Review About Accounting Ethics Accounting Essay


Ethics usually encompasses the study of doing right or wrong. According to studies made justify all paragraphs by Becker (1968), Brown and Reynolds (1973) and Gul (2000), there are several factors affecting the fact that the probability that an individual will commit an unethical behaviour. They are: the expected gain of acting or behaving unethically (or the expected loss if such an unethical act or behaviour is caught); the individual's perception of the likelihood of his unethical behaviour being caught; the form of penalties; the individual's risk profile; and the individual's perception on ethical reasoning. Based on a work by Gul et al. (2003) on the examination of Chinese auditors' ethical behaviour in an audit conflict situation, the following rephrase has been found. There exists a negative relationship between ethical reasoning and the probability of auditors acting or behaving unethically. Accordingly, auditors with higher level of ethical reasoning are less likely to act unethically. Moreover, for auditors who perceive higher risks of being caught, the negative association between ethical reason and the probability of acting unethically is weak. Therefore it has been was? concluded that both the level of ethical reasoning and the risks of detection are important factors that influence individuals', (Chinese auditors'), ethical behaviour.

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According to a framework of socio-moral development introduced by Lawrence Kohlberg (1969), individuals will deal with ethical decision-making based on the level of justice and fairness. Individuals would formulate ethical judgments according to different levels with respect to the different stages of socio-moral development of the framework. Out of them, stages 5 and 6 deal with tax ethical behaviour. Stage 5, which has received substantial empirical support, provides that social contract refers to respect of social order and live under law, such that a person would pay taxes because that person considers it is law for him/her to do so. Conversely, stage 6, a theoretical endpoint that follows from the preceding five stages, refers to 'acting right' based on universal, abstract principles of justice and rights, so that an individual uses conscience and moral concepts to guide actions. An instance would be where a person pays taxes not because it is lawful, but because it is the right thing to do.

Weiss (2003) discussed five fundamental ethical principles that could be used by individuals in ethical reasoning for justifying behaviours, actions and decisions, and for choosing alternatives. These principles are as follows:

Ethical relativism: it basically refers to self-interest in such a way that an act would be considered morally right if it serves one's self-interests and needs

Utilitarianism: This principle calculates the costs and benefits of an act, and the net benefits over costs is its 'utility'. Thus, an act is morally right if the net benefits over costs are greatest for the majority. In other words, ethical behaviour is one where the benefits exceed the costs.

Universalism: This principle takes into account duty and fairness vis-a-vis third parties. To determine whether an act is morally right, the nature of the act will be considered in lieu of its consequences. A moral or ethical act is one which respects the rights of those affected and is fair to all parties involved. An ethical duty is to do no harm.

Rights: It refers mainly to individual entitlement as to his/her pursuit of freedom of speech, expression, choice, happiness and self-respect. A moral act is one based on an individual's legal rights and on the principles of duties.

Justice: It refers to fairness and equity, determined by the extent to which wealth, burdens and opportunities are fairly distributed among all. An act is ethically right if all individuals are treated equally in the sense that they enjoy equal opportunities and advantages to society's burdens.

So far, the different views on ethichs follow each other without a link which should be made by you. There should be a flow from one paragraph to the other. It is reported that individuals who are more morally developed are less likely to behave unethically (Leming, 1978; Ponemon, 1990; Ponemon and Gabhart, 1993; Trevino, 1986; Trevino and Youngblood, 1990). Other studies suggest that the level of ethical development influences an auditor's determination to verb missing? work-related ethical dilemmas.

Tax Compliance

Long and Gwartney (1987) define income tax avoidance as "taxpayer actions designed to (a) move reported income into lower taxed categories and (b) reduce the personal costs of consumption" (p. 517 of what source?). Growing concern about the extent of the "underground economy" has prompted recent studies on tax evasion. Both tax evasion and tax avoidance aim at reducing the tax burden of the taxpayer. However the costs of these two actions are different. Tax evasion is often coupled with a possible disutility and thus creates moral costs. On the other hand, tax avoidance is stamped by information and advice cost in order to find reductions in tax liabilities, which are considered legal, and thus take advantage of the tax law. It enables the reduction of penalty and provides the taxpayer with the feeling of complying with the tax law. Therefore when we refer to tax non-compliance, we are in fact pointing towards tax evasion which is considered illegal, immoral and punishable by law. Tax compliance is growing international concerns for tax authorities and public policy makers since tax evasion seriously threatens the capacity of the government to raise its public revenue.

