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?Does a well-defined code of conduct within a company contribute to leadership skills? If so, discuss its contributions.?

?Chapter 2: ?Cognitive Processes and Ethical Decision Making in Accounting is attached.

APA Style?

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Cognitive Processes and
Ethical Decision Making in

Accounting
Chapter 2

Copyright ?2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Cognitive Development Approach

? Cognitive development refers to the thought
process followed in one?s moral development

? An Individual?s ability to make reasoned
judgments about moral matters develops in
stages

? These stages characterize the way people think
about ethical dilemmas

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Kohlberg and Cognitive Development

? Psychologist
? 20 years of research
? Moral reasoning processes becomes more

complex and sophisticated with development
? Higher stages are consistent with philosophical

theories of rights and justice

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Heinz and the Drug

? Heinz?s wife has a rare cancer
? A radium drug could help
? Druggist charged 10 times what drug cost ($200

cost; $2,000 for small dose of drug)
? Heinz could only get together $1,000
? Druggist would make no exceptions to price of

drug
? What should Heinz do?

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Sample Responses to the Heinz Dilemma

? Egoism: Steal the drug, depending on how much
Heinz likes his wife and how much risk to stealing

? Ends justify the means: Steal the drug, due to
loving the wife so much and cannot watch her die

? Act Utilitarianism: Weigh the costs and benefits of
alternative actions

? Rule Utilitarianism; justice: Do not steal the drug,
since stealing is against the law

? Rights: Right to life above all else (Constitutionally:
life, liberty, and the pursuit of happiness)

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Kohlberg?s Stages of Moral Development

? Lawrence Kohlberg?s six stages of moral
development are divided into three levels of
moral reasoning

? Level 1 ? Preconventional
? Level 2 ? Conventional
? Level 3 – Postconventional

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Level 1 – Preconventional

? Rules are seen as something external imposed
on one?s self

? Individual is very self-centered
? Stage 1 ? Obedience to rules; avoidance of

punishment
? Stage 2 ? Satisfying one?s own needs (egoism);

follow rules only if they satisfy one?s needs

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Level 2 – Conventional

? Individual becomes aware of the interests of
others and one?s duty to society

? Personal responsibility is an important
consideration in decision-making.

? Stage 3 ? Fairness to others; commitment to loyalty
in the relationship

? Stage 4 ? Law and order; one?s duty to society,
respect for authority, maintaining social order

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Level 3 – Postconventional

? Individual recognizes there must be a society
wide basis for cooperation

? Orientation to principles that shape whatever
laws and role systems a society may have

? Stage 5 ? Social contracts; upholding the basic rights,
values, and legal contracts of society

? Stage 6 ? Universal ethical principles that everyone
should follow, Kohlberg believed this stage rarely
existed; Kant?s categorical imperative

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Gilligan?s Ethics of Care

? Care-and-response orientation that
characterizes female moral judgment

? Females look for ways of resolving dilemma
where no one will experience pain

? Criticism: Implication that men lack a caring
response when compared to females

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Characteristics of Kohlberg?s Model

? Kohlberg maintains that his stage sequence is universal
? Same in all cultures

? Contrary to Geert Hofstede?s cultural dimensions
? Stages refer not to specific beliefs, but
? Underlying modes of reasoning
? Suggests that people continue to change their decision

priorities over time and with additional education and
experience.

? Individual?s moral development can be influenced by
corporate culture, especially ethics training.

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Ethical Domain in Accounting and Auditing

? Four key constituent groups of accountants and
auditors? domain are the:

? Client organization that hires and pays for
accounting services

? Accounting firm that employs the practitioner
? Accounting profession including various

regulatory bodies
? General public who rely on the attestation and

representation of the accounting firm

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Accountants Ethical Behavior

? Accounting profession has professional
standards to encourage ethical behavior

? These standards, an individual?s attitudes and
beliefs, and ethical reasoning capacity influence
professional judgment and ethical decision
making

? Post conventional reasoning is the ethical
position to take even though it may go against
corporate culture of, ?go along to get along?

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Empirical Studies

? Studies have shown that:
? Ethical reasoning may be an important determinant

of professional judgment
? Unethical and dysfunctional audit behavior may be

systematically related to the auditor?s level of ethical
reasoning

? Ethical reasoning may be an important cognitive
characteristic that may affect individual judgment
and behavior

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Moral Reasoning and Moral Behavior

? Moral judgment is the single most influential
factor of a person?s moral behavior

? Morality requires
? Person?s actions be rational
? Motivated by purpose or intent
? Carried out with autonomous free will

? Criticism of Kohlberg
? Draws too heavily from Rawl?s Theory of Justice
? Makes deontological ethics superior to other ethical

perspectives

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Rest?s Model of Morality

James Rest?s model of ethical action is based
upon the presumption that an individual?s
behavior is related to her/his level of moral
development. He breaks down the ethical
decision making process into four major
components.

