10. Arthur Andersen LLP was the auditor for Enron, WorldCom, Waste
Management and other companies that committed fraud. Andersen was
forced to shut its doors forever after a U.S. Department of Justice lawsuit
against the firm that it had obstructed justice and lied to the government in
the Enron case. One thing Andersen had done was to shred documents
related to its audit of Enron before the government could get its hands on
them. Some in the profession thought the government had gone too far given
the facts and mediating circumstances including top management’s
deception; others believed the punishment was unjustified because most
accounting firms got caught up in similar situations during the late 1990s and
early 2000s (pre-Sarbanes-Oxley). What do you believe? Use ethical
reasoning to support your answer.
At the time of Enron and Andersen scandal, most of the big accounting firms were
making more off of consulting engagements rather than auditing engagements. (Urban
legend has it that one accounting firm even paid $10,000 to a company in order to obtain
the company’s audit engagement, which was tied to a consulting engagement.) Auditing
engagements had become the loss leader for the firms. The large consulting engagements
11. In this chapter we discuss the role of Sherron Watkins in the Enron fraud.
Evaluate Watkins’ thought process and actions from the perspective of
Kohlberg’s model. Do you think she went far enough in bringing her
concerns out in the open? Why or why not?
Watkins identified the ethical issues in the Enron debacle. She was motivated to do the
right thing by self-interest and possibly enlightened egoism; this implies that Watkins was
at Kohlberg’s stage 2 (satisfying one’s own needs). It is hard to judge whether she was at
In determining whether Watkins went far enough to bring her concerns out in the open is
a bit like being a Monday morning quarterback. She did bring her concerns to the chair of
the board. Should she have taken the concerns to the audit committee, independent
member of the board, and/or the entire board? Should she have gone outside the company
12. You are in charge of the checking account for a small business. One morning,
your accounting supervisor enters your office and asks you for a check for
$150 for expenses that he tells you he incurred entertaining a client last
night. He submits receipts from a restaurant and lounge. Later, your
supervisor’s girlfriend stops by to pick him up for lunch, and you overhear
her telling the receptionist what a great time she had at dinner and dancing
with your supervisor the night before. What would you do and why?
As employee you would want to find out what the accounting and reimbursement policies
of the firm are. (If there are no policies, then policies need to be developed or possibly at
least written down.) Many firms will have at least oral policies that reimbursements are
for business related activities. Unless the supervisor is the owner of the firm he would be
expected to follow those policies also. The IRS would require a detailed receipt for
Using Kohlberg’s model, the above steps would be reasoning at the conventional level
13. Do you believe that our beliefs trigger our actions, or do we act and then
justify our actions by changing our beliefs? Explain.
A highly ethical person knows his values, principles and beliefs. Those values, principles
and beliefs would then determine his actions in an ethical situation. A person who does
not understand or fully know his values, principles and beliefs, might act in an ethical
situation without thinking through the consequences other than from an egoistic view
14. Do you think Betty Vinson was a victim of “moral blindness”? Why or why
not?
Betty Vinson’s situation at WorldCom: she knew it was wrong to “cook the books” but
she did not act on those beliefs. Instead, she followed the orders from superiors and later
justified her behavior by rationalizing it as a one-time act and demanded by people who
Moral blindness is used to describe someone who can’t tell right from wrong, rather than
just choosing to ignore doing “the right thing.” Since Betty knew that it was wrong to
15. In her case against the Defense Contract Audit Agency (DCAA) that
resulted from actions against her for blowing the whistle on improper agency
practices, Diem-Thi Le sought to provide DCAA documents to the Office of
Special Counsel (OSC) to back up her claims of retaliation. DCAA provided
Le with a memo that said she was “not permitted to access or copy or possess
any Agency document for [her] private purposes, including preparation of
complaints in any forum,” according to the OSC report, which directly
quoted the memo. DCAA Assistant General Counsel John Greenlee drafted
the template of the August 31, 2007 memo, which bore the signature of
Sharon Kawamoto, one of Le’s supervising auditors.
