ETHICS CASE: Where Were the Accountants? Sam, Im really in trouble. Ive always wanted to be an accountant. But here I am just about to apply to the accounting firms for a job after graduation from the university, and Im not sure I want to be an accountant after all. Why, Norm? In all those accounting courses we took together, you worked super hard because you were really interested. Whats your problem now? Well, Ive been reading the business newspapers, reports, and accounting journals lately, and things just dont add up. For instance, you know how we have always been told that accountants have expertise in measurement and disclosure, that they are supposed to prepare reports with integrity, and that they ought to root out fraud if they suspect it? Well, it doesnt look like they have been doing a good job. At least, they havent been doing what I would have expected. Remember, Norm, were still students with a lot to learn. Maybe you are missing something. What have you been reading about? OK, Sam, here are a few stories for you to think about:

1. In this article, Accountants and the S & L Crisis, which was in Management Accounting in February 1993, I found the argument that the $200 million fiasco was due to the regulators and to a downturn in the real estate market, not to accounting fraud but I dont buy it entirely. According to this article, rising interest rates and fixed lending rates resulted in negative cash flow at the same time as a decline in value of the real estate market reduced the value underlying S & L loan assets. As a result, the net worth of many S & Ls fell, and regulators decided to change some accounting practices to make it appear that the S & Ls were still above the minimum capital requirements mandated to protect depositors funds. Just look at this list of the seven accounting practices or problems that were cited: write-off of losses on loans sold over the life of the loan rather than when the loss occurred, use of government-issued Net Worth Certificates to be counted as S & L capital, use of deals involving up-front money and near-term cash flow, which would bolster current earnings at the expense of later, inadequate loan loss provisions due to poor loan monitoring, write-off of goodwill created on the merger of sound S & Ls with bankrupt S & Ls over a forty-year period, write-ups of owned property based on appraisal values, and lack of market-based reporting to reflect economic reality. The problem, for me, is that many of these practices are not in accord with generally accepted accounting principles [GAAP] and yet the accountants went alongat least they didnt object or improve their practices enough to change the outcome. Why not? Where were the accountants?

2. I am also concerned about the expertise the accounting profession claims to have in terms of measurement and disclosure. For example, recently there have been many articles on the health costs created by smoking, yet there are no accountants involved. For instance, a May 1994 report by the Center on Addiction and Substance Abuse at Columbia University estimates that in 1994 dollars, substance abuse will cost Medicare $20 billion in inpatient hospital costs alone and that tobacco accounts for 80 percent of those hospitalizations. Over the next twenty years, substance abuse will cost the Medicare program $1 trillion. No wonder the trustees of the Medicare Trust Fund released a report on April 21 predicting that the Fund would run out of money in seven years. These are important issues. Why do we have to wait for economists and special interest groups to make these calculations? Shouldnt accountants be able to make them and lend credibility and balance in the process? Wouldnt society benefit? Where were the accountants?

3. What about the finding of fraud? Are auditors doing enough to prevent and catch fraudulent behavior? I know what our professors say: auditors cant be expected to catch everything; their job is not to search for fraud unless suspicions are aroused during other activities; and their primary task is to audit the financial statements. But arent the auditors just reacting to discovered problems, when they could be proactive? Couldnt they stress the importance of using codes of conduct and the encouragement of employees to bring forward their concerns over unethical acts? Why is proactive management appropriate in some other areas, such as ironing out personnel problems, but reactive behavior is appropriate when dealing with fraud? Reactive behavior will just close the barn door after the horse has been stolen. In the case of the Bank of Credit & Commerce International (BCCI), for example, at least $1.7 billion was missing. I guess Im having second thoughts about becoming a professional accountant. Can you help me out, Sam?

Question 1. What would you tell Norm?

Outline:

1. Identify the problem What are the major moral or ethical issues raised Who are the primary stakeholders 2. Outline and develop alternative courses of action What are the main alternative courses of action Are there any unknown facts that may be relevant to deciding the case 3. Construct ethical arguments Identify moral principles or ethical codes of conduct that can be utilized to support a conclusion as to what should be done in regards to the assigned case. 4. Evaluate and defend the argument(s) Determine whether there are any assumptions in your argument(s) Determine whether there are any unresolved issues in your argument(s) Determine whether your argument(s) involve logical errors 5. Make a Decision Decide which of the identified options you would recommend as the best way to deal with the issue presented in the assigned case based upon the argument with the strongest ethical reasoning. Determine how someone might try to argue against your argument using other ethical reasoning and present a counter-argument in defense of your judgment.