ACT530Code Of Conducts Impact On Leadership Essay

ACT530Code Of Conducts Impact On Leadership

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Cognitive Processes and Ethical Decision Making in

Accounting Chapter 2

Cognitive Development Approach

• Cognitive development refers to the thought process followed in one’s moral development

• An Individual’s ability to make reasoned judgments about moral matters develops in stages

• These stages characterize the way people think about ethical dilemmas

Kohlberg and Cognitive Development

• Psychologist • 20 years of research • Moral reasoning processes becomes more

complex and sophisticated with development • Higher stages are consistent with philosophical

theories of rights and justice

Heinz and the Drug

• Heinz’s wife has a rare cancer • A radium drug could help • Druggist charged 10 times what drug cost ($200

cost; $2,000 for small dose of drug) • Heinz could only get together $1,000 • Druggist would make no exceptions to price of

drug • What should Heinz do?

Sample Responses to the Heinz Dilemma

• Egoism: Steal the drug, depending on how much Heinz likes his wife and how much risk to stealing

• Ends justify the means: Steal the drug, due to loving the wife so much and cannot watch her die

• Act Utilitarianism: Weigh the costs and benefits of alternative actions

• Rule Utilitarianism; justice: Do not steal the drug, since stealing is against the law

• Rights: Right to life above all else (Constitutionally: life, liberty, and the pursuit of happiness)

Kohlberg’s Stages of Moral Development

• Lawrence Kohlberg’s six stages of moral development are divided into three levels of moral reasoning

• Level 1 – Preconventional • Level 2 – Conventional • Level 3 – Postconventional

Level 1 – Preconventional

• Rules are seen as something external imposed on one’s self

• Individual is very self-centered • Stage 1 – Obedience to rules; avoidance of

punishment • Stage 2 – Satisfying one’s own needs (egoism);

follow rules only if they satisfy one’s needs

Level 2 – Conventional

• Individual becomes aware of the interests of others and one’s duty to society

• Personal responsibility is an important consideration in decision-making.

• Stage 3 – Fairness to others; commitment to loyalty in the relationship

• Stage 4 – Law and order; one’s duty to society, respect for authority, maintaining social order

Level 3 – Postconventional

• Individual recognizes there must be a society wide basis for cooperation

• Orientation to principles that shape whatever laws and role systems a society may have

• Stage 5 – Social contracts; upholding the basic rights, values, and legal contracts of society

• Stage 6 – Universal ethical principles that everyone should follow, Kohlberg believed this stage rarely existed; Kant’s categorical imperative

Gilligan’s Ethics of Care

• Care-and-response orientation that characterizes female moral judgment

• Females look for ways of resolving dilemma where no one will experience pain

• Criticism: Implication that men lack a caring response when compared to females

Characteristics of Kohlberg’s Model

• Kohlberg maintains that his stage sequence is universal • Same in all cultures

• Contrary to Geert Hofstede’s cultural dimensions • Stages refer not to specific beliefs, but • Underlying modes of reasoning • Suggests that people continue to change their decision

priorities over time and with additional education and experience.

• Individual’s moral development can be influenced by corporate culture, especially ethics training.

Ethical Domain in Accounting and Auditing

• Four key constituent groups of accountants and auditors’ domain are the:

• Client organization that hires and pays for accounting services

• Accounting firm that employs the practitioner • Accounting profession including various

regulatory bodies • General public who rely on the attestation and

representation of the accounting firm

Accountants Ethical Behavior

• Accounting profession has professional standards to encourage ethical behavior

• These standards, an individual’s attitudes and beliefs, and ethical reasoning capacity influence professional judgment and ethical decision making

• Post conventional reasoning is the ethical position to take even though it may go against corporate culture of, “go along to get along”

Empirical Studies

• Studies have shown that: • Ethical reasoning may be an important determinant

of professional judgment • Unethical and dysfunctional audit behavior may be

systematically related to the auditor’s level of ethical reasoning

• Ethical reasoning may be an important cognitive characteristic that may affect individual judgment and behavior

Moral Reasoning and Moral Behavior

• Moral judgment is the single most influential factor of a person’s moral behavior

• Morality requires • Person’s actions be rational • Motivated by purpose or intent • Carried out with autonomous free will

• Criticism of Kohlberg • Draws too heavily from Rawl’s Theory of Justice • Makes deontological ethics superior to other ethical

perspectives

Rest’s Model of Morality

James Rest’s model of ethical action is based upon the presumption that an individual’s behavior is related to her/his level of moral development. He breaks down the ethical decision making process into four major components.

