topic 5 ethical decision-making models

112/04/22 1

Topic 5Ethical Decision-Making Models

112/04/22 2

The Complexity Of Making Ethical Decisions

Different stages of moral developmentRequiring trade-offs between stakeholders’

interestsMultiple alternatives with unclear outcomesDifferent decision criteria and standards

leading to inconsistent decisionsNeed for using decision-making models

112/04/22 3

The Usefulness Of A Decision-Making Model

A useful tool for decision-making activities A framework for systematic analysis Resulting in actions with better justifications

Decision-making models The American Accounting Association Model The Laura Nash Model The Mary Guy Model The Independent Commission Against Corruption

Model

Jonathan’s Dilemma Jonathan newly joined DEF International, a big trading company in HK, as chief accountant. His subordinate, Tom, a professional accountant and the accounting manager of the company as well as the brother of his fiancee, Mary, had access to cash held by the company and was responsible for preparing both the receivables and payables accounts. During the year, Tom experienced a major financial problem. While reviewing the company’s financial statements, much to Jonathan’s surprise, he discovered that Tom had manipulated accounting records and had been involved in ‘teeming and lading’ in which he delayed the recording of receipts from debtors and sped up the recording of payments to creditors. This was to conceal the fact that he had withdrawn a substantial amount of money from the company without approval. When Jonathan discussed this with Tom, he was asked to keep the secret as the disclosure would ruin Tom’s career. When Mary knew of the case, she strongly urged Jonathan to help her brother and promised she would repay all the amounts owed to the company for Tom immediately. Should Jonathan blow the whistle and disclose Tom’s misconduct?

112/04/22 5

The AAA Model (7 Steps) :

Step 1 : Determining the factsStep 2 : Defining the ethical issuesStep 3 : Identifying major principles & rulesStep 4 : Specifying the alternativesStep 5 : Comparing values and alternativesStep 6 : Assessing the consequencesStep 7 : Making your decision

112/04/22 6



What – Tom had fraudulently withdrawn money form the co.Who – Self, Tom, Mary, Company & shareholders, Other staff, Accounting profession, Where – In the companyWhen – When Tom experienced a major financial problemHow – Withdrawn money by manipulating accounting records

112/04/22 7



Primary Stakeholders Self, Tom, Mary, My company & shareholders,

Other staff, Accounting profession

Ethical issue Whether I should keep the secret for Tom?

112/04/22 8



Principles: Integrity; Accountability; Honesty; Fairness; Truthfulness; Loyalty; Care for family…

Rules: HKSA Prof. Ethics Statements: 1.203 & 1.290C

Company’s code of conduct & corporate culture

Theft Ordinance

112/04/22 9



Alternatives:a)Keep the secret and do nothingb) Keep the secret and help Tom to cover up his act by

manipulating the accounting recordsc)Keep the secret and let Mary pay back the company as

soon as possibled) Keep the secret, ask Tom to resign and review the

accounting procedures to prevent similar incidents from happening again

e)Refuse Tom’s request and report to the management/ICAC

f) Resign from the company; and…….

112/04/22 10



• Alternative (b) violates major principles and rules, and may even break the law

• Alternatives (a) & (f) can not solve the problem, the acts compromise values such as honesty, loyalty……

• Alternatives (c) & (d) can not commensurate with moral principals such as loyalty, honesty, fairness truthfulness, responsibility and integrity

• Alternative (f) abides HKSA Ethics statements 1.203 & 1.209C; and meets the requirements of company rules and major moral principals and values

112/04/22 11



Report Tom’s fraudShort Term• I may be promoted by the top management•Company’s assets/funds will be preserved•Will hurt Mary and her family’s feelings, and jeopardize

my relationship with Mary•Will ruin Tom’s career prospects, he may face

prosecutionLong Term•Satisfied for not to trade-off my personal values•Tom may change for the better•Mary may eventually understand and forgive me•Cultivate a healthy and ethical corporate culture•Promote the reputation of the profession •Entrust the public’s confidence in the profession

112/04/22 12



Not report Tom’s fraud Short term (if Tom’s act is not discovered)•Strength my relationship with Mary•Tom can keep the job, and not be prosecuted•Compromise my professionalism of not being independent and objective

•Substantial financial loss to the companyLong term (if Tom’s act is discovered)•I may face disciplinary action taken by the profession body and ruin my own career prospects

•Affect the corporate culture. Impair company’s reputation

•May taint the reputation of the profession•May affect public confidence in the profession

112/04/22 13



Balance the consequences achieved in step 6 against the primary principles and values

evaluated at step 5, and select the alternative that best fits

112/04/22 14

The Mary Guy Model (10 Steps) :

Step 1 : Defining the problemStep 2 : Identifying the goal to be achievedStep 3 : Specifying all dimensions of the problemStep 4 : Listing all possible solutions to the

problemStep 5 : Evaluating each alternative

• I have discovered that Tom, my future brother-in-law, had stolen money form the company

• He had withdrawn money by manipulating accounting records

• My fiancée, Mary, promised to repay all outstanding amount immediately

Next five steps ...

