Ethical Judgment

"Every act is to be judged by the intention of the agent." - (Unknown author)

Ethical judgment is not enough, the decision-maker must carry through with the
ethical action.

Kohlberg and Cognitive Development

• Psychologist
• 20 years of research
• Moral reasoning processes become more complex and sophisticated with the
development
• Higher stages are consistent with philosophical theories of rights and justice

Heinz and the Drug

• Heinz's wife has a rare cancer
• A radium drug could help
• Druggist charged 10 times what drug cost ($200 cost; $2,000 for small dose of drug)
• Heinz could only get together $1,000
• Druggists would make no exceptions to price of drug
• What should Heinz do?

Sample Responses to the Heinz Dilemma

• [Egoism] Steal the drug, depending on how much Heinz likes his wife and how
much risk to stealing
• [Ends justify the means] Steal the drug, due to loving the wife so much and cannot
watch her die
• [Rule Utilitarianism; justice] Do not steal the drug, since stealing is against the law
Gilligan's Ethics of Care
• Care-and-response orientation that characterizes female moral judgment
• Females look for ways of resolving a dilemma where no one will experience pain
• Criticism: Implication that men lack a caring response when compared to females

Moral Intent
• Critical component of ethical decision making
• Internalization of virtues
• Acting in accordance with principles
• One must want to make the ethical decision

Cognitive Development Approach

• Cognitive development refers to the thought process followed in one's moral
development
• An individual's ability to make reasoned judgments about moral matters develops
in stages
• These stages characterize the way people think about ethical dilemmas

Kohlberg's Stages of Moral Development

• Lawrence Kohlberg's six stages of moral development are divided into three levels
of moral reasoning
 Level 1 — Preconventional
 Level 2 — Conventional
 Level 3 – Postconventional
Kohlberg's Model
• Suggests that people continue to change their decision priorities over time and
with additional education and experience.
• Individuals’ moral development can be influenced by corporate culture, especially
ethics training.
• Stage sequence is universal, the same in all cultures (counter to Hofstede's cultural
dimensions).

Preconventional
• Rules are seen as something external imposed on one's self
• Individual is very self-centered
 Stage 1 — Obedience to rules; avoidance of punishment
 Stage 2 — Satisfying one's own needs (egoism); follow rules only if they satisfy
one's needs

Conventional
• Individual becomes aware of the interests of others and one's duty to society
• Personal responsibility is an important consideration in decision-making.
 Stage 3 — Fairness to others; commitment to loyalty in the relationship
 Stage 4 — Law and order; one's duty to society, respect for authority,
maintaining social order

Postconventional
• Individual recognizes there must be a society-wide basis for cooperation
• Orientation to principles that shape whatever laws and role systems a society may
have
 Stage 5 — Social contracts; upholding the basic rights, values, and legal
contracts of society
  Stage 6 — Universal ethical principles that everyone should follow, Kohlberg
believed this stage rarely existed; Kant's categorical imperative fits right in

Ethical Domain in Accounting and Auditing

Four key constituent groups of accountants and auditors' domain are:
• Client organization that hires and pays for accounting services
• Accounting firm that employs the practitioner
• Accounting profession including various regulatory bodies
• General public who rely on the attestation and representation of the accounting
firm

Accountants Ethical Behavior

• Accounting profession has professional standards to encourage ethical behavior
• These standards, an individual's attitudes and beliefs, and ethical reasoning
capacity influence professional judgment and ethical decision making
• Post-conventional reasoning is the ethical position to take even though it may go
against the corporate culture of, 'I go along to get along"

Empirical Studies
Studies have shown that:
• Ethical reasoning may be an important determinant of professional judgment
• Unethical and dysfunctional audit behavior may be systematically related to the
auditor's level of ethical reasoning
• Ethical reasoning may be an important cognitive characteristic that may affect
individual judgment and behavior under a wide array of conditions and events in
extant professional practice
Rest's Model of Morality
James Rest's model of ethical action is based upon the presumption that an
individual's behavior is related to her/his level of moral development. He breaks
down the ethical decision-making process into four major components.

Components of Rest's Model

• Moral Sensitivity — the ability to identify what is moral and amoral.
• Moral Judgment— the ability to reason through several courses of action and make
the right decision when forced with an ethical dilemma.
• Moral Motivation — influences that affect an individual's willingness to place
ethical values ahead of non-ethical values.
• Moral Character— having one's ethical intentions match actions taken.

