We have many discussions about ethical behavior in this book. Describe how each of the following influence leadership behavior in accounting:

Question

• Josephson's Six Pillars of Character
• Virtue-based ethical decision making
• Usefulness of codes of ethics and the AICPA Code in making ethical decisions
• Role of moral courage in decision making
• Leadership and codes/basis for ethical behavior
• Dealing with ethical dilemmas in the workplace
• Kidder's structure to deal with ethical dilemmas and decision making
• Whistleblowing in accounting
• Role of leadership in promoting ethical behavior

Answer 1

An understanding of ethics begins with an analysis of values, both individual and organizational. Effective managers and leaders must be aware of their values, morals, and system of ethics and ethical decision making. Good character and integrity are integral components of ethical leadership. There must be a connection between a sound value system and the ability of the leader to use these values in his/her decision making. The Josephson Institute's Six Pillars of Character might easily be applied to a business setting. These six pillars are:

Trustworthiness - honesty, integrity, reliability, loyalty, keeping promises and not deceiving others.

Respect - using the Golden Rule or treating others as you wish to be treated, in addition to being courteous, listening to others, and accepting individual differences.

Responsibility - accountability, self-control, the pursuit of excellence, and considering consequences of our actions prior to making them.

Fairness - playing by the rules, not taking advantage of others, making informed judgments without favoritism or prejudice, and not blaming others.

Caring - kindness, compassion, and altruism, acting to minimize hardship and to help others whenever possible.

Citizenship - working to make one's community better, protecting the environment, making our democratic institutions work, and operating within the law.

Acting in accordance with these ethical values creates an ethical environment that, in turn, fosters buy-in by employees. Acting in accordance with nonethical values (wealth, power, prestige) is more likely to promote self-interested behavior that places the interests of the client, firm, or one's self-interest ahead of the public interest. Accounting is a community with established standards that underlie ethical behavior and enable professionals to act with integrity. Integrity is the heart and soul of ethical behavior because it provides the proper ethical perspective to deal with internal and external pressures and set them aside to do the right thing.

Once an ethical environment is created, employees and management develop trust in one another. Good leaders garner trust. Trust can be developed in many ways but most fundamentally through leading by example. Leaders must do ethical things on a consistent basis in plain and full view for their constituents to see. Transparency is critical in creating an ethical environment.

For leaders to facilitate solutions to ethical dilemmas in the workplace, written guidelines in the form of a code of conduct are useful. A code of conduct is intended to be a guide and reference for users in support of day-to-day decision making. It is meant to clarify an organization's mission, values and principles and to link them with standards of professional conduct.

In the accounting profession these standards are embodied in the codes of professional ethics of groups such as The American Institute of CPAs (AICPA) and the Institute of Management Accountants (IMA). The AICPA Code definitively places the needs and interests of the public ahead of those of a client, firm, or self-interest. The public interest ideal imparts ethical obligations to perform services with objectivity, due care, and exercise a healthy dose of skepticism in gathering and evaluating evidence.

Codes require the commitment of the company's leaders and other higher levels of management, and should address the needs of the various constituencies and stakeholders in the organization. A code is an open disclosure for the way an organization operates. It provides visible guidelines for behavior. A well-written and thoughtful code also serves as an important communication vehicle that reflects the covenant that an organization has made to uphold its most important values, dealing with such matters as its commitment to employees, its standards for doing business and its relationship with the community. A code is also a tool to encourage discussions of ethics and to improve how employees/members deal with the ethical dilemmas, prejudices, and "gray areas" that are encountered in an organization/community such as the accounting profession.

Ethical dilemmas occur when important values come into conflict, and the decision maker (the leader, in many cases) must make a choice between these values. Since both values are important, success and honesty, for example, priorities must be assigned to values and one takes precedence over the other. To the extent possible, a careful balance must be preserved to maximize both values in order to avoid unethical decision making.

Kidder offers two classifications of ethical dilemmas. In the first type of dilemma, a right versus wrong dilemma, ethical issues emerge when a core moral value has been violated or ignored. When honesty is an important value to a person, and another person is found to be acting dishonestly, it is generally acknowledged that the action was unethical. In this case, ethics is simply the obvious difference between what is right and what is wrong. In the second type of dilemma, a right versus right dilemma, however, ethical issues emerge when two core values come into conflict with each other.

When one important value raises powerful moral arguments for one course of action, while another value raises equally powerful arguments for an opposite course, we must make a choice since we can't do both. In such cases, ethics is a matter of right versus right.

Kidder also identifies four paradigms of dilemmas. In the first category of truth versus loyalty, honesty or integrity is in conflict with commitment, responsibility, or promise-keeping. In the justice versus mercy dilemma, fairness, equity, and equal application of the law conflict with compassion and care. The individual versus community paradigm is geared toward us versus them, self-versus others, or smaller versus larger groups. And finally, the short term versus long term dilemma deals with immediate needs versus future.

In his 2005 book, Moral Courage, Kidder refers to the need for "moral courage" when making difficult moral decisions. His definition of moral courage is the intersection of three concentric circles: applying values, recognizing risks, and enduring the hardship. The last one, "enduring the hardships" is the perseverance piece of the moral courage model. A leader has to be willing to persevere and stick with the "right" decision, and ignore distractions, faulty rationalizations, and justifications. In this sense the Giving Voice to Values methodology can help to respond to reasons and rationalizations given to support questionable or unethical behavior.

Moral courage of a leader requires follow through and going beyond merely thinking and talking about doing the right thing. It is the actual decision making piece that defines the ethical leader.

Kidder also points out that the act of "whistle-blowing" is an example of moral courage. Whistle blowing consists of an individual acting with the intention of making information public, and then conveying the information to parties outside the organization who then makes it public and a part of the public record. In a true whistle blowing scenario, the information has to do with possible or actual nontrivial wrongdoings in an organization.

As we have discussed throughout the book, before blowing the whistle in accounting, a prescribed process must be followed that begins with making it known to top management including the board of directors that a material misstatement exists in the financial statements. Under Section 10A of the Securities Exchange Act of 1934, the accountant should:

• Determine whether the violations have a material effect, quantitatively or qualitatively, on the financial statements.
• If yes, has management, or the board of directors, caused management to take remedial action, including reporting externally, if necessary?
• If no, then the individual must make a formal report of the issue with conclusions on the effect and provide the report to the board of directors.

After being informed, the board of directors has one business day to report the matter to the SEC and send a copy of the report to the accountant. If the accountant does not receive a copy by that time, then the accountant should report to the SEC within one business or resign from the engagement. Resignation does not preclude informing the SEC. If the accountant follows these prescribed steps, then there will not be a violation of the confidentiality obligation in the AICPA Code.

The accountant could turn into a whistleblower under the Dodd-Frank Financial Reform Act by either waiting 120 days to see if management takes corrective action and, if not, report the matter to the SEC. Alternatively, the accountant can report if she believes that the disclosure is necessary to prevent substantial injury to the financial interest of an entity or its investors and/or reasonably believes the entity is impeding investigation of the misconduct.

Ultimately, the ideal solution for promoting ethical behavior is not a punitive one, but a positive approach by the leaders of organizations. Ethical behavior must be practiced by the leaders and modeled by those they lead. Ethical decision making should be acknowledged and rewarded. Ethics and leadership go hand in hand and ethics is the heart of leadership.