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ETHICS IN ACCONTING
Ethics, sometimes known as philosophical ethics, ethical theory, moral theory, and moral
philosophy, is a branch of philosophy that involves systematizing, defending and recommending
concepts of right and wrong conduct, often addressing disputes of moral diversity. The term
comes from the Greek word ethos, which means "character". The superfield within philosophy
known as Axiology includes both ethics and Aesthetics and is unified by each sub-branch's
concern with value. Philosophical ethics investigates what is the best way for humans to live, and
what kinds of actions are right or wrong in particular circumstances. Ethics may be divided into
four major areas of study:
Meta-ethics, about the theoretical meaning and reference of moral propositions and how
their truth values (if any) may be determined;
Normative ethics, about the practical means of determining a moral course of action;
Applied ethics draws upon ethical theory in order to ask what a person is obligated to do
in some very specific situation, or within some particular domain of action (such as
Descriptive ethics, also known as comparative ethics, is the study of people's beliefs
Ethics seeks to resolve questions dealing with human morality—concepts such as good and evil,
right and wrong, virtue and vice, justice and crime
Richard Paul and Linda Elder of the Foundation for Critical Thinking define ethics as "a set of
concepts and principles that guide us in determining what behavior helps or harms sentient
creatures". The Cambridge Dictionary of Philosophy states that the word ethics is "commonly
used interchangeably with 'morality' ... and sometimes it is used more narrowly to mean the
moral principles of a particular tradition, group or individual." Paul and Elder state that, "most
people confuse ethics with behaving in accordance with social conventions, religious beliefs and
the law", and don't treat ethics as a stand-alone concept.
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Luca Pacioli, here in a 1495 portrait by an unknown Renaissance artist, wrote on accounting
ethics in 1494.
Luca Pacioli, the "Father of Accounting", wrote on accounting ethics in his first book Summa de
arithmetica, geometria, proportioni, et proportionalita, published in 1494.Ethical standards have
since then been developed through government groups, professional organizations, and
independent companies. These various groups have led accountants to follow several codes of
ethics to perform their duties in a professional work environment. Accountants must follow the
code of ethics set out by the professional body of which they are a member. United States
accounting societies such as the Association of Government Accountants, Institute of Internal
Auditors, and the National Association of Accountants all have codes of ethics, and many
accountants are members of one or more of these societies.
In 1887, the American Association of Public Accountants (AAPA) was created; it was the first
step in developing professionalism in the United States accounting industry. By 1905, the
AAPA's first ethical codes were formulated to educate its members. During its twentieth
anniversary meeting in October 1907, ethics was a major topic of the conference among its
members. As a result of discussions, a list of professional ethics was incorporated into the
organization's bylaws. However, because membership to the organization was voluntary, the
association could not require individuals to conform to the suggested behaviors. Other
accounting organizations, such as the Illinois Institute of Accountants, also pursued discussion
on the importance of ethics for the field. The AAPA was
renamed several times throughout its history, before becoming
the American Institute of Certified Public Accountants
(AICPA) as its named today. The AICPA developed five
divisions of ethical principles that its members should follow:
"independence, integrity, and objectivity"; "competence and
"responsibilities to colleagues"; as well as "other
responsibilities and practices". Each of these divisions
provided guidelines on how a Certified Public Accountant
(CPA) should act as a professional. Failure to comply with the
guidelines could have caused an accountant to be barred from practicing. When developing the
ethical principles, the AICPA also considered how the profession would be viewed by those
outside of the accounting industry.
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THE CONCEPT OF ETHICS
The definition of ethics is shaped by personal, societal and professional values, all of which are
difficult to specify. Some stress the importance of society‘s interests and others stress the
interests of the individual. These conflicting viewpoints have dominated the discussion of ethics
for a long time and may remain in the future as well. Thus, the term ‗ethics‘ will have to be
defined in this context.
The word ‗ethics‘ is derived from the Greek word ‗ethos‘ (character) and Latin word ‗moras‘
(customs). Taken together these two words define how individuals choose to interact with one
another. Thus, ethics is about choices. It signifies how people act in order to make the ‗right‘
choice and produce ‗good‘ behaviour. It encompasses the examination of principles, values and
norms, the consideration of available choices to make the right decision and the strength of
character to act in accordance with the decision. Hence, ethics, as a practical discipline, demands
the acquisition of moral knowledge and the skills to properly apply such knowledge to the
problems of daily life.
