Is failure to teach ethics the causal factor?

The Ethics column in the September issue of Strategic Finance Magazine asked: “Are accounting programs really the cause of the departure of moral values from accounting? If not, what institution is at fault?”

Unfortunately, it isn't possible to cite a single institution as the causal factor for our apparent disregard for ethical values (e.g., Fastow, Duncan, Milikin, ad nausea), nor is there a single solution to our problem.

Prof. Paul Williams, author of the referenced ethics column, posits that accounting programs have become largely technical in nature, suggesting that instruction in ethical behavior has gone by the wayside. Part of his assertion is valid. The Accounting Principles Board (APB) averaged only two Opinions per year during its existence (1958-1973), but the Financial Accounting Standards Board (FASB) has generated 147 Statements, not counting Interpretations, and the SEC has issued a plethora of regulatory pronouncements. It's no wonder that our college and university accounting programs have been extended to 150 semester hours (often including a master's degree) to accommodate the explosion of technical standards our students must master. Thus, Williams's assertion of an expanded technical focus in our programs is correct.

But while the explosion of technical standards has been absorbed into the curricula, so has ethics education. Ethics education in the 1960s and 1970s was largely limited to a few cases in auditing classes until the AACSB in 1979 made ethics education a requirement in the common body of knowledge of business education programs. Ten years later, this requirement was expanded to include ethics in the student's major area of study (e.g., accounting). Recently, Laura A. Hay, vice president, finance & technical services at the Ohio State Society of CPAs, and I conducted research that indicates that undergraduate students in Ohio's colleges and universities receive approximately 10 hours of classroom-based ethics education while they earn their bachelor's degree. And more than half the universities we studied require all business students to take an ethics-specific class. In rank order, the greatest exposure to ethics is in auditing, intermediate, and introductory accounting classes. Advanced financial and accounting systems gave the least exposure to ethics, while income taxes and cost accounting were in the mid-range, each devoting about an hour and a quarter to ethics education during the term. Stated plainly, within the last 10 years, ethics education has become integrated across the accounting curriculum, with most modern textbooks providing a variety of opportunities to incorporate ethics into the accounting program. Given the above numbers, there is no doubt the instruction of ethics in the classroom can be improved. Yet accounting programs have made definite strides to incorporate ethics as well as deal with the increased emphasis on technical standards, technology, critical thinking, and communication skills.

Now let's talk about people. Many of the recent culprits who have disdained ethical behavior occupy influential positions, such as CEO, CFO, and senior partner. They appear to have adopted actor Michael Douglas's infamous words, “Greed is good,” in the movie Wall Street. And they seem to have no qualms about taking unethical steps, disregarding the harm to employees, investors, their profession, or even themselves during their pursuit of wealth and prosperity. What is the message they are passing on to the next generations of corporate professionals?

Let's not omit two institutions that must share some blame in the Enron disaster. We cannot save harmless the SEC, our regulatory body, from the Enron/Andersen debacle. The SEC feigned being understaffed while knowing that problems existed at Andersen and that earnings at Enron, an Andersen client, grew exponentially. The SEC wasn't being alert as the public watchdog. And now the FASB seems to have divorced itself from the “substance over form” premise its predecessor (the APB) observed. The failure of the FASB to require the full consolidation of Special-Purpose Entities (SPEs) when the parent entity clearly exercises control is unforgivable. The FASB provided Enron with the allowable accounting treatment to accomplish its objective-increase earnings while not disclosing material debt guaranteed by the controlling entity.

Finally, we must look at the profession itself. Both the SEC and the AICPA found no fault with CPA firms providing lucrative consulting services to their audit clients. The value of an unqualified audit opinion seems to have virtually eroded to that of a commodity, while the largest fees are generated by a variety of consulting services provided by CPA firms. The profession and even many in academia booed when Abe Brilloff said that CPA firms should limit their scope of services to audit clients lest they face a conflict of interest.

The unqualified audit opinion must again be elevated to the highest level of reverence. And the reader of the audit report must be able to rely on the integrity of that report and the firm that issues the report. The profession must return to the cornerstones that gave it the respect of the financial community-independence, integrity, and objectivity.

This restoration can only be achieved by the mutual collaborative efforts of the profession, the private and regulatory communities, and the academic community. While the Sarbanes/Oxley Act isn't perfect, we have to accept it as a starting place to begin working together to restore the financial community's confidence in our profession.

All these, in my view, have contributed to the disregard for ethical values.

Roland L. Madison is professor of accounting at John Carroll University.

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