focus: can accountants distinguish their assets from their morals?

156 BUSlNESS ETHlCS

FOCUS: Can Accountants Distinguish their Assets from their Morals?

Shailendra Vyakarnam, Sri Srikanthan and Sharon Fitzsirnons

Can the use of focus groups be helpful to get to the roots of ethical issues in the accounting profession? The activities of one such group at Cranfield throws considerable light on the pressures to which individual accountants can be subjected. Professor Vyakarnam has recently been appointed to the Chair of Enterprise at Nottingham Trent University. Sri Srikanthan is Senior Lecturer in the Finance and Accounting Department at Cranfield University School of Management, where Sharon Fitzsimons is Research Officer in the Economics Group.

Background here is a considerable haze over the T moral and legal issues which confront

accountants. It would appear that the accountancy profession has problems in decon- structing difficult business issues into its various component parts such as: business implications, conflict of interests, violation of personal values, corporate codes, professional ethics, societal expectations and legal limits (Bartel, 1990).

The profession is not helped by being burdened with accountancy rules which are ambiguous (Likierman, 1989). Further diffi- culties arise through a lack of clarity about the purpose of accounting information. For example, should it be neutral, as the profession likes to think it is, or should it have an influence, as is often the case (Likierman, 1989)?

Accountants receive "technical" training in providing financial information and analysis, a substantial part of which is based on ambiguous concepts such as "true and fair" and "prudence". The inability of the profession to clarify these concepts causes the consequent subjectivity in interpreting and applying them. However, accountants' understanding of moral and ethical issues is acquired largely by trial and error, from parents, schools, professional rules and senior col-

leagues (Brook, 1993). This evolutionary process of learning how to resolve conflicts of interest is hardly a foresighted way to develop a profession.

The lack of structured training in ethical resolution results in a profession which is largely reactive to exogenous pressures, thus evolving for itself rules and codes of conduct which may or may not be applied (Madison, 1993).

The model below (Figure 1) attempts to capture the dynamic forces which contribute to the moral haze in accountancy. This model demonstrates the lack of clarity about moral dilemmas in the accountancy profession. In- deed the lack of clarity is likely to persist so long as the profession continues to try and solve the problem without first understanding the issues. The evidence of this behaviour (Schweikart, 1992) is that the profession is bound by rules and codes, appears to be reactive to social pressure and is not far-sighted enough to tackle the issues before they arise (Backof and Martin, 1991).

The profession is tempted to revert to its technical knowledge to assess moral behaviour (Swansa, 1990). The idea that moral behaviour in business can proportionally influence the firm's goodwill puts the moral debate into another realm of consequentialist thinking and is unlikely to lift the haze or advance the debate.

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Stage 4 Personal values

by trial and error

Stage 3 Legal

framework of country

t Stage 2 Legal

judgements in cases

Stage 1 Ambiguous rules

of accounting

Stage 5 Evolving codes of

conduct at corporate level

1 Stage 6

Professional codes resulting from

societal pressure

Figure 1. Stages of Moral Haze in Accountancy

Indeed, it has been argued (Schweiker, 1993) that because giving an account is one

Research ~~~~~i~~ way'to describe the shape of moral reasoning in a firm, due to the information regarding pricing, power, obligations, goods and the varied concerns and moods that motivate moral agents, accounting should be con- strued as part of an ethic of responsibility.

The "technical" nature of the profession appears to force a perspective on ethics which, as stated earlier, is rule bound, so much so that when the profession engages in advising others on how to measure social responsibility or to carry out social and environmental audits, the outputs tend to be based on cost-benefit analysis and are prescriptive (or check list) in nature, resulting in yet more codes and rules (Cottell, 1991).

Indeed, little consideration is given to the implementation or enforcement of the codes (Donabedian, 1993). Few support structures are in place, and this may be in part because the pressure to act ethically is infrequent (McCuddy et al,. 1993). On the other hand, there are indications that the profession has to take ethics more seriously, partly due to the growth of shared values in the profession and increasing responsibilities to their own community for conforming to acceptable professional standards (Madison, 1993).