IMPORTANCE OF ETHICS
The nature of the work carried out by accountants and auditors requires a high level of ethics.
Shareholders, potential shareholders, and other users of the financial statements rely heavily on
the yearly financial statements of a company as they can use this information to make an
informed decision about investment. They rely on the opinion of the accountants who prepared
the statements, as well as the auditors that verified it, to present a true and fair view of the
company. Knowledge of ethics can help accountants and auditors to overcome ethical dilemmas,
allowing for the right choice that, although it may not benefit the company, will benefit the
public who relies on the accountant/auditor's reporting.
Most countries have differing focuses on enforcing accounting laws. In Germany, accounting
legislation is governed by "tax law"; in Sweden, by "accounting law"; and in the United
Kingdom, by the "company law". In addition, countries have their own organizations which
regulate accounting. For example, Sweden has the Bokföringsnämden (BFN - Accounting
Standards Board), Spain the Institute de Comtabilidad y Auditoria de Cuentas (ICAC), and the
United States the Financial Accounting Standards Board (FASB).
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PHILOSOPHICAL THEORIES OF ETHICS
Decision making based on intuition or personal feeling does not always lead to the right course
of action. Therefore, ethical decision making requires a criterion to ensure good judgment. The
philosophical theories of ethics provide different and distinct criteria for good, right or moral
Three prominent philosophical theories of ethics are utilitarianism, rights and justice. They are
normative theories of ethics, which provide a principle or standard on how a person ought to
behave towards others by considering the right and wrong of an action. These normative theories
are divided into two broad classifications, consequential and non-consequential. Consequential
theories define ‗good‘ in terms of its consequences, and a best known example is theory of
utilitarianism. In contrast, non-consequential theories define ‗good‘ not by its consequences but
by its intrinsic value and the best known examples are the rights and justice theories. These
theories are described below.
(a) The theory of utilitarianism
According to this theory, the ethical alternative is the one that maximises good consequences
over bad consequences. Jeremy Bentham, who is considered as the father of utilitarian ethics,
defines utilitarianism as the greatest happiness principle (the principle of utility), which measures
good and bad consequences in terms of happiness and pain. He wrote as follows in his book ‗An
Introduction to the Principles of Morals and Legislation‘:
"Nature has placed mankind under the governance of two sovereign masters, pain and pleasure.
It is for them alone to point out what we ought to do, as well as to determine what we shall do.
On the one hand the standard of right and wrong, chain of causes and effects, are fastened to
their throne. They govern us in all we do, in all we say, in all we think."
The terms ‗happiness‘ and ‗pain‘ have broad meaning and encompass all aspects of human
welfare, including pleasure and sadness, health and sickness, satisfaction and disappointment,
positive and negative emotions, achievement and failure and knowledge and ignorance.
Applying the utilitarian principle is a procedural process involving five steps:
(1) Define the problem;
(2)Identify the stakeholders affected by the problem;
(3) List the alternative courses of action for resolving the problem;
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(4) Identify and calculate the short- and long- term costs and benefits (pain and happiness) for
each alternative course of action and
(5) Select the course of action that yields greatest sum of benefits over costs for the greatest
number of people. Thus, ethical conduct by accountants based on this theory leads to
consideration of all possible consequences of a decision for all parties affected by it.
This theory takes a pragmatic and common sense approach to ethics. Actions are right to the
extent that they benefit people (i.e. actions, which produce more benefit than harm are right and
those that do not are wrong). Thus, the cognitive process required for utilitarian decision making
appears similar to the cost-benefit analysis that is normally applied in business decisions.
However, there are important distinctions between the two concepts in relation to the nature of
consequences, the measurability of the consequences and stakeholder analysis.
(b) The theory of rights
The theory of rights stems from the belief that people have an inherent worth as human beings
that must be respected. Therefore, according to this theory, a good decision is one that respects
the rights of others. Conversely, a decision is wrong to the extent that it violates another person‘s
rights. In general, the rights can be divided into two categories:
(1) natural rights (rights that exist independently of any legal structure) and
(2) Legal rights and contractual rights (rights that are created by social agreement). The natural
rights are commonly known as human rights or constitutional rights.
