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8/10/2019 The Accounting Profession's Code of Ethics is It a Code of Ethics or a Code of Quality Assurance 2003 Critical Pers

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Critical Perspectives on Accounting(2003)14, 483503doi:10.1016/S1045-2354(02)00138-7

THE ACCOUNTING PROFESSIONS CODE OFETHICS: IS IT A CODE OF ETHICS OR A CODE

OF QUALITY ASSURANCE?

SIVAKUMARVELAYUTHAM

College of Business and Management, University of Sharjah,P.O. Box 27272, Sharjah, United Arab Emirates

A code of ethics has been the traditional means by which a profession assuresthe public and its clients of its responsibilities and thereby the maintenance of itsintegrity and reputation. As Abbott (1983) observes ethics codes are the mostconcrete cultural form in which professions acknowledge their societal obligations(p. 2). In this paper, it is argued that the accounting professions code of ethics hasmoved from a focus on moral responsibility for a public good to that of technicalspecification for a product or service. The replacement of the true and fair view re-quirement by compliance with accounting standards is highlighted as a major shiftin the focus of the code of ethics. This shift can be related to the professions needto legitimise itself within the wider public domain in which technique has replacedcharacter as an important virtue. It is concluded that code of ethics is misleading

and that code of quality assurance is more appropriate. The study is based on anevaluation of the code of ethics of the Institute of Chartered Accountants of NewZealand (ICANZ) and the Australian Society of Certified Practising Accountants(ASCPA).

2003 Elsevier Science Ltd. All rights reserved.

Introduction

A code of ethics has been the traditional means by which a profession assures thepublic and its clients of its responsibilities and thereby the maintenance of its integrity

and reputation. It is used as the principal support for a professions claim to workin the public interest. In one of the earlier articles on the professions, Greenwood(1957)states:

Through its ethical code the professions commitment to social welfare becomes a matter ofpublic record, thereby insuring for itself the continued confidence of the community. (p. 50)

More recently,Abbott (1983)points out that ethics codes are the most concretecultural form in which professions acknowledge their societal obligations. Most

E-mail: [email protected]

Received 18 May 2001; revised 10 February 2002; accepted 10 March 2002

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1045-2354/03/$ see front matter 2003 Elsevier Science Ltd. All rights reserved.


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484 S. Velayutham

professions employ formal and informal disciplinary procedures to support the en-forcement of their code of ethics.

Empirical studies, however, have raised major questions concerning the functionof the code of ethics in many professions (Taeusch, 1966; Kultgen, 1982; Parker,

1987)as well as the professions commitment to the enforcement of a code of ethics(Millerson, 1964; Carlin, 1966; Arthurs, 1970; Neu, 1991; Allen, 1991).Others haveargued that the code of ethics are merely smokescreens for the protection of sec-tional interest (Mitchell et al., 1994), and that they do not address the more importantissues such as social justice and equality (Ruland & Lindblom, 1992; Neimark, 1995;Dempsey, 2000).

The above scrutiny has contributed to a considerable amount of research onthe ethics of the accounting profession, ranging from the capacity among the ac-counting profession for ethical reasoning (Ponemon, 1990; Harrington, 1997), ma-

jor ethical problems in accounting (Finn et al., 1988) to the inclusion of ethics

in accounting education (Armstrong, 1987). The accounting profession in manycountries, e.g., Australia and New Zealand on its part have revised their code ofethics to reflect contemporary concerns (Preston et al., 1995) and put in placemore rigorous disciplinary procedures to support the enforcement of the code ofethics.

This paper seeks to ask a more fundamental questionWhat is the content of theaccounting professions code of ethics focused on? An evaluation of the Codes ofEthics of the Australian Society of Certified Practising Accountants (ASCPA, 1999)and the Institute of Chartered Accountants of New Zealand (ICANZ, 1999), highlightsthat although the codes consists of both ethical and quality elements, the main focusof the codes, as they are currently formulated, is quality rather than ethics. For theabove purpose, the paper examines both ethics and quality, and the content of thecode of ethics with respect to these concepts. In conclusion, it is suggested thatthe code of ethics should be replaced by a code of quality assurance. The codesof ethics referred to in the paper are primarily drawn from that of the accountingprofession in Australia and New Zealand.

The rest of the paper is organised into four sections. The next section identifies thefeatures of the concept of ethics, quality and quality assurance, and distinguishes theconcern of quality from that of ethics. The third section provides a brief description ofthe ICANZ and ASCPA code of ethics. The fourth section analyses and evaluates thecontent of the two codes of ethics to identify their bias and highlights the emergence

of a code of quality assurance. The last section consists of an explanation for therecent shift in the bias of the code of ethics towards quality, with some concludingremarks in the final section.

The Concern of Ethics and Quality

In contrast to the term function, which implies purpose, the term concern impliesrelationship or the interest of a particular concept. With this in mind, this sectionexamines the interest of the domain of ethics and quality, identifying the essential

and defining characteristics of both concepts.


