Ethical Obligations and Decision Making in Accounting, 4/e 1
Chapter 2 Discussion Questions
Suggested Discussion and Solutions
Sometimes in life things happen that seem to defy logic, yet that may be a sign of the times
we are living in today. The following story applies to questions 1 and 2:
On October 15, 2009, in Fort Collins, Colorado, the parents of a six-year-old boy, Falcon
Heene, claimed that he had floated away in a homemade helium balloon that was shaped to
resemble a silver flying saucer. Some in the media referred to the incident as “Balloon
Boy.” The authorities closed down Denver International Airport, called in the National
Guard, and a police pursuit ensued. After an hour-long flight that covered more than 50
miles across three counties, the empty balloon was found near the airport. It was later
determined that the boy was hiding in the house all along in an incident that was a hoax
and motivated by publicity that might lead to a reality television show. The authorities
blamed the father, Richard, for the incident and decided to prosecute him. Richard Heene
pleaded guilty on November 13, 2009, to the felony count of falsely influencing authorities.
He pleaded to protect his wife, Mayumi, a Japanese citizen, whom he believed may have
been deported if Richard was convicted of a more serious crime. Richard also agreed to
pay $36,000 in restitution.
1. Identify the stakeholders and how they were affected by Heene’s actions using
ethical reasoning. What stage of moral reasoning in Kohlberg’s model is exhibited
by Richard Heene’s actions? Do you believe the punishment fit the crime? In other
words, was justice done in this case? Why or why not?
The stakeholders in the “Balloon Boy Hoax” are the boy, Falcon Heene; the parents,
Richard and Mayumi Heene; brothers, Bradford and Ryo Heene; Larimer County sheriff,
Jim Alderman; Denver International Airport travelers and employees; National Guard
unit; local police; search and rescue teams; media and news services; Colorado taxpayers;
and the public.
The public through the media watched and worried about the fate of the boy in the
balloon. Colorado taxpayers footed the bill for the $50,000 costs of personnel time,
equipment and other incidentals to track the balloon, search and rescue mission, and
investigation of the hoax. Denver International Airport closed to avoid collision with the
Ethical Obligations and Decision Making in Accounting, 4/e 2
Falcon Heene was used by his parents to pull off the hoax that he was on a hot air balloon
that had escaped its tether. Falcon was expected to lie and help his parents with the hoax.
His brothers, Bradford and Ryo, were also expected to lie and help the parents. Media
attention was focused on all of the sons as the story played out. Falcon explained on CNN
Larry King Live in response to a question from Wolf Blitzer that he was hiding and not
responding to his name being called for the show. The media attention on the young boy
did cause him to vomit on television twice in one day.
The parents, Richard and Mayumi Heene, used the hoax to create and garner attention so
that they could get their own reality television show. Their actions were a result of
egoism. The need for media attention was the utmost reason for the hoax, and the hoax
was carried out without regard for anyone else or cost to the taxpayers. Richard Heene
had called the media and Federal Aviation Administration (FAA) twice while the balloon
was aloft.
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2. In an example of art imitating life, 16-year-old playwright Billy Reece was inspired
by the Balloon Boy incident to write a play that was first performed at the Thespian
Festival at the University of Nebraska–Lincoln in 2014. Balloon Boy: The Musical
was presented in the 2015 New York Musical Theater Festival Developmental
Reading Series. It has been said that, “Art has the power to evoke the same
emotions, thoughts, moral and ethical controversies, and conflicts that we
experience in life.” Plato was certain that art was nothing but a dangerous and
shallow imitation of life that served only to draw humans far away from the Truth.
Discuss these thoughts from your own perspective of emotions, thoughts, moral
considerations, and what “truth” means to you.
Honesty is a moral characteristic, a virtue, and sometimes considered to equate with
truthfulness yet there are differences. Honesty means you say what you sincerely believe
to be true. You can honestly state something that is untrue. For example, you may have
witnessed a crime and think you know who did it but it turns out to be wrong. Truth is
about objective fact. Something is either true or not. You can state the truth in a dishonest
manner, like if you yourself believe it to be true. A person can be honestly wrong,
believing something that is not the truth.
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3. In the debate over why good people do bad things, Tenbrunsel suggests that people
are often blind to the ethical dimensions of a situation, a concept he refers to as
“bounded ethicality.” Craig Johnson addresses moral disengagement by saying:
When others try to encourage you to bad behavior (“the dark side”) realize that you
are an independent agent, and that you have a personal responsibility to behave
morally. Discuss what this means to you.
The reality that one is an independent agent and does not have to go along with the group
or peer pressure reminds us that we are still responsible for our own actions, no matter if
everyone else in the group is doing wrong or an unethical act. Ethics is not based upon a
4. One reason otherwise good people may do bad things is what psychologists call
scripts. This term refers to the procedures that experience tells us to use in specific
situations. Unlike other forms of experience, scripts are stored in memory in a
mechanical or rote fashion. Explain why a System 1 approach to decision making
might create a script that leads us to make a questionable or unethical decision.
