Organizations have over the years received numerous criticisms due to their impractical theories and policies that prove insignificant to our current economy. While many important theories are crucial to efficient ethical systems, authors mentioned in this essay provide background information that helps us understand how certain predisposition such as laundering money, fraud, conspiracy and obstruction of justice contribute to pressure within our institutions. Basic findings gathered from various databases including AICPA, SEC and IFRS suggest theories that define the relationships between deontology and utilitarianism. The publication of Interpretation or Ethics Ruling in Journal of Accountancy constitutes ethical standards of the CPA society, State Board of Accountancy, Securities and Exchange and government agencies to ensure compliance with the set bylaws and related regulations. The main focus on deontology and utilitarianism is based on the notions of good and right that help us understand primary terms and their applicability to various institutions. The essay will also examine Enron and WorldCom frauds that did not seek the best interest of collective well being of the community, institutions and profession it served. In this case, we suggest that policy makers should propose amendments that would acknowledge the existing gap between ethical standards and accounting standards to accommodate both public and private sectors interests as well as the economy as a whole.
Deontology and Utilitarianism
Accounting moral philosophy is often intertwined between the two great traditions of utilitarianism and deontology. Although there has been considerable work defining utilitarianism, deontology is more often criticized that analyzed. Concepts of deontology have been advanced in accounting standards, leading to differences in classifying ethical theories. Many theorists have defined deontology as the class of non-teleological theories. The aspect of teleological justifies the right, moral duty or obligation on the grounds to promote what is good. Teleology theory defined deontological to include the production of good consequences as the decisive feature of morally approved behavior. This means that organizations should adhere to moral status since their actions and consequences depend on consideration other than the total goodness or badness of all consequences and immediate. Theoretically, ethical theory in deontological depends on if and only there exists some action whose moral status depends on the consideration. This implies that consideration in this case is not part of total goodness or badness of all the consequences. In theoretical view, if a theory yields any judgment that depends on the mentioned consideration, then the theory is deontological (Reiman, 1990, p.191).
Utilitarianism theories insist that following rules is necessary in order to realize organization’s net value. It also theorizes that action is wrong when it violates a good promoting rule. In affirming this claim, Stuart (1979) clearly stated in Gaus (2001) that moral theory “is a wrongful act if a coercive rule against it is justified. An act’s wrongness, then crucially depends on its violation of a good-promoting rule, even if the act itself optimally promotes the good” (p.2). This simply means that the moral standard of a theory depends on conformity to, or conflict with, a good-promoting rule. The two theoretical rules are contradictory in nature since deontological affirms the sense of non-maximizing while utilitarian complain that the rule is a rule worship Fried, 1978).
Davis (1991) takes a more classical approach by defining deontology in two perspectives; 1). He defines deontological theory as the theory that denies that right, obligation and the moral good of a theory. The theories are either implied directly or directly, what analysts perceived to promote the greatest balance of good or evil of a society or the world as a whole. Davis (1991) considers deontology “to include features that makes the rule right, or obligatory besides the good or badness consequences” (p.30). On the other hand, Davis (1991) links deontology to teleology since they “believe in one and only one basic rule or command, or ultimate right-making characteristic that incorporates the comparative value of what is, or probably will be, or intended to be brought into being” (p.30).
Reiman & Gerwirth (1978) on the other hand replicates analysis with similar data on deontology, with further analysis on how it concentrates on good promoting rather than the sole right-making characteristic while many philosophers say that utilitarian rule is based entirely on teleological which requires what Olson (1967) states “obligatory and the morally good are wholly, whether directly or indirectly, a function of what is nonmorally good” (p. 342). This makes indirect theories or rules, utilitarianism teleological. Therefore if a theory is teleological even though the good promoting rule is a right making feature of an action, then the theory in this case should be a good promotion in the right making feature of actions.