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The accounting professions code of ethics 485

Ethics

Frankena (1973) in his introductory book on ethics refers to it as a branch of philoso-phy concerned with thinking about morality, moral problems and moral judgements.

He points out that

moral philosophy arises when we pass beyond the stage in which we are directed bytraditional rules and even beyond the stage in which these rules are so internalised that wecan be said to be inner directed, to the stage in which we think for ourselves in critical andgeneral terms, and achieve a kind of autonomy as moral agents. (p. 4)

Frankena (1973) further distinguishes three kinds of thinking or approaches tomoral philosophy, namely:

1. Descriptive empirical inquiry to describe and explain the phenomenon of moral-

ity and its occurrence, normally undertaken by anthropologists and sociologists.2. Normative inquiry on what is right, good or obligatory, leading to a normative

judgement like; Knowledge is good.

3. Analytical, critical, or meta-ethical thinking attempting to answer logical, orepistemological questions like How can moral or value judgements be estab-lished or justified.

The term ethics is also frequently used as just another word for morality, andfrequently used to refer to the moral code or normative theory of an individual orgroup. This seems to be the usage adopted when it is used in the contexts of pro-fessional codes of ethics. The above discussion, however, does not provide us withthe essential and defining characteristics of ethics other than its principal concernwith morality. A review of the ethics literature however, indicates that philosophers fora long time did not find the need to define the words moral and morality. Wallaceand Walker (1970)in their collection of readings on the Definition of morality statethat it is surprising that detailed and self-conscious examination of the concept orconcepts involved should not have been undertaken earlier (p. 1).

The collection of readings highlights a number of key features that a definition ofmoral or morality should possess. It is, however, important to emphasise that thereis no universal agreement on the features. Harris (1994) argues that the terminology

used in codes of ethics, the matters covered by them, and the situations in whichappeal is made to them, would appear to fit most easily into a deontological moraltheory of a Kantian kind. The features identified therefore follow more closely aKantian view of ethics. It is pointed out that an action-guide is moral only if one(Wallace & Walker, 1970,pp. 812):

1. universalises itthe codes of ethics are applicable to members of the profes-sion, and therefore this principle is nor meant to be applicable across time andspace, but rather that the code is to be treated as a categorical imperative,e.g., thou shall not kill rather than a hypothetical imperative, e.g., if you want

X do Y.


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486 S. Velayutham

2. takes it as prescriptivea statement in the code of ethics is to prescribe acourse of action rather than to describe a course of action.

3. regards it as definitive, final, over-riding, or supremely authoritative.

Others includingFrankena (1976)argue that a definition of morality should,in addition to satisfying the above formal criteria also fulfil the following:

4. rules and principles should pronounce actions and agents to be right, wrong,good, etc., simply because of the effect they have on the feelings, interests,ideals, etc., of other persons or centres of sentient experience, actual or hypo-thetical (or perhaps simply because of their affects on humanity) (p. 689).

Frankena (1973)in an earlier article focused more on defining moral judgements,principles and codes. He identified a moral code as a moral value system consistingof one or more moral principles taken as forming a complete moral guide. The

professional codes of ethics would probably most closely fit the description. Theabove article is also focused on the need to distinguish moral codes from non-moralcodes.Frankena (1976)emphasises that

normative judgements, principles and codes are moralones if and only if, (a) besides beinguniversalised, they are backed at least when challenged, by reasons consisting of factsabout what actions, traits and characters, etc., do to the sentient lives of those affected,including others if others are affected; (b) that such facts constitute moral considerationsor reasons because they matter from a certain point of view that includes having a certainconative (desire or will to perform an action) disposition; and (c) that this point of view is amoral one just because it includes a conative disposition responsive to such facts. (p. 192)

A review of the literature highlights that moral code in addition to being univer-

sal, prescriptive, and overriding should also be concerned with persons or sentientbeings and a disposition for voluntary action.

Callahan (1988)further emphasises that ethics should not be confused with law,prudence, and obedience to authority in general or mere opinions and taste. It ispointed out that the law could permit immoralities and that morality may permit orrequire breaking a law. Morality is also distinguished from prudence in that it takesone beyond mere self-interest, by requiring us to take the rights and interests ofothers into account (Callahan, 1988). On the third point Callahan points out thatgenuine morality involves maintaining moral autonomy, i.e., the right to questioncommands if there is any reason to believe that those commands involve an unjusti-

fiable infringement of rights or will lead to harm to persons or other sentient beings(p. 13).

Quality

Although the word quality is not a new introduction to the dictionary, the word hasreceived new prominence and meaning in the last 50 years with the emergenceof the quality control movement. The Concise Oxford Dictionary defines qualityas degree of excellence. Garvin (1984) is his review of the definition of qualityidentified five different approaches. The first approach follows from the dictionary

approach. This approach he calls the transcendent (transcend, to rise above or


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extend notably beyond ordinary limits) approach, and is probably the meaning ofthe concept. Proponents of this view (Pirsig, 1974, 1992; Tuchman, 1980) claimthat quality cannot be defined precisely; rather it is a simple unanalysable propertythat we learn to recognise only through experience: Quality doesnt have to be

defined. You understand it without definition, ahead of definition. Quality is a directexperience independent of and prior to intellectual abstractions (Pirsig, 1992, p. 81).This definition borrows heavily from Platos discussion of beauty (Dickie, 1971). Thisapproach to quality is also reflected in the age of craftsmanship during the middleages where the masters in the craft guilds knew quality and it was acquired byapprentices through experience (Evans & Lindsay, 1999).

