The AICPA Code of Professional Conduct was once considered applicable in large measure to CPAs in public practice. With the new Code, this situation has changed. In addition, in many business organizations and corporations, greater stress is being placed on their own codes which are considered good business practice and are applicable to all officers and employees. The authors discuss these recent developments and present typical situations in which application of ethics faces CPAs in industry.

In the business community, the resolution of ethical conflicts does not easily lend itself to objective quantitative analysis. Managers frequently leave ethical discussions open to a number of interpretations, and subordinates are left to sort out the issues and forever wonder if they have done the right thing. There is little guidance in the form of specific rules or case studies as to how a particular ethical problem should be addressed. It is as if ethics in general terms must be left to philosophers and theologians.

A high ethical standard is presumed of the CPA in public practice. But what of the ethics of the CPA employed as a professional in the private sector? This is especially relevant now because the AICPA Code of Professional Conduct has recently been extended to include all CPAs, not just those in public accounting. There are initiatives emanating from both the public and private sectors that address the concerns raised by companies, employees, and society at large about ethical standards. These serve as a backdrop to reinforce the CPA's obligation to be armed with a consciously developed set of high ethical standards. In addition, examples of ethical dilemmas that confront the CPA in industry can be used to raise the consciousness of professional accountants involved in decision making.

Ethical Analysis: A Professional Responsibility

Missing in most discussions of ethics is the fact that, by definition, ethics is the part of philosophy that deals with the practical application of those actions over which we have control. Webster's Dictionary defines ethics as "...the principles of conduct governing an individual or a profession: the discipline dealing with what is good or bad or right and wrong, or with moral duty and obligation; a particular theory or system of moral values....," At the same time, in defining a professional, Webster's characterizes that person as one "...conforming to the technical or ethical standards of a profession or an occupation." Professionals are expected to maintain "high standards of achievement and conduct." Therefore, ethics is very much an appropriate philosophical mode of analysis and is integral to the definition of a profession.

While ethical decisions may appear to be strictly subjective, they are made in the context of personal as well as professional lives. Individual ethical conduct must be carried out in conjunction with other individuals as well as within the context of the organization. The individual dealing with a personal ethical response to a given situation does so within an organizational structure which itself has defined certain responses as ethical or unethical. When significant differences exist between the ethical beliefs of the individual and that of the organization, conflicts arise. The same is true when differences exist between the company and the societal context in which the company operates.

Whether a company chooses to address the importance of ethics in decision making in a formal manner (e.g., through the promulgation of a code of ethics) or otherwise, it is inevitable that the decision made is evaluated by all stakeholders and not just the stockholders. The stakeholders are all individuals or groups involved with the company, both internally and externally, who are affected by its decisions. The financial press is full of examples that indicate the impact that unethical decisions can have on a company and its relationship to the stakeholders who are part of the corporate culture. The responses to charges of unethical behavior are all too familiar: "I (we) lost sight of what was important in the long-term view of things." "With hindsight, we should have told them to get the hell out of here." "There was such a push for strong quarterly earnings."

These responses point to two critical factors that must be addressed by a company serious about incorporating ethics into its decision making process: the short-term versus the long-term view of what is good business, and the need to evaluate the ethical implications of a decision as part of the decision making process, rather than as a reaction to a third party's criticism of the decision. Accordingly, to ensure its imporatnce, ethical analysis must be institutionalized as an integral input into all phases of the decision making process.

Ethical Initiatives Affecting the CPA

If one accepts the tenet that a code of conduct directing ethical behavior is a critical part of the definition of a profession, then it is important that a mechanism exist for incorporating ethics into the decision making framework. While professional organizations and numerous companies have put emphasis on this process for years, there has been a renewed call on many fronts during the past decade. In part, this is a result of violations of ethical behavior in every aspect of society and, from a purely pragmatic point of view, actions to avoid excessive regulation and costly litigation. Three major initiatives affecting the CPA are emanating from professional accounting organizations, educational institutions, and the business community at large.

Professional Initiatives

The initiative coming from professional accounting organizations includes the AICPA's new Code of Professional Conduct. A major change in the new Code is the development of both principles and rules for ethical behavior. The six principles, in contrast to the spirit of the old Code, adopt a proactive and positive approach to ethics. Although the rules are an update of previous "dos and don'ts," the new principles attempt to develop an attitude and atmosphere in the profession which makes ethical considerations a cornerstone of every action a CPA undertakes. The thrust of the principles is that CPAs have an obligation beyond just complying with the law. Instead, the professionalism of accountants must be manifested by behavior consistent with a responsibility to serving the public trust.

