Question

If the police can only arrest an individual if they engage in conduct that is illegal, should the distinction between ethical and legal matter in the accounting profession? Discuss.

Answer 1

Defining Ethical

Ethics refers to the moral course of action that takes into account and strives to benefit all stakeholders in a given situation. Prior to making an ethical decision, an individual must be able to identify the possible unethical course of action and label it as such. Ethical conduct also involves striving to create the best outcomes for the Accounting professional, the client and the firm.

For example, an investment fund may explain the risks of investing in different asset classes prior to creating a portfolio or promising clients a certain expected return. While such a disclosure may dissuade some potential new clients, it will improve the firm’s long-term profitability since this action may reduce the chance of dissatisfied clients pursuing legal action against the firm. An investment firm is not necessarily obligated to make such a disclosure but may do so in a bid to be perceived as ethical.

Defining Legal

Within the Accounting industry, defining legal standards is much easier than ethical standards. Acting legally means respecting the applicable bodies of law in the firm’s jurisdiction. For example, a company may be required to have accounting practices that adhere to the GAAP or IFRS standards.

Such laws have been put into place by regulators after considering all impacts that new legislation will have. Laws are usually reactive, meaning that they are implemented after major scandals and aim to remedy an unhealthy environment; such as the Sarbanes-Oxley Act. The best laws are proactive and aim to prevent scandals by requiring preventative, best-practice actions.

Ethical, but Illegal

Going back to ethical vs. legal standards dilemma, a decision can be ethical but violate certain laws. A common example of this is “whistleblowing,” or an individual’s disclosure of dishonest, corrupt or illegal activity. While it may be ethical to denounce such activity, doing so may violate organizational policies and thus be considered illegal.

When faced with a dilemma like this, an Accounting professional should consider the repercussions of his actions prior to acting. There may be alternative systems put into place to remedy such activity such as having internal discussions or using an anonymous tipping service. Point being, there are no set frameworks in place to guide an individual’s behavior in such situations. The investment professional will have to resort to his/her best judgment and follow the course of action that will bring the most benefit to clients, family, colleagues, employers, and market participants.

Unethical, but Legal

Conversely, a decision can adhere to certain bodies of law but be seen as unethical. For example, some countries do not have laws that prohibit trading while in the possession of insider knowledge. Thus, while it may be legal to trade under these circumstances, it is considered by many to be highly unethical.

Here again, an investment professional should consider the full repercussions of his/her actions. For instance, the professional may ask themselves why they are in possession of such information in the first place and take actions to avoid being in such situations again in the future. Alternatively, the professional may choose to ignore this information and continue trading as per normal.

Conclusion

When an Accounting professional finds themselves in a situation where the only obvious courses of action violate ethical or legal principles, they must assess the situation and consider new courses of action that don’t. More importantly, firms and individuals must constantly take proactive action to mitigate the likelihood of such situations arising.