The industrial revolution separated the planning function from the execution func-tion and contributed to the demise of the masterapprentice approach to manufac-turing. In this environment the transcendent approach was found to be subjectiveand indefinite for practical purposes (Shewhart, 1931):

Dating at least from the time of Aristotle, there has been some tendency to conceive ofquality as indicating the goodness of an object. The majority of the advertisers appeal tothe public upon the basis of the quality of the product. In so doing, they implicitly assume thatthere is a measure of goodness, which can be applied to all kinds of product, whether it bevacuum tubes, sewing machines, . . . or correspondence school courses. Such a concept,is, however too indefinite for practical purposes. (p. 37)

The concept has since gone through an evolution (Anand, 1997). The secondapproach identified byGarvin (1984)is the product/service-based approach, whichviews quality as a precise and measurable variable. This approach is summed up byAbbott (1955) as follows: Differences in quality amount to differences in the quantityof some desired ingredient or attribute (p. 126). This approach to quality would beclose to that prescribed by W.E. Deming, although he did not attempt to provide adefinition. The third approach named is the user-based approach, and starts fromthe premise that quality lies in the eyes of the beholder (Garvin, 1984,p. 27). Thisview was strongly pushed by J.M.Juran (1974)when he defined quality as fitnessfor use (p. 2).

The fourth approach is identified as the manufacturing-based approach, whichemphasises conformance to requirements (Crosby, 1979, p. 15). Excellence isequated with meeting specifications, and with making it right the first time (Garvin,1984, p. 28). The last approach identified is the value-based approach, which defines

quality in terms of costs and prices. This approach, in a way, attempts to combineeconomics with manufacturing and user based approaches.Garvin (1984)refers tothis as affordable excellence.

The above classification ofGarvin (1984)whilst providing a useful analysis of theuse of the word does not provide us with a clear conception of the word (Smith,1993). Smith (1993) in his attempt at conceptual analysis identifies a number offeatures in the usage of the term. First, it is emphasised that quality is a propertyterm or attribute, and refers to a characteristic of something.Smith (1993)points outthat, except for the neo-platonists who argue that quality exists independently of itsobjects, quality always has an objecta physical thing, state, process, etc.and

cannot be conceived as existing apart from its object.


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488 S. Velayutham

Second, it is pointed out that quality is an abstract characteristic, that encompassesa variety of more or less physical attributes (Smith, 1993).It is further emphasisedthat since it is made up of a number of attributes it cannot be measured directly, butthrough a measurement of its various attributes: Though such measurements can

serve as proxy or surrogate measures of quality, they are not measures of qualityitself (Smith, 1993,p. 236).

Third, quality is considered to be a relational attribute, i.e., when certain attributesapply to an entity, it characterises it only in relationship to something else. It isfurther highlighted that quality is frequently expressed with respect to an evaluativestandard or criterion. These standards may be objectivespecific measurementrequirements, or subjectiverepresents the interests, needs, preferences or valuesof an individual or group.

Fourth, because quality cannot be directly measured, its assessment is a judg-mental process:

Quality assessment entails determining user needs, identifying entity attributes or qualitycharacteristics which relate to those needs, assessing the entitys merits on each of theattributes, and consolidating these partial scores into a final judgement of quality. (Smith,1993,p. 236)

Based on the above analysis Smith (1993) provides the following tentativedefinition:

Quality is the goodness or excellence of something (product or service). It is assessedaccepted standards of merit for such things and against the interests/needs of users andother stakeholders. (p. 237)

Garvin (1984)also identifies eight dimensions of quality to provide a frameworkfor thinking about the basic elements of quality:

1. Performancerefers to the primary operating characteristics of a product;

2. Featuressecondary characteristics that supplement the products basicfunctioning;

3. Reliabilityreflects the probability of a products failing within a specified periodof time;

4. Conformancedegree to which a products design and operating characteris-

tics match pre-established standards;

5. Durabilitythe amount of use one gets from a product before it physicallydeteriorates;

6. Servicethe speed, courtesy and competence in the delivery of the product;

7. Aestheticshow a product looks, feels;

8. Perceived qualityperception of product based on image and advertising.

The last two dimensions are highly subjective. The dimensions identified are not

definitive and other authors (Parasuranam et al., 1991) have identified other lists.


