies adherence to a balanced standard of justice without relevance to one’s own feelings or

inclinations5. Caring

a. The essence of caring is empathy. b. Empathy is the ability to understand, be sensitive to and care about the feelings of others. c. Essentially to put your feet into another’s shoe

6. Citizenshipa. We ought to behave as part of a community, obey the laws and be informed about the issues, bolunteer

in your community and vote in elections

Modern Moral Philosophies1. Teleology- “End”, “Purpose” – an act is considered morally right or acceptable if it produces some desired result such as

pleasure, the realization of self-interest, fame, utility, wealth and so on.

a. Egoism i. Egoism – defines right or acceptable behavior in terms of its consequences for the individual.

They should make decisions that maximize their own self-interest which is defined differently by each individual. Egoist should do the act that promotes the greatest good for oneself

b. Enlightened Egoismi. Takes a long-range perspective and allow for the well-being of others because they help achieve

some ultimate goal for the decision maker, although their own self-interest remains paramount.ii. An enlightened egoist may abide by professional code of ethics, avoid cheating on taxes and

create safe working conditions not because their actions benefit others, but because they help achieve some ultimate goal for the egoist such as advancement within the firm.

c. Utilitarianism Follow a relatively straightforward method for deciding the morally correct course of action for any

particular situation First – identify the various courses of action they could perform Second – determine the utility of the consequences of all possible alternatives Third – select the one that results in the greatest net benefiti. Act Utilitarianism

1. Only examine the specific action itself, rather than the general rules foverning the action, to assess whether it will result in the greatest utility (if lying would produce the best consequence in a particular situation, we ought to lie)

ii. Rule Utilitarinism1. Must choose the action that conforms to the general rule that would have the best

consequence2. “what effect would everyone’s doing this kind of action have on the general balance of

good over evil?”2. Deontology

o Refers to moral philosophies that focus on the rights of individuals and on the intentions associated with a particular behavior, rather than on its consequences

o Deontologists believe that moral norms establish the basis for actiono Deontology differs from rule-utilitarianism in that the moral norms (or rules) are based on reason, not

outcomes Act Deontology

Principles are or should be applied by individuals to each unique circumstance allowing for some space in deciding the right thing to do

Rule Deontology Believe that general moral principles determine the relationship between the asic right of

individual and a set of rules governing conducto Rights Principles

A right is a justified claim on others I have a right to freedom, then I have a justified claim to be left alone by others or can mean that

others have the duty or responsibility to leave me alone Rights Theory (Thomas Hobbes and John Locke)

Based on the work of Immanuel Kant (1724-1804)o Each of us has a worth or dignity that must be respectedo This dignity makes it wrong for others to abuse us or use us against our willo “Humanity must always be treated as an end, not mearly as a means”

To treat a person as a means is to use her to advance one’s own interests, but to treat a person as an end is to respect that person’s dignity by allowing each the freedom to choose for himself

Kantian Philosophy Categorical Imperativeo Act only according to that maxim by which you can at the same time will that it

should become universal lawo The maxim of our acts can be thought of as the intentions behind our actso The maxim answers the question: what am I doing, and why?o In other words, moral intention is a prerequisite to ethical actions

Whenever we are confronted with a moral dilemma, we need to consider whether the action would respect the basic rights of each of the individuals involved. How would the action affect the well-being of those individuals? Would it involve manipulation or deception – either of which would undermine the right to truth that is a crucial personal right? Actions are wrong to the extent that they violate the rights of individuals.

Justice- Associated with issues of rights, fairness and equality- A just act respects your rights and treats you fairly- Justice means giving each person what she or he deserves- Justice and fairness are closely related terms although difference exist

o Justice: used with reference to a standard of rightnesso Fairness: often has been used with regard to an ability to judge without reference to one’s feelings or

interests- Distributive Justice: concerns the nature of a socially just allocation of goods in a society. A society in which

incidental inequalities in outcome do not arise would be considered a society guided by the principles of distributive justice.

- Procedural Justice: is the idea of fairness in the processes that resolve disputes and allocate resources. One aspect of procedural justice is related to discussions of the administration of justice and legal proceedings.