Components Interact
• All processes must take place for moral behavior to occur.
• This framework is not a linear decision-making model, the processes instead work
through a sequence of ”feed-back" and 'Teed-forward" loops.
• Individual accuracy at one level does not necessarily mean accuracy at all levels
• Moral failure can occur when there is a deficiency in any one component.

Cognitive Dissonance
• Inconsistency between our thoughts, beliefs, or attitudes and behavior creates the
need to resolve contradictory or conflicting beliefs, values, and perceptions.
• Only occurs when we are "attached" to our attitudes and beliefs.
• How we think we should behave is different from how we decide to behave.
Rest's Model and Sherron Watkins Enron Failure
Watkins wrote a memo to Lay pointing out that accounting maneuvers jeopardized
the ability to remain in business
 Clearly identified the ethical issues
 Judgment seemed to consider the interest of Enron employees but may have
been motivated by self-interest (enlightened egoism)
 Just motivation
 Character to internal whistle-blow

Supporting Courage to Act

• Courage to withstand pressures that challenge one's commitment to act in an
ethical manner
• Supportive environment in the organization
• Ethical top must be set by top management

Professional Judgment in Auditing

• Judgment exercised with due care, objectivity, and integrity within the framework
provided by applicable professional standards, by experienced and knowledgeable
people.
• Application of professional standards.
• Some professional standards include:
 Principles of AICPA Code
 Ethical Standards of the IMA
 GAAS (Generally Accepted Auditing Standards)

Libby and Thorne: Virtues Important for Auditing

• Intellectual virtues: indirectly influence individual's intentions to exercise
professional judgment
  Most important: integrity, truthful, independent, objective, dependable,
principled, and healthily skeptical
• Instrumental virtues: directly influence individual's actions
 Most important: diligent, alert, careful, resourceful, consultative, persistent,
and courageous

Linda Thorne's Integrated Model of Ethical Decision Making

Whistleblowing illustrated
• Diem-Thi Le's, senior auditor at Defense Contract Audit Agency (DCAA), audit
opinion was changed by the branch manager
• DCAA violated the whistleblower act
• Le was ultimately put under whistleblower protection and now trains auditors
• Example shows the difficulty of transitioning from knowing what the right thing to
do is and actually doing it
Behavioral Ethics
• Considers how individuals make decisions in the real world versus how they would
make decisions in an ideal world.
• Kahneman's two distinct modes of decision making:
 System 1: intuitive system of processing info; fast, automatic, effortless, and
emotional decision processes
 System 2: slower, conscious, effortful, explicit, and a more reasoned decision
process

Ethical Reflection and Decision Making

• Consciously thinking about and analyzing what one has done (or is doing).
• A process to organize the various elements of ethical reasoning and professional
judgment.
 Evaluate stakeholder interests
 Analyze the relevant operational and accounting issues
 Identify alternative courses of action.

Comprehensive Ethical Decision-Making Model

1. Frame the ethical issue
2. Gather all the facts
3. Identify the stakeholders and obligations
4. Identify the accounting and auditing issues
5. Identify the operational issues
6. Identify the relevant accounting ethics standards in the situation
7. List all the possible alternatives of what you can or cannot do
8. Compare and weigh the alternatives
9. Decide on a course of action
10. RefIect on your decision

Integrated Decision-Making Model

1. Identify the ethical and professional issues (ethical sensitivity)
• What are the ethical and professional issues in this case (i.e., GÅAP and
GAÅS) Who are the stakeholders?
• Which ethical standards apply (i.e., AICPA Code Principles, IMA Ethical
Standards, and IFAC standards)
2. Identify and evaluate alternative courses of action (ethical judgment)
• What can and cannot be done in resolving the conflict under professional
standards?
• Which ethical reasoning methods apply to help reason through alternatives
(i.e., rights theory, utilitarianism, justice, and virtue)?
3. Reflect on the core professional values, ethics, and attitudes to help carry through
with ethical action (ethical intent)
• Consider how virtue considerations (i.e., moral virtues: intellectual and
instrumental) motivate ethical actions.
• Consider how 'ES 446 standards (i.e., independence, objectivity integrity,
professional skepticism) motivate ethical actions and behaviors.
4. Take action (ethical behavior)
• Decide on o course of action consistent with one's professional obligations.
• How con virtue considerations support turning ethical intent into ethical
action? What steps can I take to strengthen my position and argument?