It is evident from the literature that accountants have become rule bound and try to fix a problem which they do not fully comprehend. Thus there is both a need and a gap in the profession's understanding of what consti- tutes an ethical dilemma and this gap needs to be filled. The profession is growing (Epstein, M.J., 1993) and therefore needs to take up, with humility, a more positive and forward looking approach to resolving ethical dilemmas.

While the model (Figure 1 ) above attempted to capture the essence of the literature on the subject, this study attempts to work from 'ground up', testing its initial findings against the model.

Methodology

Responding to criticism of ethics research (Thompson & Smith 1991, Ryan 1991) a focus group methodology was used for this study. Problems with convenience sampling and self report measures were cited as weaknesses in the field of ethics research, but more important is the need to fit the right

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158 BUSINESS ETHlCS

What to include

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methodology to the right research question (Vyakarnam 1995).

A distinction has been made between the positivist approach and the descriptive, or exploratory, approach. The positivist approach has been criticised for relying on self reporting perceptions rather than probing actions or reasons. Until we know reasons and intentions we do not fully understand the underlying construct of an ethical dilemma for each individual. This study attempts to identlfy these constructs by allow- ing the participants to discuss ethics in a comprehensive manner, thus reaching a deeper level of understanding of ethical dilemmas.

Focus groups were chosen as a suitable methodology as they place greater emphasis on the interactions of the participants, rather than between researcher and participants. Thus greater emphasis is placed on the viewpoints of the group in question. This allows research questions and hypotheses to be generated with a minimum involvement, and consequent bias, on the part of the researcher. Ethics is a very complex subject and perhaps one to which individuals do not give a great deal of thought in everyday life. When it is a matter of examining complex subjects focus groups can be particularly useful, since it is possible to observe human motivation during the interactions. By comparing different viewpoints which might exist in a group "researchers can examine motivation with a degree of complexity that is typically not available with other methods" (Morgan and Krueger 1993). Participants can benefit from a process of learning even as they discuss the subject, thus adding depth to the discussion.

These are the main advantages of focus groups. Their main weaknesses are that some people may find it difficult to discuss a sensi- tive subject in a group; that the group could be dominated by an individual; and that an enormous volume of ideas can flow from a 2-3 hour focus group session, so making it very hard to transcribe (if taped - which in any case is recommended) and analyse. Even accepting these weaknesses it is still a valu- able research methodology for the generation of research questions and hypotheses and for understanding the underlying constructs of an ethical dilemma. It allows the accountant to describe fully why a particular situation became a dilemma and to explain the "it depends'' factors.

This particular focus group study is based on five accountants who took an MBA degree from Cranfield School of Management. They are all experienced in their profession. Two are now working as consultants, one runs his

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own business and the other two work for larger organisations. It is immediately apparent that this is a convenience sample and the authors readily admit to this - for the first study with a relatively untried methodology it was important to have a group which would have some trust in the research team so that a productive session could result. The actual group session lasted just under three hours and was video-taped for analysis later.

Findings

The analysis showed that the ethical dilemmas for accountants fell into five main categories: whistleblowing on externally induced dilemmas; moral issues; effects of custom and practice; operating with ambiguous guidelines; and the influence of competition and peers. We consider each of these in turn.

Whistleblowing on externally induced dilemmas What to include in a set of accounts has long been a topic of some discussion. The participants in the focus group told of dilemmas where they were asked to include items which they felt were unethical or misleading if they were recorded. Some cases were more serious, where the accountant had uncovered cases of fraud. In these instances the accountant felt they could not speak out against their employer or client, as to do so would mean losing their jobs. This, it seems, is a common dilemma for accountants.

"I have been told to put provisions in and if I don't do it I will lose my job. Some- times when I don't think something is right I will ask and they say you do it." "It has happened to other accountants who have seen that there is a problem, legal or otherwise. They have stood up and said something and it has cost them their job." "I told the FD that there was a problem with it and I effectively lost my job."

