QUESTION 1: Most students were able to identify the ethical issues John faced in the scenario. The better answers referred to APES 110 and were more specific to professional ethics than a general discussion about the scenario. Overall, applying the theories to the scenario was done well. Students were able to define/explain the theory and then apply the theory to the scenario. For egoism many students focused on the short-term consequences rather than analysing the long-term consequences too. For the analysis of the scenario from a Utilitarianism perspective many students failed to adequately identify all potential stakeholders and this limited their discussion of the “greatest good for the greatest number”. The better answers for the Deontological approach referred to APES 110 or applied Kantian thinking, social contract or Theology to the scenario. Finally, the majority of students concluded that a Deontological approach was the most appropriate because John has a duty as an accountant to uphold his professional duties. However they failed to evaluate the Teleological theories, including why these were not appropriate. The better answers considered Teleology’s shortcomings.
John Marshall is employed as a financial controller for Sildas Ltd (Australia division) a multinational company that manufactures highly technical components for export. John has been the financial controller for around 18 months and feels that his career is progressing well and is paid what he considers to be an excellent salary. John and his partner have a large mortgage on the home they recently built and are looking forward to commencing their family soon.
It has come to John’s attention that a selection of components are being invoiced at prices well below the cost price of materials required to produce them. After completing a sample check of invoices, he found that the invoices were all made out to a subsidiary located in Ireland. The company in Ireland does not assemble equipment that the components are part of.
John who keeps up to date with his professional development requirements, has read that some multinationals are shifting profits to tax havens to avoid paying higher rates of tax in the country where the income is generated. This is done by not invoicing at arm’s-length prices for some goods and services. John is also aware that the ATO has set up a task force to deal with tax avoidance by multinational companies. Ireland’s tax rate is 12.5%, showing in this instance the profit being taxed in Ireland at 12.5% instead of Australia’s tax rate of 30%. If the ATO finds cases of tax avoidance, the diverted profits tax will be levied at 40%.
When John approached the chief accountant Sildas Ltd, he was advised that the Irish company and the Australian company had established an agreement on pricing and that this policy was being adhered to, indicating it was just company policy and John need not worry himself about it. John was advised not to mention this to anyone including the auditors.
In John’s opinion the amounts involved are substantial.
The main ethical issue facing John is a conflict of interest. On one hand, John has a duty as a professional accountant to act with integrity, objectivity and professional competence. These duties would require John to produce a set of financial reports which outlines the true financial performance and position of Sildas Ltd. He may be breaching the Accounting Standards and APES 110 Code of Ethics for Professional Accountants by knowingly allowing the financial statements to misrepresent the financial position of the company.
There is considerable pressure on John over this matter as reporting the transfer of components at a cost well below the cost price of materials required to produce them, will contribute to the profits of the Australian division being reported well below the profit that should be reported and the Australian shareholders as well as regulators such as the ATO being misled. As cost of goods sold will be higher, both gross and net profits will not be correct.
In conflict with these duties is John’s own personal circumstances. He has recently built a new home and has a large mortgage and his partner and he are looking to commence their family soon. This would put pressure on John to maintain his existing employment arrangements (with his excellent salary).
The key ethical issue facing John is whether he should comply withthe chief accountant’s instructions. By complying with instructions not to mention this to anyone including auditors, John would be protecting his position.
John therefore must decide whether he should uphold his professional duties or yield to the pressure of the chief accountant to produce a report which shows the company’s profits as much less (amounts involved are substantial) than they should. If John remains silent, the ATO may send their task force to audit the firm for tax avoidance and if he is found to be knowingly complicit, could face charges both civil and criminal including time in jail. In addition, the Australian community is also being short changed as they will not receive the same level of services that they may have been able to enjoy had this company and other multinational companies paid their fair share of tax. Australian taxpayers may also be paying a higher rate of tax to compensate for taxes not received from multinational companies.
The first kind of teleological theory is ethical egoism. This theory determines that ethical behaviour is one which results in the best outcome for one’s self. In other words, ethical egoism mandates/justifies self-interested behaviour. Some have argued (for example, Adam Smith or Milton Friedman), that the pursuit of self-interest actually results in the greater societal benefit. Others may however be of the view that the pursuit of self-interest is often contrary to ethical conduct.
If we are to use ethical egoism to determine what John should do, then we would need to identify what will serve John’s self-interest. From the information in the case we are told that John has been with the firm for 18 months, feels that his career is progressing well, is paid what he considers to be an excellent salary and recently took out a mortgage on a new home. From this it would seem that John’s short term self-interest is best served by not making waves about the prices of components on-sold to its Ireland subsidiary.