Concluding Thoughts
Requirements of Ethical Decision-Making:
• Ethical intent
• Moral reasoning skills
• Decision-making process
 Identifying issues
 Analyze ethical issues
 Effects of alternative courses of Action
 Courage to act

WHAT IS AN ETHICAL DECISION?

- often requires us to make a choice between two or more alternative actions.
And these actions depending on how we choose the alternatives will have a
significant effect on others, other people or our community and these effects
have got a moral or ethical element in it.

MODELS OF ETHICAL DECISION MAKING

1. RATIONALIST APPROACH will require us to reason out, to think out proper
processes or steps in order to make that decision.
2. INTUITIONIST/SENTIMENTAL APPROACH – this will have us adopt a more
emotional approach in developing a process of thinking ethically. We use
perhaps some gut feeling in order to decide what is right or wrong.

We will not look at the emotional approach, we will try to look at it from a
rationalist approach by thinking through the steps and deciding what would
be the logical step of how we make an ethical decision.

ETHICAL DECISION PROCESS

1. IDENTIFYING/RECOGNIZING whether that action or issue is a moral issue or
not.
2. Make a moral judgment.
3. Establish moral intent.
4. Engage in moral behavior.
 Individual factors
 Situational factors
Accounting educators have used ethical decision-making models to teach ethics to
accounting students for many years. The traditional models rely on prescriptive
reasoning to analyze alternative courses of action and select the best choice, but
these models fail to adequately consider organizational variables, including internal
policies and practices, the code of ethics, and the role of supporters in the
organization who can help strengthen a position. The author proposes a decision-
making model that combines the Ethics and Compliance Initiative’s PLUS model,
which uses ethics filters to facilitate analysis and incorporates elements of
organizational culture, and the virtue considerations of James Rest’s Model of Moral
Behavior, which define ethical character, an important factor for accounting
professionals, who must serve the public interest.
Accounting educators typically use an ethical decision-making model to teach ethics
to accounting students. These models provide a systematic way to think through
ethical issues, identify alternative courses of action, evaluate the ethics of each
alternative, and decide what to do.
Traditionally, the decision-making models used to teach ethics to accounting
students have focused on applying philosophical reasoning methods to the analysis
of what should be done. These models tend to downplay or ignore the importance of
organizational culture in the decision-making process, including internal policies and
practices, the code of ethics, and individuals in the organization who might help
resolve the conflict.
Ethical Decision-Making Models:
EXHIBIT 1: EIGHT STEP METHOD OF ETHICAL DECISION MAKING

An ethical decision-making model first developed by Bill May at the University of

Southern California and included in his book Ethics in the Accounting Curriculum:
Cases & Readings (American Accounting Association, 1990) served as a resource for
the “Eight-Step Method of Ethical Decision Making” developed by Harold
Langenderfer and Joanne Rockness (“Integrating Ethics into the Accounting
Curriculum: Issues, Problems, and Solutions,” Issues in Accounting Education, March
1989, http://bit.ly/2Z4HJsR). This model is summarized in Exhibit 1.
One shortcoming of this model is that it introduces an organizational perspective at
the end, almost as an afterthought, and no guidance is given as to what should be
included in the organizational analysis, other than to seek out a trusted person.
Discussing an ethical matter with a trusted advisor just before decision making limits
its usefulness. Imagine, for example, that an organization pressures an accountant to
overlook financial wrongdoing. It seems logical to find out what can and cannot be
done right away and determine the key individuals in the organization to ensure that
organizational culture is adequately considered in crafting a solution to the ethical
problem.