Components of Rest’s Model

• Moral Sensitivity – ability to identify what is moral and amoral.

• Moral Judgment – ability to reason through several courses of actions and making the right decision when faced with an ethical dilemma.

• Moral Motivation – influences that affect an individual’s willingness to place ethical values ahead of nonethical values.

• Moral Character – having one’s ethical intentions match actions taken.

Moral Intent

• Critical component of ethical decision making • Internalization of virtues • Acting in accordance with principles • One must want to make the ethical decision

Components Interact

• All processes must take place for moral behavior to occur.

• This framework is not a linear decision making model, the processes instead work through sequence of “feed-back” and “feed-forward” loops.

• Moral failure can occur when there is a deficiency in any one component.

Moral Intensity

• Developed by Thomas Jones • Characteristics of moral issue (Moral Intensity)

affects decision making • Model links moral intensity to Rest’s Model

• Magnitude of Consequences • Temporal Immediacy • Social Consensus • Proximity • Probability of Effect • Concentration of Effect

Libby and Thorne: Virtues Important for Auditing

• Intellectual virtues: indirectly influence individual’s intentions to exercise professional judgment

• Most important: integrity, truthful, independent, objective, dependable, principled, and healthily skeptical

• Instrumental virtues: directly influence individual’s actions

• Most important: diligent, alert, careful, resourceful, consultative, persistent, and courageous

Linda Thorne’s Integrated Model of Ethical Decision Making

Ethical Intention

Ethical Behavior

Sensitivity

Prescriptive Reasoning

Ethical Motivation

Ethical Character

Virtue

Perception

Moral Virtue

Understanding

Instrumental Virtue

Moral Development

Identification of Dilemma

Ethical Judgment

Ethical Decision-Making Models

• Consciously thinking about and analyzing what one has done (or is doing).

• A systematic process to organize the various elements of ethical reasoning and professional judgment.

• Evaluate stakeholder interests • Analyze the relevant operational and accounting

issues • Identify alternative courses of action.

Kidder’s Ethical Checkpoints

• Recognize that there is a moral issue. • Determine the actor. • Gather the relevant facts. • Test for right-versus-wrong issues. • Test for right-versus-right paradigms. • Apply the ethical standards and perspectives. • Look for a third way. • Make the decision. • Revisit and reflect on the decision.

Integrated Ethical Decision-Making Process

1. Identify the ethical and professional issues (ethical sensitivity)

2. Identify and evaluate alternative courses of action (ethical judgment)

3. Reflect on the moral intensity of the situation and virtues that enable ethical action to occur (ethical intent)

4. Take action (ethical behavior)

Ace Manufacturing

• Three stockholders: Smith, Williams, & Jones • Jones hires son Paul to manage the office • Paul is given complete control over payroll,

approves disbursements, signs checks, reconciles G/L cash to bank statement

• Paul hires Larry Davis to help with accounting • While Paul is on medical leave, Davis finds $10,000

total in payments over payroll amount to Paul in January and February

• What should Davis do?

Application of Decision Making Model to Ace Manufacturing

• Identify the ethical and professional issues (ethical sensitivity) • GAAP – Potential fraud, misstated F/S, incorrect taxable income • Stakeholders – owners, Paul, Davis, IRS, banks • Ethical/professional standards – objectivity, integrity, due care

• Identify and evaluate alternative courses of action (ethical judgment) • Legal issues – GAAP, fraudulent F/S, tax understatement • Alternatives/ethical analysis – do nothing, confront Paul, report to Jones or

all the owners. Rule utilitarianism and rights argue for informing other partners who have a right to know, although Paul can be approached first under the theory he has a right to correct the matter

• Reflect on the moral intensity of the situation and virtues that enable the ethical action to occur (ethical intent)

• Will Davis be responsible for getting Paul in trouble? What is the right thing to do? Can Davis trust Paul again?

• Take action (ethical behavior) • Have courage, insist on correction to accounting, give Paul an opportunity to

explain

Behavioral Ethics

• Considers how individuals make decisions in the real world versus how they would make decisions in an ideal world.

