The globalization and diversification of accounting services


"The globalisation and diversification of accounting services, combined with the market competition and high profile corporate collapses have drawn attention to the accounting profession and its perceived ethical standards" ( Armstrong et al., 2003 , Leung and Cooper, 2005)

Theories of ethics

The term 'ethic' comes from the Greek word ethos and means character which is often described as a science of morality more precisely, people's perception about what is right or wrong behaviour. Individuals usually base their personal choice of ethical theory upon their life experiences. As Carroll (1996) said "One's values shape one's ethics". Accordingly there have been different bases for the formulation of ethics and three main approaches have been derived, namely normative ethics, Meta ethics and applied ethics.

Normative ethics is part of moral philosophy that regulates right and wrong behaviour and includes the formulation of moral rules that have direct implications of how human actions and culture should be like. Moreover the word 'normative' refers to norms or guidelines which are prescribed to human beings and this theory involves three main strategies.

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Deonlotological Theory states that an ethical requirement is reasonable because it is a good thing in itself. This means that a person will follow his or her obligations to an individual or society because being committed to one's duty is what is considered ethically correct. Immanuel Kant is often identified with this theory and one of the most common examples out of a list of unbreakable rules is the Ten Commandments. Subsequently the Virtue Theory states that any individual possesses certain character traits such as courage and generosity and this should be demonstrated in their everyday's actions. Therefore, they act in ways that reveal these virtues, even if it implies doing things that are generally viewed as being bad and bringing about undesirable consequences and it was studied by Aristotle, Plato and Aquina .Finally the Consequentialism/Teleological/Utilitarianism Theory considers an action to be morally right if the consequences of that particular action are more favourable than unfavourable .One author Jeremy Bentham who had studied this theory, stated that

"Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do. On the one hand the standard of right and wrong, on the other the chain of causes and effects, are fastened to their throne. They govern us in all we do, in all we say, in all we think."

Another approach is Meta-ethics which refer to the branch of ethics that seeks to understand the nature of ethical properties, statements, attitudes, and judgments and Applied ethics which concern "the philosophical examination, from a moral standpoint, of particular issues in private and public life that are matters of moral judgment". (Brenda Almond, 2010). It is a term used to describe the use of philosophical methods to identify the morally correct course of action in various fields of human life and accounting ethics as such is regarded as being in the field of applied ethics.

Theories of Accounting Ethics

The role of ethics in accounting has come to a crucial point and led to considerable debate due some financial scandals and failed audits of major companies. The concept of accounting ethics deals with the moral and values-based judgments of accountants or accounting institutions in their daily practices .Consequently there have been two important theories that explain the ethical dilemmas faced by these professionals. The most commonly applied theory used in accounting is the Kohlberg model of moral development, created by Lawrence Kohlberg in the late 1960s.

Kohlberg's theory divides moral development into three major levels and six stages that an accountant can use to measure the ethical correctness in a given situation i.e. (1) preconventional level which consists of stage one, obedience and punishment and stage two instrumental purpose and exchange followed by (2) conventional level composed of stage three the interpersonal accord and conformity and stage four social accord and system maintenance and at last (3) the post conventional level included stage five social contract and universal ethical principles. This theory had been used to examine the moral development of accounting students as well as professionals by (Jones, Massey and Thorne, 2003). Referring to the stages of moral developments, individuals had responded differently to the various ethical issues. For example those at the higher level of moral development had shown resistance to the pressure of conforming to others' judgments.

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The second theory was put forward by James R. Rest which is called the Rest's Defining Issues Test (DIS). According to this theory, some people are more ethically sensitive than others, and depending on the situations it can also create a stronger ethical pressure. Together, all the studies (Earley & Kelly, 2004 ; Tsui and Windsor, 2001 and Thorne, 2000) conducted on accounting ethics, had approximately come to the same results i.e. (1) there is a poor relationship between moral development and behaviour; (2) there are possible theoretical and measurement bias on moral development studies; (3) the Multidimensional Ethics Scale (MES) instrument has proved to be an appropriate tool for ethics research but might not be appropriate in other cultures; (4) there is a link between ethics and culture; and (5) there are no clear conclusive results concerning the existence of a gender effect or its direction on ethics research.

