How Can Professional Values Be Saved?

IN FOCUS

How Can Professional Values Be Saved?

By James C. Gaa

This article is adapted from Professor Gaa’s remarks, also delivered at the American Accounting Association’s Annual Meeting in Honolulu, August 4, 2003.

Professor Wyatt’s long career in public accounting enables him to analyze important changes that have taken place in the profession and to offer some suggestions about how the current problems might be addressed. His rich account is valuable because his 40 years of firsthand experience allow him to trace the current problems to a slow, gradual shift in values, and this can be best appreciated through the experience of someone who was there.

Professor Wyatt traces the current problems of the profession back to the 1960s, when information system consulting became a highly lucrative activity at Arthur Andersen. More fundamentally, he says that the problem consisted of a fundamental shift in values that were brought into the firm when it began hiring employees who did not share the norms of professionalism that were part of the firm’s traditional culture and that had permeated the firm previously, when everyone had been trained as accountants.

That is, the fundamental and traditional values of Andersen were corrupted by this change, a change that took place almost unnoticed, slowly, over many years.
In my comments, I want to briefly place the issue of conflicting values into its historical context and into a theoretical structure that might help us to understand the current situation and to assess the prospects for progressive change.

Normative Principles and Workplace Morality

Rather than look at the issue in terms of professional values and professional ethics per se, I am going to focus on the idea that an accounting firm is a workplace, and that workplaces operate according to sets of normative principles that guide people’s behavior. Also, I want to examine what kind of norms ought to constitute the guiding principles for accounting firms.

In her book Systems of Survival, the urban theorist Jane Jacobs developed a theory of workplace morality that shows the fundamental nature of the problem Professor Wyatt identifies, and thus helps to illuminate the situation of public accounting at the beginning of the 21st century.

Jacobs identifies two separate and distinct systems of ethical norms that govern organizational activity. These two systems are called moral syndromes because they are clusters of principles, or moral precepts, which together characterize accepted standards of appropriate behavior. That is, these syndromes capture the norms that we expect people to follow in the performance of their duties in the workplace.

First is the “Guardian” syndrome. It relates to territorial concerns, and involves the notions of protecting, exploiting, administering, and controlling. According to Jacobs, occupations for which the Guardian syndrome is appropriate include government ministries and agencies, the military, and economic monopolies. Guardian norms include a prohibition on trading, the use of power rather than voluntary arrangements, and the dispensing of largesse instead of making productive investments. Auditing is an occupation for which Guardian morality is appropriate.

Second is the “Commercial” moral syndrome, which is concerned with the production of, and trade in, goods and services. According to Commercial norms, people engaged in business are expected to compete with each other, bargain honestly, and then honor the contracts they make. They should seek productive investment opportunities, be creative and willing to take risks, and conduct their activities efficiently. The management consulting activities of accounting firms are legitimately governed by Commercial norms, although it should be noted that the greed that came to pervade Andersen is outside the bounds of Commercial morality. (In general, opportunistic behavior is outside of the Commercial moral syndrome.)

Moral Syndromes in the Accounting Profession

In many parts of the Anglo-Saxon world, public accounting has adopted features of both the Commercial and the Guardian moral syndromes from its beginnings in the first half of the 19th century. Originally, public accounting was primarily Commercial in that practitioners offered a wide range of financial services for clients, of which auditing was only a small part.

At about the same time that associations of professional accountants were established in the United Kingdom, the passage of the Companies Acts of 1844 and 1845 required balance sheets of corporations to be audited by an external auditor. This was done to protect investors against potential management fraud occasioned by the separation of ownership and management. The legislated purpose of the SEC—that is, to ensure fair and efficient securities markets and to protect investors—is a clear expression of Guardian morality.

Both the Guardian and Commercial moral syndromes were present at the birth of the profession, and since that time have shared the allegiance of public accountants in varying degrees. For a time, including the early part of the period recalled by Professor Wyatt, the values inherent in the Guardian moral syndrome were dominant, in both the promotion of investor protection and in the profession’s opposition to the Commercial syndrome, through such anticompetitive practices as bans on advertising, on competitive bidding, and on the hiring of employees from other firms.

However, as Professor Wyatt describes it, in the last 40 years or so we have seen a significant shift so that the Commercial moral syndrome has captured not only management consulting—where it started—but also the auditing function of public accounting.

It is important to emphasize that the two moral syndromes are each legitimate clusters of moral precepts. Neither is “right” or “wrong” per se. But they are incompatible, and for a given occupation or workplace one moral syndrome is more appropriate than the other. So, although they are not strictly in competition with each other, they cannot coexist easily within a single workplace. While occupations and workplaces may tolerably contain features of the other moral syndrome to a minor degree, neither syndrome is legitimate in the domain of the other.

