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Introduction and Background
Ethics is a concept which describes the systematic reflection on ethical principles or fundamental values which help an individual or organization achieve ethical integrity. Ethical decision making is a process which relies on ethical principles to evaluate all courses of action and choose one which will be viewed as ethical by the larger community (Jones, 1991, p. 367). Due to the fact that ethical dilemmas are common in many professional fields, including accounting, scholars have developed several decision-making models.
These models describe the process by which an individual can come to an ethical decision. In this case study, the researcher will seek to address the application of these theoretical models in a real-world scenario. It is important to examine the application of these theoretical models to gain the understanding of how ethics works.
A tax partner in charge (TPIC) of the accounting firm BizWiz, LLP has to evaluate the ethics of obtaining two companies as clients. The first company is Elevator Jacks, Inc. One-third of shares of this company is owned by the brother of the TPIC, who is also the vice president of the company. The second company is Run Forrest, Run, Inc. Among this company’s board of directors is the TPIC’s uncle by marriage. Two theoretical models, including the ethical decision making model and utility theory, are used in the analysis. Since TPIC is a certified public accountant (CPA) and is a member of AICPA, Code of Professional Conduct is also used in the decision-making process.
The Ethical Decision-Making Model
The decision-making process is outlined according to the eight steps of the model (Corey, Corey, & Haynes, 2014, p. 43):
- Determine the facts in an unbiased manner
- TPIC has relatives among the top-management of the two companies.
- Identify the ethical issue at hand
- The issue is if it is ethical to perform the audit of these companies since the judgment of the TPIC may be affected by their personal interest, their brother’s or uncle by marriage’s interests. Such issue may be considered a conflict of interest.
- Identify stakeholders impacted by the decision
- TPIC, BizWiz, LLP, Elevator Jacks, Inc., Run Forrest, Run, Inc. are the stakeholders impacted by the decision.
- Consider all available alternatives
- There are three available alternatives:
- to submit bids on the audits for the two companies and disclose the relationship;
- to submit them and not to disclose the relationship,
- not to submit them to maintain the firm’s integrity.
- There are three available alternatives:
- Consider how the decision will affect the stakeholders
- If TPIC performs audit and does not disclose the relationship, the independence of BizWiz, LLP might be put into question. Also, TPIC might find themselves under pressure to perform a fraudulent activity. If TPIC discloses the relationship, it will reduce the treat to independence, but not eliminate it. If TPIC declines to submit bids on the audits, this will result in financial loss.
- Discuss the pending decision with relevant others
- TPIC discusses the decision with their partner.
- Make the decision
- In order to maintain integrity, TPIC makes a decision not to submit bids on the audits.
- Monitor and assess the quality of the decision
- A conflict of interest is a generally understood as a concept which describes those situations in which a professional judgment is affected by another interest. The performance of audit by the TPIC with the relationship disclosed creates a conflict of interest. Whether the relationship is disclosed or not, it puts the company’s integrity at risk. There is a threat to the TPIC’s independence in the form of TPIC’s familiarity with the companies’ top management. Such type of threat is classified as familiarity threat in AICPA Code of Professional Conduct (AICPA Code of Professional Conduct, 2014, p. 41). By pursuing the audit of these two firms the TPIC “will in all likelihood be in violation of one or more rules if he or she remains associated with the matter creating the [ethical] conflict” (AICPA Code of Professional Conduct, 2014, p. 29). Thus, the most ethical decision is to withdraw.
The Utility Theory
The purpose of the utility theory is to serve as a guide in the decision-making process. According to this theory, a utility is “a measure of the desirability of consequences of courses of action” (Utility, n.d., par. 1). The basic assumption of utility theory is that when an individual is presented with several alternatives, they choose such course of action which will result in the most desirable consequences, or, in other words, maximum utility (Fishburn, 1968, p. 338).
Among the three alternatives presented above, decisions a. and b. present less desirable outcomes from the ethical point of view. Even if the relationship between TPIC is disclosed, it does not make the audit of these companies justifiable. Section 54 of AICPA Code of Professional Conduct states that “to maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity” (AICPA Code of Professional Conduct, 2014, p. 5).
Even with the relationship disclosed, it will be difficult for the TPIC to be objective while performing financial audit due to the familiarity with the companies’ top management. As such, the most ethical decision is to withdraw.
AICPA Code of Professional Conduct. (2014). Web.
Corey, G., Corey, M., & Haynes, R. (2014). Ethics in Action. Boston: Cengage Learning.
Fishburn, C. (1968). Utility Theory. Management Science, 14(5), 335-378. Web.
Utility. (n.d.). Web.