Virtue Ethics- To make an ethical decision, one must internalize the traits of character that make one an ethical person- What is moral in a given situation is not only what conventional morality or moral rules require, but also what a

well—intentioned person with a good moral character would deem appropriate- Stress the importance of developing good habits of character, such as benevolence- Plato’s four cardinal virtues

o Wisdomo Courageo Temperanceo Justiceo Other Virtues

Fortitude Generosity Self-respect Good temper Sincerity

June 1 – Milgram Video and Concepts of Behavioral Ethics

Kohlberg’s Cognitive Development ApproachCognitive development: Refers to the thought process followed in one’s moral development. An individual’s ability to make

reasoned judgements about moral matters develops in stages.

Kohlberg concluded, on the basis of 20 years of research that people develop from childhood to adulthood through a sequential and hierarchical series of cognitive stages that characterize the way they think about ethical dilemmas. Higher stages rely upon cognitive operations that are not available to individuals at lower stages and are thought to be “morally better” because they are consistent with philosophical theories of justice and rights.

Kohlberg uses the Heinz and Drug Dilemma - Heinz steals from druggist because he can’t find enough money to purchase the drug that his wife needs to survive

Level I – Preconventional (Choices are made based on what the individual decision maker wants [egoism])Individual is very self-centered. Rules are seen as seomthing external imposed on oneself

Stage 1: Obedience to Rules; Avoidance of punishmenta) What is right is judged by one’s obedience to rules and authority

[Company contractor may refuse to pay bribe because it may be against policy, or decide to pay bribe because there is little chance of being caught and punished]

Stage 2: Satisfying One’s Own Needsa) Rules and authority are important only if acting in accordance with them satisfies one’s own needs (egoism)

[contractor views payment as essential to gain contract and that other competitors are willing to make payment, and by not doing so can affect her moving up the ladder and possibly forego personal rewards and salary increases. Because everything is relative, each person is free to pursue her individual interests]

Level II – Conventional Individual becomes aware of the interests of others and one’s duty to society. Personal responsibility becomes an important consideration in decision making

Stage 3: Fairness to Othersa) An individual is not only motivated by rules, but seeks to do what is in the perceived best interest of others

especially those in a family, peergroup or work organization. There is a commitment to loyalty in the relationship[Contractor wants to be liked by others. She is reluctant to make payment, but agrees to do so not because it benefits her interests, but in response to the pressure imposed by her supervisor who claims that the company will lose a major contract and employees will be fired if she refuses to go along]

Stage 4: Law and Ordera) Emphasizes the morality of law and duty to the social order.b) One’s duty to society, respect for authority and maintaining the social order becomes the focus of decision making

[Contractor might refuse to make payment even though it leads to loss of jobs in her company because she views it as her duty to do so in the best interests of society. She does not want to violate the law

Level III – PostconventionalPrincipled morality underlies decision making at this level. The individual recognizes that there must be a society wide basis for cooperation. There is an orientation to principles that shape whatever laws and role-systems a society may have.

Stage 5: Social Contracta) Individual is motivated by upholding the vasic rights, values and legal contracts of societyb) Recognizes that in some cases that legal and moral points of view may conflictc) To reduce such conflict individuals at this stage base their decisions on a rational calculations of benefits and

harms to society[Contractor weights the alternative courses of action by evaluating how each of the groups is affected by her decision to make the payment. Weights the pros and cons and decides that the loss of one’s reputational capital are greater than the benefits]

Stage 6: Universal Ethical Principlesa) Right and wrong are determined by universal ethical principles that everyone should followb) Believe that there are inalienable rights, which are universal in nature and consequencec) They are not valid because of a particular society’s laws or customs, but because they rest on the premise of

universalityd) Justice and equality are examples of principles that are deemed universal.e) If a law conflicts with an ethical principle, then an individual should act in accordance with the principlef) *** Follows Kant’s Universal Categorical Imperative ***

[Contractor would disregard pressure from her supervisor or the perceived best interests of the company when deciding what to do. Her actions would be guided only by universal ethical principles that would apply to others in the same situation – Kant’s Categorical Imperative]

