Investigating the lack of ethicality of accountants in the discharg...

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This paper deals first with the influence of contemporary accounting education on the lack of ethicality of accountants in the discharging of their professional responsibilities, and thereafter on the possible role of social and environmental accounting practices and concepts in the improvement of such circumstances.

Recent years have seen the accounting profession coming under severe attack, not for their professional incompetence, but for their lack of ethics in (a) their professional practice and in (b) discharging their obligations to the people who appoint them and depend upon their output for safeguarding and enhancing their financial investments (Dunn & Sikka, 1999). The accounting profession is active in areas of business, commerce, trade and industry in various avatars. Accountants work for and with business organisations (Dunn & Sikka, 1999). They assist and participate in management actions, especially in areas of finance, investments and accounts, and are directly involved in line activities in banking, investment, finance and insurance companies (Clarke, et al, 1997). As professional accountants they represent a huge body of professionally qualified and accredited accounting experts who provide a range of financial, accounting, taxation, and consultancy services to organisational managements and shareholders (Clarke, et al, 1997). As part of national and international standard setters they represent powerful group of policy makers who constantly interact with heads of business, industrial, and trade associations and governments and participate in, as well as independently take, actions that have far reaching economic and financial consequences (Deegan & Unerman, 2006). Taken as a whole, they represent a powerful group of experts who pervade the economic fabric of society and play influential roles in its economic activity and growth (Deegan & Unerman, 2006).

The most visible face of the accounting profession is represented by the auditing fraternity. Led by four global organisations, KPMG, PricewaterhouseCoopers, Ernst and Young and Deloitte, auditing firms and auditors provide auditing services to a range of small and large business organisations across the globe (PricewaterhouseCoopers, 2000). They are appointed by the owners and shareholders of businesses to examine the accounts of their specific organisations and report back to them on the truth and fairness of such accounts (PricewaterhouseCoopers, 2000). The relationship between auditors and shareholders is a complex principal agent relationship, because whilst auditors are appointed by and are responsible to shareholders, their constant engagement with organisational managements in the course of their work often results in the dilution of their basic responsibilities and obligations (PricewaterhouseCoopers, 2000).

Auditors represent themselves as neutral, apolitical, and knowledgeable experts who use their professional knowledge and expertise, abiding by clearly defined ethical codes of conduct, for the benefit of and in the interest of their principals, namely the shareholders of their client businesses and to other people who use their audited statements (PricewaterhouseCoopers, 2000).

Recent years have however witnessed numerous instances of flagrant breach of ethics by the members of the accounting profession, especially in their role as auditors of major corporations. Three of the most famous of these cases of dereliction of ethical obligations and duties occurred in the cases of BCCI, Enron, and WorldCom. In the case of the BCCI (Bank of Credit and Commerce International), a major international bank that was closed down by the Bank of England in 1991after the revelation of a huge fraud, it came to light that the bank's auditors, Price Waterhouse not only knew of various gross irregularities in the working of the bank, but had also taken loans from the bank for two of their Caribbean partnerships (Auerbach, 1991). The certification by Price Waterhouse of the truth and fairness of BCCI's financial statements helped the bank in misleading its depositors and other financial institutions, as well as regulators and investigators, about its true financial condition (Auerbach, 1991). The collapse of the BCCI, in 1991, led to the filing of law suits against both the auditors of the bank, Ernst and Young and Price Waterhouse, which was finally settled in 1998 for 175 million USD (Auerbach, 1991).

WorldCom filed for bankruptcy in July 2002. The company admitted to the falsification of billions of dollars in expenses in order to boost the profits of the company. Arthur Andersen, then the world's largest audit firm, gave a clean report to the company's financial statements for 2001. Subsequent investigations revealed that the executives of WorldCom had engaged in large scale tweaking of accounts, double counting of revenues from single customers, keeping of delinquent accounts, fraud, conspiracy and making of false statements (Cernusca, 2007). Arthur Andersen was accused of negligence in its conduct of professional responsibilities at WorldCom and settled with the court appointed plaintiffs for 65 million USD (Hevesi, 2005).