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Very often, it is because of complicated tax laws that higher incentives for tax evasion are generated. In a study by Alm and McCallin (1990), the results found that a decrease in the rate of return on risky income increases the amount of declared income. Moreover, individuals tend to substitute from evasion to avoidance if the return from avoidance increases or the riskiness of avoidance is lower compared to tax evasion.

Tax evasion depends on how illegal activities are interpreted by tax laws. Law can be used by taxpayers or tax preparers in a "creative" way, seeing it as a material to work on, and possibly able to transform, taxpayers' own interest.

Compliance with the tax law typically encompasses the following:

True reporting of the tax base

Correct computation of tax liability

Timely filing of return

Timely payments of amounts due

The economic analysis of crime has been thoroughly carried out in the classic article of Gary S. Becker, named "Crime and Punishment: An Economic Approach". In this article, non- compliance is considered a rational individual decision which is based on various factors such as, probability of detection and conviction and levels of punishment. The likelihood that an offender will be detected and convicted and the nature and extent of punishments differ widely from person to person and activity and activity. Different rules and regulations are enacted by the government of states to protect against violation of person and property through murder, rape, or burglary and to restrict "discrimination" against various activities such as collusive business arrangements, "jaywalking", materials used in constructions, amongst others. Becker considers crime as not only covering the felonies receiving wide newspaper coverage, like murder, robbery, and rape, but also tax evasion. The analysis mainly concentrates on the optimal policies to combat illegal behavior. Here again, there should be a better flow between the paragraphs otherwise it just looks like 'copy paste' on an ad hoc basis

Most individuals' actual tax assessments depend upon the income they choose to report, which may not necessarily be the same as their true income. Allingham and Sandmo (1972) analysed the individual's decision on whether and what portion of his income to invest in the risky activity labeled "Tax Evasion" through underreporting. In brief, it concerns the relationship between taxation and risk taking. Full reporting of income is considered a risk-free activity while reporting only a fraction of it beats the risk of being caught and fined. In this paper, it is assumed that the probability of detection is exogenously given to the individual taxpayer. It is found that the amount of tax evaded is inversely related to the audit rate and penalty rate, while it depends negatively on the tax rate and positively on income if his utility function is decreasing absolute risk aversion. Both the direct gains from evasion and the expected fine depend proportionally on the tax rate. Therefore, the taxpayer would choose a level of reported income so as to maximize his or her expected utility of net wealth. The taxpayer may voluntarily report more of his income in response to a rise in the probability of being detected, the penalty or fine charged upon those who are caught and the tax rate. Yitzhaki (1974) extends his analysis by showing that the tax rate mentioned in Allingham-Sandmo model has both a substitution effect and an income effect. The substitution effect favors tax evasion since an increase in tax rate is considered more profitable to underreport income at the margin so that more money is retained when one underreports a Rs of income. On the other hand the income effect discourages tax evasion where, assuming a decreasing absolute risk aversion, taxpayers would be less willing to underreport income since a rise in the tax rate would lead to a decrease in the net income. Consequently, the net effect is assumed to be uncertain. Clotfelter (1983) finds that both the marginal tax rate and the level of after-tax income have a significant impact on individual underreporting. In a study made by Dubin and Wilde (1988), the results indicated that there exists a negative relationship between tax audit rate and tax non-compliance.

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Tax compliance determinants based on the tax compliance model of Fischer et al. (1992) have been an important subject of research in many developed countries. The model elaborates 14 key factors influencing tax compliance. These factors have been categorized into 4 groups by Fischer and associates, namely:

Demographic (e.g. age, gender and education),

Non-compliance opportunity (e.g. income level, income source and occupation),

Attitudes and perceptions (e.g. fairness of the tax system), and

Tax structure (e.g. complexity of the tax system, probability of detection, penalties and tax rates)

In sum, economic, sociological and psychological factors have been incorporated into a comprehensive one in Fischer et al. (1992) tax compliance model which is illustrated in the following diagram:



Jackson and Milliron (1986) reported a positive link between age and taxpayer compliance. Besides, data coming from the Taxpayer Compliance Measurement Program (TCMP) of the Internal Revenue sSrvice also indicate that "noncompliance is significantly less common and of lower magnitude among householders in which either the head or the head spouse is over age 65" (Andreoni et al., 1998). It is generally concluded that young taxpayers are more willing to take risks and are less responsive to sanctions, when caught. Ritsema et al. (2003) also find that age is a determining factor for intentional evaders, with younger taxpayers less compliant.


