ETHICS CASE

THE HISTORY OF ETHICS IN ACCOUNTING

In the wake of recent, high-profile accounting scandals, you might think that ethics is a relatively new topic to the field of accounting. Actually, ethics has been an important part of accounting since methods of keeping financial records gained momentum in the thirteenth century. A code of ethics now applies to all accounting professionals and ethics has become an integral feature of accounting education.

BRIEF HISTORY OF ETHICS IN ACCOUNTING

Luca Pacioli, an Italian mathematician and Franciscan friar, described a method of keeping financial accounts in 1494 when he published his first book Summa de Arithmetica, Geometria, Proportioni, et Proportionalita (translated “everything about arithmetic, geometry, and proportions”). In this book he wrote about many topics, including the first ever double-entry bookkeeping system, cost accounting – and accounting ethics. Over the years, ethical

standards have been developed by many different professional associations, government agencies, and private companies. These organizations created ethical codes

of conduct which their members or employees are expected to follow when they perform their professional work.

An important organization in the early development of accounting ethical standards was the American Association of Public Accountants (AAPA) which was created in 1887. During that year, accounting became a profession, or a group of people whose members must meet certain standards to engage in the practice of accounting. In 1907, the AAPA incorporated professional ethics into its membership rules. However, membership in the AAPA was voluntary and therefore the ethical standards of the AAPA could not be enforced on a widespread basis. The

AAPA was later renamed to the American Institute of Certified Public Accountants (AICPA).

The code of ethics of the AICPA is a major force in applied accounting ethics in today’s business world. The ethical standards of the AICPA are fully described in Section 4 of this module—Ethical Standards for Accounting Professionals. Members of the AICPA are Certified Public Accountants (CPAs) who must comply with the AICPAs ethical standards. Noncompliance could result in losing a license to practice as a CPA.

ETHICS IN THE ACCOUNTING PROFESSION

In the middle of the twentieth century the Commission on Standards of Education and

Experience

for Certified Public Accountants identified seven characteristics of a profession:

1. 1. A specialized body of knowledge
2. 2. A formal education process to acquire the specialized body of knowledge
3. 3. A standard of professional qualifications to enter the profession
4. 4. A standard of conduct
5. 5. Recognition of status
6. 6. An acceptance of social responsibility
7. 7. An organization devoted to the advancement of the social responsibility

Characteristic 4—requiring a standard of conduct and characteristic 6—accepting social responsibility,

relate most directly to accounting ethics. What standards of conduct should accountants follow

and what is the social responsibility accountants have toward the public they serve? A professional must accept a moral responsibility to act in the best interests of the public. This means that business must look beyond profits to the common good and be sure not to harm the public good. The purpose of business is to make a profit, but profit should not be the only motive for business. Adam Smith maintained that business should seek a profit within the ethical principles of justice and fairness. Therefore, a business professional must protect the public interest while pursuing the profit motive. Many would argue that acting in the best interest of the public is also in the best interest of the company. In other words, ethics is good for business and makes the company successful even as the company looks out for the common good.

ETHICS IN ACCOUNTING EDUCATION

Colleges and universities in the U.S. have included ethics in their curricula since Harvard University was founded as the oldest institution of higher learning in the United States. Many colleges since then have included ethics courses in their liberal arts programs. In the 1980’s, however, applied accounting ethics really gained momentum and many colleges in the U.S. started incorporating ethics into accounting and business classes. This incorporation of ethics into business and accounting is called applied ethics because the ethical principles learned in the philosophy classes is applied to practical accounting situations in accounting classes. With applied ethics, students get to add a new dimension to their business decision process—soft ethical issues in addition to the hard numbers traditionally used to evaluate business projects.

DISCUSSION QUESTIONS

1. 1. Some argue that ethics cannot be taught in college because students have already formed their values when they come to college. Do you think ethics should be included in the accounting curriculum in colleges and universities?

2. 2. Do you feel that good ethical behavior is good for company profits? Describe a situation in which making a decision in the interest of the public good would increase the profitability of a business in the long run.