Enron declared bankruptcy in 2001, in what was until then the largest bankruptcy in the United States (Cullinan, 2004). Subsequent investigations into the conduct of Enron and its auditors revealed the conduct of numerous dodgy and downright fraudulent activities by the company that included creation of undisclosed off-books companies, incorrect accounting for SPEs, failure to provide complete disclosure, and unfair financial reporting (Cullinan, 2004). It was also revealed that Arthur Andersen had actively colluded with the management of Enron in the preparation and certification of false information and had obstructed the course of justice by shredding substantial incriminating material (Cullinan, 2004). The aftermath of the Enron and WorldCom episodes led to the breakup of the firm and to the takeover of its operations by a number of international and local audit firms (Cullinan, 2004).

Apart from these three high profile episodes, numerous incidents with serious ethical implications on the professional conduct of big and small accounting firms have come to light in recent years. Such scandals have devastated the reputation of the accounting profession and many people now readily perceive the occurrence of such scandals to be the outcome of lack of ethics in the accounting profession. Contemporary observers and analysts of accounting education state that the cause of such unethical behaviour can be traced back to inadequate accounting education, especially with regard to the ethical element. Russell and Smith (2003, p 1) state as follows.

"If we are looking for a primary contributing cause of corporate malfeasance at firms such as Enron, Equity Funding, WorldCom, Sunbeam, Arthur Andersen, and HealthSouth, we need to look no further than the classrooms of colleges and university accounting programs that have not significantly adapted their methods of instruction or approach to accounting and management education over the last 5060 years". (Williams & Elson, 2010, p 1)

This perceived lack of ethics in the conduct of the professional work of accountants have resulted in the occurrence of significant research on the connection of accounting education with the paucity of ethics in accountants, and the consequent occurrence of financial scams of varying degrees of magnitude in the corporate world. Prem Sikka of the University of Essex, along with Dila Agrizzi, Colin Haslam, and Orthodoxia Kyriacou, investigated the relationship of accounting education with unethical behaviour from the perspective of academic accounting instruction in 2007. Their paper, termed "The State of UK Professional Accountancy Education: Professionalising Claims", approaches the issue of the relationship between education and ethics by examining the various text books used by accountancy students from ethical perspectives.

Rob Gray, along with Bebbington and McPhail published an extensive article on the same issue in 1993. Concluding that the contemporary conduct of accounting education could very well lead to lack of professional ethicality of accountants, Gray et al, (1994), went on to state that such ethical deficits could possibly be made up by the progressive utilisation of social accounting methods for reporting of organisational performance and position.

This particular paper attempts to investigate and assess the nature of evidence provided by Sikka and his co-researchers to demonstrate the connection between inadequate ethical content in accounting education and lack of ethics in the practice of their professions. The paper thereafter examines the validity of the claim of Sikka and his co-researchers on the relevance of social accounting to address this deficit in ethics.

Commentary and Analysis

Sikka, et al, (2007) introduce their study by referring to the tendency of accountancy bodies to present accounting as an objective and independent activity that aimed to show an unbiased and true state of organisational performance and affairs. They state that whilst such claims are validated by their discourse on the quality of education provided to accountants and to their exhibition of ethical conduct, the actual education provided to accountants appears to be essentially rule bound and technical in nature and contains little material on the social consequences of corporate and accounting actions. Accountancy students are fully imbibed with the necessity of organisations to maximise the wealth of shareholders, which in their eyes is far more important than issues of justice and social equity. The researchers cite the views of a number of authors like Albrecht and Sack, (2000), and Craig and Amernic, (2002), to emphasise on the connection between the lack of ethical content in accounting education and the consequent ignoring of ethical issues in the conduct of the accounting profession.

Sikka et al, (2007), investigate this connection between accounting education and attitudes towards professional practice by studying the content of various books that are routinely studied by accountants to obtain fundamental and advanced knowledge about their subjects and their professional functions. This route of investigation is adopted by them on the surmise that an investigation into the content of the important literatures studied by prospective accountants and students of accounting will effectively reveal the actual ethical content in their education. The authors furthermore take up three important streams of accounting education and theory, namely financial accounting, auditing, and management accounting, for detailed investigation. The choice of books for their study is taken from the syllabi of professional accounting courses conducted by important accountancy bodies like the Institute of Chartered Accounts of England and Wales (ICAEW) and the Association of Chartered Certified Accountants (ACCA).