Deontology and Justice
When constructing utilitarianism and deontology theories, philosophers often try to draw a distinction between the two, linking utilitarianism to the rule that promote good while deontological as an act of rules of justice. Reiman & Gerwirth (1978) further states that “a theory is especially prone to b e deemed deontological if an act can be right when it distributes a good in the proper way at cost of the total amount of goodness produced” (p.15). Equating deontology with justice helps us capture the idea of that justice be done whenever a wrongful act is committed. As applied in property law, Scanlon (1978) states that “equality of distribution and fairness of processes are among the property that makes states of affairs worth promoting” (p.99). In his explanation, Scanlon links utilitarian theory to fairness and equity. Fairness and equity are often linked to morally desirable features of states of affairs or social institutions. It departs from deontological theories which bring fairness and equity as specific moral requirements rather than moral goals.
Scanlon (1978) moves from claiming that goodness of fairness and equity are kind of goodness which pertains to states affairs and does not make individuals better off to the claim that it is kind of moral goodness. In this case, equity can be identified as a moral requirement in which utilitarianism promotes moral good. It also qualifies as deontological since it identifies a right making feature which is not good-promoting. Teleological theory promotes good features of state’s affairs, the right in which it maximizes its complex good and gives certain trade off rates among the goods. Deontology on the other hand is inked to fairness, justice, respect for rights, and recognition of goods (Reiman & Gerwirth, 1978, p. 48). In another deontology definition, Olson (1967) states that
deontology theory of ethics is one which holds that at least some acts are morally obligatory regardless of their consequences for human weal or wore. The popular motto ‘Let justice be done though the heavens fall’ coveys the spirit most often associated with deontology theories (p.343).
On this avenue, deontology is only justified when a wrongful act is done. Some philosophers emphasize that deontology rule are those things you must do no matter what (Friendman, 1978, p.9). On the other hand Donagan (1977) maintains that “it is absolutely impermissible to commit murder” and “even for a good end, it is impermissible for anybody, in conditions of free communication between responsible persons, to express an opinion he does to hold” (p.88). In sum, deontologists take an approach of refraining individuals from violating wrongful acts as refusal to do so will have very bad consequences.
Deontology as the Priority of the Right over Good
Like many other philosophers, Goodin (1995) equates utilitarianism to the rule that limits reasons. In his definition, Goodin argues that situations require that we abandon the impossibly complex aim of optimizing each time we act, and accept guidelines of rules. This is to mean that the good is nevertheless prior to the right and our knowledge of the right is entirely depended on the notion of good. Therefore an individual can only practice good if they only knew what good is and how complex is the matter to optimize it, then they can see the need to be guided by rules. This statement theorizes that utilitarian is teleological while deontological is a non-optimizing rule. The standard definition of utilitarian theory may be taken to imply that the theory is in the end optimizing. It explains that breaking the rules is sufficient for wrong doing eve if it’s meant to yield better results could be achieved by violating them.
Since deontology is linked to the moral obligation of the basis of desire to promote good, it’s generally agreed that moral intuitionism is a claim that intuitions are in some way self-evident. According to Prichard (1978) perception “the sense that we ought to do a certain thing arises in our unreflective consciousness, being an activity of moral thinking occasioned by various situations in which we find ourselves” (p.16). Self-evidence goes beyond the degree of justification to constitute knowledge. Self-evidence is therefore endorsed by both deontology and utilitarian theories in which the relevant moral intuitions are generated by principles and moral judgments. This is to say, moral intuitions preserve the status of institutions. Another deontologist such as Benn (1988, p.58) gives a more detailed analysis by explain that different principles should be traded off against each other and against values to accommodate moral judgments in specific cases. The word trading off implies that the rules are not absolute. This interpretation allows a coherent and systematic rational choice among conflicting duties (Prichard, 1978).