In his research, Thorne (2000) used the accounting defining issues test (ADIT) and took the DIT as a prototype. He selected junior and senior accounting students from US Universities and Taiwan Universities and anonymous questionnaires were given to them. The results from 215 US students and 427 Taiwanese students were used and the findings suggested that apart from being in different countries, there is significant relationship between cultural values and individual's moral development.

Gender differences in ethical judgements

Many researchers have devoted considerable effort to find gender differences in various ethical issues especially because the role of sex differences in organisational settings is gaining significant attention. In Caroll Gilligan's article In a different Voice, (1982) she pointed out that in moral disclosure, males show an orientation more towards autonomy and objectivity and a devotion to universal principles, while females produce more contextual responses. Then (Freud, 1925/1961) noted that "for women the level of what is ethically normal is different from what it is in man. Their superego is never so inexorable so impersonal, and as independent of its emotional origins as we require it to be in men".

Virtue Theories criticism mention that in every epoch women have shown less sense of justice than men implying that they are less ready to acquiesce to the great exigencies of life, and that they are more often influenced in their judgments by feelings of affection or hostility. Besides in other studies, females have shown advanced level of moral reasoning ability compared to males, for example, (Shaub, 1994) investigated the relationship of demographic variables with the moral reasoning of accounting students and auditors. He collected the data from 207 auditors from four offices of a single Big-Six Certified public accountants firm in the south-western United States and 91 senior accounting students from a mid-western university. The three-scenario defining issues test (DIT) survey was used to get a higher response rate. His findings showed that at a significant 0.05 level females had a significantly higher level of moral reasoning than males in both samples.

Conversely some researchers stated that gender has no significant effect on moral reasoning such as (Rogers and Smith 2001) who examined the gender effects on ethical reasoning. The data was collected from 88 accounting students at a state university in the southern United States, using a three-scenario DIT survey and unethical vignettes. The results indicated that there is no significant gender difference. In a view of all these studies, researchers had attempted to explain and understand in both sexes the characteristics and precursors of their moral conception even though the end results haven't been a universal one. Anecdotally, the whistleblowers for Enron and WorldCom and in the local context Air Mauritius were all women hence supporting the fact that females can be seen as being more ethical.

Business Corporate ethics

Business ethics can be defined as codes of principles and standards that govern decisions and actions within a company. Since businesses are at the strategic centre of society, they have a stake in their communities and therefore the purpose of ethics in business is to direct business people to abide to a code of conduct that facilitates and encourages public confidence. Organisations can manage ethics in the workplace by establishing an ethics management program but such as the (Professor Stephen Brenner in the journal of business ethics 1992, V11, pp. 391-399) said "All organisations have ethics programs, but most do not know that they do".

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Goodpaster (1989) in Rossouw and Van Vuuren (2004) argued that "businesses that institutionalise ethics can cultivate higher levels of moral reasoning and its sustainability depends on ethics strategy which is part of the operating consciousness of the organisation". There are two schools of thought that are central to business ethics i.e. Stakeholder perspective and shareholder perspective.

The Stakeholder perspective asserts that companies should consider all the needs and interests of their stakeholders and not only those who have a direct financial claim in the company's profits. Therefore the concept behind this belief is the Corporate Social Responsibility but it can be seen that businesses who are engaged in societal welfare are more interested in preventing themselves from any economic harm and attempt to promote higher levels of business ethics by focusing on public interest. For example Enron's strong support of the Kyoto Protocol on global warming initially proved to be an exemplary environmental responsibility accord but as Enron was also the proprietor of the world's largest wind-power supplies, it had a major financial gains and losses at stake. Therefore it can be argued that Enron's support was mainly based on concern for the bottom line before any real concern for the public. On the other hand, the Shareholder perspective which focuses on making decision based on the best interests of shareholders mostly in wealth maximisation. As Milton Friedman wrote "There is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits so long as it engages in open and free competition, without deception or fraud." But most critics of the shareholder theory are against this idea, since executives are responsible for maximisation of shareholder's value and are given large incentives to do so. They may respond by embracing whatever manipulation to achieve that goal.