System 1 thinking can lead to snap decisions that make it more difficult to resolve an
ethical dilemma in a morally appropriate way. It may occur because you lack important
information regarding a decision, fail to notice available information, or face time and
cost constraints. You don’t have the time or inclination and fail to see the dangers of
deciding too quickly.
5. How do you assess at what stage of moral development in Kohlberg’s model you
reason at in making decisions? Do you believe your level of reasoning is consistent
with what is expected of an accounting professional? How does the stage you
indicate relate to the findings of research studies discussed in this chapter about
moral reasoning in accounting?
Students are usually reasoning at level two or three, trying to do what is expected of them
by different standards, perhaps out of self-interest or beliefs held by others influential in
their lives (i.e., peer group). Accounting students who become professionals are often
reasoning at level three, influenced by the firm and what is in the best interests of clients.
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6. Using the child abuse scandal at Penn State discussed in Chapter 1, explain the
actions that would have been taken by Joe Paterno if he had been reasoning at each
stage in Kohlberg’s model and why.
Stage 1: Paterno would not tell anyone about Sandusky, if he could be sure that no one
would ever find out, as it would keep others from being mad at him. However, once
McQueary informed him about Sandusky, Paterno would tell his superiors to show his
obedience to rules and avoidance of punishment. Stage 2: Paterno would want to satisfy
his own needs and protect his football program. Thus, he would tell the athletic director
but would avoid confronting Sandusky. Stage 3: Paterno would want to follow the rules
7. In his research into the components of ethical decision making, Rest raised the
following issue: Assuming someone possesses sound moral reasoning skills, “Why
would they ever chose the moral alternative, especially if it involves sacrificing some
personal value or suffering some hardship? What motivates the selection of moral
values over other values?” How does Rest’s model deal with such a question? How
would you answer it from the point of view of an accounting professional?
James Rest attempted to address some of the problems that are recognized in Kohlberg’s
work, and used a model with three levels of understanding: personal interest, maintaining
norms, and post-conventional. Rest focuses on maintaining norms (similar to the
conventional level) and post-conventional schemas. By maintaining norms, Rest means
recognizing the need for society-wide norms, a duty orientation, the need for cooperation,
uniform and categorical application of norms, laws, and rules, and that individuals will
obey the norms and laws and expect others to do the same even though it may not benefit
all affected parties equally.
Moral motivation reflects an individual’s willingness to place ethical values (e.g.,
honesty, integrity, trustworthiness, caring, and empathy) ahead of nonethical values (e.g.,
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8. In the text, we point out that Rest’s model is not linear in nature. An individual who
demonstrates adequacy in one component may not necessarily be adequate in
another, and moral failure can occur when there is a deficiency in any one
component. Give an example in accounting when ethical intent may not be sufficient
to produce ethical behavior and explain why that is the case.
The ethical domain for accountants and auditors involves (1) the client organization that
hires and pays for accounting services; (2) the accounting firm; (3) accounting
profession; and (4) the general public. Andersen auditors may not have been aware that
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ethical issues existed in the audit of Enron (ethical sensitivity) because they were blinded
by the size of scope of the nonaudit fees. The auditors may have been perfectly capable
of applying ethical judgment but absent the awareness that an ethical issue exists, moral
action is unlikely to occur.
In the Enron case, Enron was paying more consulting fees to Andersen than audit fees.
As one of the largest clients of Andersen’s Houston office, if not entire firm, Enron
expected Andersen to do the audit quickly and with minimal disruptions so that the
9. In teaching about moral development, instructors often point out the threefold
nature of morality: It depends on emotional development (in the form of the ability
to feel guilt or shame), social development (manifested by the recognition of the
group and the importance of moral behavior for the group’s existence), and
cognitive development (especially the ability to adopt another’s perspective). How
does this perspective of morality relate to ethical reasoning by accountants and
auditors?
Accountants and auditors must have the proper emotional development in order to put
others first and before self; the social development to recognize the importance of the
public need for fair financial statements, and being able to follow a code of ethics; the
10. 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
1. Humans are sensitive to inconsistencies between actions and beliefs.
• According to the theory, we all recognize, at some level, when we are acting in a way that
2. Recognition of this inconsistency will cause dissonance, and will motivate an individual
to resolve the dissonance.
3. Dissonance will be resolved in one of three basic ways:
a. Change beliefs
▪ Perhaps the simplest way to resolve dissonance between actions and
beliefs is simply to change your beliefs. You could, of course, just decide
that cheating is o.k. This would take care of any dissonance. However, if
Ethical Obligations and Decision Making in Accounting, 4/e 9
organizing our thoughts. Therefore, though this is the simplest option for
resolving dissonance it’s probably not the most common.
b. Change actions
▪ A second option would be to make sure that you never do this action
again. The guilt and anxiety can be motivators for changing behavior. So,
you may say to yourself that you will never cheat on a test again, and this
c. Change perception of action
▪ A third and more complex method of resolution is to change the way you
view/remember/perceive your action. In more colloquial terms, you would
“rationalize” your actions. For example, you might decide that the test you
cheated on was for a dumb class that you didn’t need anyway. Or you may
say to yourself that everyone cheats so why not you? In other words, you
11. Do you believe that a person’s stage of moral development and personal moral
philosophy play a role in how values and actions are shaped in the workplace?