Prichard (1978) provides us a strong interpretation of the priority of the right over the good without relying on the knowledge of what is good. Deontologists such as Gauthier (1988) tries to bridge this gap by explaining that “describes a form of justification in which first principles are derived in a way that does not suppose any final human purposes or ends nor any determine conception of the human good” (p.341). This statements emphasizes that the requirement that deontological justifies does not determine conception of the good and a justification can only be a deontology if it relies on a non-determinant notion of the good. It only requires the general idea that each person’s good is to be understood in terms of maximizing the satisfaction of her preferences (Gauthier, 1988). The claim that the principle of right is based on the satisfaction of preferences based on some knowledge of good or non-determinant qualifies the theory as deontology. This is to assert that justification begins with non-moral concept of the good and the right is defined in terms of rules or principles that have certain promoting relations to the good so conceived (Gauthier, 1988; Gaus, 2001).
Grounded Values
Deontologists employ an approach of justifying moral principles by first observing the values and moral principles of organizations and how they justify the moral principles. The conceived relationship between two aspects assumed the existence of moralized relations. This is to mean that our understanding of moral good is depended on the colored moral convictions about the way people are treated and the way they treat others. Deontologists draw attention to the limits of ranking in terms of priority the intertwined concept of the right and good. The principles of right and duty are prior to our conception of the goods or values that help us affirm that the principles of right derive from our values. Our values of the social world are deeply informed by moral principles and to reject our moral principles we will undermine the rational basis of our values. This simply means that the theory of deontology derives from our moral values. The main focus on deontology and utilitarianism is based on the notions of good and right and helps us understand the primary terms of types of reasons to act (Gert, 1988, p.70).
It has long been argued that ethical systems are either utilitarian-right based or deontological-fairness and justice. Utilitarian ethics accepts the foundation of moral utility. Straurt (1979) defines utilitarian ethics as “ those actions that are right in proportion as they tend to promote happiness and wrongful acts tend to reverse happiness (p.15). Sidgwick (1966) gives a more comprehensive analysis by stating that.
By utilitarianism is here meant the ethical theory, is that conduct which, under any given circumstances, is objectively right, is that which will produce the greatest amount of happiness on the whole: that is, taking into account all whose happiness is affected by the conduct (p.10).
In other words, Sidgwick (1966) utilitarian approach implies that an action can only be right if its yields happiness. In this aspect the author takes the position that morality and efficiency are consistence. In affirming this argument Posner (1983) states that “the criterion for judging whether acts and institutions are just or good is whether they maximize the wealth society” (p.15). This is to mean that an act of an institution may only be deemed ethical if it is more sufficient than any other alternative. Therefore if an act of policy results to misallocation of resources, it is deemed unethical and reduces efficiency. Utilitarian is defined in terms of definite and measurable units, where choices are ranked makes it hard to determine the precise measurement values. On pubic policy aspect, utilitarian argue that all the illegal acts are against public policy as they do not promote public interests or for the common good of individuals. This is to the reason that nonsmokers have smoke free restaurants and workplaces and to the interest of smokers to smoke in work places and restaurants and to the interest of prostitutes to earn a living in the interests of their clients to be able to use their services. In this case, moralists would ban prostitution if they could but other segments of the industry would like to the use the same services to make a living. Other stake holders and employees would like to see legislation passed to protect them against illegal activities (McGee, 2004, p.89).
Accounting Ethics in AICPA adoption
In determining the relationship between utilitarianism and deontology in today’s economy, research gathered here assesses public interests and the degree of economic freedom by reviewing AICPA regulatory policies and their impact on employees and beneficiaries of their services. According to Hale (2002), ethical values are foundations on which a civilized society is based on. On business aspect, Hale (2002) states that “ethics are designed to direct activities of an organization and employees are required to abide by a code of conduct that facilitates public confidence in providing products and services” (p.10). Accounting ethics are both applied in a normative and descriptive discipline when we think about accounting ethics; the first thing that comes into mind is financial statements, frauds, insider transactions, security frauds, bribery and executive conceptions. All these areas cover ethical aspects of accounting standards.