EXHIBIT 2: THORNE’S MODEL OF ETHICAL DECISION MAKING

Linda Thorne took a different approach in developing an ethical decision-making

model. Thorne’s model relies on characteristics of ethical behavior to decide on a
course of action, giving the model a distinctively “virtue ethics” feel to it. Her model
integrates James Rest’s Four-Component Model of Moral Behavior with the
foundation of virtue ethics theory (James R. Rest, “Morality,” Handbook of Child
Psychology: Cognitive Development, vol. 3, John Wiley and Sons, 1983). Thorne’s
model is described in Exhibit 2 (“The Role of Virtue in Auditors’ Ethical Decision
Making: An Integration of Cognitive Developmental and Virtue Ethics Perspectives,”
Research on Accounting Ethics, vol. 4, JAI Press, 1998).
The following explains the key elements of Rest’s model and how it links to ethical
decision-making as described by Thorne:
Ethical sensitivity: Perceiving the ethical issues, problems or dilemma.
Prescriptive reasoning: Using ethical judgment to reason through the ethics of
alternative courses of action.
Ethical motivation: Having the intention to make the right choice after deciding on
the ethical response to the dilemma.
Ethical behavior: Summoning the courage to make the right choice even in the face
of countervailing pressures.
The benefit of using Thorne’s model is its explicit recognition of the role of virtue in
ethical decision-making. This is important because if an accountant or auditor lacks
integrity—a basic virtue—then it is less likely the ethical choice will be made and
implemented because internal pressures overwhelm ethical action and compromise
professional judgment.
The drawback of Thorne’s model is that it does not recognize the important role that
organizational systems play in carrying out ethical choices with ethical action.
Decision makers should be aware of those within the organization who can help to
counteract unethical pressures and strengthen their position early on so they can
contribute their knowledge to each step of the ethical analysis.

Ethical Reasoning:
Langenderfer and Rockness incorporate principles, rules, and values into their
decision-making process, while Thorne takes a more targeted view by relying on
prescriptive reasoning to determine what ought and ought not be done. A detailed
discussion of these ethical reasoning methods is beyond the scope of this article, but
a brief overview is warranted to understand the role of ethical judgment in decision
making and how organizational variables fit in.
 1. Teleology.
Teleological ethics relies on an analysis of the outcomes or consequences of each
action; the best choice is that which maximizes the benefits while minimizing the
harms of alternative actions. Langenderfer and Rockness rely on this consequence-
based approach in evaluating the alternatives. One problem with this model is that it
is biased toward evaluating outcomes, and does not provide explicit recognition of
virtue or the moral duty of decision makers to respect the rights of those affected by
the decision. Thorne’s model overcomes this shortcoming by relying on all forms of
prescriptive reasoning.
2. Deontology.
Deontological ethics, or duty ethics, bases moral decision making on foundational
principles of obligation. A major approach is rights theory, under which each
individual has certain rights that should be respected; similarly, decision makers have
an obligation to satisfy those rights. The most important application of deontological
ethics is based on the categorical imperative. According to this perspective, ethical
actions occur when the reasons for acting are those that would be universally
acceptable; in other words, the actor would want others to resolve ethical conflicts
using the same or similar approach if they face a similar situation. Deontology is
important for accounting professionals, who are expected to exercise objective
judgment in deciding the best course of action.
3. Virtue ethics.
Unlike teleological and deontological ethics, which rely on prescriptive reasoning,
virtue ethics deals with developing specific traits of character that are part of the
pursuit of human excellence. These include moral virtues that govern behavior (e.g.,
courage, honor, justice, self-control, truthfulness) and intellectual virtues that deal
with thought processes. Moral virtues are acquired through understanding, good
judgment, reasoning abilities, and practical wisdom. Intellectual virtues are gained by
deliberating about what can and cannot be done.

Ethical reasoning methods are an important part of ethical decision making, but they
are insufficient to ensure ethical choices are made, as the organization may not
support the ethical decision. Internal systems should be evaluated throughout the
decision-making process. For example, an organization that emphasizes “an “end
justifies the means” approach to decision making, a drawback of consequence-based
reasoning, might undervalue the role of internal systems and place greater emphasis
on achieving a specific goal. Imagine the goal is to maximize reported profits,
regardless of how that occurs. Knowing that the systems do not support ethical
decision making early on might help resolve the conflict.

EXHIBIT 3: MINTZ AND MORRIS’S INTEGRATED ETHICAL DECISION-MAKING

PROCESS

Following on Thorne’s model, the author and Roselyn Morris developed an

Integrated Ethical Decision-Making Process that incorporates the accounting
dimension explicitly by examining professional standards and SEC regulations. It also
includes an organizational perspective in the moral development and virtue stages.
Organizational considerations include: 1) identifying the effects of the dilemma on
the employees, management, and the organization; 2) evaluating whether legal
issues exist and their effects on the organization; and 3) finding supporters in the
organization to strengthen the position and help to counteract opposing points of
view. The process is described in Exhibit 3 (Mintz and Morris, Ethical Obligations and
Decision Making in Accounting: Text and Cases, 4th Edition, McGraw-Hill Education,
2017, pp. 76–79).

