Accounting Ethics (and fraud)

Postings by Art Berkowitz on ethics and fraud. Most of them are serious, but sometimes we also need to have a little fun.

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Location: Orange County, California, United States

Art Berkowitz, C.P.A. is an author, speaker, and consultant from Orange County, California. He writes ethics, fraud, and accounting courses (CPE) for accountants and other financial professionals. Art has also written a weekly online column for The Wall Street Journal and a book on the Enron debacle. To order any of his self-study courses go to

Tuesday, January 03, 2006

Accounting Ethics vs. Life's Ethics: Is There Much Difference?

During the past few years, the accounting and business communities have been faced with huge ethical conflicts that shook the related professions to their core. What are the responsibilities of management, boards of directors, the internal accounting departments, the external auditors, the underwriters, the legal departments both internal and external, and who are they responsible to?

Enron, WorldCom, Tyco, Xerox, Adelphia, Global Crossing contained numerous ethical decisions for each of these groups and most of the public would agree that the system failed. Arthur Andersen, historically one of the most stalwart and conservative of the international CPA firms, was deemed to have failed in fulfilling their responsbility to protect the public in multiple cases of fraud and mismanagement. Two of the four largest remaining international CPA firms - KPMG and Ernst & Young have been fighting charges of developing and promoting tax shelters that have put into question the role of accounting firms in today's society.

So I ask, "Are the ethical failures highlighted by these cases much different from the critical ethical dilemmas now facing our society in general?

The Institute of Global Ethics, a Maine-based think tank, organized to promote ethical behavior in individuals, institutions, and nations through research, public discourse, and practical action recently published their Top 10 Ethics Stories of 2005"

These stories include issues that range from government corruption to the right-to-die to massive financial fraud to decisions that result in people physically suffering or dying. In other words, they did not draw a distinction between business ethics and the ethics we face in everyday life. The issues and decision making strategies we make in our personal life and in our business life are similar. That is why I often integrate life issues with business issues when I teach ethics in my accounting ethics classes and courses.

I found it of particular interest that they selected the issue of torture as the number one ethics story for 2005. For the past year I have led off my accounting ethics class with the following case study.

What is Ethical?

The year is 1983. You are a high ranking US intelligence officer. There has been substantial “chatter” that a terrorist attack will take place in the next 24 hours. You hear this from your electronic listening methods as well as your human intelligence sources. You have captured suspected terrorists in your prisons, some of which have been captured during the past 72 hours. Officially, the US abides by the rules of the Geneva Convention. In view of the imminent danger to innocent lives, what methods of interrogation would you use?

About 12 hours later, a key ally's intelligence raids a hotel just inside Lebanon and provides you with a captured suspected terrorist. The papers captured with the terrorist provide strong indications that the original chatter was correct and that the terrorist act will take place against a US facility in the next 12 hours.

You conduct your interrogations of the prisoners and the captured suspected terrorist in accordance with the Geneva Convention and US policy, which do not include torture or humiliation (including the kinds we saw at the Abu Ghraib prison); nor do you ask any of your allies to conduct the interrogations for you, since many don’t have the same restrictions you do. Twelve hours later, bombs go off in a US army barracks in Lebanon killing 241 soldiers.

Questions for Discussion

As you read through each of these paragraphs, did your views change as to what decision you would make?

How did you reconcile your decision with public policy?

How did you justify your decision with your own ethical beliefs?

Do you believe that the violation of one person's rights destroys the rights of everyone?

Ultimately, have you made the most ethical decision?

Finally, if you were faced with an ethical decision that conflicts with your personal belief of what is right and wrong, but could protect the life (or the financial well being) of one person, what would you do? Would your decision change if the number of persons saved were in the hundreds or thousands?

I have added a comment feature for this posting. Feel free to post your comments as to how you would deal with this difficult ethical issue.


Anonymous Harold L. Katz said...

You have asked a most difficult question. My answer bounces from one side to the other. A part of my brain says you do what you have to do when you know you have less than 12 hours to do something. Another part of me tells me that experts say that torture doesn't result in correct answers, logic says it should. When push comes to shove, I conclude that it is easier to apologize for having been too agreesive than it is to explain to your country men why people died that you might have saved.

3:45 PM  
Anonymous Christine @ accounting cpe said...

This post is awesome and very informative.

Th question was fine answered and it is thoroughly explained. I have learned a lot from this post.

Thanks for sharing!

10:49 AM  

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