Moral Issues These dilemmas were probably the least fre- quently reported and were defined as dilemmas where the law or the professional rules did not apply. This category included items such as cashing of cheques and accept- ance of money not owed to the firm. Three of the five who participated in the group ad- mitted having done this, but it only became a dilemma for them when large sums of money

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were involved, or, interestingly, it depended on who was doing the over-paying.

“I have banked a cheque on many oc- casions. You bank it, then you wait for them to catch you.” “A cheque came in for f280,OOO from a client. I knew that they didn’t owe any money so what do I do. I banked it and waited and nothing happened. I learned later that this company had gone out of business probably because of this kind of inefficiency. ”

Effects of Custom and Practice There was a general consensus that some things, while technically wrong, were acceptable within certain limits. These were certain actions that accountants tended to ‘turn a blind eye to‘ as it was generally understood among accountants that it was acceptable. It was only at a certain point that the accountant would feel they were in a dilemma. One of the participants presented a dilemma which illustrates this point. He described a practice in a small painter and decorator firm. The accountant knew that the owner was having small improvements done to his house charged to the firm. This is illegal but it only became a problem for the accountant when, in his view, things got out of hand.

”He used to have things done to the house charged to someone else. It was taken as part of the job that it was always done that way. But then he decided to have more major work done, like a new roof. I found myself with f60 or f70 grand short.”

It is interesting to note that the accountant found certain behaviour acceptable as ”it was always done that way.”

Operating Within Ambiguous Guidelines When asked what place ethics and morality had in their profession they all claimed that the rules and legality took precedence over the moral dimension. They referred firstly to the rule book when deciding on the right thing to do.

”The legal issue to me as an accountant is vital. The first thing is to be within the law.“ “I want to do X, let’s see if there is a way I can do it . . . I have yet to see an accountant or a businessman who says I want to do X, but it is not the right thing to do.” “You wouldn’t break the law to protect a moral issue.’’

“The question that bothers me is who is our loyalty to. Is it to the client, is it to right or wrong, or is it to the law? I tend to sort of duck the issue by saying my loyalty is first to the client as long as I am not going to end up in jail.”

This is consistent with the finding of Fisher and Rosenzweig (1995) that accountants are generally rule-based in their ethical reasoning. This extends to the belief that unless a practice is expressly prohibited then it is seen as acceptable.

“One feels that as an accountant there are so many rules and regulations that any- thing outside this is acceptable.”

This belief is manifested in the accountant’s attitude that the laws can be twisted to suit people’s own interests. ’Bending a line’ is another feature expressed by all the participants in this study as a practice endemic within the profession and one which highlights the legal and moral haze in which accountants find themselves. What is acceptable is shaped by custom and practice and they are able to just* this by using the ambiguity in the rules.

”It is all a question of how much can I bend

“It is the willingness to comply with them (the rules) that’s important. I suppose it is endemic within the Mergers and take- overs environment within the past six years or so. I have seen it as any rule can be broken if you can get the advisors. The more rules the more you pay. You pay f100,OOO fee to find a way around things.” ”I was only an accountant at the time - which has a lot of bearing on how far you can push things.”

how much CUT2 the line.” I bend the line

Znfluence of Competition and Peers The competitive environment was also cited as another difficulty in deciding on the course of action. There is a feeling that if an accountant does not deliver desirable figures for the company or the City, then there is always another accountant who will. Morality is not easy in difficult times, as there is always someone there to pick up the extra business. Once again, the accountants come up against an economic barrier to acting ethically.

“The institutional investors want short term results and they take a very short term view. Therefore we as accountants are not to blame. We are doing what the investment analyst wants us to do, therefore we take a short term view, therefore we increase EPS for that year.”