Some studies have suggested that the culture and values of firms have a direct impact on accountant's behaviour (Clikeman, 2003; Appelbaum et al, 2005). An organisation's ethical climate is regarded as the vital part of corporate culture and therefore employees learn how to behave through the formal and informal socialisation environment. Hence if an organisation's activities are morally correct, its employees also will behave accordingly that is in a morally correct way.

The public interest versus self interest

Increased knowledge of what underpins public interest is considered to be a fundamental ethical issue that challenges the professional accountant in today's environment. However there's still a lack of attention given to ethical and professional values such as integrity, objectivity and commitment towards the public interest before accentuating self interest. As a result, there has been a decrease in society's trust and belief that accountants act in the best interest of the public. A more focused attention should be allocated to it since the accounting profession has been criticised for placing their self interest before the interest of third parties and thus leading to a high number of corporate collapses and accounting failures. Consequently, the profession has been pinpointed for a variety of ethical problems starting from lack of independence by public accountants on audit engagements, engaging in creative accounting, tax fraud and evasion and conflicts of interest as well as failure of the duty of care towards shareholders and the public. Additionally (Flathman 1966, p. 32) argues that "It is true that self-interest has a legitimate place in the public interest, but deciding whose self-interest and to what extent it requires the utilisation of values and principles which transcend such interests". According to (Armstrong et al. 2003) "The number of accounting abuses has served as a prima facie evidence that something more is needed in terms of accounting ethics". Can ethics be taught? At some point in life, ethics must be taught as people are not born with innate desires to be ethical or to be concerned with the welfare of others.

Calls for increased ethics education

Professional and educational institutions have recommended including ethics education in accounting curriculum at university level and business schools as it's the starting place for developing ethical and moral competencies. PricewaterhouseCoopers (2003, p.1) observes that "at this critical juncture we choose to focus on accounting education because of the important role in rebuilding public trust". For example professional ethics is at the heart of the ACCA qualification, the aim of this module is to give exposure to a range of ethical perspectives and it is very essential because the accountancy profession moves towards strengthened codes of conduct, regulation and legislation with an increasing focus on professionalism and ethics in accounting. "Enriching ethics in accounting education and improving the moral behaviour of its members is viewed as one way to restore credibility of the profession" (Mcphail, 2001). In 2006, International Federation of Accountants (IFAC) published the results of a research about ethics education in the world. The findings shown, that there is a positive feedback for the need and scope of ethics education for accountants and a general belief that it is indispensable to ensure less exposure to ethical dilemmas in the performance of their duties.

Empirical studies made by (Clikeman and Henning, 2000) suggested that ethics incorporated in the accounting curriculum does influence students' professional attitudes. However the question is whether this education has an ongoing benefit once the graduates enter in the workforce. An answer to this question was given through research conducted by (Winbush and Shephard, 1994) who stated that "ethical behaviour of subordinates has shown to be strongly influenced by their supervisors thus suggesting that the ethical climate of an organisation reflects the climate that employees adopt.

Professional Ethics and Regulation

The introduction of statue based roles for the accountancy profession is usually referred to as self regulation and is a typical characteristic of professionalism. As such all common established professions, like accountancy bodies, have undoubtedly been self regulatory since their inception where all members should adhere to the Code of Professional Conduct. These codes are established to promote the high quality services and contribute to economic development. Although codes of ethics are important devices that go beyond regulations and laws, it doesn't guarantee that members of the profession comply with the code especially with competitive pressures or the need to meet client's demand. Therefore, due to several accounting scandals within the profession, new regulations and reforms have been implemented to struggle the dangers of unethical behaviour. Consequently, the framework had provided the International Accounting Standards Board (IASB) and the financial Accounting Standard Board (FASB) with both a basis for setting standards and concepts to use tools for resolving accounting questions through an upon-agreed framework thus reducing the influences of personal biases and help accountants to better handle ethical matters.

Moreover apart from the Code of Professional Conduct, financial accounting practitioners throughout the world are generally regulated by a large number of accounting standards which are put forward to bring uniformity and protect investors. Accordingly when regulation was introduced, there were several theories available to describe who benefits from such regulation.

