Public Accounting Development
Chapter I: Introduction
As a result of such public accounting scandals involving the world’s largest public accounting firm, Arthur Anderson, and its unethical mishandling of such corporate accounts as Enron, WorldCom, Merck and Xerox, the public has a low level of confidence in the ethical makeup of Certified Public Accountants. (Coleman, Kreuze, and Langsam: 2004).
At the foundation of this ethical disintegration of the profession are cases of poor moral judgments and simply bad decision making. Thus, based off of this finding, a question as to the ethical standards of the profession today have been raised, essentially asking what is, or should be, the ethical code governing Certified Public Accountants?
In order to regain and eventually maintain the public’s trust in the profession, Certified Public Accountants must present themselves as an honest and ethical profession. In order to accomplish this, all professionals in the field must adhere to a high level of moral behavior in the form of a Certified Public Accountant Code of Ethics.
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This paper and the involved research will focus on the moral development and ethical decision-making methods of a select sample of Certified Public Accountants in Taiwan. The paper will statistically analyze the data with selected demographic variables that are collected through the appropriate testing instruments specifically designed to measure moral development and ethical decision making. These specialized tools include the use of the Defining Issues Test for measuring the CPA’s stages of moral reasoning and the three questions of the Multidemensional Ethics Scale for measuring their ethical decision-making process.
It is a general belief that an individual with lower moral development levels will be more likely to exhibit unethical behavior. It is also commonly held that demographic and institutional factors contribute to an individual’s moral development and ethical decision making skills.
This study investigates the truth of these statements by both studying the relationship between moral development and ethical decision-making actions and by choosing age, gender, level of position, educational level and ethical education as independent variables. The net result is that this paper presents the professional practitioner with useful information and insight on developing and operating an ethical work environment.
Since 2000, numerous, high-profile accounting scandals have occurred involving prettifying financial statements, inflating operating income figures falsely increasing overall yields, inaccurate recording of payments never made, just to name a few. In Taiwan the trend was no different. In 2004, Procomp Informatic and Infodisc were found to be in financial failure as a result of accounting errors, defalcation and illegal cash flow.
Further, Kelon Electrical Holdings Company was found to have reported inflated revenue numbers by over $112 Million. In 2007, the nation incurred the most serious financial criminal cases in the history, the financial scandal of the Rebar Group. Two of the group’s listed companies, the China Rebar Company and Chia Hsien Food and Synthetic Fiber Company, had filed the applications of the insolvency protection on Dec. 29, 2006.
However, the announcement of this major information was deferred until Jan. 4, 2007. According to the news released by the Taipei district court, this scandal involved in a record-high embezzlement of TWD 73.1 billions from the Rebar Group and other financial institutions, which had seriously affect the banking system and the capital market as well. Over 100 thousands of the shareholders and creditors were accordingly influenced. This event led the society to afresh emphasis the importance of the moral issues.
What can be understood from these unfortunate events is that ethical violations in accounting occur around the world. Thus, the problem of lost investor and public confidence in the financial statement, the hallmark of the accounting profession, has become a global epidemic. The cause of this ethical epidemic is a loss of moral reasoning. (Chamberlain: 2002; Joel: 2005).
Public confidence in the profession is essential, both to the profession’s growth and success, but also to the success and growth of the businesses that the profession serves. The accounting process is an essential component of measuring an organization’s economic growth. By law, CPAs are the only profession able to provide this measurement service. Thus, CPAs are relied upon by the public to possess and exhibit both high levels of competency and objectivity, but also, and most importantly, high levels of ethical standards. This critical role played by CPAs in the business world is undermined when questions of integrity and ethics are publicly questioned as having a reputation for high ethical standards is the essence of the profession. (AICPA Professional Standards: 2002).
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In Taiwan, the accounting profession is ethically governed by an independent accounting standards board. This board, the Accounting Research and Development Foundation (ARDF) is responsible for the development, publication and implementation of the Statements of Financial Accounting Standards (SFAS). The purpose of the ARDF is to “develop accounting standards and help enterprises establish valid accounting systems in Taiwan.” (ADRF: 2004).
The field of study on moral development, which is the foundation of ethical practices, has been an important sub-field of psychology since the mid 1970s. (Rest, 1979). Within this psychological field, many studies have been conducted on the moral development of accountants.
All of these studies are generally based on the six-stage sequence of moral and cognitive development proposed by Kohlberg. The purpose of this theory is to understand the reasoning behind an adult’s method of decision making based on what he or she personally believes is morally right or wrong. (Baxter & Rarick: 1987; Shenkir: 1990).
In general, Kohlberg’s six stages can be summarized into three categories: pre-conventional, conventional and post-conventional. According to Kohlberg, moral reasoning follows a clear pattern of development that is step-by-step and whose stages are invariant. (Kohlberge: 1981, p. 136). Kohlberg’s findings are even more important to the study at hand in that, according to his study, these stages of moral development are universal and thus applicable to all cultures.
In fact his studies even involved various cultures in Taiwan. (Kohlberg: 1981). To summarize, Kohlberg’s theory identifies a person’s current stage of moral judgment, reliably measures stage change, demonstrates that a higher stage is a better stage, and supports ethical/moral improvement through the advancement of cognitive stages. (Kholberg: 1981).
The tool Kholberg utilized in testing his theory of moral development was the Moral Judgment Interview (MJI). The MJI is a tool in which the subject is presented with an assortment of moral dilemmas in which all require choices. The subject’s responses to these presented dilemmas are thereafter interpreted and coded for scoring purposes. The psychologist Rest furthered this theory of moral development by inventing the Defining Issues test (DIT).
The DIT is used to measure moral development by having the subject evaluate various considerations and then make specific statements about the given dilemma using a multiple-choice question formant. (Rest: 1986). Both testing formats have been reviewed and validated as being scientific methods for evaluating individual moral development, although the DIT is often cited as being easier to use and score.
The second component of the study at hand is to evaluate the ethical decision making process and logistics as it applies to CPAs. Decision making is the key managerial activity that requires both conceptual skills and reflective maturity. Essentially, it is the complex process of identifying a situation in which a decision must be made, analyzing the problem requiring the decision, considering and evaluating all available alternatives, making a decision, taking a specified course of action and, finally, evaluating the results.