112/04/22 15




Whether to disclose Tom’s fraudulent activity to the company

Next five steps ...

112/04/22 16




What –Tom had fraudulently withdrawn money form the co.Who – Self, Tom, Mary, Company & shareholders, Other staff, Accounting professionWhere – In the companyWhen – When Tom experienced a major financial problemHow – Withdrawn money by manipulating accounting records

Next five steps ...

112/04/22 17




Alternatives:a) Keep the secret and do nothingb) Keep the secret and help Tom to cover up his act by manipulating the accounting recordsc) Keep the secret and let Mary pay back the company as soon as possibled) Keep the secret, ask Tom to resign and review the accounting procedures to prevent similar incidents from happening again e) Refuse Tom’s request and report to the management/ICACf) Resign from the companyg)……..

Next five steps ...

112/04/22 18




Alternatives (a), (b), (c), (d)•Pros: strengthen relationship with Mary; Tom can be protected•Cons: financial loss to the company; unfair to other staff; taint the reputation of the profession; compromise rules, values….

•Risk (unintended consequences): (a) & (b) - high chances for the auditors to find out in an audit. Tom can not be longer protected as intended.

(a): my own career prospects might be ruined for being disloyal

=> High risk, costs are greater than benefits (b) – I might be even prosecuted for conspiracy

=> Higher risk, higher costs(c) – chances for being caught is reduced => low risk, costs=benefit(d) – chances for being caught is reduced, but Tom will loss his job

=> low risk, costs are greater than benefits Next five steps ...

112/04/22 19


Step 1 : Defining the problemStep 2 : Identifying the goal to be achievedStep 3 : Specifying all dimensions of the problemStep 4 : Listing all possible solutions to the problemStep 5 : Evaluating each alternative

• (e) – Pros: company’s assets/funds will be preserved; fulfilled my responsibilities and meet the professional and legal requirements, satisfied personal values; protect reputations of my company and the accounting profession

- Cons: hurt Mary’s feelings, jeopardize our relationship; ruin Tom’s career prospects, hemay even be prosecuted

- Risk (intended/unintended consequences) => no risk, benefits greater than costs

• (f) – Costs higher than benefit, problem is unsolved=> higher costs

Next five steps ...

112/04/22 20


Step 6 : Eliminating too costly alternativeStep 7 : Ranking feasible alternativesStep 8 : Choosing the alternative to maximize

valuesStep 9 : Developing an overall solution

Alternative (a) – high risk, high cost=> eliminate

Alternative (b) – higher risk, higher cost=> eliminate

Alternative (f) – higher cost=> eliminate

Step 10 : Committing to the choice made

112/04/22 21




1.Alternative (e): benefits are greater than costs (utilitarian), fulfill professional & legal requirements, preserve major principals and values

2.Alternative (c): costs and benefits are equally distributed (justice); trade-off values such as honesty, integrity, fairness; may break professional and Co’s code

3.Alternative (d): low risk, high cost


112/04/22 22




Alternative (e): disclose Tom’s misconduct can maximizes the most important values such as integrity, honesty, truthfulness, loyalty to my company and to the profession, fair to other honest staff and shareholders. The alternative is also likely to achieve the goal without misgiving


112/04/22 23




Combine top ranking alternatives for each dimension to develop an overall solution


112/04/22 24

The ICAC’s ETHICS PLUS Model :

ETHICS : Six steps E stablishing facts and identify ethical issues T aking stock of all stakeholders H aving an objective assessment I dentifying alternatives and assess effects C omparing and evaluate alternatives with

reference to PLUS S electing course of action

Facts:• Self-study case analysis

Ethical Issue:• Whether I should keep the secret for Tom?