The authors make use of more than 30 publications, including publications of well known accountancy experts like Gray, accounting firms like PricewaterhouseCoopers and associations like the ICAEW and the CIPFA, which are routinely studied by accountancy students for their professional certificates. The first observation of the authors in the course of their study relates to the absence of social or organisational theory for explaining the reasoning behind accounting and its consequences in these publications. They state that whilst specified books on financial accounting provide information on book keeping and accounting statements and techniques, they do not have any content on ethical or moral implications of accounting on public interest, social responsibility, and the social contract of business. They state that whilst the obtaining of a basic realisation of the connection between accounting and society calls for fundamental conceptualisation of relevant social issues, nothing of this sort is available in the text books taken up for examination and analysis. Accounting is moreover presented as a neutral technology without any reference to its influence on issues like employment, savings, and wealth distribution, even whilst such issues are regularly published in the media. Whilst some information is provided on conceptual accounting frameworks or statements of principles, no theoretical underpinning or embedded world views of such principles or frameworks are provided by the respective authors.

Sikka, et al, (2007), further analyse books on financial accounting and find that whilst some of these books cover complexities in areas of accounting, accounting standards, legal issues and conceptual frameworks, they provide little explanation of relevant theories in areas of economics, agency and other issues that underpin accounts. Whilst the use of truth and fairness in accounting is a widely used term in routine accounting, these books contain little discussion on the issue. The authors also note that whilst some books on international accounting examine reporting differences between specific countries, little explanation is provided on the reasons for such differences and their relationship to history and culture. Although harmonisation of accounting is felt to be a desirable objective, little discussion takes place on its consequences to different nations that have dissimilar social and cultural mores.

The authors' investigation of auditing books leads to equally disappointing results. Taking up the accounting publication developed by PricewaterhouseCoopers for analysis, the authors find it replete with technicalities and legalities, but silent on the issue of social and organisational implications of auditing and the role of audit firms in allegations concerning audit failures. Whilst the book does not take up the issue of auditing from organisational perspectives, the material on ethics is also no more than a restatement of official guidelines and not enlarged with any relevant discussion on the management of various conflicts within firms and between firms and outsiders.

The authors find that whilst the books used to study auditing are voluminous, they do not deal at any length with issues like fraud, auditing failures, globalisation, or the ways in which auditors can serve wider social interests. The researchers also state that the books on auditing do not analyse the recent auditor related financial scams and their references to financial scandals are cursory, to say the least. Little attention is given to the creation of a powerful cartel by the big four audit firms, as also to their constant dialogue and demands with independent states for the passing of desired regulation and the associated threats of uprooting their operations from these states and causing social turmoil if their demands are not met. The authors find little mention of the various workforce and labour processes that are associated with audit work and the influence of organisational values, cultures, and attitudes of audit firms on the results of their audits.

The researchers' analysis of the chosen books on management accounting reveal that significant attention has been paid by the authors on transfer pricing and financial engineering. The researchers state that whilst (a) multinational companies regularly engage in financial engineering and management of profits through transfer pricing and parking of funds in tax havens and (b) that various methods are being adopted by affected governments to the curbing of such practices, the course books on management accounting, whilst serving to increase the knowledge of students about tax implications of transfer, are silent on the checking of such practices, even when the organisational interests of business firms conflict with those of society.

Management accounting education, Sikka et al (2007) state, prioritises the use of transfer pricing to protect organisational revenues and to maximise shareholder wealth. The researchers state that detailed investigation of the text books used by accounting students reveals little justification for the claims of accountancy bodies of their constant efforts to professionalise their discipline through advancement and cultivation of the social and public obligations of accountants and their ethical conduct. They find that accounting education continues to be a technical process that is not related to the broader organisational and social context and that very little effort is made in these books to develop broader world views and social obligations and consequences of their actions. Sikka and his co-researchers investigate the connection of accounting education with ethics by relating the paucity of information on ethics in text books to the unethical behaviour of accountants.

Both Piaget's and Kohlberg's models for development of ethics perceive the process of development of ethics as one that starts in early childhood and continues through school and various stages of adulthood, influenced by their individual socialisations, their parents, peers and teachers and their various learning experiences (Reimer, et al, 1990). Kohlberg also states that these stages are hierarchically integrated and that people not only do not lose sight of the insights obtained in early stages but integrate them into broader frameworks as they progress in life (Reimer, et al, 1990).