Among many natural rights, the right to the truth is important to the function of accounting. The
users of financial statements have the right to truthful and accurate financial information when
making choices on alternative investment strategies. This right imposes a moral obligation on the
accountant and the reporting entity to prepare and issue, true and fair financial statements. On the
other hand, legal and contractual rights are important in the accountant-employer and the
accountant-client relationships. These contractual relationships mean that employers and clients
have a legal right to expect professional and competent service from the accountants. In turn, the
accountants have a corresponding legal duty to perform their tasks to the best of their ability
within the constraints of their expertise.
(c) The theory of justice
Understanding this theory requires understanding various notions of justice. Generally, justice is
described as fairness, which refers to the correlation between contribution and reward. However,
fairness alone cannot define the term justice. There are also other forms of justice, which include
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equality (assumes that all people have equal worth), procedural justice (concerns with due
process) and compensatory justice (addressed the loss from a wrongful act). However, a
comprehensive theory incorporating these various domains of justice has yet to be developed.
Thus, the focus of this paper is on the theory of justice, which is based on the principle of
distributive justice. It focuses on how fairly one‘s decisions distribute benefits and burdens
among members of the group. Unjust distribution of benefits and burdens is an unjust act and an
unjust act is a morally wrong act. Hence, under this theory, an ethical decision is one that
produces the fairest overall distribution of benefits and burdens.
Universities began teaching business ethics in the 1980s. Courses on this subject have grown
significantly in the last couple of decades. Teaching accountants about ethics can involve role
playing, lectures, case studies, guest lectures, as well as other mediums. Recent studies indicate
that nearly all accounting textbooks touch on ethics in some way. In 1993, the first United States
center that focused on the study of ethics in the accounting profession opened at State University
of New York at Binghamton. Starting in 1999, several U.S. states began requiring ethics classes
prior to taking the CPA exam.
Seven goals of accounting ethics education
Relate accounting education to moral issues.
Recognize issues in accounting that have ethical implications.
Develop "a sense of moral obligation" or responsibility.
Develop the abilities needed to deal with ethical conflicts or dilemmas.
Learn to deal with the uncertainties of the accounting profession.
"Set the stage for" a change in ethical behavior.
Appreciate and understand the history and composition of all aspects of accounting
ethics and their relationship to the general field of ethics.
In 1988, Stephen E. Loeb proposed that accounting ethics education should include seven
goals (adapted from a list by Daniel Callahan). To implement these goals, he pointed out
that accounting ethics could be taught throughout accounting curriculum or in an
individual class tailored to the subject. Requiring it be taught throughout the curriculum
would necessitate all accounting teachers to have knowledge on the subject (which may
require training). A single course has issues as to where to include the course in a
student's education (for example, before preliminary accounting classes or near the end of
a student's degree requirements), whether there is enough material to cover in a semester
class, and whether most universities have room in a four-year curriculum for a single
class on the subject.
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Accounting, or accountancy, is the measurement, processing and communication of financial
information about economic entities. Accounting, which has been called the "language of
business", measures the results of an organization's economic activities and conveys this
information to a variety of users including investors, creditors, management, and regulators.
Practitioners of accounting are known as accountants.
Accounting can be divided into several fields including financial accounting, management
accounting, auditing, and tax accounting. Financial accounting focuses on the reporting of an
organization's financial information, including the preparation of financial statements, to external
users of the information, such as investors, regulators and suppliers; and management accounting
focuses on the measurement, analysis and reporting of information for internal use by
management. The recording of financial transactions, so that summaries of the financials may be
presented in financial reports, is known as bookkeeping, of which double-entry bookkeeping is
the most common system.
Financial accounting focuses on the reporting of an organization's financial information to
external users of the information, such as investors, regulators and suppliers. It measures and
records business transactions and prepares financial statements for the external users in
accordance with generally accepted accounting principles (GAAP). GAAP, in turn, arises from
the wide agreement between accounting theory and practice, and change over time to meet the
needs of decision-makers.
Financial accounting produces past-oriented reports—for example the financial statements
prepared in 2006 reports on performance in 2005—on an annual or quarterly basis, generally
about the organization as a whole.