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Table 1 Four stages of the quality movement

Identifying characteristic Inspection Statistical quality Quality assurance

date of inception (1800s) control (1930s) (1950s)

Primary concern Detection Control Co-ordination

View of quality A problem to be

solved

A problem to be solved A problem to be solve

but one that is attacke

proactively

Emphasis Product uniformity Product uniformity with

reduced inspection

The entire production

chain, from design to

market

Methods Gauging and

measurement

Statistical tools and

techniques

Programs and system

Orientation and

approach

Inspects in quality Controls in quality Builds in quality

Adapted fromGarvin (1988, p. 37).


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prevents one from making arbitrary decisions in respect of given individuals. Incontrast to the above, a quality statement would be relative to an entity, prod-uct or service. If one follows the value based approach to defining quality thenthe quality statement would vary with the price. It is important to emphasise that

relativity of quality statements is different from the concept of relativism in ethics.The concept of relativism in ethics maintains that there are no universal standardsof good, bad, right and wrong (Flew, 1979). Relativism recognises difference invalues in different cultures and time, a code of ethics seeks to guide the behaviourof its members during a particular time in a particular country or countries,relativism would be an essential consideration for a study comparing differentcodes.

Third, ethical statements are usually expressed in very generalterms, e.g., oneought to keep ones promises. In contrast to the above, quality terms are very specificwith measurement for each attribute. The specificnature of quality control and the

specifications that follow from measurement contribute to other activities such asquality control and quality assurance. While quality control is concerned with theapplication of principles of statistics and probability to production and service deliveryproblems, quality assurance is an auditing function to assure that the quality controlfunctions were effectively carried out.

Fourth, whilst both ethics and quality are expressions of attitudes, the former is con-cernedwith attitudes which are moral(Spriggle, 1964), while the latter is concernedwith attitudes which are tastesabout products and services. Ethical judgementsare evaluative following from attitudes about what is good, bad, right and wrong,while quality judgements are evaluative with respect to standards based on specifictaste.

Fifth, ethical acts and judgements frequently follow from the attitudes of the firstperson or the actor, while quality judgements frequently follow from attitudes ofthe third personthe audience or consumer.Frankena (1973)refers to the formeras having a certain conative disposition. May (1975) argues that the provision ofprofessional services can adapt a covenant approach or a contractual approach.May (1975)distinguishes the covenant approach as follows:

As opposed to the ideal of philanthropy that pretends to wholly gratuitous altruism, covenan-tal ethics places the service of the professional within the full contexts of goods, gifts andservices received; thus covenantal ethics is responsive. As opposed to the instrument ofcontract that presupposes agreement reached on the basis of self-interests, covenantal

ethics may require one to be available to the covenant partner above and beyond the mea-sure of self-interest; thus covenantal ethics has an element of the gratuitous in it.

Following from the above distinction a covenant approach to the provision of ser-vices emphasises the attitudes of the first person, while quality specifications followfrom a contractual approach to the provision of services and emphasises the atti-tudes of the third person.

Other differences between ethical statements and quality statements that followfrom the earlier include a strong focus on measurement in quality standards asopposed to ethical codes. The quality movement also places considerable emphasison techniquessuch as statistical methods while codes of ethics place a great deal of

emphasis on education and characteror the development of virtues. Furthermore,


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Table 2 Distinction between ethics and quality

Ethics Quality

Emphasis on sentient beings Emphasis on product or serviceUniversalisable Relative

General SpecificAttitudes which are moral Attitudes relate to tasteAttitudes of actor or first person

to third personAttitudes of consumer or third personbinding on actor

Frequently non-measurable MeasurableDefining feature of character Defining feature of techniqueAutonomy as moral agent Lack of autonomyconformanceBeyond price and cost Price and cost based

as pointed out at the beginning of our discussion of ethics, autonomyfor the actor asa moral agent is an essential feature of ethics, quality on the other hand emphasises

conformance. Whilst cost and price are also not major features of a discussion ofethics, there are important considerations in quality assurance systems (Garvin,1984). The differences between ethics and quality are summarised in Table 2. Insummary the central distinction between ethics and quality is the object of interest,in ethics it is sentient beings, while in quality it is products and services. This sectionprovides the framework for analysing and evaluating the focus of the ICANZs andASCPAs code of ethics.

The ICANZ and ASCPAs Code of Ethics

Different professional bodies use different terms for their codes of ethics. For exam-ple, the Institute of Chartered Accountants of New Zealand (ICANZ) uses the termCode of Ethics (COE) while the Australian Society of Certified Practising Accoun-tants (ASCPA) uses the term Code of Professional Conduct (CPC). The use of theterm Code of Professional Conduct by the ASCPA, rather than, the term Code ofEthics as used by ICANZ probably indicates an attempt by the ASCPA to widen thedomain of its code to include areas other than ethics. The ICANZ in addition to theCode of Ethics also issued a new class of statements referred to as professionalstandards, and at the moment has only one Professional Standard (PS-1) on QualityControl.

Both the COE and CPC is divided into three main sectionsIntroduction, whichhighlights the objective and purpose of the code of ethics, its applicability and com-pliance;Fundamental Principles, these principles are to express the basic tenets ofethical and professional conduct; and Ethical Provisions (COE) or Statements andBy-laws (CPC).