The Code has been extended to apply to all CPAs, including those employed in the private sector. By including all CPAs, the Code ensures that the title "CPA" universally carries high standards of professionalism and ethics. Accordingly, all CPAs now have a stated obligation to act professionally and in the public interest. For example, CPAs in private industry will adhere to the principle of competence by fulfilling a comprehensive set of continuing professional education requirements. Moreover, CPAs in industry are required to be as objective in applying GAAP when preparing financial statements as CPAs in public practice performing audits.

The National Association of Accountants (NAA), the world's largest organization of management accountants, has also been actively involved in promoting ethical behavior among accountants in the private sector. The NAA's Standards of Ethical Conduct for Management Accountants has emphasized the obligation of management accountants "...to organizations they serve, their profession, the public, and themselves to maintain the highest standards of ethical conduct.1 Since accountants produce and monitor financial reports both for internal and external use, it is imperative that their integrity be beyond reproach.

Despite these initiatives promulgated by the professional accounting organizations, Stephen Zeff in an article entitled "Does the CPA Belong to a Profession?" has raised two issues that may adversely affect the CPA's professional status. The first issue he discusses is that diversified services draw firms into competition with other disciplines that have few or no professional/competitive restraints. He suggests that this may erode the professional judgment of the accountant. The CPAs in private practice face these same issues of competition and diversification that impinge on their ability to maintain an appropriate professional response to ethical questions.

Zeff also argues that ethical and judgmental problems may arise because of the increase in a rule-dominated practice. The problem of a rule-dominated practice is that it may lull us into a false sense of what is right and wrong by viewing decision making through a legal/illegal lens. Here the concern becomes one of form over substance with ethical decision making being replaced by legal decision making.2

Educators Must Set the Tone

It is not only in the professional accounting organizations that the ethics question is being addressed. Educators are concerned with how ethics should be incorporated into the accounting curriculum. The American Accounting Association (AAA) in its report, Future Accounting Education; Preparing for the Expanding Profession, has noted that a professional accounting education goes beyond providing skills and knowledge. In addition, it must "...instill the ethical standards and the commitment of a professional. The general effort to develop in students a concern for individual needs and for the overall advancement of society must be given more emphasis.3 The report notes that accountants need to be creative, sensitive, and aware of the needs of society. While the circumstances within which we exercise professional judgment may change, the common thread running throughout these changing circumstances should be those characteristics that define the accountant as a professional.

The National Commission on Fraudulent Financial Reporting (Treadway Commission) has also recommended that students be exposed to ethical questions and that more emphasis be placed on the ethical dimension of financial reporting in the business and accounting curricula. As recent insider trading cases have revealed, ethical decisions are not only the concern of upper level managers, but also may be faced by individuals early in their professional careers.

Companies Join In

A third initiative has been generated by companies themselves with a renewed interest in codes of ethics developed by companies. The Corporate Ethics Project of the Business Roundtable, which includes the CEOs of 200 major corporations, recently looked at 100 companies and how they have dealt with the issue of corporate ethics. The project pointed to the "crucial role of top management" and the necessity of providing constant leadership in tending to and renewing the values of the organization. This was also strongly recommended by the Treadway Commission which emphasized the importance of the tone set by top management and its influence on the corporate environment. Two other major findings of the Business Roundtable project were a deep conviction that a good reputation for fair and honest business is a prime corporate asset and that corporate obligations extend to a variety of constituencies or stakeholders. Recognizing that the human conscience is fragile, the Ethics Project emphasized the role that ethics plays in the company must be pervasive, extending to hiring, training, oversight, recognition and reward, review for adherence, and channels for reporting problems. They noted the growing conviction that "...strong corporate culture and ethics are a vital strategic key to survival and profitability in a highly competitive era.4

Ethics: Good Business Sense?

There is evidence from surveys of practitioners that accountants in the private sector might be under pressure to ensure that financial results meet expectations, both internal and external to the company. This raises a practical question about whether ethical behavior is at odds with the notion of maximizing reported profitability. The question must be addressed from both a short-term and long-term perspective. The response made by Johnson & Johnson to the Tylenol crisis had very negative short-term implications for profits but, in the long-term, represented not only an ethically sound decision but one which was praised as making good business sense as well. There is growing concern in the financial press over the emphasis on short-term earnings results at the expense of performance over the long-term. Companies themselves are criticizing this short-term view and are beginning to develop methods for evaluating performance from a long-term perspective.