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Components of Rest?s Model

? Moral Sensitivity ? ability to identify what is
moral and amoral.

? Moral Judgment ? ability to reason through
several courses of actions and making the right
decision when faced with an ethical dilemma.

? Moral Motivation ? influences that affect an
individual?s willingness to place ethical values
ahead of nonethical values.

? Moral Character ? having one?s ethical
intentions match actions taken.

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Moral Intent

? Critical component of ethical decision making
? Internalization of virtues
? Acting in accordance with principles
? One must want to make the ethical decision

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Components Interact

? All processes must take place for moral behavior
to occur.

? This framework is not a linear decision making
model, the processes instead work through
sequence of ?feed-back? and ?feed-forward?
loops.

? Moral failure can occur when there is a
deficiency in any one component.

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Moral Intensity

? Developed by Thomas Jones
? Characteristics of moral issue (Moral Intensity)

affects decision making
? Model links moral intensity to Rest?s Model

? Magnitude of Consequences
? Temporal Immediacy
? Social Consensus
? Proximity
? Probability of Effect
? Concentration of Effect

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Libby and Thorne: Virtues Important for
Auditing

? Intellectual virtues: indirectly influence
individual?s intentions to exercise professional
judgment

? Most important: integrity, truthful, independent,
objective, dependable, principled, and healthily
skeptical

? Instrumental virtues: directly influence
individual?s actions

? Most important: diligent, alert, careful, resourceful,
consultative, persistent, and courageous

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Linda Thorne?s Integrated Model of Ethical
Decision Making

Ethical Intention

Ethical Behavior

Sensitivity

Prescriptive
Reasoning

Ethical
Motivation

Ethical Character

Virtue

Perception

Moral Virtue

Understanding

Instrumental Virtue

Moral Development

Identification of
Dilemma

Ethical Judgment

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Ethical Decision-Making Models

? Consciously thinking about and analyzing what
one has done (or is doing).

? A systematic process to organize the various
elements of ethical reasoning and professional
judgment.

? Evaluate stakeholder interests
? Analyze the relevant operational and accounting

issues
? Identify alternative courses of action.

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Kidder?s Ethical Checkpoints

? Recognize that there is a moral issue.
? Determine the actor.
? Gather the relevant facts.
? Test for right-versus-wrong issues.
? Test for right-versus-right paradigms.
? Apply the ethical standards and perspectives.
? Look for a third way.
? Make the decision.
? Revisit and reflect on the decision.

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Integrated Ethical Decision-Making Process

1. Identify the ethical and professional issues
(ethical sensitivity)

2. Identify and evaluate alternative courses of
action (ethical judgment)

3. Reflect on the moral intensity of the situation
and virtues that enable ethical action to occur
(ethical intent)

4. Take action (ethical behavior)

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Ace Manufacturing

? Three stockholders: Smith, Williams, & Jones
? Jones hires son Paul to manage the office
? Paul is given complete control over payroll,

approves disbursements, signs checks, reconciles
G/L cash to bank statement

? Paul hires Larry Davis to help with accounting
? While Paul is on medical leave, Davis finds $10,000

total in payments over payroll amount to Paul in
January and February

? What should Davis do?

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Application of Decision Making Model to
Ace Manufacturing

? Identify the ethical and professional issues (ethical sensitivity)
? GAAP ? Potential fraud, misstated F/S, incorrect taxable income
? Stakeholders ? owners, Paul, Davis, IRS, banks
? Ethical/professional standards ? objectivity, integrity, due care

? Identify and evaluate alternative courses of action (ethical judgment)
? Legal issues ? GAAP, fraudulent F/S, tax understatement
? Alternatives/ethical analysis ? do nothing, confront Paul, report to Jones or

all the owners. Rule utilitarianism and rights argue for informing other
partners who have a right to know, although Paul can be approached first
under the theory he has a right to correct the matter

? Reflect on the moral intensity of the situation and virtues that enable
the ethical action to occur (ethical intent)

? Will Davis be responsible for getting Paul in trouble? What is the right thing
to do? Can Davis trust Paul again?

? Take action (ethical behavior)
? Have courage, insist on correction to accounting, give Paul an opportunity to

explain

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Behavioral Ethics

? Considers how individuals make decisions in the
real world versus how they would make
decisions in an ideal world.