The Introduction section of both the COE and the CPC highlight the need for thestatements, e.g., One of the hallmarks of a profession is the commitments by itsmembers to high standards of professional conduct . . . . The Societys Code of Pro-fessional Conduct is designed to provide members with authoritative guidance onacceptable standards of professional conduct (CPC); and Those who pursue a vo-

cation in which knowledge and skills are offered in the service of the affairs of others,


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have responsibilities and obligations to those who rely on and are affected by theirwork. It is the duty of a governing professional body to identify those responsibilitiesand obligations and codify them for the benefit of both the providers and recipientsof their skills (COE).

The other major part of the Introduction of both the COE and CPC emphasises theneed to comply with the code by all members of the professional body supported bythreat of disciplinary action for non-compliance.

The second section consists of Fundamental Principles that express the basictenets of ethical and professional conduct. The COE of the ICANZ and the CPC ofthe ASCPA share a common set of fundamental principles with some variation inthe ordering of the principles and the wording. They are:

(a) Public interest;

(b) Integrity;

(c) Objectivity and independence;

(d) Competence and due care;

(e) Professional behaviour or image of profession;

(f) Compliance of technical standards and other standards of the body; and

(g) Confidentiality. Each of the above principles is accompanied by a short para-graph of explanation in both the COE and CPC.

The third section is made up of a number of Ethical Provisions (EP), Ethical Guide-lines (EG) in the COE, or Statements and By-laws in the CPC. This section is toconstitute the enforceable part of the code. The COE has some 88 EPs dividedinto eight classes on the use of descriptions and designations, method of practice,matters affecting service to clients and standards of work, relations with employers,technical dealing with certain services, client monies and members trust accounts,promotion of professional services and relations with other members, and compli-ance. The COE also consists of two EGs dealing with independence and on ethicsin tax practice.

The Statements and By-laws in the CPC are divided into four classes, namely

those applicable to all members, applicable to members providing public accountingservices, those contained in other parts of the members handbook relevant to spe-cific aspects of professional conduct, and professional statements. The first classapplicable to all members mainly provides guidelines on the preparation of legal doc-uments. The main issues in the second class relate to professional fees, funds heldin trust and client monies, practice names and descriptions, referrals and changes.The third class requires compliance with accounting, auditing, taxation, and man-agement consulting services standards, engagement letters, general quality controlstandards, policies and procedures, and forms of practice. The last class includesdetailed statements on independence, professional fees, client monies, referrals and

changes in professional appointment.


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An Evaluation of the ICANZ and ASCPAs Code of Ethics

To identify the focus of the accounting professions code of ethics one must scrutinisethe structure of the code of ethics as well as the purpose of the code of ethics. It is

also not sufficient to just look at the code of ethics but also the relationship of thecode of ethics to other pronouncements of the accounting profession.

It was earlier pointed out that the use of the term CPC by the ASCPA, was probablyto widen the domain to include other areas. The rationale provided for the CPCseems to reinforce the above. An analysis of the rationale shows it to be circular withno clear definition of the use of the term professional. The rationale for the COE, incontrast to that of CPC, is clearly identified as one of codifying the responsibilities andobligations of accountants to those who rely on their services. The above rationalecould be well adopted for a code of quality assurance.

Collins and McRae (1987)point out that the fundamental principles section of a

code of ethics is to be goal-oriented, positively stated and inspirational. Its intent is toencourage members to go beyond the minimum framework of the present rules in thespirit of professionalism. The purpose of the fundamental principles section appearsto be similar to the mission statements of many companies. Of the above seven fun-damental principles in the COE and CPC, those principles that the profession is mostconcerned about (Finn et al., 1988;Leung & Cooper, 1995), e.g., independence,compliance with standards and competence, and the need to be enforced are sup-ported by other statements or guidelines. For example, both the COE and CPC havea separate ethical guideline (COE) or professional statement on independence andobjectivity. The requirement to comply with technical and other standards impliesthat accounting and auditing as well as quality standards are subsidiary parts of the

code of ethics and therefore in analysing the code these standards should be takeninto account. The need for integrity seems to be a major ethical issue in the taxationarea and both the COE and CPC have separate statements or EG for Tax Practice.

In evaluating the concern of the COE and CPC, an important question is whetherthe fundamental principles are law like statements or ethical principles that providefor a kind of autonomy as moral agents. Most of the fundamental principles like pub-lic interest, integrity, independence, competence and due care, and confidentialityseem to be focused on character and therefore considered to be general ethicalprinciples. In contrast, the other fundamental principles like compliance with techni-cal and other standards and, professional behaviour could not be considered to be

ethical principles since their compliance depends on law like statements and qualitystandards, which do not provide for autonomy in decision making. Second, the laterprinciples pronounce actions and agents to be right, wrong, good and bad based onrules and regulations rather than on the effect they have on the feelings, interests ofother persons or sentient beings.

It seems however that fundamental principles that appear to be ethical state-ments, e.g., public interest are not meant to be enforceable and frequently in conflictwith other sections like EG and accounting standards as illustrated byRuland andLindblom (1992).They show that accountants sometimes have a genuine conflictbetween duties to comply with professional rules and duties to disclose information

in the public interest.


