Ethics in Business and Accounting:

Lessons We Are Learning

Prepared by Dr. L. Murphy Smith
Dill Distinguished Professor of Accounting
Murray State University


For permission to use or adapt this presentation, please
contact Dr. Smith, msmith93@murraystate.edu
Why are ethics so important?
Business operations require trust.
Consider the millions of business
transactions that take place daily
that require mutual trust. Would
you go to a job if you didnt trust
your employer to compensate you?
How many people would shop on
the Web if they didnt trust that
their financial information would be
secure?
The classical economists such as Adam
Smith considered economics a branch of
ethics. Business activity would grind to a
halt without trust, fair dealings, and
honest communication.
In his 1995 book, Trust: The Social Virtues and the Creation
of Prosperity, Francis Fukuyama writes: "One of the most
important lessons we can learn from an examination of
economic life is that a nations well being as well as its
ability to compete, is conditioned by a single, pervasive
cultural characteristic: the level of trust inherent in the
society."

When evaluating ones goals
and objectives, a vital question
must be asked: What is your
highest aspiration?
A. Wealth
B. Fame
C. Knowledge
D. Popularity
E. Integrity
If integrity is second to any
of the alternatives, then it is
subject to sacrifice in
situations where a choice
must be made. Such
situations will inevitably
occur in every persons life.
About how many high school students
do you think cheat on exams?
a. 10%
b. 25%
c. 50%
d. 75%
e. 100%

In a recent Wall Street Journal
article, Psychology professor
Steven Davis says that cheating by
high school students has increased
from about 20 percent in the 1940s
to 75 percent today.
Students say cheating in high school is
for grades, cheating in college is for a
career.
If students lack ethics in high school and
college, then there should be little surprise
that they lack ethics in their careers. Greed
and over-reaching ambition often end in
disastrous personal consequences.
Convicted inside trader, Dennis Levine, in
a Fortune magazine article wrote:
I have painful memories of Sarah
learning to walk in a prison visiting
room, and of Adam pleading with a
guard who wouldnt let him bring in a
Mickey Mouse coloring book.
For what reason do people most
often sacrifice their integrity and
act unethically?
a. Need for popularity
b. Greed for money
c. Desire for power
d. Ambition to be famous
e. Something else
Money can be dangerous!?
It is the most often cited cause of unethical behavior.
Whoever loves money never
has money enough; whoever
loves wealth is never satisfied
with his income. (Eccl 5:10)

For what will it profit a man,
if he gains the whole world and
forfeits his life? (Matthew
16:26a)

For the love of money is a root
of all kinds of evil.
(I Timothy 6:10a)
Rembrandts Parable of the Rich Man, 1627.
Academic Institutions
have established ethics
codes for their students,
e.g. the U.S. Air Force
Academy Honor Code:
We Will Not Lie, Steal Or Cheat,
Nor Tolerate Among Us Anyone Who Does."

What do you think is the harder part?
a. Line 1
b. Line 2

Ethics codes: Accounting and Business
Accounting and business organizations have established ethics codes. The code of
ethics of the Institute of Internal Auditors includes the following principles:
1. Integrity
The integrity of internal auditors establishes trust and thus provides the basis
for reliance on their judgment.
2. Objectivity
Internal auditors exhibit the highest level of professional objectivity in
gathering, evaluating, and communicating information about the activity or
process being examined. Internal auditors make a balanced assessment of all
the relevant circumstances and are not unduly influenced by their own
interests or by others in forming judgments
3. Confidentiality
Internal auditors respect the value and ownership of information they receive
and do not disclose information without appropriate authority unless there is a
legal or professional obligation to do so.
4. Competency
Internal auditors apply the knowledge, skills, and experience needed in the
performance of internal audit services.






Corporations, e.g. Halliburton, have
established ethics codes to guide their
employees.

Founded in 1919, Halliburton is
one of the world's largest
providers of products and
services to the oil and gas
industries. Halliburton employs
more than 100,000 people in
over 120 countries working in
five major operating groups:
Source: http://www.halliburton.com/, 1/16/06.
Company policy requires Directors, employees and agents to observe high
standards of business and personal ethics in the conduct of their duties and
responsibilities.
Directors and employees must practice fair dealing, honesty and integrity in every
aspect of dealing with other Company employees, the public, the business
community, shareholders, customers, suppliers, competitors and government
authorities.
No Director or employee should be misguided by any sense of loyalty to the
Company or a desire for profitability that might cause him or her to disobey
any applicable law or Company policy. Violation of Company policy will
constitute grounds for disciplinary action, including, when appropriate,
termination of employment.
http://www.halliburton.com/policies/ethical_business.jsp, 1/16/06.
Halliburtons Code of Business
Conduct: Ethical Business
Practices