The public interest Theory according to which regulation takes care of the public interest rather than particular vested interests and as society needs reassurance, the regulation is deemed to be an instrument to create such assurance. (King, 2006, Chap 14) suggested that "The Sarbanes-Oxley Act (SOX) in 2002 was also designed in the public interest, because it was necessary to avoid other financial scandals". The act contains 11 titles starting from corporate board responsibilities to criminal penalties and has contributed to restore confidence in capital markets and strengthened corporate accounting control. However the alternative to this theory is The Capture Theory where legislators are captured by industry and (Beaver 1998, p164) explained that "The prime beneficiaries of regulation were not the public but rather those being regulated". Moreover the last but not least theory, The public interest group theory, which states that legislators and regulators main's aspiration is to remain in power therefore they design regulation that best suit to the needs of the interest group that exercise more relative pressure on them.

Ethics and corporate governance

Sir Adrian Cadbury (2002) defined corporate governance as "a system by which companies are directed and controlled". It comprises an engagement to ethical business conduct that maximise shareholder's wealth on a sustainable basis while promoting fairness to all stakeholders though the most crucial challenge for sound corporate governance is the people's mindset and organisational culture. It is quite possible that in the effort to achieve targeted financial results, there could be attempt at doing things which are verging on the illegal border and in certain circumstances there are some practices which remain legal but far less from being ethical such as tax planning. For that reason, there is an increasing concern about standards guiding financial reporting and accountability especially after losses suffered by investors which could have been prevented with better transparent reporting practices. It has been observed that whenever there is a Fraud cases or corporate failures, accountants are often pinpointed as being the culprits and pay for something that they have been compelled to do. But the truth is that management often place high pressure on accountants to achieve high earnings and when there is bad news, they suffer from the wrath of their employers. Therefore they must come forward with alternatives to satisfy the exigencies of their boss for example adjusting figures to enhance the image of organisation's profitability. Frequently when manipulation of figures are discovered, it is the subordinates who are found to be guilty and are sentenced to huge amount of penalty or years of imprisonment while real culprits are enjoying lavish homes, cars and company benefits. As a result if these cases are not brought to justice, they will get away with these kinds of behaviour and the prevalence of unethical behaviour will keep on rising. Fortunately in the cases of Enron, WorldCom and Tyco, the true perpetrator i.e. the Chief Executive Officer (CEO) had been caught red-handed. In an Enron article titled "Jeff Skilling: Enron's Missing Man", Wendy Zellner who did the inquiry in this affair, got pieces of evidence of Jeff Skilling's (CEO) involvement in the scandal and wrote in her article that "He implicitly and explicitly pushed subordinates to break laws as a heavily indebted Enron scrambled to hide years of bad investments to keep its crucial credit rating." For WorldCom, in a business week article named "At WorldCom, It's Déjà Vu All Over Again", it has been found that it was the management who were responsible for the illegal activities. They pointed out that "The Deloitte & Touche, the accounting firm dealing with WorldCom's financial figures, quit because they didn't agree with the moral decisions WorldCom was making with regard to their record keeping". In the light of these scandals, the implementation of the SOX has helped to reduce illegal activities from management, achieve quality governance and restore investor's trust.

The ethics behind earnings management "cooking the books"