Management accounting focuses on the measurement, analysis and reporting of information that
can help managers in making decisions to fulfil the goals of an organization. In management
accounting, internal measures and reports are based on cost-benefit analysis, and are not required
to follow GAAP.
Management accounting produces future-oriented reports—for example the budget for 2006 is
prepared in 2005—and the time span of reports varies widely. Such reports may include both
financial and nonfinancial information, and may, for example, focus on specific products and
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"Accountants and the accountancy profession exist as a means of public service; the distinction
which separates a profession from a mere means of livelihood is that the profession is
accountable to standards of the public interest, and beyond the compensation paid by clients."
—Robert H. Montgomery
Accounting ethics is primarily a field of applied ethics, the study of moral values and judgments
as they apply to accountancy. It is an example of professional ethics. Accounting ethics were
first introduced by Luca Pacioli, and later expanded by government groups, professional
organizations, and independent companies. Ethics are taught in accounting courses at higher
education institutions as well as by companies training accountants and auditors.
Due to range of accounting services and recent corporate collapses, attention has been drawn to
ethical standards accepted within the accounting profession. These collapses have resulted in a
widespread disregard for the reputation of the accounting profession. To combat the criticism
and prevent fraudulent accounting, various accounting organizations and governments have
developed regulations and remedies for improved ethics among the accounting profession.
Accounting ethics has been deemed difficult to control as accountants and auditors must consider
the interest of the public (which relies on the information gathered in audits) while ensuring that
they remained employed by the company they are auditing. They must consider how to best
apply accounting standards even when faced with issues that could cause a company to face a
significant loss or even be discontinued. Due to several accounting scandals within the
profession, critics of accountants have stated that when asked by a client "what does two plus
two equal?" the accountant would be likely to respond "what would you like it to be?". This
thought process along with other criticisms of the profession's issues with conflict of interest,
have led to various increased standards of professionalism while stressing ethics in the work
The role of accountants is critical to society. Accountants serve as financial reporters and
intermediaries in the capital markets and owe their primary obligation to the public interest. The
information they provide is crucial in aiding managers, investors and others in making critical
economic decisions. Accordingly, ethical improprieties by accountants can be detrimental to
society, resulting in distrust by the public and disruption of efficient capital market operations.
"Every company in the country is fiddling its profits. Every set of published accounts is based on
books which have been gently cooked or completely roasted. The figures which are fed twice a
ETHICS IN ACCONTING
year to the investing public have all been changed in order to protect the guilty. It is the biggest
con trick since the Trojan horse. ... In fact this deception is all in perfectly good taste. It is totally
legitimate. It is creative accounting."
THE ROLE OF ETHICS IN ACCOUNTING
Samanthi Senaratne is Professor in Accounting and the present Head of the Department of
Accounting at the University of Sri Jayewardenepura. She holds a Bachelors Degree in
Accounting with a first class, an MBA and a PhD specialising in finance. She is prolific
researcher and has published widely in the areas of corporate governance, corporate social
responsibility reporting and accounting education. She engages in teaching in the areas of
financial reporting and accounting theory at both undergraduate and postgraduate levels.
Ethics and professional practice
It is extremely important for accounting professionals to be ethical in their practices due to the
very nature of their profession. The nature of accountants‘ work puts them in a special position
of trust in relation to their clients, employers and general public, who rely on their professional
judgment and guidance in making decisions. These decisions in turn affect the resource
allocation process of an economy. The accountants are relied upon because of their professional
statues and ethical standards. Thus, the key to maintaining confidence of clients and the public is
professional and ethical conduct
Ensuring highest ethical standards is important to a ‗public accountant‘ (one who renders
professional services such as assurance and taxation service to clients for a fee) as well as to an
‗accountant in business‘ (one who is employed in a private or public sector organisation for a
salary). Both ‗public accountants‘ and ‗accountants in business‘ are in a fiduciary relationship,
former with the client and latter with the employer. In such a relationship, they have the
responsibility to ensure that their duties are performed in conformity with the ethical values of
honesty, integrity, objectivity, due care, confidentiality, and the commitment to the public
interest before one‘s own
The ‗Framework for International Education Standards for Professional Accountants‘ (2009)
published by International Accounting Education Standards Board (IAESB) of IFAC identifies
that the overall objective of accounting education should be to develop competent professional
accountants, who possess the necessary (a) professional knowledge, (b) professional skills, and
(c) professional values, ethics, and attitudes. In this respect, the International Education Standard
(IES) 4 - Professional Values, Ethics and Attitudes of IAESB recommends that a programme of
professional accounting education should provide potential professional accountants with a
framework of professional values, ethics and attitudes to exercise professional judgment and act
in an ethical manner that is in the best interest of society and the profession.