Prior research testing the tax compliance level of males compared to females suggests that females are more likely to tax compliance. Traditionally, the following conclusion has been drawn by Jackson and Milliron, (1986): females have been identified with conforming roles, moral restraints and more conservative life pattern; all of them promote higher tax compliance. A study conducted by Baldry (1987) also finds that more females than males tend to tax compliance. However, the study by Houston and Tran (2001) indicates a higher proportion of tax evasion committed by women than men.


Education refers to the taxpayers' ability to understand and comply with the tax laws (Jackson and Milliron, 1986). Two aspects of education have been distinguished: "the general degree of fiscal knowledge and the degree of knowledge involving evasion opportunities" (Groenland and Veldhoven, 1983). This knowledge is considered to be an important factor affecting tax compliance behaviors. It is found that taxpayers with greater fiscal knowledge tend to more positive tax ethics scores. Chan et al. (200) also concluded that there is a direct relationship between education and the likelihood of being tax compliant.


Income level

According to this factor, as income rises, tax evasion should subsequently increase (Andreoni et al., 1998). It is found in Ritsema et al. (2003) that income level is positively linked with tax owed. Moreover, Houston and Tran (2001) report that the subjects in the lower income group ten to have a lower proportion of tax compliance by under-reporting income than their counterparts in the higher income group.

Income source

It is being reported that whether to overstate expenses or to understate income will be mainly influenced by opportunities presented before taxpayers. Greater tax non-compliance opportunity tends to come from self-employment and such income sources that are not subject to withholding taxes. Aitken and Bonneville (1980) found that self-employed taxpayers are more likely to be tax non-compliant. It is also suggested that those who acknowledged receiving additional income that is not taxable at source tend to be evading taxes more often.


This relates to the taxpayer's employment. Sutherland (1949) found tax evasion to be committed by respectable individuals with high social status in the course of performing his employment. Besides, the Taxpayer Compliance Measurement Program indicates that "among all sole proprietors those who engaged in sales from fixed locations understated taxes by the greatest percentage" (Andreoni et al.1998)


Fairness of tax system

When taxpayers are dissatisfied with the fairness of the tax system, they tend to be more tax non-compliant. Surveys conducted by Scott and Grasmick (19882) and Spicer and Lundstedt (1976) indicate that taxpayers who perceive the tax system to be unfair, are more likely to evade taxes. One important means to ensure tax compliance is to provide more tax knowledge in order to improve taxpayers' perception of the fairness of the tax system.

Peer influence

Peer influence is referred to as the influence of taxpayers' associates such as friends, relatives and colleagues. Scott and Grasmick (1982) reveals that taxpayers with peers who practice tax non-compliance tend to commit as well. Chan et al. (2000) also concludes that taxpayers would commit tax non-compliance so long as this behavior is consistent with in-group expectations and norms.


Complexity of tax system

Complexity of the tax system is regarded as an important reason for tax non-compliance. Tax complexity can be seen in two dimensions, namely the excessive details in the tax rules and the numerous computations required. The tax rules and computations should be simple, understandable and clear in order to encourage tax compliance. Clotfelter (1983) reports that complexity of the tax returns is linked with greater underreporting of tax.

Probability of detection and penalties

Generally, higher audit probabilities and severe punishment in the form of penalties enhance tax compliance. Massimo (1993) suggests that individuals would be more likely to evade taxes if there is some zero probability of being caught. Raising the probability of detection through higher tax audit would be increasing tax compliance. Besides, fears of penalties prohibit tax evasion. Taxpayers would be less likely to evade taxes if non-compliance is dealt with severe penalties. According to the study of Allingham and Sandmo (1972), tax compliance can be increased by increasing penalties when detected. Grasmick and Scott (1982) indicate that individuals are less likely to acknowledge tax non-compliance if such acts are associated with severe penalties.

Tax rates

The empirical study of Clotfelter (1983) indicates that progressive tax rate is a significant variable influencing tax compliance behavior. It is assumed that the probability and level of underreporting are positively related to the marginal tax rate.

