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  • Ken McPhail

    Executive Summary

    This report is part of a broader process of ethical reflection and review being undertaken by The Institute of Chartered Accountants of Scotland. As is the case with many individuals, the Institutes pause for reflection may be related both to its maturation and the fact that over the past few years the accounting profession has gone through a period of intense crisis. It is therefore not insignificant that the project coincides with the Institutes 150th Anniversary or that it comes in the wake of the Enron, WorldCom and Parmalat debacles (see ICAS, 2004; Morrison, 2004).

    To mark the Institutes 150th Anniversary and, no doubt, as part of the professions process of post-Enron self-examination, The Institute of Chartered Accountants of Scotland commissioned a tripartite series of reviews that aim to explore professional ethics in some detail (see Lovell, 2005; Pierce, 2006). This series of reviews begins to explore the complexity of professional ethics by bringing together disparate but related discussions from a broad range of accounting, moral philosophy and psychology literatures. Alan Lovells report collates the literature on ethics in business in general and Aileen Pierces review focuses on the insights that the literature provides into ethics and professional accounting firms. This report focuses on the literature on ethics and the individual professional accountant.

    Taken together, these reports (along with ICAS, 2004) provide a basis for beginning to explore the complex ethical challenges facing the profession as it heads into the 21st Century.

    This report reviews the literature on ethics and the individual professional accountant. The study draws on a broad range of literature in an attempt to begin to model the complexity of individual ethical behaviour with a view to highlighting the types of issues that the Institute may need to consider if it is to engage with individual professional ethical development in a meaningful way. The report discusses the following issues:

    • The ethical predisposition of accountants in particular.
    • The nature of the ethical individual.
    • The structure of the ethical issues that individuals face.
    • The characteristics of professions and professionalism.
    • Changes in both the perception and experience of professionalism.
    • How the profession might begin to engage with changing conceptualisations of professionalism.
    • Experience within the other professions.
    • Findings from other countries.

    The new millennium has not started well for accountants. The collapse of Enron, and the ignominious fall of the accounting institution Andersens, followed by WorldCom then Parmalat, has thrown the profession into crisis & again! Accountants are no strangers to scandal. Since its inception 150 years ago, the profession has consistently experienced periods of crisis (see Edwards, 2001), from the Royal Mail scandal in the 1930s (Mitchell and Sikka, 1993) to allegations of money laundering in the 1990s (Mitchell, Sikka and Wilmott, 1998). So the question of professional ethics has come to the fore again.

    But what is the question? Clearly, professional ethics encompasses an individuals response to ethical dilemmas. Was David Duncan, the partner responsible for the Enron audit, wrong to shred audit working papers? Certainly there is a need to understand how individuals experience ethical dilemmas within specific circumstances and the factors that influence their response. There is also a need to question what individual moral development means and how the profession can help accountants, faced with complex ethical dilemmas in practice, to make the right decisions. But the question of individual professional ethics is broader than this. It involves the function of accounting within the political and economic system. Arthur Wood of the Securities and Exchange Commission once commented, in relation to an earlier accounting crisis, that:

    & the cause of this crisis is the fact that investors and depositors are losing faith in the ability of the accounting profession to perform the job that has historically been its unique function: assuring the integrity of financial information on which our capitalistic society depends. (P Armstrong, 1987).

    The professional ethics of individual accountants is linked to the functioning of the capital market system. The accounting profession currently gains its legitimacy from its ability to perform this particular function (Hooks, 1991) and this may, in turn, explain the level of state interest in the accounting profession post Enron (see for example, Fearnley and Beattie, 2004).

    This crisis, like previous debacles (for example Polly Peck, Coloroll and Sound Diffusion) is therefore socio-political in its nature and hints at a broader systemic failing (See for example Puxty, 1997 and McKernan and ODonnell, 1997).

    Yet Enron et al. pushes the professional ethics debate into new territory. It is different from previous crises in detail. Much of the analysis, for example, has focused on the technical complexities of accounting for complicated financial transactions. The concern is that the concepts and categories of conventional accounting practice are now outmoded and struggling to cope with contemporary business practice. However, more significantly, the socio-economic context of the Enron debacle also differs from previous cases. Yes, the scandal occurred in a period when international capital markets were distinctly bearish and had been for some time, but more importantly, it happened in a period of changing social attitudes towards both business and the professions. It occurred within a milieu of increased questioning of the role of business in society and post-modern scepticism regarding the authority and function of the professions (Hauptman and Hill, 1991; Dillard and Yuthas, 2002).

    Enron, therefore, presents a significant challenge to the profession. However, the challenge comes not only in the need to understand the nature of the specific ethical dilemmas individual accountants face, and how the profession can help its members to respond to them in an appropriate way, but it also presents a challenge to the routine functioning of accounting within society. It represents an opportunity for the profession to critically engage with changing public expectations in relation to the civic functioning of the professions.

    The aim of this particular study is to critically analyse and synthesise the literature on the changing nature of individual professional ethics. The report takes its structure from the remit given for the study: ethics and the individual professional accountant, and is split into four main chapters. Following some brief comments on the method employed, the report initially focuses on the ethical nature of individuals and the structure of ethical issues. This section provides the context for considering how individuals may experience and respond to ethical issues in practice. Chapter two extends the discussion by focusing on the characteristics of professionalism. The purpose of this chapter is twofold. Firstly, one would imagine that within the sphere of accounting, the idea of professionalism might influence the way an accountant identifies, experiences and responds to ethical dilemmas. However, this chapter also attempts to begin to expand the discussion of professional ethics into the arena of public expectations, civic responsibilities and the public interest in general, if indeed, this is what being a professional is about. The penultimate chapter considers whether the notion of professionalism has changed over time and the report concludes by exploring some of the suggested responses to the crisis within the literature. Some suggestions for further research are also provided.

    The research discussed in chapters one to four is used to develop a framework for beginning to think about the complexity of the ethics of individual professional accountants.

    Given that this study is part of a broader ethics project, the report attempts to engage with the other reviews in the series and also the ICAS Research Committees perspective on these issues as discussed in its report Taking Ethics to Heart. It is perhaps in this potential for open dialogue and debate, created, in part, by the collapse of Enron that the greatest opportunity for substantive change is found.

    ISBN 1 904574-18-1 £15.00

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