Resolving Ethical Dilemmas

Transcription

1 Resolving Ethical Dilemmas Dave Co(on, CPA, CFE, CGFM Co(on & Company LLP Alexandria, Virginia

2 Ethics Pre-Quiz Which United States President promised to have the most ethical administration in history? A. Barak Obama B. George W. Bush C. Bill Clinton D. George H. W. Bush E. Ronald Reagan F. Jimmy Carter G. Lyndon Johnson H. Richard Nixon Why is it so difficult to be ethical? 1

3 A Theoretical Framework for Making Ethical Decisions Theoretical Framework Kohlberg s Theory of Cognitive Development Post-conventional Level Conventional Level Pre-conventional Level Individual decides what is right or wrong using universal ethical principles such as the common good and justice Individual is concerned about expectations of significant others and relies upon rules and laws to determine what is right or wrong Individual decides what is right or wrong based on consequences Level of Sophistication Source: Auditors Ethical Reasoning: Insights from Past Research and Implications for the Future, Journal of Accounting Literature, 2003, By Jones, Joanne; Massey, Dawn W.; Thorne, Linda. 2

4 Theoretical Framework Kohlberg s Theory of Cognitive Development Principles-Based Thinking Just do the right thing Rules-Based Thinking Situational Ethics Just follow the rules Just Don t get caught Level of Sophistication So, why can t we simply all agree to always just do the right thing? 3

5 Doing the Right Thing Ø The Right Thing is not something about which everyone always agrees Ø We are often oblivious to ethical dilemmas Ø We have a strong ability to rationalize doing the wrong thing Ø In some situations, it is impossible to follow all of the ethics rules Doing the Right Thing: Where Should Our Focus Be? Ø It s the economy, stupid. --James Carville, 1992 Ø It s the conflicts of interest, stupid. --Dave Cotton,

6 The Right Thing is not something about which everyone always agrees Philippa Foot s Trolley Problem Ø A trolley is running out of control down a track Ø In its path are 5 people who have been tied to the track by a mad philosopher Ø Fortunately, you could flip a switch which will lead the trolley down a different track to safety Ø Unfortunately, there is a single person tied to that track Ø Should you flip the switch or do nothing? Philippa Foot, The Problem of Abortion and the Doctrine of the Double Effect in Virtues and Vices (Oxford: Basil Blackwell, 1978)(originally appeared in the Oxford Review, Number 5, 1967.) 5

7 Philippa Foot s Trolley Problem Ø A utilitarian view asserts that it is obligatory to flip the switch. According to simple utilitarianism, flipping the switch would be not only permissible, but, morally speaking, the better option (the other option being no action at all). Philippa Foot, The Problem of Abortion and the Doctrine of the Double Effect in Virtues and Vices (Oxford: Basil Blackwell, 1978)(originally appeared in the Oxford Review, Number 5, 1967.) Philippa Foot s Trolley Problem Ø An alternate viewpoint is that since moral wrongs are already in place in the situation, flipping the switch constitutes a participation in the moral wrong, making one partially responsible for the death when otherwise the mad philosopher would be the sole culprit. An opponent of action may also point to the incommensurability of human lives. Philippa Foot, The Problem of Abortion and the Doctrine of the Double Effect in Virtues and Vices (Oxford: Basil Blackwell, 1978)(originally appeared in the Oxford Review, Number 5, 1967.) 6

8 Philippa Foot s Trolley Problem Ø Under some interpretations of moral obligation, simply being present in this situation and being able to influence its outcome constitutes an obligation to participate. If this were the case, then deciding to do nothing would be considered an immoral act if one values five lives more than one. Philippa Foot, The Problem of Abortion and the Doctrine of the Double Effect in Virtues and Vices (Oxford: Basil Blackwell, 1978)(originally appeared in the Oxford Review, Number 5, 1967.) Philippa Foot s Trolley Problem Ø A trolley is running out of control down a track Ø In its path are 5 people who have been tied to the track by a mad philosopher Ø Fortunately, you could flip a switch which will lead the trolley down a different track to safety Ø Unfortunately, there is a single person your mother tied to that track Ø Should you flip the switch or do nothing? 7