Ethics and Tax Compliance

Intentional tax non-compliance is a serious and pervasive problem for an economy, since it causes great losses in government revenue. Income taxes being the major source of revenue for the government of most states, non-compliance has a significant economic impact. In a study made by Reckers et al. (1994), the following conclusion is drawn: ethical beliefs about tax evasion more highly correlate with compliance that deterrence factors. This conclusion is in line with the findings of other articles like those by Caroll (1987), Etzioni (1988), Roth, Scholz and Witte (1989) and Smith (1990). In Reckers (1994), individuals' tax ethics are interpreted to predict tax non-compliance. The finding in this research suggests that ethical beliefs, perceived by the participants in the study, are an important factor influencing taxpayer behavior.

The primary theoretical framework theory in economics for non-compliance purposes has been the deterrence theory. According to the latter theory, taxpayers are assumed to be rationally performing a cost-benefit analysis of non-compliance by considering the value of the marginal tax rate, the risk of detection and penalties involved when caught. This theory is consistent with the classical expected utility theory, such that a rational taxpayer would be expected to make compliance decisions that will maximize his/ her utility. This view of decision-making is mainly motivated by self-interests. This means that individuals are thought to promote their own interests rather than the interests of others. Ethical values are seen as interfering with rational behavior and utility maximization.

Sociological research, however, had extended this view to include the concern for social duty and self-interested goals. Individuals may be influenced by ethical values while making decisions since their behavior may be based on a sense of duty, rather than gains provided by their acts. Therefore, in the deterrence models, taxpayers choose a compliance level that maxims utility (choosing what is best for the taxpayer himself), whereas in sociological models, this choice also takes into consideration the social obligation of the taxpayers as well (what is the taxpayer's duty). Etzioni (1988) states that ethical values may lead to more effective and efficient decision-making process.

Some conclusions that can be drawn from previous research are that ethical values differ from one individual to another (Kohlberg, 1976) and that specific ethical values correlate highly with self-reported tax compliance. Ethical values tend to influence an individual's behavior such that a taxpayer may edit, out of the possible choices, all those that are not considered to be consistent with their moral duty of tax compliance. However, not all taxpayers will view tax evasion with the same sense of morality. Reckers et al. (1994) explains prospect theory to be framing the year-end withholding position of a taxpayer as a gain (receive refund) or a loss (taxes due). The research is to analyze whether and to what extent this theory affects the taxpayer's compliance decision-making. The findings concluded that taxpayers with high compliance ethics were hardly affected by their withholding position because their sense of duty to comply with tax laws exceeded, in importance, the withholding frame. It is also suggested by literature that marginal tax rates influences compliance behavior. However, the study found that the manipulations of the marginal tax brackets scarcely affect the response of individuals who view tax evasion as morally wrong. Thus, morality is seen to be settling both the framing and the tax effects for those participants that view tax evasion as an ethical issue.

Tax Practitioners

Given the complexity of the tax laws and in an era of increased enforcement penalties, more taxpayers are nowadays turning to tax practitioners, or tax professionals, for assistance in preparing their tax returns. Therefore tax practitioners play a significant role, together with taxpayers and the revenue authority, in a tax system of voluntary compliance. This is so mainly in situations where tax laws are ambiguous and the tax liability depends much on the interpretation of complex provisions of the laws. The fact that tax practitioners are considered to have greater technical knowledge, professional experience and be more familiar with the administration of the tax law, as compared to ordinary taxpayers, has prompted the latter to shift the burden of accurate filing of returns to tax practitioners. Consequently, tax practitioners need to exert a strong influence on tax compliance issues. Thus, in the performance of their duties, there are questions that need to be asked: do tax practitioners have a collective or civic commitment, albeit vaguely defined, to the tax system and the community at large?

Applying ethical standards to tax practice would mean to refer to standards which include professional competence, objectivity, integrity, public interest and confidentiality. It encompasses the attitudes of truthfulness and integrity involved in an accountant's practice. In this study emphasis will be mainly laid upon ethics 'in practice' from the point of view of one of the major players in the tax arena, namely the tax practitioner.

Tax practitioners must recognize that ethical issues need to be considered in their decision making process. The role of tax practitioners is basically to be the client's advocate, in an attempt to minimize their client's tax liability. In performing their duties, they may experience conflicts in trying to fulfill the role of their client's advocate while, simultaneously, adhering to the demands of other constituencies such as their firm, the tax authorities and the accounting profession. These demands may pose ethical conflicts for tax professionals. Ethical conflict is basically a state of internal disagreement and disharmony in relation to mutually exclusive desires or goals of an individual that influence a decision (Trevino, 1986).