Prior research shows that students are
affected in a positive manner by classes that
include ethics education. Teddy Roosevelt
said, To educate a person in mind and not in
morals is to educate a menace to society.
Can ethics be taught?
What is ethics?
Ethics: a branch of philosophy which is the systematic study
of reflective choice (decision problems), of the standards of
right and wrong (moral principles) by which it is to be guided,
and of the good or bad (consequences) toward which it may
ultimately be directed.
An ethical problem occurs when you must make a choice
among alternative actions and the right choice is not
absolutely clear. Often that choice affects the well-being of
other persons.
Philosophical Principles in Ethics
Imperative Principle: Do what is right. Act according to absolute
moral rules (e.g. lying is wrong). Ethics is a function of moral
rules and principles and does not involve a situation-specific
calculation of consequences.
Utilitarian Principle: Do what produces the greatest good.
Generalization Argument: This is a combination of the imperative
principle and the utilitarian principle. Make the decision by
considering the consequences if everyone made the same choice
under similar circumstances. That is, what would happen if
everyone acted in this way?
Steps in Ethical Decision-Making
1. Define all the facts and circumstances:
e.g. Who, what, where, when, and how?

2. Identify the people (stakeholders) affected by the situation;
What are the stakeholders rights and obligations?

3. Identify the alternative decisions and consequences.

4. Make the decision.
Financial Scandals
Ethics and corporate governance play key roles in the capital
markets. Financial scandals often lead to new regulations.
1930s - Corporate financial scandals led to U.S. securities acts.
1980s - Savings and loan debacles led to FDIC Improvements
Act of 1991.
Late 1990s and early 2000s - Corporate financial scandals led
to SOX of 2002, creation of PCAOB and more than 20
SEC rules.
2008 - Financial crisis led to Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010. This law includes
reforms of the financial regulatory system and a number of
corporate governance provisions affecting public
companies.

Short Cases: Enron
Enron Corporation is considered by many to be the most infamous financial
scandal in U.S. history. The Enron scandal caused people to question the
reliability of the financial reporting practices of publicly traded corporations.
Enron was a key event leading the U.S. Congress to pass a new federal securities
law, the Sarbanes-Oxley Act of 2002, often referred to as SOX.
Before its collapse in late 2001, Enron was a highly regarded energy company
located in Houston, Texas. The companys bankruptcy, which was the largest in
U.S. history at the time, resulted in 20,000 employees losing their jobs. Many of
them also lost their life savings, which were tied up in Enron stock. As explained
in the 2005 documentary film Enron: The Smartest Guys in the Room, a great
number of the companys assets and profits were overstated or in some cases
completely fraudulent and nonexistent.
Short Cases: WorldCom
WorldCom began in 1983 as Long Distance Discount Services, Inc. (LDDS). It
was located in the U.S. in a middle-sized town, Hattiesburg, Mississippi. Bernard
Ebbers became the companys CEO in 1985. In subsequent years, the company
name was changed to LDDS WorldCom and later just WorldCom. From 1999 to
2002, the company manipulated earnings by using fraudulent accounting
methods, thereby presenting a false image of economic growth and prosperity. As
a result, the companys stock price continued to climb, when in reality it should
have been falling.
Two techniques were used to cook the books. The first was underreporting line
costs by recording them as assets on the balance sheet instead of correctly
expensing them on the income statement. The second technique was overstating
revenues through recording fraudulent transactions regarding corporate
unallocated revenue accounts. During 2002, a small group of internal auditors at
WorldCom worked together, frequently in the evening and in secret, to explore
and reveal $3.8 billion in fraud.
Short Cases: Parmalat
Parmalat is an Italian-based multinational corporation specializing in dairy and
food products. In the late 1990s, Parmalat entered into world financial markets in
a significant way, financing several international acquisitions, especially in the
Western Hemisphere, with debt. However, by 2001, a number of the new
operations were losing money. As a result, the company began extensively using
derivatives for financing. This facilitated efforts to disguise the extent of the
companys financial liabilities and losses. Parmalat cooked its books by
purchasing its own credit-lined notes and thereby creating an asset, but an asset
that in reality was meaningless.
By 2003, the company was no longer able to pay off debts and make bond
payments: a 14 billion euro shortfall led to the companys collapse, which became
Europe's biggest bankruptcy. Prior to Parmalats collapse, the companys former
CEO, Calisto Tanzi, had become a symbol of great economic success and a
business hero of sorts. Italians were amazed how a once powerful company could
suddenly disintegrate.
A democracy cannot exist as a permanent form of
government The average age of the worlds greatest
civilizations has been 200 years. These nations have progressed
through this sequence: From bondage to spiritual faith, to great
courage, to abundance, to selfishness, to complacency, to
apathy, to dependency, and back again to bondage.
More than 200 years ago, Professor
Alexander Tyler wrote of the
Athenian Republic, which had
fallen 2,000 years earlier:
Ethical standards are essential to a free society
Ethics is essential to the functioning of a free society: 2
nd
U.S.
President John Adams observed: We have no government
armed with power capable of contending with human passions
unbridled by morality and religion. Our Constitution was
made only for a moral and religious people. It is wholly
inadequate to the government of any other.
Where Do We Start?
Upon What Can We
Agree?
People learn about ethics from various
sources. Upon what do you base your
personal code of ethics?
a. Study of history
and literature
b. USAF Honor Code
c. Personal experiences
and observations
d. Religious beliefs
e. Something else
Whether we
derive a code of
ethics from
religious beliefs, a
study of history
and literature, or
personal
experience and
observation: We
can all agree
upon some basic
values.
In an issue of Management Accounting,
James Brackner stated: The universities are
responding with an increased emphasis on
ethical training for decision making. For the
most part, however, they ignore the teaching
of values. For moral or ethical education to
have meaning there must be agreement on
the values that are considered right.
Be sure you are
right, then go
ahead.
David Crockett
1786-1836
A nation or a culture
cannot endure for long
unless it is undergirded
by common values such
as valor, public
spiritedness, respect for
others and for the law; It cannot stand unless it
is populated by people who will act on the
motives superior to their own immediate
interest.
Chuck Colson, Against the Night
When the situation
needs improvement,
Gandhi offers
guidance: You must
be the change you
wish to see in the
world.
Michael Josephson, in Chapter 1 of
Ethical Issues in the Practice of
Accounting, describes the Ten Universal
Values: Honesty, integrity, promise
keeping, fidelity, fairness, caring, respect
for others, responsible citizenship, pursuit
of excellence, and accountability.
Are there legal concerns?
Is it right? (If you know its wrong, dont do it!)
Does it comply with company values?
Does it comply with the principles of your profession (for
accountants, GAAP)?
Would you be embarrassed by your decision if others knew
about it?
Who else is affected by this (others in the company,
customers, etc.)?
Questions to
Consider for Ethical
Decision Making
Questions to
Consider for Ethical
Decision Making
Are you willing to take sole responsibility for this
decision?
Is there another course of action that does not create an
ethical dilemma?
How will it look in the newspaper?
Do you think a reasonable person would agree with your
decision? (Ask an appropriate person.)