To develop and determine the role of deontology and utilitarianism, its important to determine their applicability in financial institutions and the public as a whole. Accounting ethics as applied in code of professional conduct is composed of composition of by laws, applicability and compliance. The Code of Professional conduct is incorporated in the America Institute of Certified Public accountants consists of the following sections; 1) Principles and; 2) Rules. Bylaws provide Rules and standards that members of the organization are required to adhere to. This refers to the theory of deontologist. Professional ethics laws designed to provide guidance and rules to all members in educational sectors, both private and public practices and the government (AICPA Professional Standards, 2008, p.10).
In following rules and regulations, disciplinary measures are also put in place to punish members who fail to comply with the rules. Ethics rulings consists of formal rulings and its interpretation as adopted in state societies, practice units and other interested parties is depended on the willingness of party application which is not limited to the scope. The AICPA Professional Standards (2008) also states that “members who depart from such guidelines shall be a burden of justifying such departures in any disciplinary hearing” (p.10).
Ethics Ruling in Journal of Accountancy comprise different, but related bodies in explaining the relationship between ethical standards and accounting profession. According to AICPA Professional Standards (2008), members of accounting professional standards are applicable to the “CPA society, State board of accountancy, Securities and Exchange and government agencies that regulate client businesses and evaluated clients’ compliance with the set bylaws and related regulations (p.10).
The public interests
Members of the American Institute of Certified Public Accountants are required to execute public interests as their primary responsibility. Members are for this case required to carry out their responsibility to the public with integrity irrespective on the intense pressure they are being subjected to. In cases of solving conflicts, these members are required to subject their professional responsibility with integrity, objectivity and due profession care and are expected to provide equality services and should in all manner demonstrate a level of professionalism consistence with the Code of Professional Conduct. In this aspect, members should always demonstrate their dedication to professional excellence (AICPA Professional Standards, 2008, p.17).
Applicability
The AICPA code of Professional conduct is applied by member of accounting profession for purposes of seeking both the public and organizational interests. Members are required to not to subcontract people to act on their behalf when executing their duties. If such happens, then, the subcontractor will be held responsible for the acts of all persons associated with him (AICPA Professional Standards, 2008, p.29).
Enron’s auditor’s actions were unethical since they were against the current SEC regulations of misrepresenting financial status of the company. As provided by AICPA Professional Standards (2008), the US legal system allows companies to manage their own employee pension funds and the fraud conflicted with public interest because the company had obligatory duty to use funds in a way that benefited them even if they were sinking into losses (p.11).
The managers and executives also conflicted with public interest because they had a duty to act in the best interest of the company and its stakeholders (AICPA Professional Standards, 2008).
The management violated several accounting rules that conflicted with accounting law, SPE laws and AICPA code of Professional conduct when it bend the accounting rules to satisfy their own desires of profit making and completely ignoring the interests of stakeholders, employees and the business. Most of the problems experienced by the company derived from immoral and unethical actions by top authorities of the company to achieve personal gains. Therefore in order to prevent reoccurrence of future unethical issues, there’s need to emphasis on the integrity of executives. To help prevent the looming frauds such as Enron and WorldCom, SEC enacted the Sarbanes-Oxley bill to help prevent loopholes within the accounting and financial disclosures. Due to the increasing frauds in our economy today, several organizations are trying to reorganize their employees towards remaining loyal to the ethical standards demanded by AICPA and SEC (Rollings et al, 2005, p.18; US Securities and Exchange Commission, 2001)
Enron’s Influence and Ethical concern
Enron’s scam demonstrated the need to reevaluate the ethical system of business culture within organizations and reconstruction of accounting laws concerning these misconducts. Ethical issues faced by Enron range from systematic, organizational and personal levels. On personal level, the individual’s greed and ill conceived acts to fraud the public went against the State’s and public interest. Organizational level describes the causes of unhealthy and unethical decisions made from top management, while the systematic level describes the eternal influences. In incorporating ethical values in institutions, personal level calls for character evaluation of both Enron executives and managers and the accountant that conspired to commit the fraud (Rollings et al, 2005).