Thus, Guardian occupations should be conducted in accordance with the Guardian moral syndrome, and should not follow Commercial moral precepts to any major degree. In short, Commercial morality is inappropriate as the precepts governing the auditing profession.

So, what about Professor Wyatt’s characterization of the opinion of Andersen’s consultants—that the accountants’ business model was stodgy and unnecessarily confining? The debate appears to have been about which moral syndrome would dominate the workplace. Because an accounting firm is a single workplace, it might have seemed natural, especially as events unfolded slowly over a long period, to believe that the Commercial moral syndrome was appropriate for all firm activities, including auditing. In any case, the Commercial moral precepts won the battle.

Because the external audit is essentially a Guardian activity, importing incompatible Commercial values into the audit side of the firm was a major mistake. The management consultants at Arthur Andersen were correct that the accountants’ values were stodgy and not appropriate for their part of the workplace. The accountants were also correct, however, in their belief that their traditional Guardian values were appropriate for the auditing domain within the workplace. Thus, accounting firms in general, not just Andersen, were seduced by the idea that one set of values should be followed by the whole firm—that is, in every part of the workplace.

It’s not clear to me from Professor Wyatt’s account, or in other sources I’ve read, whether or how long Andersen attempted to keep the two moral domains of auditing and consulting separate, each with its own set of moral precepts. (What does seem clear is that the problem of sharing profits between the two areas would have made such an arrangement difficult to sustain for a long period.)

In any case, throughout the accounting profession the Commercial moral syndrome became predominant. At the same time, the audit function was unable to escape the demands of Guardian morality, even though accounting firms tried to make auditing conform to Commercial norms. The SEC has seen to that. The result is the mixing of moral syndromes, resulting in what Jacobs calls “monstrous moral hybrids,” which she defines as “organizations that, instead of sticking to their own syndrome, take whatever they choose from either.” In the case of auditing, words were consistent with Guardian morality, while actions bespoke Commercial morality. (It would be interesting and important to determine the degree to which other accounting firms have become monstrous moral hybrids, too.)

This theory of the morality of the workplace implies that the current problems of the public accounting profession are an inevitable consequence of mixing the Guardian and Commercial moral syndromes, and in particular of allowing Commercial morality to dominate the workplace. Regardless of the attitudes and intentions of individual members of the profession, public accounting cannot successfully pursue the Commercial and Guardian orientations simultaneously. Public accountants’ responsibility for causing the current mess is in part the result of thinking they can have it both ways, that is, of trying to import the Commercial moral syndrome into the domain of auditing.

Diagnosis and Prognosis

As for how this situation might be fixed, I agree with Professor Wyatt’s diagnosis of the profession’s problems. That is, I also believe that the root problem is a major shift in values, from a focus on what he terms professionalism and ethical values to a focus on commercial values, and what I have characterized as a shift from the Guardian to the Commercial moral syndrome. We thus agree that the profession needs to shift back toward the values that characterized it in an earlier time, with auditing conducted in accordance with Guardian morality.

So, the question arises of what the accounting profession can do to reestablish its proper mission, and how much it needs to change so as to move back to the professional values that have been lost—back to auditing in accordance with Guardian morality, as society seems to demand.

The answer is, I believe, that it cannot do much. We might wish that the profession would move in that direction voluntarily. The trouble is that it has already adopted Commercial norms in the practice of auditing. When practiced Commercially, public accounting provides a much greater opportunity to earn high incomes than if it is practiced in accordance with Guardian moral precepts. Although individuals might be willing to move back to a Guardian orientation, I find it difficult to believe that the profession as a whole would—or could—do so voluntarily. The economic incentives driving Commercial behavior are just too strong to give up easily—or without a fight.

Rather than asking a large group of people voluntarily to give up great economic benefits, it makes more sense to move them away from treating auditing as a Commercial activity by removing or reducing the economic incentives that drove Guardian morality out of auditing in the first place.

This can be accomplished by a change in the institutional structure of the public accounting profession. This is exactly what the Sarbanes-Oxley Act is intended to do. Note that the act’s real title read, in part, as follows: “An Act to protect investors by improving the accuracy and reliability of corporate disclosure.”

There are two ways in which the act encourages a move back to the values and principles of Guardian morality. The first is fairly obvious: The restrictions in section 201 on the provision of any nonaudit services to audit clients that the Public company Accounting Oversight Board (PCAOB) determines to be impermissible, drastically reduce the potential rewards of following Commercial norms.

We can thus expect a move away from the dominance of Commercial norms, which will help provide the conditions for the reemergence of Guardian behavior on the part of auditors. Whether Sarbanes-Oxley goes far enough in this direction it is too early to tell.

The second way in which Sarbanes-Oxley encourages movement back toward the traditional professional values of Guardian morality is perhaps less obvious. The establishment of the PCAOB brings with it a separation of Guardian and Commercial considerations at the institutional level. The act gives the PCAOB the authority to set the following (for the audits of public companies):