Rest’s Four Component Model of Ethical Decision MakingJames Rest builds on Kohlberg’s work by developing a four-component model of ethical decision0making process. The four-component model describes the cognitive processes that individuals use in ethical decision making

Depicts how an individual first identifies an ethical dilemma and then continues through his intentions and finally courage to behave ethically

1) Moral Sensitivitya. First step in moral behavior requires that the individual interpret the situation as moralb. The individual has to be able to identify an ethical situation and enables us to focus on how alternative courses of

actions might affect ourselves and others2) Moral Judgement

a. An individual’s ethical cognition of what ideally ought to be done to resolve an ethical dilemma is called prescriptive reasoning

b. The outcome of one’s prescriptive reasoning is his ethical judgement of the ideal solution to an ethical dilemma3) Moral Motivation

a. Reflects an individual’s willingness to place ethical values ahead of nonethical values that relate to self-interestb. An individual’s ethical motivation influences her intentions to comply or not to comply with her ethical judgement in

the resolution of an ethical dilemma4) Moral Character

a. Individuals with strong ethical moral character must be able to carry out their ethical intentions with ethical actions while being able to withstand any pressures (integrity) to do otherwise

Rest does not offer the framework as a linear decision-making model, but instead suggests that the components interact through a complicated sequence of feedback and feedforward loops.

Note that an individual may be adequate in moral judgement, but may be inadequate in moral sensitivity

Cognitive Dissonance: The difference between how we think we should behave and how we decide to behave. The inconsistency between our thoughts, beliefs, attitudes and behavior creates the need to resolve contradictory or conflicting beliefs, values and perceptions

Thorne’s Integrated Model of Ethical Decision Making

Behavioral Ethics (Daniel Kahneman)- Our minds have two distinct modes of decision making “System 1”, “System 2”- System 1 thinking is our intuitive system of processing information, automatic, effortless and emotional decision processes- System 2 thinking is slower, conscious, effortful, explicit and more reasoned decision process- System 1 thinking can make it more difficult to resolve an ethical dilemma in a morally appropriate way- A decision making model built on system 2 thinking can provide a more systematic analysis that enables comprehensive

judgement, clearer reasons, and ma more justifiable and defensible action than otherwise would have been the case- ***Virtue is what bridges the gap between moral judgement and ethical behavior***

Integrated Ethical Decision Making Model (Links to Rest’s framework)1. Identify the ethical and professional issues (Ethical sensitivity)

a. What are the ethical and professional issues in this case (GAAP, GAAS)b. Who are the stakeholdersc. Which ethical standards apply (AICPA, IFAC standards)

2. Identify and evaluate alternative courses of action (Ethical Judgement)a. What can and cannot be done in resolving the conflict under professional standards?b. Which ethical reasoning method apply to help reason through alternatives (rights theory, utilitarianism, justice

and virtue)3. Reflect on the core professional values, ethics and attitudes to help carry through with ethical action (Ethical Intent)

a. Consider how virtue considerations (moral virtues, intellectual, and instrumental) motivate ethical actions and behaviors

b. Consider how IES standards (independence, objectivity, integrity, professional skepticism motivate ethical actions and behaviors)

4. Take action (Ethical Behavior)a. Decide on a course of action consistent with one’s professional obligationsb. How can virtue considerations support turning ethical intent into ethical action?c. What steps can I take to strengthen my position and argument?

June 8 – Legal Concepts & Corporate Governance

Foundations of Corporate Governance Systems- Essential part of creating an ethical organization environment is to put in place effective corporate governance systems that

establish control mechanisms to ensure that organizational values guide decision making and that ethical standards are being followed

- Accountability: refers to the relationship between workplace decisions, strategic direction and compliance with legal and ethical considerations

- Oversight: provides a system of checks and balances that limit employees and managers opportunities to deviate from established policies and strategies aimed at preventing unethical and illegal activities

- Control: is the process of auditing and improving organizational decisions and actions which relies on internal audit and internal control processes