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It is important to note that compliance with accounting and auditing standards isa recent addition to the code of ethics of the accounting profession. Prior to the1940s there were no accounting or auditing standards and financial reporting wasguided by the principle of presenting a true and fair view of the state of affairs of the

entity. Rutterman (1984) points out that this principle was a very powerful force in theregulation of company financial reporting in combining both fairness of presentation(that is freedom from bias as between different users of financial statements) andthe recognition of economic substance rather than mere legal form. The true andfair view approach views accounting information as a public good like other formsof knowledge which could be useful to a range of people in different circumstances.The focus of the accountant from this perspective is the entity, to represent the affairsin a truthful manner just as a researcher.

The true and fair view requirement also provided the accounting profession witha moral purpose similar to the other professions, e.g., the Hippocratic Oath of the

medical profession, and that of the legal profession to uphold justice. The accountingfunction could be seen as one promoting social justice (truth and fairness) throughthe provision of information. To ensure that financial statements presented infor-mation truly and fairly, was a covenant that auditors entered into with users of thefinancial statements in contrast to a contract that an auditor enters into with a firm.The other elements of the code of ethics are then developed to support this moralpurpose. The true and fair view requirement was an ethical principle. It was con-cerned with the impact of information on sentient beings and provided for a kindof autonomy to the accountant and auditor as a moral agent. True and fair was auniversal prescriptive requirement to guide the actions of accountants.

The principle of presenting a true and fair view is, however, now considered an

anachronism (McGregor, 1991),and calls have been made for its total removal fromcorporate law. Waller (1990) points out that . . . the latitude implied by the words trueand fair view has become so great as to render many sets of accounts meaningless(p. 53). The compliance with accounting and auditing standards requirement is fun-damentally different from the true and fair view requirement. The former assumesaccounting information to be a product or service (Hanlon, 1994). This is very ap-parent in the way accounting and auditing standards are framed.

Underlying accounting standards is a conceptual framework or a statement ofconcepts. The conceptual framework is based on the information needs of users:

The objectives of general purpose financial reporting are to provide information to assistusers in: (a) assessing the reporting entitys financial and service performance, financialposition and cash flows; . . . . (Statement of Concepts, ICANZ, p. 4)

Following fromGarvins (1984)eight dimensions of quality, the above representsthe performance dimension against which the product or service is to be measured.The components of the financial report (balance sheet, income statement) and sup-plementary statements (statement of accounting policies, auditors report) representthe features of the product or service. The conceptual framework also identifiesqualitative characteristics such as reliability and relevance. Standards (accountingstandards) are then developed to ensure that the product or service meets the per-

formance dimensions identified earlier.


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496 S. Velayutham

The purpose of quality assurance is not only to detect or control quality but alsoto build in quality through programs and systems at every stage of the productionprocess. Auditing standards represent the programs and systems that auditors musthave in place to ensure a quality product or service. This is reflected in the type of

auditing standards developed for different stages of the processdesign (terms ofaudit engagement, and planning), production or preparation (audit evidence and sta-tistical sampling and testing) and delivery (auditors report on financial statements).The accounting profession also has quality assurances processes in place like theReview Program of the ASCPA (PP 5).

The shift to a product or service view of accounting information is also supportedby the accounting professions desire to limit its liability to third parties who relyon financial reports and in proportion to their responsibility (Gwilliam, 1997). Theresponsibility of auditors then becomes more limited to its clients and identifiedusers.

Following from the moral purpose of providing a true and fair view, independenceand objectivity were identified as essential prerequisite to achieving the above pur-pose. It was presumed that if auditors were independent there would be no incentiveto be dishonest. It is however, a major ethical issue for the accounting professionbecause accounting firms, which provide auditing services, frequently want to pro-vide other services to the client as well. Following from the above the most impor-tant concern of the principle of independence and objectivity is the prevention ofsituations of conflict of interest and excessive reliance of particular clients for itssurvival.

Recently this principle has been framed in a totally different fashion. It is not iden-tified as an ethical principle, but rather as a factor affecting the quality of a product orservice. This view is succinctly articulated byAllen (1997)Chairman of the Indepen-dence Standards Board (ISB) in the recent Seymour Jones distinguished lecture:

. . . the first important point that I suggest to you is that we should keep in mind that auditorindependence is not a value in and of itself. Independence in this context is an instrumentalvalue. We value it because we think it helps produce something else: efficiency (of thecapital markets and thus efficiency of the economy as a whole). (p. 3)

There are many values as well as technology that contribute to efficiency but wewould not refer to them as ethical values. Second, as has been pointed out whenwe refer to something as ethical, they are important values in themselves. Following

from the perspective that independence is an instrumental value, Allen (1997) arguesthat independence regulation should be a costbenefit exercise: Losses that mayarise from flawed auditsincluding flaws that may arise from auditor dependenceshould be reduced, but not regardless of the price entailed in doing so (p. 5). Thisapproach to independence is very similar to Garvins (1984) last approach to definingquality in terms of cost and prices.

