Ethical Issues in Accounting

John Blake, Catherine Gowthorpe

• Publisher: Routledge
• Year: 2005
• ISBN:
  9781134694501
• Edition: 1
• Topic: Philosophy
• Subtopic: Philosophy History & Theory

Ethical Issues in Accounting offers a comprehensive and accessible introduction for students and teachers of business studies and accountancy as well as the practicing accountant.
The book covers the ethical implications of several aspects of accounting: * ethics and taxation
* creative accounting
* ethics in accounting regulation
* ethical dilemmas in the public sector
* whistleblowing
* various aspects of social accounting, including environmental accounting.
The fitness of the accounting profession as guardians of accounting and auditing ethics is also discussed in detail.

1

THE ETHICS OF ACCOUNTING REGULATION

John Blake, Julia Clarke and Catherine Gowthorpe

ACKNOWLEDGEMENT

This chapter draws heavily on material in the article, The ethics of accounting regulation an international perspective’, by John Blake, Julia Clarke and Catherine Gowthorpe published in Business Ethics – A European Review in July 1996. We thank the editor of the journal, and its publisher, Blackwell (Oxford), for their kind permission to reproduce the material.

OVERVIEW

There is a well-established tradition of ethical guidance for the practising accountant. In this chapter we argue that ethical issues also arise in relation to the accountant’s role in the process of accounting regulation. We:

1 Identify the role of the accounting practitioner in different national modes of accounting regulation.

2 Consider the economic impact issues that arise in accounting regulation and the conflicting views on how accountants should react to these.

3 Review the range of ethical perspectives that have been applied to the question of whether accounting regulators should be influenced by economic impact issues.

4 Discuss five cases of economic impact issues considering the relevance of an ethical perspective in each case.

5 Identify the level of representation of women on seven accounting standard-setting bodies and discuss the implications of a possible limitation in the ethical values informing the debate on accounting standards which arises from under-representation of women.

THE ROLE OF THE ACCOUNTING PRACTITIONER IN DIFFERENT NATIONAL MODES OF ACCOUNTING REGULATION

Accounting regulation can come from either the public sector or the private sector; in many countries there is a combination of the two. Most countries have some form of legislation on accounting, whether in the form of ‘company law’, as in the UK, ‘accounting law’, as in Sweden, or ‘tax law’, as in Germany. In addition some countries have governmental bodies with either delegated authority to regulate accounting, as with the Instituto de Contabilidad y Auditoria de Cuentas (ICAC) in Spain, or with a formal advisory role to the legislature, as with the Bokforingsnamnden (BFN – Accounting Standards Board) in Sweden. Professional accountants may be among those nominated as members of such a body, either by direct governmental appointment, as with ICAC in Spain, or by nomination of their professional body, as with BFN in Sweden.

Private sector accounting regulation tends to have originated with professional accounting bodies. Examples were the Accounting Principles Board (APB), set up by the American Institute of Certified Public Accountants which led the way in setting recommendations from 1959 to 1973, and the Accounting Standards Committee (ASC), founded by the UK accounting bodies, which set accounting standards from 1970 to 1990. In both countries replacement bodies, in the USA the Financial Accounting Standards Board (FASB) since 1973 and in the UK the Accounting Standards Board (ASB) since 1990, have been set up with nominees from a range of interested parties but continued strong representation from the accounting profession.

These private sector standards can be enforced in various ways:

1 In some countries the law may explicitly require companies to comply. Canada is an example. In the UK compliance with accounting standards has effectively been a legal obligation for large companies since 1989.

2 In countries such as the UK, Australia, and New Zealand, which specify some general level of quality that company accounts must achieve such as the ‘true and fair view’, compliance with accounting standards may be regarded as evidence of achieving that level (see for example Renshall and Walmsley 1990: 313).

3 A governmental regulatory body may review standards and require companies to comply with them. This is the procedure of the SEC in the USA.

4 The accounting profession may require its own members, acting as company auditors or directors, to use their influence to secure compliance.