112/04/22 25




• Self• Tom• My company, shareholders and other staff• Mary• Accounting profession

112/04/22 26




Refer the self-study case analysis

112/04/22 27




a)Keep the secret and do nothingb)Keep the secret and help Tom to cover up by manipulating records

Pros:•Protect Tom from prosecution, losing job and license (short term)

•Strengthen my relationship with Mary (short term)Cons:•Compromise my professionalism and personal values such as honesty and fairness. If manipulating the records, I might be prosecuted

•Substantial financial loss to the company and its shareholders•Damage company’s reputation and affect our corporate culture

•Taint the reputation of the profession, affect public confidenceCosts are greater than benefits

112/04/22 28




c) Keep the secret and let Mary pay back the company ASAPPros…..Cons…d) Keep the secret, ask Tom to resign and review the accounting procedures to prevent similar incidents from happening again

Pros…..Cons…..e) Refuse Tom’s request and report to the management….Pros….Cons…f) Refuse Tom’s request and report to ICACPros….

112/04/22 29




P rofessional code of conduct/company rules: a) b) c) d) e) f) g)

• HKSA Professional Ethics Statement 1.203 x x x x √ √ √

• ……………………………………….......................... 1.290C x x x x √ ? √

• Company code of conduct, company rules x x x x √ x √

L egal requirements• Companies Ordinance s121 x x √ √ √

√ √ • Theft Ordinance √ x √ √ √ √

√• Common law requirements √ x ?

√ √ √ √

Uncompromisable self values: • honesty, integrity, fairness, loyalty…… x x x x √

√ ?

S unshine test • Open discussion of the issue with all parties x x x x x

x x• Disclose the decision without misgivings x x x x √

√ ?

112/04/22 30


ETHICS : Six steps PLUS : Four standards of behaviour

P rofessional/ Trade-related/ Corporate code of conduct

L egal requirements U ncompromisable self values S unshine test

112/04/22 31

The Laura Nash Model (12 Questions) : To articulate ideas of responsibilities involved

and to lay them open for examination. It helps sort out perceptions of the problem and improve the nature and range of alternativesQ1 : Defining the problem accurately ?Q2 : Other side of the fence ?Q3 : How did this situation occur ?Q4 : Loyalties and to whom ?Q5 : Intention in making this decision ?Q6 : Intention versus likely results ?

All precise facts need to be considered:WhatWhoWhereWhenHow

(Next six questions….)

112/04/22 32



From Tom’s ViewYou are his future brother-in-law and you have to help him

From other staff’s viewUnfair to them if Tom’s fraudulent activity is not addressed

From shareholder’s viewDeceitful & disloyal to them if help Tom to cover up his act

From other members of profession’s view

Taint the reputation of the profession if help Tom to cover


112/04/22 33



Consider all background information• Tom suffered major financial loss• Tom withdrawn a substantial amount of money

from the company• He manipulated accounting records and had been

involved in ‘teeming and lading’• My fiancée, Mary, asked me to help her brother to

cover up his act and promised to repay all outstanding amounts immediately


112/04/22 34



Consider and weigh values The company: Revenue, Reputation, Corporate culture The profession: Reputation, Ensure public’s confidence The public: Generally accepted moral principals Self: Personal belief and values Mary: Care and commitment


112/04/22 35



Justify the action

Intention for reporting :• Protect company’s assets/funds from

stolen- Fulfill my responsibilities as a chief

accountant- Personal belief: integrity, honesty…- Promotion


112/04/22 36



Are good intentions well-served?

•Tom’s acts will be stopped

• I will be promoted

or

•The top management may trust Tom’s words against mine.


112/04/22 37

The Laura Nash Model (12 Questions) :

Q7 : Injuries to whom ?Q8 : Discussing with the affected parties ?Q9 : Your position over a long period of time ?Q10 : Convincing to your primary

stakeholders ?Q11 : Symbolic potential of your action ?Q12 : Exceptions to your stand ?

Consider all effects on all possible stakeholdersSelf:Tom:Company (shareholders & other staff)Mary:The profession:

112/04/22 38




Cannot engage all primary Stakeholders for discussion

112/04/22 39




• Satisfied for not to trade-off my personal values

• Cultivate a healthy and ethical corporate culture

• Protect the profession’s reputation• Mary may eventually understand and forgive• Tom may change for better

112/04/22 40




Can your decision survive disclosure and public scrutiny

Yes As the decision for report will benefit the interests

of my company, my profession and the general public

112/04/22 41




Perception of others

Understood: for the company’s long-term benefits

Misunderstood: disloyal to my fiancée self-interest: promotion

112/04/22 42




Rationalization for deviating

If Tom agreed to disclose his fraud to the top management of the company

112/04/22 43

Blending Various Decision-Making Approaches

Different models : Common decision algorithm but slightly different road maps

Arriving at an ethical decision with a two-step approach Step One : Understanding the ethical problem Step Two : “Thinking through” the issues

involved

topic 5 ethical decision-making models

Documents