Following from this view of independence, the Ethical Guidelines (EG) ofICANZ and Professional Statements of the ASCPA identify the situations whichmight contribute to a compromise in independence. The conceptual frameworkguiding financial reporting in New Zealand (Statement of Concepts) and Australia

(Statement of Accounting Concepts) identify relevance, understandability, reliable,


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neutrality and comparability as important quality characteristics of financialreports and accounting information. The fundamental principles of independenceand objectivity are supposed to ensure the achievement of the above qualitycharacteristics.

The third section of the COE and CPC consisting of EP and Statements andBy-laws that constitutes the enforceable part of the code are made up of detailedrules. Rules concerning the use of descriptions and designations, methods of prac-tice, relations with employers, and the promotion of professional services and re-lations with other members are mainly focused on the protection of the professionrather than society (Parker, 1987).Parker (1987)points out that these ethical pro-nouncements are supposed to avert potential threats to the professions reputationand market, to counter any potential infringements upon its scope of services bynon-members, and to avoid potentially destructive internal competition within theprofession for resources and markets (p. 129).

The other EP and Statements and By-laws, like matters affecting services to clientsand standards of work could be identified as very much concerned with quality, whilethat on client monies and members trust accounts, and professional fees could beconsidered to be focused on ethics. The latter provisions are focused on ensuringgeneral ethical principles such as honesty and fairness.

The most interesting introduction to the accounting jargon in recent times wouldbe the term quality control itself. The ASCPA and the Institute of Chartered Accoun-tants in Australia (ICAA) issued two miscellaneous professional statements calledAPS4Statement of Quality Control Standard and APS5Quality Control Policiesand Procedures in 1982. These two statements introduced the term quality controlto the accountants handbook in Australia. In New Zealand, the ICANZ issued Pro-fessional Standard No. 1 (PS-1) in 1998. All three standards on quality control areaddressed at the accounting firm or practice rather than the individualThe pur-pose of this Professional Standard is to establish standards and provide guidanceon (a) quality control policies and procedures of an accounting firm regarding workgenerally; and quality control procedures regarding the work delegated to assistantson an individual engagement (PS-1, para 1).

This focus on the firm follows from recognition by the accounting profession inter-nationally that responsibility for maintaining quality of work invariably rests with thefirm rather than the individual (Institute of Chartered Accountants in England andWales, 1986). The quality control standards seems to be an extension of the COE

or CPC to the firm, taking into account the nature of the firm: Quality is maintainedthrough compliance with the Code of Ethics, Professional Standards and Profes-sional Engagement Standards issued by the Institute (PS-1, para 9). The qualitycontrol standards therefore are focused on such areas as supervision, delegation,client evaluation, and inspection and review.

This section sought to evaluate the content of the accounting professionscode of ethics. The fundamental principles of the code of ethics with the excep-tion of compliance with standards seem to be ethical statements. Their statementsseem to be universalisable, i.e., imply a universal judgement on the actions of allmembers of the professional body. They have been identified because violation

of those principles by accountants could have adverse effects on sentient beings


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than society set for other groups (De George, 1990). De George further emphasisesthat professionals were expected to follow a higher standard in their personal as wellas their professional conduct.

Many of the services provided by professionals were also considered not to be

limited to the private domain but were considered to be public goods. The aboveview contributed to large scale subsidisation of some professional services bythe state, e.g., free health care and legal aid; and therefore the terms of the ser-vice was to go beyond individual customer specifications. Because of the above, andthe view that professional services were based on complex knowledge (Greenwood,1957),the provision of professional services was not determined by specific stan-dards, but rather general goals as represented by the Hippocratic Oath in medicine.Similarly, financial reports were to provide a true and fair account of the finan-cial position of the company, rather than based on compliance with accountingstandards.

Whilst Greenwood (1957) and Abbott (1983) have pointed out that the professionscode of ethics is a means of acknowledging societal obligations and ensuring thecontinued confidence of the community, the literature seldom identifies in what waya lack of professional ethics or virtues affects professional reputation and/or publicinterest. One plausible explanation in the literature is that the code of ethics provideslegitimacy to professional work (Abbott, 1988). It is pointed out that legitimation

justifies both what professions do and how they do it. Legitimating work connectsprofessional diagnosis, treatment and inference to central values in the larger culture,thereby establishing the cultural authority of professional work (Abbott, 1988). Abbott(1988) points out that legitimation both establishes that the results produced bysuccessful professional work are culturally valued results, and that they are producedin a culturally approved manner.

Abbott (1988)identifies a fundamental shift in society and consequently profes-sions, from legitimacy of character to legitimacy of technique. It is argued thatin the twentieth century character lost much ground to science and technology,and its emphasis on rationality and efficiency (Abbott, 1988).This shift in the ba-sis for professional legitimacy is broadly reflected in the education and trainingof professionals. Professional examinations focus on technical competence ratherthan personal moral values. Although ethics is included in professional examina-tions it is but a small part. Probably the only moral sanction than might preventa technically competent person from admission to a professional body is a crim-

inal record. Another crucial question is whether a client is more interested in themoral values of a professional or his/her technical competence. If ethics was thedefining feature of character then quality can be identified as the defining fea-ture of technique. For the above reasons, the current concern with ethics in pro-fessions can be attributed to its impact on the quality of professional servicerendered.

