Tuesday, January 14, 2003

A rather long post on my thoughts regarding external auditors and their RESPONSIBILITY TO THE PUBLIC

"The (Auditors) Code of Professional Conduct recognises that the essence of professional is an attitude of mind, which cannot be pinned down and defined. The Code is designed to provide guidance to members about what peers consider being acceptable behaviour and cites integrity, objectivity and independence as fundamental principles.

Studies carried out locally have shown that users of financial reports have serious concerns regarding the independence and objectivity of auditors in South Africa. The concern is strengthened by the fact that a relatively high percentage of auditors admitted that they are aware of independence shortcomings. It seems therefore that the Code is not achieving its objectives."

The above statement by Henk Heymans appeared in editorial comment in the April 1995 issue of Accountancy SA. The same article concludes with the suggestion that to remedy the situation "the central objective of a conceptual framework of ethics should be to develop and articulate a logical and cohesive body of concepts that can serve as a guide to the resolution of practical issues that require consideration from time to time. Ideally, the body of concepts should emerge from a process that is ‘principle’ oriented rather than one oriented to compromise and consensus emerging from differing views." It is this framework, states Heymans, that must be impressed upon students to "provide them with a set of values in terms of which professional behaviour can be moulded."

Little has changed over the last 6 years. It was my contention then and remains so today that this very narrow view of ethics - reduced to a set of imperatives (i.e. Where ethical decisions are decided with reference to a ‘rule’ or ‘principle’) is partly to blame for the ethical shortcomings (or perception thereof) within the auditing profession. These ethical shortcomings are once again in focus – notably with the fallout from Enron’s collapse in the US and from the South African failures of the last year or so.

This view of ethics is echoed in a standard reference work for auditing students and practitioners by the description that ethics is "a set of ideals, which may take the form of rules of conduct that provides the distinction between right and wrong behaviour." My contention is that ethics is a far broader and less clear-cut issue than can be prescribed by a set of rules. Much of the debate about ethical issues stems from deep suspicion of principles as a touchstone of modern morality.

The need for ethical behaviour to be maintained by members of a profession is clear. Firstly to imbue, in the mind of the public, confidence in the profession. Secondly, to protect the monopoly of that profession within a particular society. Thirdly, to pre-empt unwanted regulation by the state or other legislative authority. The question that must be asked is whether this ethical conduct is best encouraged by a prescriptive code of ethics or whether a system based on an informed set of possible outcomes should be put into practice.

A recent Financial Times article by columnist Peter Martin points out that following:

“Singling out accountants in this way is not meant to imply that they are any less capable of responding to moral dilemmas than other business people. It is just that auditors…have a public role that makes these ethical issues more visible.
Indeed, more and more business areas are falling into the trap that enmeshes accountants. The more that scandals lead regulators to impose detailed prescriptive rules, the more business people will settle for fulfilling the letter of those rules, without thinking of the broader ethical purpose they serve.”3
A further problem is that the Code of Ethics is placed in an ivory tower that must be complied with at all cost. This means that people are obeying the code, not out of a desire to behave ethically, but rather to avoid the censure of noncompliance. When professional organisations adopt codes of ethics, these organisations encourage a code-implied model of ethical decision making. The auditor evaluates ethical dilemmas against the code and makes a decision based on avoiding possible violation.

Studies have shown that audit managers with high-moral-development detect material fraud at a higher rate.This suggests that compliance with a code has far less effect on how auditors behave than how they react within the constraints of the environment and the personal moral framework that they operate with. The attitude seems to exist that if an action complies with the code it is ethical. The same study also found that firms tended to retain, through advancement, staff (notably the male staff) that were less sensitive to the ethical implications of various issues. What this really means is not certain but would perhaps suggest that staff who turn a blind eye to ethical implications are more likely to succeed in the accounting profession. This seems to be in contrast to the clear economic incentive (i.e. reducing the risk of litigation and/or audit risk) of accounting firms to retain high-moral-development staff.

The problems that the profession face over issues of independence and objectivity are in part due to over-reliance on and the inflexibility of the code of ethics for all ethical decisions. The problem here is that once a person has violated the code on a trivial matter where the positive outcomes of not obeying the code far outweigh the negative issues involved in compliance, the sanctity of the code is broken and he begins to think that if it all right in one case to violate the code it may be so in other cases (which may not be so trivial - such as issues of independence).

A study of cheating amongst accounting students revealed that 38% of students would cheat (plagiarise) if there was zero risk of detection.6 This patently suggests that perhaps students (being potential members of the profession) are in need of some moral development.

Other studies cite numerous empirical tests in support of the view that professional education improves moral reasoning in accountants and that among accountants across the globe in eight countries from the USA to the Philippines and Moldova, there is not global uniformity when it comes to making ethical decisions.This makes the issue of creating a code of ethics that is fully representative of the profession (which is undeniably global) a pipe dream.

For issues of professional ethics to be resolved successfully the moral nature of the members of the profession must be developed to allow them to make ethical decisions based on reflective choice rather than in accordance with a set of rules. The code is useful here in that it can provide a quick reference or starting point in making ethical decisions of an everyday nature. But I contend that since it would be impossible for a code to encompass all possible moral viewpoints that it must not be seen to be set in stone. To make ethical decisions the profession must be allowed to refer to a higher ‘mission statement’, something that places the profession squarely as member of society.
Perhaps this is too difficult to envision, or the thought of not having a rule book to refer to is too daunting, but this should not deter us from at least exercising a modicum of self reflection (as opposed to code reflection) when confronted with ethical dilemmas. As Peter Martin suggests, the question auditors should be asking is : “What is the right thing to do?”. Not I argue : “Does this comply with the code of conduct?” And certainly not : “Would anyone ever know if we overlooked this issue?”
Auditors, are first and foremost human beings (despite numerous arguments to the contrary) and have a duty to the society they are part of. The code of conduct of the American Institute of Certified Public Accountants starts by saying that: "The distinguishing mark of a profession is acceptance of its responsibility to the public." It should end there too.

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