Defining Corporate Governance- Emphasizes the separation of ownership and control in corporations- “the ways in which the suppliers of finance to corporations assure themselves of getting a return on their investment”- A corporate governance regime typically includes mechanisms to ensure that the agent (management) runs the firm for the

benefit of one or more principals (shareholders creditors, suppliers, clients, employees and other stakeholders)- Corporate governance deals with issues that result from the separation of ownership and control. But corporate

governance goes beyond simply establishing a clear relationship between shareholders and managers

Views on Corporate Governance- In a public corporation, firm decisions should be orientated towards serving the best interests of investors- Classic Principal Agency Problem: Conflicts of interest and moral hazard issues that arise when a principal hires an agent

to perform specific duties that are in the best interest of the principal but may be costly, or not in the best interests of the agent.

- One traditional approach is for shareholders to give the CEO shares or options of stock that best over time, thus inducing long-term behavior and deterring short term actions that can harm future company value

- Agency costs arise due to information asymmetry since insiders know more than outsiders- Agency costs can also arise if the BOD fails to exercise due care in its oversight of management- Stewardship Theory: focuses on enabling managers rather than controlling them because they can be trusted to act in

the best interests of the shareholders- Steward CEO can best act when he or she is also the chairperson of the board, which the dual roles are enablers that would

be viewed as a violation of control mechanisms under agency theory

Importance of Good Governance- Survey indicates that transparency of corporate dealings is the most important element of investment decision ~68%- Followed by high standards of corporate governance ~62% and ethical behavior of staff ~46%

Executive Compensation- One of the most common approaches to the agency problem is to link managerial compensation to the financial

performance of the corporation in general and the performance of the company’s shares- This occurs by creating long-term compensation packages and stock option plans that tie executive wealth to an increase in

the corporation’s stock price

Backdating Stock Options: changing the grant dates of stock options to coincide with a dip in the stock price making the options worth more because less money would be needed to exercise them and buy stock

Clawbacks: Provisions that money of benefits are taken back as a result of special circumstances generated by the misconduct of key officials

Say on Pay: Dodd-Frank act requires firms to hold at least one vote every three calendar years with a separate nonbinding say-on-pay.

Corporate Governance Mechanisms (Razaee)- Corporate governance is shaped by internal and external mechanisms- Internal Mechanisms: help manage, direct, and monitor corporate governance activities to create sustainable

stakeholder value (BOD, independent directors, audit committee, management, internal controls and the internal audit function)

- External Mechanisms: intended to monitor the company’s activities, affairs and performance to ensure that the interests of insiders are aligned with the interests of outsiders *financial markets, state

and federal statutes, court decisions, shareholder proposals)- Note: Independent directors enhance governance accountability- Note: Separate meetings between the audit committee and external auditors strengthen control mechanisms

Role of BOD- Hold ultimate responsibility for their firm’s success or failure- Business Judgement Rule: the officers and directors of a corporation are immune from liability to the corporation for losses

incurred in corporate transactions within their authority, so long as the transactions are made in good faith and with reasonable skill and prudence

- BOD have a fiduciary duty to safeguard corporate assets and make decisions that promote shareholder interests- Owe duty of care in carrying out their responsibilities, which means to act in the best interests of the shareholders

Audit Committee- Audit committee has to be completely independent of management- Takes financial statement oversight and follows basic principles of responsibility, accountability and transparency- KPMG Ten Commandments

o Focus on financial reporting and strong internal controlso Review the company’s whistleblower processes and compliance programo Understand the significance of risks to the company’s operations and financial reportingo Consider whether the company’s disclosures provide investors with the information eeeded to understand the

state of the businesso Set clear expectations for the internal audit function and communication with the external auditors o Understand the audit committee’s role in information technology

Internal Auditors- Interact with top management and assist to fulfill their role in developing accurate and reliable financial statement and

compliance with laws and regulations- Should have direct and unrestricted access to audit committee

Audited Financial Statements- Securities Exchange Act established mandatory independent audits of publicly traded companies in order to give third

parties confidence that the companies’ books could be trusted

Whistleblowing- 4 Elements of whistleblowing

o The whistleblowero The bhitleblowing act or complainto The party to whom the complaint is madeo The organization against which the complaint is lodgedo