160 BUSINESS ETHlCS

“I have rationalised it by saying I know the business is viable. It’s just that the analysts have an expectation. If I don’t deliver what I’ve said I’ll deliver, and twenty other companies do, their share price will go up and my share price will go down.” “A lot of the bending of lines comes from the competitive environment. If you won’t take the business, a competitor will come in and do it.”

”Because of the competition and the com-

petitive pressures, I would put more than half the reponsibility on the authorities and the government for having the right rules in place, and that is the environment in which competition takes place.”

The model which emerged from the review of literature contained six causes of moral haze in accountancy. The initial findings from this study indicate five main causes, some of which overlap with the literature and others which do not, as can be seen in Figure 2 .

I Headings from the Model Findings from this study I Personal values Moral issues

Whistleblowing on externally induced dilemmas

Codes of conduct Effects of custom and practice

.~

I Ambiguous rules

Legal judgements Legal frameworks

No comments in literature on competition

Operating with ambiguous guidelines

No comments were made except that law was treated as a minimum threshold

Influence of competition and peer pressure

Figure 2 . Compan’ng the literature and the findings from this study

The overlaps are not unexpected, especially with the weight of emphasis on rule-based ethics. Perhaps the main new contribution which has come from this focus group is to highlight the influence of competitive forces, both on the industry and on one’s own career (dealt with here as peer pressure). Indeed, the pressures on one’s own career in terms of survival and advancement were deeply felt and this again highlights the need for accountants to be able to deal with ethical problems in a more effective way than they do at present, because one of the consequences of a lack of debate is that personal values and those of society may be compromised under real or perceived competitive forces.

Indeed, this issue opens up another area of debate which is outside the scope of this paper but is important to management and business: the issue of ethics in a competitive, free-market environment, a paradigm which is certainly part of the current political and economic thinking.

Summa y of Findings

The analysis indicates that there are three main types of dilemmas accountants face:

those that pertain to survival issues (I must act unethically or I lose my job); those that deal with moral issues (I’m not breaking any rules but I know what I’m doing is wrong); and those that are due to custom and practice (I know it is against the rules, but I am still going to do it).

What is important to consider is the legality of the situation. The multitude of ambiguous rules mean that the course of action is far from clear. This allows the accountant to be- lieve that ’bending the line’ or finding a way around the rule is an acceptable response. The accountants in the study felt that there were exogenous pressures on their profession to act in this way.

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Discussion

The literature review suggested a cyclical model (Fig. 1) as contributing to the moral haze in accountancy. From this focus group it can be suggested that the process is indeed cyclical, but a more representative model of the discussion would be as shown in Figure 3.

The model is now reduced to four stages with the underlying dynamics of the stages adding depth to our understanding of the accountant’s moral haze. It can be further condensed if we consider that the model

consists of two main cyclical forces; the legal or rule based force (steps 1, 2 and 4) and the personal or cultural force (stage 3). For ease of discussion and because each of the com- ponents is interrelated, the results will be discussed in the context of these two main forces.

The Rule Based Force (stages I, 2 and 4 ) The accountants in this study can be said to be rule-based in their ethical reasoning as the question of legality featured in the majority of the dilemmas and being legally covered was

O f /

Professional codes resulting f?om societal

Stage 2 Legal

Eramework country

Figure 3. Dynamics of Moral Haze in Accountancy


162 BUSINESS ETHICS

not being seen to break the rules

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an important aspect of any resolution. This reliance on the rules to determine their ethics is concurrent with that of Swansa (1990) who noted that accountants refer to their technical knowledge when faced with an ethical problem. Similarly, Fisher and Rosenzweig (1995) found that accountants are rule-based in their ethical reasoning. Their prescriptive notion of morality extends to the belief that if it is not expressly forbidden then it is permitted. This belief does not leave much room for morality as the attitude seems to be 'if you don't tell us not to do it then we're going to do i f ' . A popular distinction made is the distinction between the letter of the law and the spirit of the law. The letter of the law expressly forbids an action, while the spirit of the law leaves it to the accountant to decide on whether a particular action falls within the scope of the law. Ambiguity in the letter of the law leads to "creative accounting" in applying the spirit of the law. Accountants can be said to adhere to the letter of the law but not the spirit of the law.

