Ethical Behaviour Notes

Ethical Behaviour

16.1 Thinking + Doing = Ethical Behaviour

• Ethical behavior involves more than just knowing what's right.
• It includes:
  • Ethical reasoning: Understanding the ethical issues and alternatives.
  • Ethical motivation: Being driven to behave ethically.
  • Ethical character: Having the courage and fortitude to persevere, even with negative consequences.
• Examples of ethical dilemmas:
  • Boss pressuring you to make a wrong accounting entry.
  • Colleague including personal costs in a business expense account.
  • Board member challenging other board members on an ethical issue.
• Figure 16a: Ethical behaviour calculation

16.1.1 Enabling Competency 1: Acting ethically and demonstrating professional values

• Acting Ethically and Demonstrating Professional Values is the first enabling competency in the CPA Map.
• Ethical behavior enhances the profession's reputation.
• Ethical lapses harm CPAs, the profession, and stakeholders.
• The CPA Map requires:
  • Adhering to rules of professional conduct (1.1.1).
  • Recognizing compromised ethical behavior and seeking guidance (1.1.2).
  • Adhering to laws, regulations, policies, and societal norms (1.1.3).
  • Reporting unethical behavior (1.1.4).
• Ethical behavior requires both "thinking about" and "doing" the right thing.

16.1.2 The CPA Way and ethical behaviour

• The CPA Way is a process to help behave ethically in any professional situation.

• Figure 16b: The CPA Way

16.1.3 CPA Mindset and ethical behaviour

• The CPA Mindset is the attitude and behavior of a CPA.
• It's crucial when facing ethical issues, requiring ethical motivation and character.
• Strive to be an ethical hero, embracing the CPA Mindset.
• Avoid being an ethical villain, neglecting the CPA Mindset when uncomfortable.

16.1.3.1 Do you see the connections?

• Consider how fulfilling each value and behavior in the CPA Mindset helps ethical behavior.

• Ethical actions (1) avoid harm to people, organizations, or stakeholders and/or (2) are viewed as right or good.

• Figure 16c: The CPA Mindset

16.2 Assessing the situation

• Assessing the situation means understanding the problem, identifying key factors, and planning the work.

16.2.1 Identifying ethical issues and alternatives

• Recognizing an ethical issue is crucial.
• An ethical issue is a situation where actions might harm people/stakeholders or violate what's considered right/good.

16.2.2 Aren’t ethical issues obvious?

• Some ethical issues are easily detected, others not.
• Examples of less obvious issues:
  • Impaired professional judgment due to tiredness.
  • Accidental communication of confidential information.
  • Rumors of data manipulation for performance compensation.
• Practice explicitly looking for ethical issues.
• Familiarize yourself with common types of accounting ethical issues:
  • Lying or intentionally misleading others.
  • Disobeying technical or professional standards.
  • Violating laws or regulations.
  • Violating Rules of Professional Conduct.
  • Intentionally misstating/biasing financial or nonfinancial information for purposes such as:
    • Influencing market values
    • Achieving compensation or other performance goals
    • Complying with debt covenants
    • Manipulating contractual compliance and/or payments
  • Hiding information from auditors or regulators.
  • Allowing an external client or internal customer to influence CPA’s professional judgment.
  • Engaging in business practices that are socially or environmentally harmful.
  • Failing to ensure privacy and confidentiality of information.
  • Proceeding with insufficient expertise.
  • Tolerating theft, inefficiencies, or other waste of organizational resources.
  • Diverting organizational assets to personal use.
  • Paying or receiving bribes.
  • Altering or biasing analyses or communications.
  • Over- or under-reporting time or costs.
  • Ignoring any of the above practices by others within your realm of influence.

16.2.3 Other key situation information

• Gather key situational information once a potential ethical issue is identified.

16.2.4 Planning work on ethical and other major issues

• Plan to investigate all ethical issues, as even small ones can become important.
• Ethical issues are often related to other issues, so choose the order for addressing them.
• Example: Boss pressuring you to make a wrong accounting entry.
  • Two issues: (1) addressing the ethical issue and (2) determining the correct accounting treatment.
  • Address the accounting issue first. If the entry is appropriate, the ethical issue is irrelevant. If inappropriate, analyze the ethical issue.

16.3 Analyzing an issue

• Analyzing a Major Issue includes selecting and applying analysis methods/tools, thoroughly analyzing relevant information, and evaluating information quality.
• Analysis of relevant information for an ethical issue should be thorough.