Earnings Corrupts?

In considering many of the ethical decisions facing the manager, a key factor influencing ethical/unethical behavior is often the concern over a decision's impact on earnings. The Treadway Commission has noted the negative impact that this myopic notion of profitability can have on top management. Rather than viewing attempts to reduce fraudulent financial reporting as defensive, the Commission emphasizes sound financial reporting as making good business sense by positively affecting the corporate reputation. A corporation must meet not only the condition of viability, but also that of legitimacy for its continued existence. Legitimacy means the way in which the enterprise goes about its economic role in accordance with generally accepted rules, principles, and standards, whether or not they are required by law or statute.5 The role that ethics plays in decision making goes beyond the legal dimension and must concern itself with whether or not the decision meets the value orientation of the company as well as the environment in which it operates.

This belief in corporate social responsibility does not deny the importance of profits and financial viability to the company. Rather, it sees ethical decision making as an integral part of sound business decision making and as having a positive effect on its long-term financial success. Support for this exists in the popular financial press. In a Fortune article ranking America's most admired corporations, one of the eight criteria used for evaluation was a sense of responsibility to community and environment.6 The well-known management analyst Peter Drucker goes further, encouraging a company to turn a social problem into an economic opportunity and benefit rather than viewing it as a cost to be absorbed.7

Employees Are Affected

There may also be internal costs to a company failing to deal with the impact that unethical behavior may have on employees. When employees are faced with significant conflicts arising from differences between personal and corporate ethical value systems, they may be faced with a choice of living with this conflict or choosing to work elsewhere. Both of these choices can result in real costs to the employer. It has been suggested that when the employee chooses to stay with the company, these conflicts may have adverse effects on productivity through reduced quality of work performance, absenteeism, strained relationships, and low morale. Those who choose to resign also represent a cost since they are most likely to be individuals whose work performance may be superior and are therefore in the best position to be able to find work elsewhere.8 In either case, there is most likely an impact on the profitability of the company for failing to provide the employee with a positive outlet and response mechanism for these areas of conflict.

In addition, there may be future costs for the company if employees choose to detach themselves from the perceived "corporate unethical decision." This separation of personal ethics from the corporate ethics might result in a future action being taken by the employee with a lack of consideration of its ethical implication for the company. This "losing touch" with their personal value system is often cited by those found to be involved in illegal or unethical behavior. The institutional value system replaced their personal value system on the job and eventually impaired their ability to function in an ethical manner.

A Proactive Organizational Response

As discussed, the Treadway Commission has noted that the "tone at the top" is the most critical factor affecting ethical behavior in corporations. It is imperative that the CPA in industry advocate and promote this proactive approach recommended by the Commission. This approach should be reflected in the organizational climate rather than the reactive mode often noted in the financial press.

Debate Will Continue

While the debate over what constitutes ethical behavior has, and will, wage on for years, the importance of addressing this issue within a company has been well established. Whether an organization chooses to respond to this concern strictly from a self-centered point of view, to reduce the threat of increased regulation or future litigation, or chooses to raise the issue to a higher, more altruistic goal, it appears that there are benefits to be gained both from an economic perspective and through the creation of a more healthy work environment. A common thread running through Peter's and Waterman's book, In Search of Excellence, is that companies who have achieved excellence have made a conscious attempt to pay attention to the needs of their employees and customers.9

Every Day Guidance

Just as companies adopt models for decision making in their approach to responsibility accounting or capital budgeting, it is imperative that they also provide a framework within which to evaluate the ethical implications of their decisions. This extends beyond the adoption of a corporate "code of ethics" to the implementation of a working model that can serve to provide guidance to employees in their every day handling of complex and ambiguous situations. Failure to adopt this working model can result in the creation of a "moral vacuum" that allows each of the employees to decide for themselves what will, or will not, constitute ethical behavior. While some have dismissed the entire process on the basis that ethics cannot be taught, others have decided that, at a minimum, it is critical to raise the ethical consciousness of those who work within the company.