Can you make
a difference?
How can an honest person
succeed?
If societal values are deteriorating,
maintaining high ethical standards in
accounting and business grows
increasingly difficult. People will
undoubtedly ask, if everyone else is
dishonest, then how can an ethical
person possibly succeed?
Nevertheless, the real question is,
how does one measure success?
Why is it often so hard to
do whats right?
To sin by silence when
they should protest makes
cowards of men. -
Abraham Lincoln
Do you think this relates to line 2 of the USAF
Honor Code?

The right way is not
always the popular and
easy way. Standing for
right when it is unpopular
is a true test of moral
character.
- Margaret Chase Smith,
first woman elected to
both houses of Congress
You cannot make
yourself feel
something you do
not feel, but you
can make yourself
do right in spite of
your feelings
Pearl S. Buck,
author, Nobel
Laureate
To see what is
right and not to
do it is want of
courage.
- Confucius
The reputation of a thousand years may be
determined by the conduct of one hour.
Japanese proverb
At a Congressional Hearing
on Accounting and Business
Ethics in July 2002, Truett
Cathy, the Founder of
Chick-Fil-A quoted Proverbs
22:1 "A good name is
more desirable than great
riches; to be esteemed is
better than silver or gold."

The truth is that fame and
fortune are nothing
compared to personal honor.
Honor is
better
than
honors.
Abraham
Lincoln
Take-Away Points
Important: Ethics is a major concern to people in every
walk of life. While academic concepts and technical
skills are important, at the heart of all business and
social activity is a foundation of ethical values.
Ethics can be taught: Research shows that ethics
education has a positive impact on peoples ethical
perspectives and behavior.
Deep Truths: While economics, history, sociology, and
financial reporting are important academic topics, the
issue of ethics addresses deeper truths about doing
business and living life in general.
A nation or a culture cannot endure for long unless it
is under-girded by common values such as valor, public
spiritedness, respect for others and for the law; It
cannot stand unless it is populated by people who will
act on the motives superior to their own immediate
interest. -- Chuck Colson, Against the Night.