16.3.1 Quantitative and/or qualitative methods and tools

• Use methods and tools to analyze the effects of an ethical issue.
• Example: Boss pressuring you to make an accounting entry you think is wrong.
  • Methods might include:
    • Applying a conceptual framework approach to evaluate choice of accounting policy and procedure
    • Reading source documents or other information to determine accounting implications
    • Calculating the financial impact of the accounting entry and assessing its materiality and effect on ratios or other performance measures
    • Qualitatively evaluating the incentives associated with the entry

16.3.2 Ethically prohibited versus ethically permitted alternatives

• Reduce work by ruling out non-viable alternatives.

• Alternatives are either ethically prohibited or ethically permitted.

• Figure 16d: Ethical issue alternatives

• Ethically prohibited actions are forbidden by one or more relevant ethical constraints.

• Examples:

  • Rules of Professional Conduct disallowing ownership interest in an audit client.
  • Company's code of ethics prohibiting using company computers for personal benefit.

• Ethically permitted actions are allowed by all relevant ethical constraints.

• Figure 16e: Ethically permitted actions

• Save time by summarizing arguments for/against only ethically permitted actions.

• Summarize arguments to persuade decision makers that ethically prohibited alternatives might cause harm.

• Consider your audience when deciding how much time to spend on analysis of ethically prohibited actions.

• Sometimes no alternatives exist that will satisfy all ethical constraints.

16.3.3 Key assumptions: Rationalizing unethical behaviour

• Pay attention to assumptions used to excuse or justify unethical behavior.
• Familiarize yourself with common rationalizations:
  • If it’s necessary, it’s ethical
  • Doing the right thing would cost too much (the false necessity trap)
  • If it’s legal, it’s proper
  • It’s company policy
  • I was told to do it
  • It’s all for a good cause
  • I was just doing it for you
  • They deserved it
  • It doesn’t hurt anyone
  • I didn’t mean to hurt anyone
  • Everyone does it
  • It’s okay if I don’t gain personally
  • The company owes me
  • I can still be objective
  • No one will know
  • It’s not my job to interfere
  • I don’t have time to come up with another alternative
  • I don’t want to cause trouble for my peer, or internal customer, or external client, or…

16.4 Conclude and advise

• Concluding and advising for an ethical issue involves special attention to ethical behavior.

16.4.1 Conclusion for one alternative

• The most important decision criterion is whether the alternative is ethically prohibited or ethically permitted.
• Correctly interpret quantitative or qualitative results and consider ethical implications, including rationalizations.
• Example: Boss pressuring you to make a wrong accounting entry.
  • Determine if the entry complies with accounting standards.
  • If it doesn't comply, recording it is ethically prohibited.
  • If correctness is subject to professional judgment, further consider ethical issues.
  • Consider: Why is your boss pressuring you? Who might be harmed if the entry is made? How would the entry be viewed if it were to become publicly known?
  • If recording the entry would cause unjustified harm, it would be ethically prohibited.
• An ethically permitted alternative should satisfy all of the decision criteria shown in the following table.
• Decision Criteria for an Ethical Permitted Alternative
  • Satisfy all ethical constraints
  • Cause no unjustified harm to people or stakeholder groups
  • Act consistently with what individuals, the CPA profession, relevant stakeholders, and society typically view as good or right
  • Avoid rationalizations

16.4.2 More than one ethically permitted alternative

• Choose the most ethical alternative, often involving trade-offs.
• Examples of Decision Criteria for Making Ethical Trade-Offs
  • Demonstrate the habits and values of humans at their best (virtue approach)
  • Do the most good and least harm (utilitarian approach)
  • Respect everyone’s rights and dignity (rights approach)
  • Treat people or other stakeholders equally, or proportionately and fairly (fairness or justice approach)
  • Maximize contribution to the community and society (common good approach)

16.4.2.1 What if none of the alternatives seem to be viable?

• If each alternative violates at least one ethical constraint, decision is still required.
• Example: Retail clothing store buying from a factory with unsafe working conditions.
  • Continuing to use the supplier violates company policy and harms workers.
  • Stopping could lead to unnecessary harm to workers and the local economy.
  • The better choice involves ethical trade-offs.
  • Perhaps the least harm would come to workers if the company continues buying from the factory.

16.4.3 Advice for implementation

• Ethical behavior might require more than simply choosing among alternatives.
• Include create ethical safeguards to reduce the threat of unethical behaviour or to mitigate harm.
• Examples:
  • Retail company instituting a monitoring system at the factory.
  • Penalizing the supplier for violations.
• Examples of Ethical Safeguards
  • Education and training on ethical behaviour, policies, and procedures
  • Strong internal control and risk management
  • Adequate corporate governance
  • Requirements to adhere to professional and ethical standards, policies, and procedures
  • External monitoring of compliance with ethical policies and procedures
  • Disciplinary processes
  • Explicit requirement and procedures to report breaches of ethical policies and procedures
  • Access to consultation about ethical matters with an independent advisor

16.4.3.1 What if ethical recommendations are ignored?

• Find guidance in the Rules of Professional Conduct.
• Rules describe situations to report a breach, or resign from an engagement or from employment with an organization.
• There may be times when the rules do not adequately address your concerns.
• Change job positions or seek alternative ways to achieve your personal goals.