Le wanted clarification. Kawamoto told Greenlee in a September 7, 2007,
email that Le wanted to know if she could “access documents related to
audits cited in her performance appraisals in order to prepare complaints to
OSC and the Equal Employment Opportunity Office,” states the OSC
report. Le wanted copies of her performance appraisals and related emails.
Greenlee responded that Le “may not distribute or disclose those documents
to anyone else—period—without asking permission. That permission will not
be granted her.”
Do you think Le should have been provided access to her performance
appraisals and related emails, given that some aspects of this information
contained work-related matters and client information? Does she have an
“ethical right” to such information? What ethical limitations might have
existed for Le with respect to using this information, assuming that she was a
member of the Institute of Management Accountants (IMA)?
Le should have been provided access to her performance appraisals and related emails.
As a federal agency there should have been a procedure for an employee to appeal
performance appraisals. The appeal process includes access to those appraisals. Any
work-related matters or client specific information could be redacted. The justice theory
16. In this chapter, we discuss the study by Libby and Thorne of the association
between auditors’ virtue and professional judgment by asking members of
the Canadian Institute of Chartered Accountants to rate the importance of a
variety of virtues. The most important virtues identified were truthful,
independent, objective, and having integrity. The authors note that the
inclusion of these virtues in professional codes of conduct (such as the
Principles of the AICPA Code of Professional Conduct) may account for
their perceived importance. Explain how these virtues relate to an auditor’s
intention to make ethical decisions.
The virtues of independence and objectivity relate to the auditor being responsible to the
accounting profession and the general public: the ethical domain of auditing. The virtues
of honesty and integrity are part of the questioning mind, search for knowledge, and
17. Interpretation 102-4 of the AICPA Code of Professional Conduct that was
discussed in Chapter 1 provides that a CPA should not knowingly
misrepresent facts or subordinate her judgment when performing
professional services. Explain how Rest’s model of moral development
influences the steps a CPA should take to avoid subordinating professional
judgment.
Rest’s model has four components (moral sensitivity, moral judgment, moral motivation,
and moral character). A CPA requires moral sensitivity to know when his judgment is
being pressured towards subordination to the client or other interests. The CPA needs to
keep the interest of the public foremost in making judgments and remaining skeptical, be
18. Explain what you think each of the following statements means in the context
of moral development.
a. How far are you willing to go to do the right thing?
b. How much are you willing to give up to do what you believe is right?
c. We may say we would do the right thing, but when it requires
sacrifice, how much are we willing to give up?
Each of the statements indicates that doing the right thing may not be easy or
comfortable. It may require speaking up when it is easier and more comfortable to remain
silent. The statements highlight why doing the right thing is not the common thing to see
19. In a June 1997 paper published in the Journal of Business Ethics, Sharon
Green and James Weber reported the results of a study of moral reasoning of
accounting students prior to and after taking an auditing course. The study
also compared the results between accounting and non-accounting students
prior to the auditing course. The authors found that: (1) accounting students,
after taking an auditing course which emphasized the AICPA Code, reasoned
at higher levels than students who had not taken the course; (2) there were no
differences in moral reasoning levels when accounting and non-accounting
majors were compared prior to an auditing course; and (3) there was a
significant relationship between the Seniors’ levels of ethical development
and the choice of an ethical versus unethical action. 39 Comment on the
results of this study.
The results of the study show that ethical training and emphasis can make a difference in
behavior, level of ethical development and the knowledge of ethical versus unethical. The
study does not indicate the duration of the ethical training or optimal intervals of when to
update the training. The discussion of the profession’s codes of ethics keeps the
20. A major theme of this chapter is that our cognitive processes influence ethical
decision making. Use the theme to comment on the following statement,
which various religions claim as their own and has been attributed to Lao
Tzu and some say the Dalai Lama:
“Watch your thoughts; they become your words.
Watch your words; they become your actions.
Watch your actions; they become your habits.
Watch your habits; they become your character.
Watch your character; it becomes your destiny.”
One’s character reveals one’s values and whether one has the courage to act on those
values. Character traits include integrity, honesty, compassion, trustworthiness, loyalty,
citizenship. A person shows his or her character by displaying these traits, which ones are
important and which are not. The quote above shows the relationship between thoughts,