EXHIBIT 4: PLUS ETHICAL DECISION MAKING MODEL

The PLUS Ethical Decision-Making Model
The PLUS Ethical Decision Making Model was developed through the Ethics Resource
Center, the research arm of the Ethics and Compliance Initiative (ECI). The ECI is a
community of organizations committed to creating and sustaining high-quality ethics
and compliance programs to assist organizations in building strong cultures. The
mission of the ECI is to help its members across the globe operate their businesses at
the highest levels of integrity.
The PLUS model is based on a seven-step process, described below. “PLUS” is an
acronym (Policies, Legal, Universal, and Self) for the ethics filters that facilitate the
analysis of ethics considerations and implications of the decision at hand. These
filters ensure that ethical issues rise to the forefront in ethical decision making. A
description of each filter and its role in decision making follows (Ethics Resource
Center of the ECI, The PLUS Decision Making Model.
Policies. Is it consistent with organizational policies, procedures, and guidelines?
Legal. Is it acceptable under applicable laws and regulations?
Universal. Does it conform to universal principles and the values of the organization?
Self. Does it satisfy my personal definition of right, good, and fair?
The advantage of the PLUS model is that it relies heavily on organizational ethics.
This is important because no matter how good one’s ethical judgment may be,
ethical decision making is not likely to occur unless support for the position exists in
the organization.
Step 1: Define the problem.
Determine why a decision is necessary and identify the desired outcomes. This helps
to clearly state the problem and where to look for alternatives to resolve it. Consider
the PLUS factors to ensure the existing situation does not violate any of them.
Step 2: Seek out relevant assistance, guidance, and support.
Identify the available resources within the organization. This helps to define the
guidelines and individuals within the organization that may help resolve the problem.
Step 3: Identify available alternative solutions to the problem.
Consider all relevant solutions to avoid the dichotomy of one choice versus another.
Step 4: Evaluate the identified alternatives.
This step uses decidedly consequence-based criteria. Positive and negative
consequences are evaluated, with fact-based consequences weighed more heavily
because the expected outcome is more likely to occur. The PLUS factors are an
integral part of the evaluation to supplement teleologically based outcome-oriented
considerations with universal principles (deontology) and virtue ethics as
represented by organizational values. This step uses decidedly consequence-based
criteria. The plus model should be expanded to incorporate specific consideration of
the ethical reasoning theories discussed above.
Step 5. Make the decision.
After evaluating all the alternatives, decide on a course of action. The reasons for
choosing one alternative over the others should be explained, especially if the
decision is by a work team that recommends a solution to higher management.
Step 6. Implement the decision.
Putting the decision into effect is essential to change the situation and resolve the
problem.
Step 7. Evaluate the decision.
A determination must be made as to whether the decision fixes the identified
problem. Questions to ask include: Did it go away? Did it change appreciably? Is it
better now, or worse, or the same? What new problems did the solution create? In
making these determinations, it is important to incorporate the PLUS factors to
ensure the solution conforms to organizational policies, laws and regulations,
universal principles, and values adopted by the organization.
EXHIBIT 5: INTEGRATION OF MINTZ/MORRIS MODEL AND PLUS DECISION MAKING
MODEL

Ethical decision making is a complicated process that relies on organizational

variables to ensure that the ultimate decision is supported by those who have to
carry it out. The PLUS model incorporates those factors and should be used in
accounting ethics education to make it more relevant given the increased focus on
organizational ethics in the post-SOX era. The model can also be used in continuing
education courses to keep accounting professionals up to date on approaches to
state-of-theart ethical decision making.
The advantage of using the integrated model described in Exhibit 5 to teach ethics to
accounting students is that it increases student awareness of organizational factors
that influence ethical decision making. In reality, regardless of the ethical justification
for one’s position, a decision is unlikely to be implemented unless individuals within
the organization support resolution of the ethical problem. Knowing how the internal
systems work can help to make that determination early on and influence ethical
decision making in a positive way.