5 The technical quality of private sector pronouncements may be so respected that in practice companies choose to comply with them. This is generally true for pronouncements from Sweden’s professional accounting body, which are followed by large Swedish companies. In Spain a private body of accountants, the Asociación Espñnola de Contabilidady Adminstración (AECA), issues recommendations which are commonly adopted by companies and frequently form the basis for subsequent official regulations from the governmental body ICAC (see above).

Thus professional accountants may be involved in the process of accounting regulation as members of public sector or private sector regulatory bodies, appointed by government, a professional body, or some other interest group. In the USA, concern that members of the accounting standard-setting body might be influenced by the interests of their employer led to the structuring of the FASB with seven full-time members, each of whom must sever all links with their previous employer. This contrasts with the previous structure of the APB with part-time members selected to assure a well-defined representation of large international CPA firms, other CPA firms, business and academics. Meyer (1974) examined voting records on the APB and concluded that ‘no dominant pattern of voting could be discerned’. Nevertheless Senator Metcalf expressed concern that the (then) ‘Big Eight’ might dominate the accounting standard-setting process (US Congress 1976). Studies of voting patterns in the APB (Rockness and Nikolai 1977), the FASB (Brown 1981, Selto and Grove 1982) and a study of both (Newman 1981) have failed to identify any pattern of a ‘Big Eight’ voting block dominating these bodies.

Members of the accounting profession may also become involved in the accounting regulatory process through lobbying the regulators. A former FASB chairman tells us that the large public accountancy firms are regarded as a source of unbiased neutral comment on accounting issues, and so their representations are particularly influential (Armstrong 1977).

Studies of audit firm lobbying to the FASB raise questions as to whether the ‘Big Eight’ firms are biased in representing accounting regulation. Haring (1979) found a positive, though not statistically significant, association between client lobbying and audit firm lobbying, and also found that the likelihood of FASB support for an accounting rule is statistically related to accounting firms’ preferences. Puro (1984), in an examination of audit firm lobbying, found that on standardisation issues, firms tended to favour the position adopted by their clients, while on disclosure issues, firms tended to opt for the approach that maximises their own income, i.e. large firms favour increased complexity, small firms oppose it.

Thus, the evidence seems to suggest that accounting firms do have a bias in their preference for certain forms of accounting regulation that influence their lobbying but do not influence the voting pattern of FASB members with former accounting firm links. In view of the apparent reliance placed by accounting regulators on the representations of these firms, a question arises as to what ethical constraints should affect their lobbying.

ECONOMIC IMPACT ISSUES AND THE ACCOUNTING REGULATOR

Published company accounts are available to a wide range of users. The information that managers provide in those accounts may influence the behaviour of those users. Changes in accounting rules can lead to changes in the information shown in accounts and consequently to changes in the behaviour of the users of the accounts. These changes in behaviour can affect the economy in general and the position of the reporting company and its managers in particular. Thus changes in accounting rules give rise to potential ‘economic consequences’, a term which has been defined as follows:

Accounting choices have economic consequences if changes in the rules used to calculate accounting numbers alter the distribution of firms’ cash flows, or the wealth of parties who use those numbers for contracting or decision making.

(Holthausen and Leftwich 1983: 77)

The distinction between ‘contracting’ and ‘decision making’ is a key point, also termed as ‘direct’ as against ‘indirect’ issues (Benston and Krasney 1978), or ‘mechanistic’ as against ‘judgemental’ issues (Blake 1992). This arises because accounts are used in two ways.

First, the numbers in the accounts may define the rights and obligations of the company in line with some regulation or contract. Examples are company borrowing power limits which are frequently defined as a multiple of share capital and reserves, and directors’ bonus schemes, which may be based on some proportion of reported profit. These are the ‘contracting’ or ‘mechanistic’ issues.