Quality also attaches itself to impersonal subjects, e.g., product and service whileethics attaches itself to human subjects. This makes the concept of quality more con-sistent with contemporary values of moral minimalism highlighted byBaumgartner(1988).It is highlighted that people show a considerable degree of embarrassment

and discomfort whenever interpersonal tensions arise, and this frequently arises


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500 S. Velayutham

with ethical judgements while there is less interpersonal tension in judgements ofquality.

Wolfe (1989)points out that the claims of the market and the state has contributedto the demise of the moral claims of the civil society. Wolfe (1989)argues that the

dominance of the market in our lives makes that of being a good consumer ourprincipal moral obligation in society: my obligation to you is to do what is best forme (p. 7). He also points out that in contemporary society moral obligations isequated to financial obligation:

if fiduciary experts tell us we need to raise the social security tax to keep the fund fromgoing bankrupt, our obligation to the previous generation is resolved for us, and we needneither praise nor blame ourselves for whatever results. (p. 14)

It is also pointed out that the dominance of the state minimises our moral obliga-tions: the care of others is not my responsibility, but that of government agencies.

When we discuss quality, we also refer to the control of quality, how we measurequality, what policies do we have in place to ensure quality, and what indemnity willbe made for defective quality. The above attributes of quality seem more in harmonywith the modern technological society with its emphasis on measurability, consumerand control, which are not important attributes of ethics. The concept of quality withits focus on contracts is more consistent with current values that emphasise thereplacement of moral obligation with financial obligation (Wolfe, 1989). The penaltyfor deficient quality is frequently financial indemnity which focuses on the damagessuffered by the user of a product or service whilst the penalty for the non-observanceof ethics focuses on the provider of the service.

Whilst the content of the code of ethics has evolved the profession has sought toretain the term code of ethics and some moral concepts such as public interest. Theaccounting profession has attempted to legitimise a new commercial ideology withintraditional discourse (Neimark, 1995; Dempsey, 2000). It represents the mixing oftwo inherently incompatible syndromes, the commercial (quality) and the guardian(ethics) (Jacobs, 1992).Just as Jacobs attributes many of the scandals of the 1980to the mixing of the two systems, many of the accounting scandals probably can beattributed to the same.

It is probably time that the accounting profession separated the two syndromes andprovided a terminology (code of quality assurance) more appropriate to the content.The focus on quality would, however, require major re-orientation in how professions

see themselves and the service they provide. First, the traditional professionalclientrelationship, in which the professional is considered to possess special competencein a specific area and therefore assumed to know what is good for the client better thatthe clients themselves has to change. The professional has to rather see the clientas a consumer who has certain needs which the professional must first understandand then design his/her service to meet those needs.

Second the profession must define what constitutes quality service and must iden-tify means of measuring the variables that contribute to quality service. The iden-tification and measurement of what constitutes quality service would enable theprofession to put in place policies and procedures to ensure the provision of quality

service by its members.


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Conclusion

In recent times, ethics has attracted considerable interest in professional practiceand accounting education curricula debates. Central to the renewed interest in

ethics, is the professions code of ethics. It has been accepted without questionthat the main focus of the code of ethics is moral responsibility. This paper chal-lenges the above implicit assumption, and provides an alternative viewthat themain concern of the code of ethics is quality.

To this end, the paper distinguishes the concern of ethics and quality. It is high-lighted that the primary interest of ethics is the feelings, interest and ideals of sentientbeings while quality is focused on products and services. It is shown that whilst thecodes consists of ethical and quality elements, the main focus of the codes as theyare currently formulated is quality rather than ethics. The ethical elements are mainlyconcentrated in the fundamental principles section of the codes, which are goal ori-

ented and inspirational but frequently having little impact on professional practicesince they are not generally enforceable. It is pointed out that the replacement ofthe true and fair view requirement underlying financial reporting by the compliancewith standards requirement shifted the focus of the codes from ethics to quality.The focus of the codes shifted, from the ideals of sentient beings to standards for aproduct or service. The replacement also eliminated the moral purpose underlyingfinancial reporting. It contributed to a fundamental shift in the view of accountinginformation, from that of a public good to that of a product or service. This shift, it ispointed out, can be attributed to the professions need to legitimise itself within thewider public domain in which technique has character as an important value.

It is therefore argued that the term code of ethics is misleading to those who rely

on it. A more appropriate term would be a code of quality assurance. This wouldhighlight to customers what they can expect with respect to the service they receive.The attention of the profession would also be more focused on the delivery of qualityservice rather than be distracted by debates on ethics.

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the accounting profession's code of ethics is it a code of ethics or a code of quality assurance...

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