• Kahneman’s two distinct modes of decision making:

• System 1: intuitive system of processing info; fast, automatic, effortless, and emotional decision processes

• System 2: slower, conscious, effortful, explicit, and a more reasoned decision process

Leon Festinger

• Recognized the limitation of philosophical reasoning approaches integrated into decision making models

• How we think we should behave is different from how we decide to behave

• Coined term of Cognitive Dissonance in 1956

Cognitive Dissonance

• Inconsistency between our thoughts, beliefs, or attitudes and behavior creates the need to resolve contradictory or conflicting beliefs, values, and perceptions.

• Only occurs when we are “attached” to our attitudes and beliefs.

• How we think we should behave is different from how we decide to behave.

• Example of Betty Vinson of WorldCom

Giving Voice to Values

• Behavioral ethics approach with an emphasis on developing the capacity to effectively express one’s values in a way that positively influences others

• Finding levers to effectively voice and enact one’s values • Ask to think about the arguments others might

make that create barriers to expressing one’s values in workplace

• Ask to think how best to counteract these “reasons and rationalizations”

• Used post-decision making (already decided what to do)

GVV Questions

• How you get it done effectively and efficiently? • What do you need to say, to whom, and in what

sequence? • What will the objectives or push-back be, and, then • What will you say next? • What data and examples do you need to support

your point of view? • GVV relies on developing arguments, action plans,

and rehearsing how to voice/enact moral values.

Reasons and Rationalizations

• Expected or Standard Practice – “Everyone does this.”

• Materiality – “The impact is not material. It doesn’t really hurt anyone.”

• Locus of Responsibility – “This is not my responsibility; I’m just following orders.”

• Locus of Loyalty – “This is not fair to the client, but I don’t want to hurt my reports/team/boss/company.”

• Isolated Incident – “This is a one-time request.”

4 – Step GVV Process

• What are the main arguments you are trying to counter? That is, what are the reasons and rationalization you need to address?

• What’s at stake for the key parties, including those with whom you disagree?

• What levers can you use to influences those with whom you disagree?

• What is your most powerful and persuasive response to the reasons and rationalizations you need to address?

Doing Good by Being Good: GVV

• Matt and Becca head up Accounting Club fundraising for hurricane victims in the college community

• Donations totaled $20,367 and 2,000 hours of volunteer work

• Only $20,000 given to victims • Where is the other $367 or where is receipt for

the fees on gift cards?

Doing Good Analysis with GVV

• What are the main arguments to counter or reasons and rationalizations to address?

• Locus of loyalty, materiality, isolated incident, student graduating

• What’s at stake for the key parties? • Reputation, leadership stake, faculty advisor and community

• What levers can you use to influence those with whom you disagree?

• Speak to other officers, approach Matt, go to faculty advisor, jeopardizing respect

• What is your most powerful and persuasive response to the reasons and rationalizations?

• Cheating, job in Big 4, loyalty to club, consequences to club and officers in cover up

Ace Manufacturing Analysis with GVV

• What are the main arguments to counter or reasons and rationalizations to address?

• No one hurt, private company, sympathy card, materiality, not being compensated properly, isolated incidents, Jones has approved, will pay back

• What’s at stake for the key parties? • Reputations, embarrassment, right to know, loss of job, ability to obtain

loan

• What levers can you use to influence those with whom you disagree?

• Ask for supporting documents for coding of expenses, harm to company and embarrassment to dad, long-term effects, telling all the owners

• What is your most powerful and persuasive response to the reasons and rationalizations?

• Verifying that vendor is not paid twice, using money for personal use is stealing and no materiality test, challenges Jones about knowing, owners need (have a right) to know

Concluding Thoughts/Key Issues

• “The road to success is littered with failures, but the lessons learned are crucial in plotting your course to success.” Kristi Loucks

• Kohlberg’s model of moral development • Rest’s model of ethical decision-making • Cognitive development • Issues of moral intensity and virtue in Integrated

Decision-Making mode • Behavioral ethics • Moral reasoning skills • Giving Voice to Values

Video Links

• Ethics Relationships: http://www.youtube.com/watch?v=Lhwhgf01Ozw&feat ure=related

• Personal Behavior: http://www.youtube.com/watch?v=NxdbzcR4nfA

• https://www.youtube.com/watch?v=6yXuNnjnnEA • Case 2-9 Phar-Mor:

http://www.youtube.com/watch?v=NAMz8QR6c5w • Case 2-10 WorldCom:

http://www.youtube.com/watch?v=7g_d-phoUrU • https://www.youtube.com/watch?v=6yXuNnjnnEA

(Cynthia Cooper interview)

ACT530Code Of Conducts Impact On Leadership Essay

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