Second, the readers of the accounts may take decisions on the basis of the information provided, and managers may change their behaviour in response to their expectations as to users’ reaction. Thus, present and potential investors may change their view of share values, governments may change their view as to the tax burden that an industry is able to bear, or employees may adjust their wage demands. These are the ‘decision making’ or ‘judgemental’ issues.

The potential economic impact of accounting regulations explains why managers seek to control or influence the process of accounting regulation. As Whittred and Zimmer argue: ‘These wealth transfers, the economic consequences of accounting method choice, are ultimately the source of the incentive to possess financial rule making authority, or at least to influence the deliberations of rule making bodies’ (1988:10).

A range of views can be identified on the legitimacy of allowing economic consequences to influence accounting regulation. One is that awareness of these issues can lead to the argument that ‘the setting of accounting standards is as much a product of political action as of flawless logic or empirical findings’ (Horngren 1973: 61) or the perception of accounting regulation as ‘essentially a political process’ (Gerboth 1973: 479). Against this view advocates of ‘neutrality’, a view that accounting rules should not be chosen by reference to how they might influence a decision or judgement, argue that ‘the criterion by which rules are to be judged is not the effect they may or may not have on business behaviour’ (Solomons 1978). The essential feature of accounting regulation is the provision of ‘a level playing field’ (Solomons 1989: 37) and any other approach means that ‘the credibility of the information being supplied is lost or damaged’ (Stamp 1980). Between these two views a compromise can be identified, a ‘mixed strategy’ (Rappaport 1977), whereby some form of assessment of economic impact is combined with the development of a ‘technical solution’ based on a conceptual framework.

THE ETHICAL PERSPECTIVE

As Taylor observes:

One of the most commonly held opinions in ethics is that all moral norms are relative to particular cultures. The rules of conduct that are applicable in one society, it is claimed, do not apply to the actions of people in another society. Each community has its own norms, and morality is entirely a matter of conforming to the standards and rules accepted in one’s own culture.

(1975: 13)

The literature on the application of ethical principles to accounting regulation that we consider here has arisen mainly in the context of the USA, with some contribution from the UK and Australia. We will consider the relevance of this perspective to issues arising in other cultures in the next section.

Ruland (1984) identifies three perspectives in philosophy which have a bearing on the question as to whether accounting regulators should be guided by economic consequences issues.

The question of whether ends justify means; that is, in the context of accounting regulation, whether achievement of desirable economic outcomes justifies taking a particular approach to an accounting rule. The deontological point of view is that moral rules apply to the actual actions, the means whereby an end is pursued. The teleological point of view is that an action should be judged on the basis of the moral worth of the outcome. One mechanism that accounting regulators can use to promote a deontological approach is to formulate a conceptual framework, laying down the basis on which accounting regulations are to be formulated, and so providing a basis for assessing the quality and consistency of specific accounting regulations. Collett (1995) points out an interesting inconsistency in the Australian Conceptual Framework Statements issued by the Australian Accounting Research Foundation. While the formulation of such statements implies a deontological approach, the statements themselves specify that all prospective costs and benefits, including by implication issues of economic consequence, should be considered in the formulation of accounting regulations. This implies a teleological approach.

The distinction between positive and negative responsibilities. A positive responsibility holds individuals liable for stat...

Table of contents

• Cover
• Halftitle
• Professional Ethics
• Title
• Copyright
• Contents
• List of illustrations
• Notes on contributors
• Series editor’s preface
• Introduction
• 1 The Ethics of Accounting Regulation
• 2 The Ethics of Creative Accounting
• 3 The Accountant as Whistleblower
• 4 Assumptions, Values and Principles: Accounting in the Public Services
• 5 Taxation and Ethical Issues
• 6 The Professional Accounting Bodies as the Guardians of Accounting and Auditing Ethics
• 7 The Partisanship of the Accountancy Bodies: Some Observations
• 8 Ethical Issues and the Auditor
• 9 A Model for Ethical Education in Accounting
• 10 Values and Accounting: Divergences in Ethical Thinking on Accounting for the Environment
• 11 Corporate Social Reporting: An Ethical Practice?
• Index