Theories of Ethics and Moral Development

Ethics in a general sense has been defined as the systematic study of conduct based on moral principles, reflective choices, and standards of right and wrong conduct. Like general ethics, ethical behavior from a professional standpoint also involves making choices based on the consequences of alternative actions. As indicated in the following passage from The Philosophy of Auditing Mautz and Sharaf, 1961, p. 232:

Ethical behavior in auditing or in any other activity is no more than a special application of the general notion of ethical conduct devised by philosophers for men generally. Ethical conduct in auditing draws its justification and basic nature from the general theory of ethics. Thus, we are well advised to give some attention to the ideas and reasoning of some of the great philosophers on this subject.

Prior research on ethical issues in accounting has generally avoided philosophical discussions about "right and wrong" or "good and bad" choices. Instead the focus has been on the ethical or unethical behavior of accountants based on whether they conformed to rule-oriented codes of professional conduct. Various theories of ethics have been identified and used to resolve ethical dilemmas, but the two prevailing theories applicable to CPAs are utilitarianism and rule deontology.

Utilitarian Principle. Utilitarianism is based on the "greatest good" criterion. According to this principle, when faced with an ethical problem, the consequences of the action are evaluated in terms of what produces the greatest amount of good for the greatest number of people. The emphasis here is on the consequences of the action rather than on the following of rules.

Rule Deontology. Rule deontology is a deontological theory and is based on a duty to a moral law. Thus, the accountant's actions rather than their consequences become the focus of the ethical reasoning process. Under this principle, an accountant is morally bound to act according to the requirements of a rule of conduct of the Code without regard to a concern for the effects of that action.

Is the ethical behavior of CPAs involving confidentiality decisions based on a moral reasoning process that weighs the good against the bad based on the consequences to all stakeholders (utilitarianism)? On whether the rule of conduct for the profession is always applied? If utilitarianism is applied, each situation involving confidential client information would have to be evaluated to determine if it would be morally right to disclose the information (this does not pertain to those situations that are specifically excluded in Rule 301). The confidentiality rule would be followed only if that course of action produced the greatest good to the greatest number of people. If rule deontology is applied, however, the Professional Code of Conduct would be followed in all circumstances involving client confidential information (except as stated in the Code), regardless of the consequences.

The Participants

To determine which reasoning process governs the behavior of CPAs in resolving an ethical dilemma involving confidential client information, a survey consisting of three scenarios was mailed to 100 CPAs randomly selected from the AICPA membership directory. A response rate of 50.5% was achieved.

Each scenario required two responses: 1) to inform or not inform a third party of confidential client information, and 2) to indicate which response given in 1) was considered "good ethical behavior" if the Code was disregarded. Respondents were also asked to provide justification for their answers.

Scenario 1 relates to the preparation of a tax return whereas, scenarios 2 and 3 involved information related to an audit. The three scenarios are presented in the accompanying table.

Results

Scenario 1. Given a Code, most (78%) respondents would not inform the IRS. This is in agreement with the rule of conduct. Although the variability increased, most CPAs (70%) in this situation, would make the same decision without a Code. This is consistent with the justification given that most CPAs perceived themselves to be an advocate of the client in a tax engagement. There was no perceived conflict in the rule of conduct and what most accountants perceived as good ethical behavior.

Scenario 2. Most CPAs (78%) responding in this situation would adhere to the Code and not inform one client of information discovered while auditing another client. A large percentage (52%) of respondents, however, indicated that informing would be the "best ethical behavior." In most instances, "potential safety concerns" were cited as the justification for considering informing as the "best ethical behavior." Thus, there appears to be some conflict in adhering to the Code and the moral value of some CPAs.

Scenario 3. Given a Code, a majority (78%) of CPAs would not inform, which is in agreement with the Code. A lesser percentage (53%), however, feel this is the best ethical behavior.

Conclusions and Implications

The findings of this study indicate that CPAs usually adhere to the Code (rule deontology) in resolving issues involving confidentiality. However, such decisions are not always in accord with what they perceive as "good ethical behavior." The broad principles of the Code indicate that ethical conduct, in the truest sense, means more than abiding by a letter of a rule. It means accepting a responsibility to do what is honorable or doing that which promotes the greatest good to the greatest number of people, even if it results in some personal sacrifice. Somehow, the profession needs to emphasize the "greatest good" criterion more strongly in applying the rules of conduct.

SCENARIOS

Scenario 1: James Corporation employs the regional CPA firm of Green and Cash to audit its financial statements. The firm has been asked to prepare quarterly financial statements for the first quarter of 1986. Bob Ethics, a staff accountant, was assigned to do the work. During the course of preparing the statements, Bob discovered that James Corporation materially understated net income on last year's tax return. Bob informed his supervisor about this and the client is asked to prepare an amended tax return. The client, however, refused to take corrective action.

Scenario 2: Johnson Manufacturing Corporation is a publicly owned company that manufactures equipment used by hospitals and medical laboratories. The company is audited by the national accounting firm of Adams & Pitre. One day, John, the senior in charge of the engagement overheard a conservation between two managers indicating that although they met inspection standards, they were aware of a defect in a particular piece of equipment, but they had not notified any of their customers because they felt the probability of malfunction was low. John takes this information to the controller and is told not to include it in the audit report. He then takes it to the manager on the engagement. The manager informs University Hospital, one of its clients, and also a major customer of Johnson Manufacturing Corporation, not to purchase any more equipment from Johnson. Johnson sues Adams & Pitre for violating the confidentiality rule.

Scenario 3: William Johnson, a CPA, served as a director of Last National Bank for a year. As a director, William may be held liable for damages if he fails to use care and prudence in administering bank affairs and such action causes the bank to suffer a financial loss. In the course of an audit, William discovered a seriously weakened financial position in a client who has a large loan at Last National Bank. Disclosure of this condition to the other bank directors would minimize the bank's loss, however, since the audit has not been completed, this would represent a violation of Rule 301 of the Code.

Barbara L. Adams, PhD, CPA, South Carolina State University, Fannie L. Malone, PhD, CPA, Texas Southern University, and Woodrow James, Jr., South Carolina State University