Earnings management has increasingly become an issue for the accounting profession and it is not an incidental activity since companies are increasingly "planning" on the profits to be disclosed. "Every company is fiddling its profits; every set of accounts is based on books which have been gently cooked or completely roasted" (Ian Griffiths, New Creative Accounting, 1995). According to (Healy and Wahlen, 1999), "Earnings management occurs when managers use judgement in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of a company or influence contractual outcomes that depend on reported accounting numbers". Several studies such as Simon (1998) and Cotobally, (2000), have demonstrated that the six proxies for earnings management are size, risk, managerial bonuses and incentives, leverage, constraints on interest cover and dividend payout. On the short term, everything starts by being an inoffensive exercise through management discretion of manipulation of figures. Likewise this "cooking the books" practice is being done abiding by the rules then goes bigger and bigger while thinking that things will get better but on the long run it goes out of control. Recent evidences are Enron (direct association made to the off-balance sheet loss-making ventures), WorldCom and Xerox. Nevertheless even if the use of earnings management is not an illegal practice, it is clear that managers in financial difficulties are looking to solutions, no matter they are unethical. Companies generally prefer to report a steady trend of growth in profit where investors will be enticed into buying company stock rather than to show volatile profits with a series of dramatic rises and falls. Moreover, Accountants who accept the ethical challenge that creative accounting raise need to be aware of the scope for both abuse of accounting policy choice and manipulation of transactions as good practice do not prevent companies from going through earning management since they are adhering to the rules but still it is an immoral and unacceptable activity which should be counteracted.

Auditor's independence

Auditors are required to observe proper standards of professional conduct specifically the ethical guide known as the 'Rules of Professional Conduct" or "The Rules". The fundamental principles which they should observe are integrity, objectivity, confidentiality and independence. Auditors have a duty to adhere to high standards of behaviour which requires them to follow both the spirit of auditing and ethical standards. The issue of Auditor's independence is complex and central to ethical matters in accounting. Independence has been defined as "avoidance of situations which would tend to impair objectivity or permit personal bias to influence delicate judgement" (Carey et al., 1966). According to the US Securities and Exchange Commission (SEC) commissioner (Steven Wallman 1996, p.77) " Independence is part of the essence that underlies the success of our public accounting system, it helps provide the objectivity that permits the profession to perform its attestation and monitoring functions effectively". The client hires the auditor to give an opinion about whether financial statements give a true and fair view of the organisation's performance and it enhances the credibility of financial reporting. Therefore the auditor is required to conduct the audit in an independent way essentially his state of mind and has to tell the truth as he sees it and permit nothing to influence him or turn him from that course.

Furthermore to have a better understanding of the determinants of failed audit independence, a look at a research made in 2005 will be useful. This study conducted in Malaysia by Abu Bakar et al. (2005), surveyed the users of financial Statements particularly 86 commercial loan officers in Malaysian commercial banks using mail questionnaires. The results shown that on a scale of one to six, (1) smaller audit firms, (2) audit firms operating in a higher level of competitive environments, (3) audit firms serving a given client over a longer duration, (4) larger size of audit fees, (5) audit firms providing Management Advisory Services (MAS), and, (6) the non-existence of an audit committee, are alleged as having a higher risk of losing independence. Audit firm size is the chief factor, followed by tenure, competition, audit committee, MAS and size of audit fee.

Causes of ethical failure

Fraudulent activities can occur for various reasons such as those mentioned earlier but in order to combat them, there should be an in depth study in order to find out the thread to their occurrence.

An article in the Managerial Auditing Journal 2007 discussed the top nine factors that cause ethical failures for accountants based on a survey of 66 members of the International Federation of Accountants (IFAC). The respondents were asked to express their views by selecting whether they: "strongly disagreed", "disagreed", "agreed" or "strongly agreed" about possible statements which contribute to ethical failures. Results of the analysis are shown in the table below

Ethical Failure Factor

Number of respondents(N)

Overall Mean

Self interest



Failure to maintain objectivity and independence



Inappropriate professional judgment



Lack of ethical sensitivity



Improper leadership and ill-culture



Failure to withstand advocacy threats



Lack of competence



Lack of organisational or peer support



Lack of professional body support



Table 1: Perceptions of Factors contributing to ethical Failure

(Source: Managerial Journal 2007)

According to professional accountants' responses, self interest and failure to maintain objectivity remains the most prone factors that cause ethical failure. In another study conducted by Wimbush and Shepard (1994) they argued that the ethical behaviour of subordinates is strongly influenced by the management's exigencies and therefore it reinforces the way lower level employees act. But as a whole, all factors listed in the table above was recognised as a cause of ethical failure and these issues mentioned are common issues faced by accountants in their daily practice. Therefore wider consultation and collaboration with professional bodies would be useful in restoring public confidence that had been threatened following the wave of corporate scandals all around the world.