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NEED OF ETHICS IN ACCOUNTING
Accountants are given access to private information and therefore the nature of your job means
that people expect you to be highly trustworthy, says Sally. With companies and clients investing
more than just their trust in accountants, it is important that you have a strong sense of ethics
beyond the basic wrong versus rights.
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BETTY VINSON, CYNTHIA COOPER, AND MORAL COURAGE: A
CASE STUDY IN ACCOUNTING ETHICS AT WORLDCOM
David Christensen, Jeff Barnes, and David Rees
Southern Utah University
On 21 July 2002 the second largest telecommunications company in the U.S.,
WorldCom, Inc., applied for bankruptcy protection. WorldCom failed because of the bad
business decisions of its executives to manipulate earnings with improper accounting entries.
The key executives involved in the fraud were CEO Bernard Ebbers and CFO Scott Sullivan.
The accountants who were pressured by Ebbers and Sullivan to prepare improper accounting
entries included Director of General Accounting Bufford Yates, Controller David Meyers,
Director of Legal Entity Accounting Troy Norman, and Director of Management Reporting
Betty Vinson. Each was convicted of securities fraud and received federal jail sentences,
including billionaire Bernie Ebbers who received a 25-year sentence in federal prison.1 Betty
Vinson received a 5-month jail sentence.
Another key player in this sad story of greed and conflicting loyalties is Vice President of
Internal Audit Cynthia Cooper, a whistleblower who with two other internal auditors, Gene
Morse and Glyn Smith, doggedly investigated and revealed the fraud to WorldCom‘s audit
In this case study you will read about the ethical pressure faced by Betty Vinson and Cythia
Cooper as they each balanced conflicting loyalties between family, employer, and profession.
Betty first balked then caved to the pressure and ruined her career; Cynthia did not cave and was
named one of three ―Persons of the Year‖ by Time Magazine in 2002 for her moral courage at
WorldCom (Lacayo and Ripley 2002).
PART 1 - ACCOUNTING FRAUD AT WORLDCOM
PART 2 - WHISTLE BLOWERS AT WORLDCOM
PART 3 – MORAL COURAGE AND FIRST PRINCIPLES
Moral courage is the courage to be moral – to act with fairness, respect, responsibility, honesty
and compassion even when the risks of doing so are substantial. R. Kidder (2005) indicates that
―moral courage does not back us fearfully into dangerous corners so much as draw us inexorably
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toward first principles. Done right, it is less about hazards and obstacles than about virtues,
standards, and rightness – the courage to be moral.‖
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What Can Result from Poor Ethics in Accounting?
Many negative consequences can result from poor ethics in accounting practices. The first result
is generally a lag in business. Accounting firms rely heavily on word-of-mouth for promotion,
and it's all too easy for a few bad stories about unethical behavior to sway prospective clients
away from a particular firm. There can also be serious legal repercussions for those who are
found to be violating legal codes and standards for their jurisdiction
What Can I Do to Be an Ethical Accountant?
To begin with, study your area's legal statutes regarding accounting practices. While it is true
that what is legal and what is ethical can be two different things, the legal code is a good basic
guide to help you understand the prevailing feeling towards what is right. Likewise, make sure
that you always put the interests of your clients ahead of your own, that you safeguard client
information doggedly and never behave in a fashion that you know to be wrong while handling
Why are Ethics Important in Accounting?
Proper ethics and ethical behavior are extremely important in accounting for a variety of reasons.
To begin with, accountants are often privy to sensitive information regarding their clients, such
as Social Security or bank account numbers. This gives accountants a good deal of power in
regard to their clients and it is important that the trust between an accountant and their clients not
be abused. In the same way it is important that the industry itself does not become stigmatized as
an unethical one, something that could potentially harm business for all accounting firms.