There is a certain degree of nuance to this theory however, as long-term self (rather than short-term) self-interest is the major consideration. In pursuing ethical egoism, we would advise John to weigh up the long-term consequences for himself on the two main courses of action available to him.
If John were to consider the longer term future consequences, he might be concerned that the under reporting of sales might ultimately work to his detriment if the tax evasion is detected.
The ATO and shareholders may pursue John over the misstated financial figures. Given these consequences, John might decide it is in his long-term self-interest to report this issue to the auditor or raise the issue with someone higher up the company corporate ladder. He could also seek advice from his professional accounting body prior to making any decisions.
The inaccurate reporting of stock may be discovered and deemed illegal, auditors may decide that John was complicit and he could be charged with white collar fraud and face disciplinary proceedings from his professional accounting body as well as the ATO.
The second teleological theory, utilitarianism (as authored by JS Mill) is like ethical egoism in that it is also focused on consequences but differs in that the focus of the consideration is the best outcome for the greatest number of people, or the ‘greater good’. Utilitarianism therefore requires a cost benefit analysis concerning the consequences for all stakeholders.
While this may seem like a sound basis for ethical conduct, there are potential issues with firstly identifying the majority (and what happens to the minority) and then determining what the ‘greater good’ is.
A consideration of the ‘greater good’ could lead John to decide that by allowing the current transfer pricing arrangement to continue, this be considered as being for the ‘greater good’ in the short term for key stakeholders such asfellow employees, the on-going reputation of the company and John himself.
Conversely John might decide that the greater long term good would actually be served by presenting a true and fair (and legal) presentation of the accounts. If John is of the view that the law should be complied with and that breaching the accounting standards/ tax evasion is of long term detriment both to Sildas Ltd, Sildas Ltd shareholders and himself then the greater good would be best served by challenging and not being in breach of regulations. If the tax evasion was detected this could seriously damage the reputation of the company and thus also share prices.
As can be seen from the above discussion, pursuing utilitarianism rather than egoism does not necessarily result in a different course of action being pursued. There is a difference however in that utilitarianism considers the consequences for a wider group of stakeholders than ethical egoism – which focuses only on one key stakeholder.
In providing advice to John based on utilitarianism, we would tell him to think about all those affected by this decision. He would need to consider the stakeholders (major stakeholders or all stakeholders). John could think the major stakeholders were company shareholders, fellow employees and the board or he might also consider other stakeholders including the australian community and the accounting profession as being important in his consideration of the ‘greater good’. If John decides the greater good is best served by doing whatever it takes to keep the company operational in Australia, then John would create the potentially misleading financial report with the company paying a lot less tax than they would normally be required to pay.If John however decides that the ‘greater good’ is best served by providing a true and fair financial report, then this decision would lead to higher profits being reported and more taxes being paid in Australia and thus benefiting all Australians.
The Normative ethical theory of teleology is based on an assessment of potential consequences of actions. This means that an ethical action is defined as one which results in a particular outcome. There are different kinds of teleological theories and the differences are based on who is assessed as being the key beneficiary/beneficiaries of a particular action.
Deontology on the other hand ignores consequences and instead focuses on fundamental rights and duties. The ‘golden rule’ is an example of deontology, whereby you owe a duty to treat others as you would have them treat you. The works of Kant are synonymous with deontology. Kant identified the notion of the ‘categorical imperative’, where one should try to find the key underlying principle governing ethical conduct and then seek to employ that principle as a universal basis for future action. Likewise, if a person were to decide that an action was unethical in a given context (for example, lying), then according to Kant, that action would be deemed to be unethical in all contexts.
Deontological ethics mandate the pursuit of fundamental rights and duties. In this case John might look to the ‘golden rule’ of ‘do unto others’, Kants ‘categorical imperative’ or he could look at the duties required of himas an accounting professional, including integrity, objectivity and professional competence. In applying the golden rule, John would need to think about how he would wish to be treated if he were in the position of being a major shareholder/Australian taxpayer. If pursuing the categorical imperative, John would ask herself whether creating misleading financial reports is acceptable in any given situation. If looking at the accounting code of professional ethics, John would need to ask whether he would be acting with integrity or objectivity if he were to allow this obvious transfer pricing arrangement to continue.
According to deontology, one should try to identify fundamental rights and duties and always adhere to them, regardless of consequences. In this case it can be argued that John has a fundamental duty, as an accountant, to report the company financial position in a truthful/legal manner. Given this, John has a duty to report this discrepancy to the board and the auditor.John should not try to anticipate the consequences for himself, the chief accountant, other influential stakeholders or the employees. Instead he should simply identify his fundamental duty and adhere to it. Presumably in normal circumstances John would not permit stock sales and profits to be understated, so he should not allow the current circumstances to change his behaviour. John has a duty to never allow misstatements to occur, regardless of consequences or context.