9 We are often oblivious to ethical dilemmas Rest s Model of Ethical Action Four Components of Ethical Reasoning 1. Identification of an Ethical Dilemma awareness that a situation may affect the welfare of others. 2. Ethical Judgment evaluation of outcomes that ought to occur. 3. Intention to Act Ethically value assessment of the right choice versus other decision alternatives in formulating an intention to act. 4. Ethical Action/Behavior carrying out the ethical action. Source: Auditors Ethical Reasoning: Insights from Past Research and Implications for the Future, Journal of Accounting Literature, 2003, By Jones, Joanne; Massey, Dawn W.; Thorne, Linda. 8

10 You Make the Call Ben Evolent is a member of the county council and chairs the public works committee Ben contacts each applicant for a project approval and requests that the applicant make a voluntary donation to some deserving group; e.g. The local high school track was repaved by a developer ($125,000) Another developer built new shelves for the elementary school library ($20,000) Ben keeps none of the donated money for himself and always gives ample public credit to the donors. You Make the Call Ben Evolent is a member of the county council and chairs the public works committee Ben contacts each applicant for a project approval and requests that the applicant make a voluntary donation to some deserving group; e.g. The local high school track was repaved by a developer ($125,000) Another developer built new shelves for the elementary school library ($20,000) Ben keeps none of the donated money for himself and always gives ample public credit to the donors. Is this ethical? 9

11 You Make the Call Robin Plundar is a member of the county council and chairs the public works committee Robin contacts each applicant for a project approval and requests a voluntary donation Some applicants pay Robin the donation and their projects receive prompt approval Some applicants decline to pay the donation and their projects seem to take longer to receive approval Ripped from the Headlines 10

12 Dernoga Money Thomas E. Dernoga was a Prince George s County Council member from 2001 to 2010 Dernoga Money Thomas E. Dernoga jokingly referred to himself as Robin Hood. contributions to various groups which totaled about $1 million during his eight years in office were Dernoga s way of getting developers to help improve the communities where they did business, he said. He said the track at High Point High School was resurfaced with $125,000 he got from a couple of developers, and the bookshelves at the Deerfield Elementary School library were restocked with $20,000 he got from another. 11

13 Dernoga Money Dernoga said he never held up a project because a developer had declined his requests for a donation. He said he never crossed any ethical or legal boundaries and never used the money for himself. Dernoga regularly presented checks at back-toschool nights and other programs in his Laurel district. Community and school leaders have called the donations Dernoga money. Dernoga Money 12

14 Dernoga Money From the Donor s Perspective representatives for developers said they think it is inappropriate to be asked for money while seeking approval on a project. The solicitations came in private, and if the developers raised questions, their projects were delayed, they said. It seemed like by not playing the game, we were suffering, said a representative for one developer. Classic Rationalizations If you don t want to contribute, I m not going to hold it against your project, he said. I ll treat your project fairly. But don t come look to me for favors. Most of the people want a favor. They want more density. They want more parking. They all want something. They seem to think they are entitled. You say you want the county to do you a favor that might be good for the county, but it is also going to make you a lot of money. But are you willing to support local needs? 13

15 Classic Rationalizations You have these people making millions, and all this density and all the traffic [we d] absorb on Route 1. You mean to tell me you have nothing to help out our schools? Dernoga said. I found it greedy on the part of the property owners. Dernoga said that project would have cost the main developers $120 million and that $100,000 would have been a drop in the bucket, Corruption? Any scheme in which a person uses his or her influence in a business transaction to obtain an unauthorized benefit contrary to that person s duty to his or her employer. -- Fraud Examination, Third Edition, Albrecht, Albrecht, Albrecht, and Zimbelman, South-Western Cengage Learning,