Since AICPA laws express the profession recognition responsibility to the public by accepting to adhere to the provided regulations to extend their responsibility to clients, the public and their colleagues, the chief financial officer Andrew Fastow was held responsible for creating several SPEs strategically designed to transfer debts to and from the company and for removing debts off the books. He was also charged with federal charges of laundering money, fraud, conspiracy and obstruction of justice. Fastow along with several others were involved in engaging in financial gaming activities totaling to $ 161,000. Former CEO, Kenneth Lay was also charged with civil charges in regard to a wide range of schemers o fraud by overstating the company’s financial results and misleading public representations about the company’s performance. Enron’s editor, Arthur Anderson was also accused of committing unethical conduct by trying to retain the loyalty of the company executives. He was later charged with criminal charges of obstruction of justice and by destroying and deleting computer files crucial to the case. Many of the charges directed at these individuals are clear indication of deontological theory. The greedy managerial act of acquiring profits based on self interest did not promote moral good, an act that can be linked to utilitarian theory. The ethical issues come to question the characters of these individuals as they place the company’s future at risks for personal gains (Rollings et al, 2005).
On the group levels, many individuals are swayed to act a certain way based on the influence of fellow group members. The interactions that take place among group members have the tendency to formulate group think. This means that individual decisions are greatly influenced by ideas generated by the group and characterizes conformity to prevailing points of view. Individuals are in this case tied to corporate culture, adopted their ethics associated with their roles as managers. Evidently, many Enron scandals were committed by managers who felt that they were obligated to act so as demanded by the pressures of their managerial roles, which caused them to act in unethical manner. The close relationships that were formed among leading top executives at Enron and the board of directors grew arrogant, thinking they were invincible. These frauds formulated by these executives created a corporate culture that focused more on profitability and success at any cost. These corporate cultures created norms that led to humiliation and mistreatment of Enron whistle blowers. The company’s corporate culture promoted “up-or-out”, where the company CEO would step on other people to maximize profits (Rollings et al, 2005, p.17).
On systematic level, external factors such legal and regulatory structure were said to have contributed to instability of the company, individuals making decisions contradictory to what they normally do. With sound ethical system in place, people like Anderson would not have frauded the public. SEC regulations require accountants to present true values of companies in auditing accounting books, which was obviously not represented. Most companies have code of ethics that that prevent managers and executives from getting involved with other businesses, which was not the case for Enron (Rollings et al, 2005, p.17). Due to lack of regulations in companies, these codes are voluntary since board of directors can set them aside whenever they wish to. Here, the managers are faced with conflicts of interest because they have a duty to act in the best interest of the company and shareholders. Utilitarian argue that all the illegal acts are against public policy as they do not promote public interests or for the common good of individuals. However, there are no rules that prevent managers from acting on their own business judgment about what is best interest of the company (Rollings et al, 2005, p.18; US Securities and Exchange Commission, 2001).
Ethics Rulings and Responsibility to clients
Professional service members including directors and members of the firm are required not to have relationships with other firms tat could impair members’ objectivity. AICPA Professional Standards (2008) provide exceptions cases where “members believe that the professional services can be performed with objectivity and relationships is disclosed to and consent is obtained from all the appropriate parties, performance of the service shall then be permitted” (p.12). In view of these factors it’s unethical for a member of public practice to accept a position as bank director where the member’s clients are likely to engage in significant transaction wit h the bank. If a member is engaged in public practice, members are required to avoid high profitability of a conflict of interest or interference with member’s ability to serve the clients interest objectivity and in complete confidence (AICPA Professional Standards, 2008, p.12).
Conclusion
Deontology and utilitarianism have received considerable criticism and its significant number of deregulations in organizations, which brings us to the question, how do we address the impracticability of organizational bylaws to frauds on the markets? Here we do argue, however, that policy makers should examine in context the shortcomings of the ethical standard and consider in the future whether to undertake a project that would eliminate the differences that exist in the applicability. Since Enron and WorldCom frauds did not seek the best interest of collective well being of the community, institutions and the profession it served, policy makers should propose for amendments that would acknowledge the existing gap between ethical standards and accounting standards to accommodate both public and private sectors interests as well as the economy as a whole.
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