Consciousness Raising

This process of consciousness raising can be accomplished from a number of perspectives. A corporate code of ethics is certainly a beginning, but it has been well documented that the code must become a living document that begins with the "tone at the top." Johnson & Johnson demonstrated that its code was an action-oriented one. Its "Credo" of corporate values, which is over 40 years old, played a major role in guiding it through its response to the Tylenol crisis. It is an active document that is constantly reevaluated and that "...strikes a balance between centralized management control and giving employees enough autonomy to build mutual trust critical to maintaining a value system." Top management is actively involved with this process.10

Unless ethical questions are discussed before the situations arise, the response may not be well thought out but will represent an attempt based on different and possibly conflicting views of what constitutes the most appropriate response. Companies spend time and money orienting the new employee to the corporate culture. This orientation should also include a clear understanding of the firm's position on ethical behavior and its impact on particular practices that the employee may encounter. Whether explicitly stated or not, the employee will encounter a corporate climate from the first day of training by observing the way peers and superiors respond to specific situations that arise in the workplace. This climate can result in the formation of a process for dealing with complex, ambiguous situations, or individuals can be left to decide for themselves about the best course of action if a "take care of it" mentality has been observed.

The process must include both planning and control in the same sense that we use the terms in other managerial models. The planning part of the process includes the development of the code of ethics and its incorporation into training and professional development programs. It includes making ethical analysis an "input" into accounting-based decision making. The control aspect consists of regular reviews of the decision making process, channels for reporting problems, and inclusion of ethical issues as part of the evaluation and reward structure.

Examples of Ethical Dilemmas Confronting the CPA

Whereas codes of ethics may represent a company's ethical stance at the conceptual level, concrete examples may do more to raise the ethical consciousness of employees in the decision making process. Examples can be found in all the major functions performed by CPAs in industry, including the roles of product costing, decision making, planning, and control.

Product Costing Can Be Manipulated

Product costing is required by GAAP to evaluate inventory and eventually cost of goods sold in the financial statements. However, the Treadway Commission points out that pressures could arise to minimize the reported cost of goods sold. This could take the form of accountants being asked to massage the allocation of overhead or changing the estimates of the economic life of assets. Pressures could also exist for accountants in industry to delay proper writedowns of the value of inventory. For example, in the highly competitive and technologically advanced consumer industry, new products are introduced at a rapid pace. This heightens the probability that demand for existing products and inventory could flatten or decrease. Management under earnings performance pressure may be tempted to engage in financial statement management by not writing down inventory. As the saying goes "If you can't report good performance, you can at least have a good performance report."

With the extension of the Code to include all CPAs, accountants in industry now have the same stated obligation as auditors to ensure the proper valuation of all assets and to properly cost the inventory.

Decisions Are Being Made

An example of ethical ambiguities in the decision making area occurs when companies are investigating whether to outsource any part of the production process. In addition to the obligations to stockholders, does the company have any responsibilities to the workers, suppliers, and the community in which they are currently located? Moreover, assume a company's production costs would be lower abroad because the pollution control laws are less stringent and therefore cheaper to comply with. Should the lower costs justify the possible increased health and safety risks that could occur in the company's new location? To resolve this issue, the accountant could follow the guidelines of Sir Adrian Cadbury who argues that for an action to be considered ethical, it must be open to public scrutiny and that the manager would not be embarrassed if the action were made public.11

With the European Community headed towards substantial economic integration by 1992, many more accountants will be employed by businesses increasingly attuned to the notion of competing in world markets. However, one ethical issue that arises is how to reconcile the variations in cultural and ethical values with the worldwide corporate decision making process. Accounting rules and disclosure requirements differ significantly among foreign countries and the U.S. Although illegal payments to procure business are clearly outlawed by the 1977 Foreign Corrupt Practices Act, a gray area can arise from the issue of what constitutes acceptable expenditures. The CPA in industry could be asked to approve expenditures for entertainment in one country which might be considered unacceptable in the context of doing business in the U.S. This is where the accountant could help set policies and guidelines through a promulgated company code of ethics which would clarify the universality of employees' actions.

Planning Is Also Susceptible

Accountants are involved in the preparation and presentation of budgets. One ethical issue facing accountants revolves around pressures from individual departments or divisions to use the budgeting process to maximize their share of allocated corporate resources. If the accountant develops an unrealistic budget, this could result in needless investment in unnecessary equipment or the production of excess inventory. Using stakeholder analysis (which analyzes the decision in terms of all affected parties both internal and external to the company) the accountant could evaluate this effect in terms of possible future layoffs, lost opportunity cost of a more effective use of corporate resources in other segments of the business, and possible loss of wealth to the stockholders when actual earnings don't meet expectations.