It would at first sight appear from Sikka's research and findings that (a) accountancy students, who take up its professional study in their twenties after completing their secondary, and in many cases their undergraduate education, come in with little or no concept of ethics, (which by itself is an untenable proposition), and (b) the complete lack of instruction in their professional education on the ethical and social implications of their work, result in tendencies to disregard ethics in the course of their professional engagement. Whilst the researchers do investigate their proposition with earnestness, the evidence used, namely paucity of matter on ethics in textbooks, to justify lack of ethicality in the work of accounting professionals, appears to be a trite superficial and disregards the various other ethical influences experienced by individual, before, during and after the completion of their education from a myriad other sources.

Gray, along with Bebbington and McPhail, (1994), took up the ethical issues of accounting education in their publication "Teaching Ethics in Accounting and the Ethics of Accounting Teaching: Educating for Immorality and a possible case for Social and Environmental accounting Education", in 1994. Whilst Gray and his co-researchers did not adopt similar investigative approaches and preferred to approach the issue through examination of secondary material on the use of learning theory and ethical, moral and deontological perspectives, they came to the conclusion that contemporary accounting education does not contain any ethical or intellectual approach or justification and essentially focuses on technicalities and profit maximisation.

They conclude that such education is essentially shallow in nature, ignores deep learning, is inadequate in developing intellectual potential and can lead to inadequacies in ethical development. Gray, et al, (1994) follow this finding by stating that social and environmental accounting can help to moderate the absence of ethical content in accounting education by providing a perceptive mirror to conventional accounting. It represents the process of conveying the social and environmental results of the actions of business firms to various interested groups within society. It stresses upon corporate accountability and challenges conventional financial accounting, which provides a rather narrow picture of the interaction between organisations and society. It is a normative concept that broadens the scope of accounting by extending to events that go beyond the purely economic and is not exclusively addressed in financial terms. Social accounting is based upon the premise that business firms shape their external environment in positive and negative ways through their actions and should thus include such issues in their accounting and reporting practices.

Such social accounting, which is essentially broad in nature and deals with various perspectives of organisational work can enhance the world view of accountants and enable them to broaden their perspectives. Exposure to social accounting will call upon students to question their accepted ethical perspectives and look at the social and environmental dimensions of business organisations and their accounting with different perspectives. Environmental accounting, Gray et al, (1994), state, will provide students with specific opportunities to investigate the implications of accounting and business in environmental degradation, a particularly important contemporary social issue and the various moral and social priorities they place upon accounting in terms of professionalism, ethics and public interest. Environmental accounting can further more open up the various limitations of reliance upon financial utilitarianism and consequentialism in ethics from the perspectives of deontological and motivist rationale (Martínez de Anguita & Wagner, 2010).

Gray, et al, (1994) conclude, through the use of Kohlberg's levels of ethical reasoning that adoption of social and environmental accounting could over time result in environmentally sensitive behaviour, appreciation of the need for sustainability and eco-centric approach that respects life. They state that continuous focus upon procedural, repetitive and algorithmic aspects of accounting, to the continued ignoring of social and environmental needs, is essentially a negative approach that needs to be corrected without delay.

Whilst Gray's arguments on greater exposure to social and environmental accounting do appear to be relevant in the inculcation of ethicality in the mental and professional orientation of accountants, critics of social accounting state that such accounting principles are grounded in the same accounting rationale and do little more than allow managements to window dress their financial statements with contrived messages about their social awareness and sense of social responsibility (de Anguita & Wagner, 2010). Critics notwithstanding, corporate social responsibility is slowly gaining ground in the modern day business world as more and more corporations respond to enormous social and environmental pressures for greater transparency in reporting and improved corporate governance processes (Martínez de Anguita & Wagner, 2010). Social accounting can undoubtedly play some role in increasing the awareness of accountants about the larger responsibilities of business towards society.

This essay takes up two issues for discussion and analysis, namely the role of paucity ethical content in contemporary accounting textbooks on the unethical behaviour of accountants and the possible role of social accounting, both in education and in practice, in improving their ethical awareness and sensitivity. Whilst it would be fair to state that the absence of such content will play its role in not increasing the ethical awareness and sensitivity of accountancy students, the drawing of conclusions between contemporary accounting education and lack of ethics in professional practice would be tantamount to denying the role of various other influences in the determination of ethical awareness and sensitivity. The role of social accounting in improving ethical awareness of accounting practitioners is however logical and the accounting profession could well improve in its attitudes to society by including it, both in education and in practice.