16.5 Communicate

• Communicate effectively through listening, understanding, speaking, and writing.
• Strong communication helps to ensure that decision makers can comprehend the work performed and act on your advice.

16.5.1 Listening

• Progression through The CPA Way requires good listening skills.
• Ask appropriate questions, understand others’ communications, and empathize with others.
• Seek input from other people, such as independent third parties or legal counsel.

16.5.2 Required communications

• Requirements to communicate information about ethical issues.
• The enabling competencies require you to report ethical issues to higher levels of management, legal or regulatory authorities, or others when appropriate.
• The Rules of Professional Conduct include situations with required communication.
• Organization might have additional policies and procedures for ethics-related communications.
• Familiarize yourself and comply with applicable requirements.

16.5.3 Persuading others

• Persuade others to recognize the harmful effects of doing the wrong thing and/or face negative repercussions.
• Confront an organizational culture that people use to rationalize unethical behaviour.
• Strong communication skills, along with other enabling competencies such as conflict management, will help you communicate as persuasively as possible.

16.6 Self-evaluation checklist: Ethical behaviour

• Reflect on your ethical Behaviour for a prior or new ethical issue.
• What would be some criteria that you would expect to broadly apply when faced with an ethical issue?

CPA Mindset

1. Have you clarified your own attitudes and values so that you know what they are, can monitor their conformity with the CPA Mindset, and anticipate how they might affect your actions? Include:
   -- Your motivation to act ethically
   -- Your courage, fortitude, and perseverance to act ethically, even if it leads to negative consequences

Assess the Situation

2. In this situation, do you see any possibility of an ethical issue—i.e. that your actions, the actions of people you advise, or the actions of an organization you help to shape, might harm one or more people or stakeholder groups, or might violate what is considered to be right or good?

3. Are key aspects of the ethical issue and context identified, such as the following?
   -- Decision maker goals/objectives
   -- Other key stakeholders and their needs/preferences
   -- Ethical constraints (i.e. Rules of Professional Conduct; laws and regulations; society norms; organizational policies, procedures and norms; and individual ethics)
   -- Professional resources, including Rules of Professional Conduct
   -- Key situation factors that might increase the risk of unethical behaviour
   -- Other available information that might be useful for evaluating the existence or impact of the potential ethical issue, such as harms and benefits, or duties and rights

4. Have you identified at least two alternatives for analysis?

Analyze the Issue

5. Are alternatives analyzed thoroughly? Consider questions such as these:
   -- Have you analyzed whether each alternative might harm one or more people or stakeholder groups, or might violate what is considered to be right or good?
   -- Have you analyzed whether each alternative complies with relevant ethical constraints?
   -- Are findings interpreted logically?
   -- When applicable, did you consider different interpretations of rules, standards, or other information for the situation?
   -- Have differing viewpoints been considered sufficiently?
   -- In what ways might analyses be expanded?
   -- What are the arguments for and against each alternative?
   -- Have uncertainties, contingencies, or further developments been considered sufficiently?
   -- When you began working on this issue, did you have a preference for one alternative? If so, how did you ensure objectivity as you analyzed information?

6. Have you identified and analyzed the effects of rationalizations that you or other people might use to excuse or justify unethical behaviour?

7. When appropriate, is information about the situation integrated into the analysis?

8. When appropriate, has the quality and sufficiency of information been questioned and/or tested?

9. If applicable, have you considered whether/how the analysis for this ethical issue might affect analyses for one or more other issues?

Conclude and Advise

10. Have you applied appropriate decision criteria to reach a conclusion about whether each alternative is ethically permitted or ethically prohibited?

11. If applicable, have you applied decision criteria to make trade-offs for choosing among alternatives that are each ethically permitted?

12. If no alternatives satisfy all ethical constraints, have you applied decision criteria to select the most ethical alternative?

13. If applicable, have implementation plans been developed or contemplated? Consider, in particular, recommendations for ethical safeguards.

14. Have you developed a plan for your personal course of action if you are unable to adequately resolve the ethical issue with other decision makers?

Communicate

15. If needed, have you obtained input from other people, such as independent third parties or legal counsel, who can help you look at the situation more objectively or offer advice about how best to proceed?

16. If applicable, have you complied with professional, organizational, or other requirements to communicate information about ethical issues?

17. Have you communicated as effectively and persuasively as possible for the situation?