? Kahneman?s two distinct modes of decision
making:

? System 1: intuitive system of processing info; fast,
automatic, effortless, and emotional decision
processes

? System 2: slower, conscious, effortful, explicit, and a
more reasoned decision process

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Leon Festinger

? Recognized the limitation of philosophical
reasoning approaches integrated into decision
making models

? How we think we should behave is different
from how we decide to behave

? Coined term of Cognitive Dissonance in 1956

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Cognitive Dissonance

? Inconsistency between our thoughts, beliefs, or
attitudes and behavior creates the need to
resolve contradictory or conflicting beliefs,
values, and perceptions.

? Only occurs when we are ?attached? to our
attitudes and beliefs.

? How we think we should behave is different
from how we decide to behave.

? Example of Betty Vinson of WorldCom

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Giving Voice to Values

? Behavioral ethics approach with an emphasis on
developing the capacity to effectively express one?s
values in a way that positively influences others

? Finding levers to effectively voice and enact one?s values
? Ask to think about the arguments others might

make that create barriers to expressing one?s values
in workplace

? Ask to think how best to counteract these ?reasons
and rationalizations?

? Used post-decision making (already decided what
to do)

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GVV Questions

? How you get it done effectively and efficiently?
? What do you need to say, to whom, and in what

sequence?
? What will the objectives or push-back be, and, then
? What will you say next?
? What data and examples do you need to support

your point of view?
? GVV relies on developing arguments, action plans,

and rehearsing how to voice/enact moral values.

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Reasons and Rationalizations

? Expected or Standard Practice ? ?Everyone does
this.?

? Materiality ? ?The impact is not material. It doesn?t
really hurt anyone.?

? Locus of Responsibility ? ?This is not my
responsibility; I?m just following orders.?

? Locus of Loyalty ? ?This is not fair to the client, but I
don?t want to hurt my
reports/team/boss/company.?

? Isolated Incident ? ?This is a one-time request.?

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4 ? Step GVV Process

? What are the main arguments you are trying to
counter? That is, what are the reasons and
rationalization you need to address?

? What?s at stake for the key parties, including
those with whom you disagree?

? What levers can you use to influences those
with whom you disagree?

? What is your most powerful and persuasive
response to the reasons and rationalizations you
need to address?

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Doing Good by Being Good: GVV

? Matt and Becca head up Accounting Club
fundraising for hurricane victims in the college
community

? Donations totaled $20,367 and 2,000 hours of
volunteer work

? Only $20,000 given to victims
? Where is the other $367 or where is receipt for

the fees on gift cards?

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Doing Good Analysis with GVV

? What are the main arguments to counter or reasons and
rationalizations to address?

? Locus of loyalty, materiality, isolated incident, student
graduating

? What?s at stake for the key parties?
? Reputation, leadership stake, faculty advisor and community

? What levers can you use to influence those with whom
you disagree?

? Speak to other officers, approach Matt, go to faculty advisor,
jeopardizing respect

? What is your most powerful and persuasive response to
the reasons and rationalizations?

? Cheating, job in Big 4, loyalty to club, consequences to club and
officers in cover up

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Ace Manufacturing Analysis with GVV

? What are the main arguments to counter or reasons and
rationalizations to address?

? No one hurt, private company, sympathy card, materiality, not being
compensated properly, isolated incidents, Jones has approved, will pay
back

? What?s at stake for the key parties?
? Reputations, embarrassment, right to know, loss of job, ability to obtain

loan

? What levers can you use to influence those with whom you
disagree?

? Ask for supporting documents for coding of expenses, harm to company
and embarrassment to dad, long-term effects, telling all the owners

? What is your most powerful and persuasive response to the
reasons and rationalizations?

? Verifying that vendor is not paid twice, using money for personal use is
stealing and no materiality test, challenges Jones about knowing, owners
need (have a right) to know

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Concluding Thoughts/Key Issues

? ?The road to success is littered with failures, but the
lessons learned are crucial in plotting your course to
success.? Kristi Loucks

? Kohlberg?s model of moral development
? Rest?s model of ethical decision-making
? Cognitive development
? Issues of moral intensity and virtue in Integrated

Decision-Making mode
? Behavioral ethics
? Moral reasoning skills
? Giving Voice to Values

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Video Links

? Ethics Relationships:

ure=related

? Personal Behavior:

? https://www.youtube.com/watch?v=6yXuNnjnnEA
? Case 2-9 Phar-Mor:

http://www.youtube.com/watch?v=NAMz8QR6c5w
? Case 2-10 WorldCom:

http://www.youtube.com/watch?v=7g_d-phoUrU
? https://www.youtube.com/watch?v=6yXuNnjnnEA

(Cynthia Cooper interview)

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