16 Public Corruption? Public corruption involves a breach of public trust and/or abuse of position by federal, state, or local officials and their private sector accomplices. By broad definition, a government official, whether elected, appointed or hired, may violate federal law when he/ she asks, demands, solicits, accepts, or agrees to receive anything of value in return for being influenced in the performance of their official duties Was Dernoga a crook? Or did Dernoga actually believe he was serving the community by his actions and simply fail to see the ethical failings of his actions? 15

17 You Can t Make Up Stuff Like This Term- limited off of the PG County Council, Dernoga ran for County A<orney General Washpost Crime looms as major issue in Prince George s state s a<orney race "Crime is ea@ng at the county," Dernoga said. "We have a a<rac@ng business. Develop your ethical dilemma radar to increase the chances that you will see ethical dilemmas 16

18 In determining whether you have made the right decision the chartered accountant should always pause and ask him/ herself the following important questions: Ø Is my decision morally defensible? Ø Would a reasonable (and informed) third party reach the same conclusion? Ø Will the decision potentially compromise my professional and/ or personal reputation? Ø If my decision was subject to public scrutiny would I, my family and my colleagues be proud? If there is any doubt in relation to any of the above questions then there is a threat that needs to be considered and addressed. Practical Ethics A Guide to Ethical Decision Making, Heather Briers, Director Professional Standards, Institute of Chartered Accountants in Ireland,Conference 2005 Rest s Model of Ethical Action Four Components of Ethical Reasoning 1. Identification of an Ethical Dilemma awareness that a situation may affect the welfare of others. 2. Ethical Judgment evaluation of outcomes that ought to occur. 3. Intention to Act Ethically value assessment of the right choice versus other decision alternatives in formulating an intention to act. 4. Ethical Action/Behavior carrying out the ethical action. Source: Auditors Ethical Reasoning: Insights from Past Research and Implications for the Future, Journal of Accounting Literature, 2003, By Jones, Joanne; Massey, Dawn W.; Thorne, Linda. 17

19 In some situations, it is impossible to follow all of the ethics rules You Make the Call Ivana Dotha-Righthing, CPA, has been engaged to audit the financial statements of Bernie L. Madhatter Investment Securities LLC Halfway through the audit, Ivana discovers that Bernie is not really investing his customers money as he is promising, but is instead just running a Ponzi scheme Ivana consults the AICPA Code of Professional Conduct for guidance 18

20 You Make the Call Ivana notes that Article II The Public Interest, states that: Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism. But then she sees that Rule 301 Confidential Client Information says that: A member in public practice shall not disclose any confidential client information without the specific consent of the client. What should Ivana do? You Make the Call A Ivana should resign from the engagement and uphold her very specific ethical obligation under Rule 301 Confidential Client Information. (That Public Interest thing is pretty general and kind of vague.) B Ivana should report what she has found to law enforcement authorities. 19

21 Good news if you do Yellow Book audits GAGAS Paragraph 4.30 Auditors should report known or likely fraud, noncompliance with provisions of laws, regulations, contracts, or grant agreements, or abuse directly to parties outside the audited entity in the following two circumstances. Good news if you do Yellow Book audits GAGAS Paragraph 4.30 a. When entity management fails to satisfy legal or regulatory requirements to report such information to external parties specified in law or regulation, auditors should first communicate the failure to report such information to those charged with governance. If the audited entity still does not report this information to the specified external parties as soon as practicable after the auditors communication with those charged with governance, then the auditors should report the information directly to the specified external parties. 20