Capital budgeting is another area of planning which is ripe with ethical dilemmas. Since many companies have elaborate mechanisms to evaluate capital budgeting requests, CPAs may confront pressures from divisional managers to circumvent the formal process. This could take the form of breaking up a large expenditure into smaller components. The smaller requests, in turn, might not need to comply with as formal and rigorous guidelines as larger projects do. In both the generation of the projections and the framing of the amount of the capital budget expenditure, the CPA in industry could refer to the objectivity principle of the Code. The principle of objectivity suggests that all CPAs must be unbiased in their work and be firm in expressing their subjective professional judgment.

The last activity we explore is the role of accountants in helping control and motivate employees' performance. One major accounting technique used to evaluate and subsequently reward performance is the ubiquitous ROI. To artificially boost ROI a manager could defer discretionary expenditures such as R&D, maintenance, advertising, and employee development. In addition, the manager could raise ROI by keeping the asset base low as a result of not investing in new and perhaps needed long-term operating assets.

These actions constitute an ethical problem for accountants because an accounting tool is being distorted to promote a favorable evaluation of a manager. Two of the principles of the AICPA's Code of Conduct, "The Public Interest" and "Due Care," are particularly relevant here. The CPA in industry should strive to develop multiple criteria that could more effectively evaluate and control the performance of the company's managers. Therefore, the objective of acting ethically, which translates (in this case) into improving one's competence and acting in the general public's best interests, will also result in the greater long-term profitability of the employer.

Conclusion

By its very nature, any discussion of ethics is subjective. There are no easy answers to ethical questions and situations that confront the professional. This does not mean this topic can be ignored. Ethical questions have to be answered and the situations have to be addressed. It is critical that accountants take an active role in helping the company begin the process of consciousness raising and establishing an appropriate corporate value system. This will offer all employees, including the accountants, an institutional ethic within which these dilemmas can be resolved. Regardless of whether there are clear answers, there should be a clear process.

The issue of ethical decision making in business should only increase in importance in the near future. In our litigious society, companies which do not institutionalize ethics into their corporate culture could find themselves expending financial resources in the courtroom rather than on revenue-generating assets. Moreover, CPAs in industry now can turn toward the AICPA's Code of Professional Conduct to resist pressures they might confront to engage in actions which run counter to their ethical sensibilities. Accountants should strive to develop measures that will capture a company's long-term successes and failures and thus help create an atmosphere that will minimize the need for "creative accounting" to produce mere paper profits. To prevent future government regulation, the accounting profession must ensure that the behavior of its members is impeccable. As this article has attempted to demonstrate, this desired ethical behavior can be fostered by both enforcing strict adherence to the Code of Professional Conduct and by promoting and raising the ethical consciousness of the profession's members.

1National Association of Accountants. Statements on Management Accounting, Standards of Ethical Conduct for Management Accountants, Montvale, NJ, 1983. 2Zeff, Stephan A. "Does the CPA Belong to a Profession?," Accounting Horizons, June, 1987. 3AAA Future Committee, "Future Accounting Education: Preparing for the Expanding Profession," Issues in Accounting Education, Spring, 1986. 4The Business Roundtable, "The Rationale for Ethical Corporate Behavior," Business and Society Review, Winter, 1988. 5Lank, Alden G. "The Ethical Criterion in Business Decision-Making: Optional or Imperative," in Ethics in American Business: A Special Report, Touche Ross, 1988. 6Davenport, Carol. "America's Most Admired Corporations," Fortune, January 30, 1989. 7Drucker, Peter. "The New Meaning of Corporate Social Responsibility," California Management Review, Winter, 1984. 8Moser, Martin R. "Ethical Conflict at Work: A Critique of the Literature and Recommendations for Future Research," Journal of Business Ethics, May, 1988. 9Peters, Thomas J. and Robert H. Waterman, Jr., In Search of Excellence, New York: Warner Books, Inc., 1982. 10"Businesses are Signing Up for Ethics 101," Business Week, February 15, 1988. 11Cadbury, Sir Adrian. "Ethical Managers Make Their Own Rules," Harvard Business Review, September- October, 1987.

Jeffrey R. Cohen is Peat Marwick Research Fellow and an Assistant Professor in the Department of Accounting, Carroll School of Management, Boston College, Chestnut Hill, MA. Robert M. Turner is an Instructor in the Department of Accounting, Carroll School of Management, Boston College, Chestnut Hill, MA.