Ethical Issues Facing Accountants
The collapse of Enron resulted in black marks against the accounting profession and several
reforms to change accounting standards. It is hoped that these changes will eliminate such
unethical procedures as making the company's shares financially more viable, but establishing no
gain to shareholders and creditors.
The task of accounting is to state the truth about an organization's financial condition and
provide the conditions of trust required by a market economy. The American Institute of
Certified Public Accountants has established ethical guidelines and rules of conduct that are to be
followed by its members. This Code of Professional Conduct is applicable not only to
accountants but to financial professionals. A part of the code stresses the profession's ultimate
responsibility to its public, which includes shareholders, clients, creditors, the business
community, governments, and employers who are involved with commerce.
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One of the reasons that Enron and similar events occurred is that the accounting firms placed too
much importance on the corporate interests and not enough on the investors' interests. The
accountants cooperated with the company's management team, which led to "cookie-cutter"
rather than principle-founded accounting practices, such as depreciation and inventory
Because there can be such leeway with financial statements, accountants must act as "security
guards" and be able to resist their own desire for personal gain. There are many cases where
financial transactions continue to be inaccurately stated, such as essential figures left out of
statements and debits listed on the ledger's credit side or not listed at all. Accountants need to be
sleuths and find such errors and then tell the truth about them.
Although the accounting profession has overall been recognized for its excellent work, such
instances as Enron tarnish the whole field. The Public Company Accounting Oversight Board
(PCAOB) was created to develop auditing standards with ethics rules and quality control for
Accounting firms must set high criteria in hiring and training practices of new personnel,
especially courses on ethics and professional responsibility. In the past not enough emphasis had
been placed on ethics issues. In addition to checking a candidate's references, the accounting
employer needs to clearly discuss the importance of ethics in job interviews. Larger accounting
firms may want to consider having one person who specifically oversees ethics and
accountability. Nearly all states require that certified public accountants must take continuing
education courses to keep their licenses, yet only a handful of states mandate ethics training.
Ethics and professionalism
One of the elements that many believe distinguishes a profession from other occupations is the
acceptance by its members of a responsibility for the interests of those it serves. A high standard
of ethical behavior is expected of those engaged in a profession. These standards often are
articulated in a code of ethics. For example, law and medicine are professions that have their
own codes of professional ethics. These codes provide guidance and rules to members in the
performance of their professional responsibilities.
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Public accounting has achieved widespread recognition as a profession. The AICPA, the national
organization of professional certified public accountants, has its own Code of Professional
Conduct which prescribes the ethical conduct members should strive to achieve. Similarly,
the Institute of Management Accountants (IMA) the primary national organization of
accountants working in industry and government has its own code of ethics, as does the Institute
of Internal Auditors the national organization of accountants providing internal auditing
services for their own organizations.
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ANALYTICAL MODEL FOR ETHICAL DECISIONS
Ethical codes are informative and helpful. However, the motivation to behave ethically must
come from within oneself and not just from the fear of penalties for violating professional codes.
Presented below is a sequence of steps that provide a framework for analyzing ethical issues.
These steps can help you apply your own sense of right and wrong to ethical dilemmas
Determine the facts of the situation. This involves determining the who, what,
where, when, and how.
Identify the ethical issue and the stakeholders. Stakeholders may include
shareholders, creditors, management, employees, and the community.
Identify the values related to the situation. For example, in some situations
confidentiality may be an important value that may conflict with the right to know.
Specify the alternative courses of action.
Evaluate the courses of action specified in step 4 in terms of their consistency with
the values identified in step 3. This step may or may not lead to a suggested course
Identify the consequences of each possible course of action. If step 5 does not
provide a course of action, assess the consequences of each possible course of action
for all of the stakeholders involved.
Make your decision and take any indicated action.
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Ethical behavior is difficult for any researcher to measure and analyze, especially in real-life
situations. Results are often imprecise due to the challenges inherent in quantifying what is
ethical and what is not. Much of the work done is theoretical, and involves either creating or
applying ethics models. To draw conclusions from ethics research, due to the many variables
involved, researchers must rely on judgment and assumptions as they study an individual‘s
actions, reactions and reasoning for the individual‘s behavior. Nonetheless, the conclusions
drawn and models proposed in ethics research provide valuable insights into ethical behavior,
and it is an important area of academic research.
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