22 Good news if you do Yellow Book audits GAGAS Paragraph 4.30 b. When entity management fails to take timely and appropriate steps to respond to known or likely fraud, noncompliance with provisions of laws, regulations, contracts, or grant agreements, or abuse that (1) is likely to have a material effect on the financial statements and (2) involves funding received directly or indirectly from a government agency, auditors should first report management s failure to take timely and appropriate steps to those charged with governance. If the audited entity still does not take timely and appropriate steps as soon as practicable after the auditors communication with those charged with governance, then the auditors should report the entity s failure to take timely and appropriate steps directly to the funding agency. Good news if you do Yellow Book audits GAGAS Paragraph 4.31 The reporting in paragraph 4.30 is in addition to any legal requirements to report such information directly to parties outside the audited entity. Auditors should comply with these requirements even if they have resigned or been dismissed from the audit prior to its completion. [Emphasis added] 21

23 It s the conflicts of interest, stupid. The vast majority of ethical dilemmas we find ourselves facing stem from conflicts of interest 22

24 AICPA s Conceptual Framework: 7 Categories of Threats 1. Self-review 2. Advocacy 3. Adverse interest 4. Familiarity 5. Undue influence 6. Financial self-interest 7. Management participation 45" Independence v Conflict of Interest Ø Rule 101 Independence: 18,379 words Ø Rule Conflicts of Interest: 451 words Ø 2012 Yellow Book: Independence appears 167 times Ø 2012 Yellow Book: conflict of interest appears 2 times 23

25 Independence v Conflict of Interest Ø Rule 101 Independence: 18,379 words The word interest appears 117 time The word conflict appears 0 times Ø What s up with that? Conflict of Interest A situation that has the potential to undermine the impartiality of a person because of the possibility of a clash between the person's self-interest and professional interest or public interest. -- A conflict between the private interests and the official responsibilities of a person in a position of trust. --Merriam-Webster 24

26 Our Current Audit Model Audit Report Audit Firm Fees Company Being Audited Congressional Hearing on Audit Quality Managing partner of firm that failed to note material misstatements in a governmental audit was being grilled by a congressman Congressman: Isn t it true that in the year of this audit period, your firm received more than $20 million in consulting fees from this government? Managing partner: Congressman, my firm had $8.9 billion in revenue last year. We would never compromise our integrity for $20 million in consulting fees. Congressman: Well, how much would it take? 25

27 Our Current Audit Model Not a Conflict of Interest Says the AICPA Audit Report Audit Firm Fees Company Being Audited Rule 102-2, Conflicts of Interest A conflict of interest may occur if a member performs a professional service for a client or employer and the member or his or her firm has a relationship with another person, entity, product, or service that could, in the member's professional judgment, be viewed by the client, employer, or other appropriate parties as impairing the member's objectivity. 26

28 What audit organizations find and report more fraud, waste, and abuse than any others? Who Is This Man? 27

29 Consider This Ø The GSA administrator (and the White House) had known about this scandal for many months before the IG issued his report Ø The GSA administrator resigned the day the report became public Ø Do you think Brian Miller felt any pressure to water down or quash his report? Ø Raise your hand if you think we would have ever heard of this waste and abuse if the IG served at the will and pleasure of the GSA administrator Our Current Audit Model Until we can find a better audit model, we better recognize that this IS a conflict of interest and make sure we have safeguards in place that assure that we Do The Right Thing. Audit Report Audit Firm Fees Company Being Audited 28

30 Independence Impairment versus Conflict of Interest Is there really a difference? No. Ditch the 18,830 words in Rules 101 and and replace them with 10 words Avoid Conflicts of Interest and Just Do the Right Thing Doing the Right Thing Isn t Easy Ø The Right Thing is not something about which everyone always agrees Ø We are often oblivious to ethical dilemmas Ø We have a strong ability to rationalize doing the wrong thing Ø It s all about conflicts of interest Ø In some cases, it is impossible to follow ALL the rules 29

31 Go forth and Do The Right Thing Winter Seminar Resolving Ethical Dilemmas Dave Cotton, CPA, CFE, CGFM Cotton & Company LLP Alexandria, Virginia 30