Critics of teleological theory would point to the problems of basing ethical conduct on consequences. These problems stem from the fact that it is impossible to predict exactly what the consequences of ones actions will be. In terms of ethical egoism, the pursuit of ones self-interest without giving consideration to the interests of others can also be questioned, while questions can also be raised about utilitarianism in terms of how we are to measure the ‘greater good’ and how this compares with the consequences for those who are not part of the ‘greater’. Critics of teleological theory would therefore question the courses of action outlined above and would suggest courses of action based on deontology.
A good conclusion would need to provide some sort of argument that ties all of this together. Students might for example argue in favour of any perspective or say that all provide relevant insights
QUESTION 2: Overall, this answer was not completed as well as question one. Most students were able to differentiate between the socially constructed and socially constructing perspectives. However, most students when evaluating which perspective best described accounting history since 1900 focused solely on one perspective, rather than giving a weighted/balanced argument for both before forming their conclusion. Further, many students were not specific when discussing accounting history since 1900 and what evidence there is for each perspective, rather opting for a general discussion on the developments of accounting. This detracted from their argument that accounting history over the past 118 years was best described by one or both perspectives.
a) Accounting can be identified as being socially constructed or socially constructing. Define these two terms.
b) Which view of accounting history do you think best explains the development of accounting? Illustrate your answer with reference to key events in history from 1900 onwards to justify your position. Your response should consider both changes to accounting practice and regulation as well as other major events that have shaped/are shaping accounting.
Key historical events from 1900 – 2018
1900 – 1930:
1930 – 1980:
1980 – 2018:
Socially Constructed – accounting has developed to meet the needs of users
Socially Constructing – As accounting has developed, society has changed as a result
The socially constructed perspective of accounting history suggests that accounting has developed to meet the changing needs of society. Where society has developed a need, accounting has been adapted to meet this need. Accounting, under this perspective is a tool used to reflect events and assist in decision making.
Most of the key events from the history of accounting can be used to support the socially constructed perspective.
In the 20th century there was a continuation of legal developments including the mandated preparation of a profit and loss statement following the stock market collapse in 1929. There has also been a gradual increase in the number of accounting principles/standards beginning with the first codification of accounting between the 1920s and 1950s. The various legal changes to accounting, including mandated balance sheets, audits and profit and loss statements were all arguably a response to a societal demand for greater protection of users.
The industrial revolution provides a clear example of the socially constructed perspective of accounting history. The industrial revolution led to major technological advancements such as mass production and the development of railways. This then led to the development of costing techniques which accounted for overhead costs, which were then factored into prices charged to customers.
Other 20th century developments included the increase in computerised accounting practices to meet the needs of increasingly fast and complex business practices. Globalised business practices have also led to the internationalisation of accounting standards. The internationalisation of accounting practices can be seen as a clear example of accounting responding to changes in business practices, namely the increased propensity of firms to operate within more than one jurisdiction and the draw investors from outside of their local environment.
The main alternative to the socially constructed perspective of accounting history is the ‘socially constructing’ perspective of accounting history. This perspective argues that accounting, rather than being a passive reaction to societal events, has actually helped to shape society in various ways – often negative.
The origins of the socially constructing perspective can be traced to Sombart’s thesis (Mathews and Perera, 1996). Sombart posited that the origins of double entry bookkeeping actually preceded capitalism. In other words, double entry bookkeeping – with its enhanced measures of profit and capital – actually enabled firms to effectively pursue the profit motive, and that this led to the development of capitalism.
The socially constructing perspective has also been used to argue that the development of accounting has advantaged some people at the expense of others. The argument has been presented that as accounting has been primarily developed by businesses, it presents events in a way that is advantageous to business people. The transfer of profits into capital and the treatment of wages as an expense are seen as means through which accounting ‘constructs’ the privileged position of owners/capitalists over workers. Similarly, the development of management accounting during the industrial revolution was able to construct internal hierarchies within large workplaces and hence allow for the more effective control of individuals. 20th century developments such as the internationalisation of accounting standards can also be seen to have had an impact by allowing multi-national corporations to take advantage of emerging markets more easily.
Each of these perspectives has a certain amount of merit and can be supported with historical events from the 20th century. Authors including Yamey (1964) have argued that the socially constructed perspective is more appropriate, with particular reference to the origins of double entry bookkeeping. Mathews and Perera (1996) supported Yamey (1964) by saying that the weight of evidence would tend to support the socially constructed perspective of accounting history. Having said this, their socially constructing perspective can be seen to possess a certain amount of merit, especially with regard to the power of accounting to shape people’s perceptions of business performance.
A good conclusion would need to provide some sort of argument that ties all of this together. Students might for example argue in favour of either perspective or say that both provide relevant insights.
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