A profession's code of ethics are guidelines given to that profession over and above the law. The accountancy profession has changed its code of ethics more times than any other (Backof and Martin, 1991), but these changes have been accused of being reactive as op- posed to proactive. They often set out the minimum level of acceptability, not what is ideal or, for that matter, optimum. The technical nature of accountants means that they look to the ethical code to guide their morality. Among the accountants in the focus group there was a call for more rules to prevent unethical practices. However, it is difficult to structure ethical guidelines to cover all eventualities. What is more desirable is encouraging debate on ethical issues. Accountants in our study at no time pointed out to their employer or otherwise that what they were being asked to do was against professional ethics. If they did they were fired. Serious ethical debate would raise awareness of the importance of professional ethics and encourage accountants to regard it as a very real consideration. It will also help accountants to realise that there is a lot more to ethics than not being seen to break the rules.

The Cultural Force (stage 3) All the participants in the focus group spoke of the pressure to act in a way they may be- lieve is unethical. This pressure comes from a variety of sources: from their superiors, from their peers and from the competitive environment. It was apparent from the discussion that today's accountant is not equipped or

July 1996

encouraged to resist this pressure. The only reward for acting ethically, as far as the accountants in the study could see, was at the expense of any economic benefit. This pressure led to accountants creating their own personal values by trial and error. The polar- isation at this stage into the moral high and low grounds leads to consensus or compro- mise, usually at just above the minimum in the rule-based stages of decision making. In return this unethical behaviour becomes expected, adding to the pressure. Eventually this becomes part of the 'it was always done this way' culture.

To respond in an ethical manner the accountant requires, first, proper training and secondly, support or an incentive to resisting this pressure. In their training accountants are not made aware that they may be put under this pressure. As it was the most fre- quently reported of our dilemmas, it quite clearly is an issue. Knowing that they will face this problem in their career is not enough. They must also be given the support from their professional body on resisting these matters as so little exists at the present (Donabedian 1993).

These measures will only help the accountant should they decide to resist the pressure, as they will not be able to stop the pressure. What is required at a deeper level is a change in culture. Organisational culture has long been recognised as a determinant of ethics (Singhapakdi 1993).

In the case of accountants the pressure to act unethically comes from sources other than the organisation. The City analysts, clients and other accountants were also cited as reasons why the accountants may act unethically. There was a feeling among the accountants that they were expected to be- have in a certain way. They were expected to produce the best, if not the most representative EPS, expected to cover up frauds, expected not to record cash transactions. These expectations of their profession led to unethical behaviour that was endemic within the accountancy profession. It may be that this disregard for ethics was part of their professional culture.

This phenomenon may be brought about by the lack of clarity in the rules. This is obviously a problem in a profession whose ethics is guided by the rule book. The participants in this study acknowledged that these rather vague rules allowed them to find ways around them. Indeed, they gave some indication that this belief may be one that is widespread throughout their industry and contributes to the moral haze. "On the one hand, he is bound by a professional code of

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ethics (that are rather ambiguous in nature) and on the other he feels obliged, almost (and sometimes obliged by the risk of losing his job), to adjust those rules or sometimes to break them in order to comply with what is required of him. This is not helped by the fact that if he takes the moral stance he can always be replaced by someone who, while still bound by the same ethical code, will do what is asked. After all, they are not breaking any rules! "

This brings the discussion round to the role of the accountant. Is the public perception different from the professional organisations? It would seem from this discussion that it may be, and the accountant is again in an ambiguous and confusing position. To change existing expectations is an extremely difficult task and one that can only be addressed by the most effective change agents, education and debate.

This study has been based on one focus group and has demonstrated a richness of data. Future research needs to follow up both the research method of focus groups and more detailed investigation of the profession, since there is a need to develop a better process for education and discourse in business ethics.

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focus: can accountants distinguish their assets from their morals?

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