Explain.
Starting an entry level position with a firm, it is hard to see how my personal values and
actions can make a difference in the workplace. However, as I work up the career ladder,
my values and actions can affect others in the workplace and the overall ethical tone at
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12. Explain why moral problems may be of greater intensity than nonmoral problems.
Nonmoral problems include what movie will I go see this weekend, what shoes to wear
today, or whether to eat out dinner or cook in? These problems present dilemmas for me,
13. Michael just graduated with a degree in Accounting from State University. He
worked hard in school but could only achieve a 2.95 GPA because he worked 40
hours a week to pay his own way through college. Unfortunately, Michael was
unable to get a job because the recruiters all had a 3.0 GPA cut-off point. Michael
stayed with his college job for another year but is anxious to start his public
accounting career. One day he reads about a job opening with a local CPA firm.
The entry-level position pays little but it’s a way for Michael to get his foot in the
door. However, he knows there will be candidates for the position with a higher
GPA than his so he is thinking about using his overall GPA, which was 3.25
including two years of community college studies, rather than his major GPA and
the GPA at State, even though the advertisement asks for these two GPAs. Michael
asks for your opinion before sending in the resume. What would you say to Michael
and why?
You should inform Michael of the need for integrity in accounting. It is possible that he
(Michael) would not get passed the screening process even if he uses the 3.25 GPA. If he
does get passed the screening process, normally the firm will require an official
transcript. The firm could figure out that Michael was lying. That would disqualify him
14. In this chapter, we discuss the study by Libby and Thorne of the association
between auditors’ virtue and professional judgment, done by asking members of the
Canadian Institute of Chartered Accountants to rate the importance of a variety of
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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
15. 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 a responsible employee you should know what the accounting and reimbursement
policies of the firm are. (If there are no policies, then policies need to be developed or
16. According to a survey reported by the Daily Mail in the United Kingdom, one in
eight women has bought expensive clothes, worn them on a night out, and then
returned them the next day. Nearly half of those who did confess said they were
motivated by money because they couldn’t afford to keep the clothes given their
current economic condition. But 18 percent said they did it because they enjoyed the
“buzz.” Those most likely to do it were 18– to 24-year-olds, 16 percent of whom
admitted to returning worn clothes (http://www.dailymail.co.uk/femail/article-
2157430/How-women-wear-expensive-new-frock-shop.html#ixzz3ea5m2mo).
Assume you are best friends with one such woman. She asks you to go shopping
with her for a dress for the Senior Prom. She says the dress will be returned after
the prom. You know what she does is wrong, but she is your best friend and don’t
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*want her to get in trouble. What would you do and why? How might you counter
the likely reasons and rationalizations she will give for her actions?
Borrowing clothes or other merchandise from a retailer and then returning them after
being used for a special occasion is a form of stealing. Retailers are in business to sell
their merchandise, not rent it (not rent free at that).
We should want our best friends to have values close to our own values. Why? For a
couple of reasons. One is that we are judged by the company we keep and another is that
we could have our values eroded by our friends’ values. If we often observe our friends
Nicole: Don’t you want to keep the dress after the prom? Wouldn’t it would be fun for
you to show your future daughter or son, the dress you wore to your senior prom? Are
you going to borrow your future wedding dress?
Kelly: Silly, of course I will buy and keep my wedding dress! Look, the stores expect
this kind of borrowing, especially on gala and prom dresses, and everyone does.
Nicole: So, if everyone does it that makes it okay? I still think it is a form of stealing or
at least unauthorized borrowing. If it is okay because everyone is doing and the stores
expect it why don’t you tell the salesperson as we check out? Why does the store want to
do all the paperwork for a sale and then a return?
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excitement in borrowing the dress. Last time I did this, the dress was still on my credit
card at the closing date and it sent my credit card over the credit limit. Boy, did I get in
trouble with my parents!
Nicole: It is senior prom time of year. Does the store have much problem with customers
buying senior prom clothes and accessories and then returning the items after they are
worn and used?
17. Sharon is an intern with a local CPA firm. Prior to returning to school, her
supervisor goes on sick leave and asks her to do some complicated reconciliation
work for him. She is given what seems to her to be an unrealistic deadline. Sharon
looks at the workpapers and supporting documentation and realizes she doesn’t
have the skills to complete the work without help. She contacts her supervisor who
tells her to talk to Holly, a good friend of Sharon and former intern at the firm, for
help. Holly returned to school one semester ago. What ethical considerations do you
have in this matter? What would you do and why?
Sharon should be properly supervised as an intern. Holly might be able to explain to
Sharon the reconciliation, particularly if she had done the reconciliation in the previous
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What if the work is not done correctly? What if Holly suggested that Sharon copy the
prior year workpaper, including copying the tickmarks and legends? What if Sharon takes
that suggestion as making dry or ghost tickmarks?
The firm should properly supervise Sharon, as an intern, to ensure that the work is
performed with due diligence and provides sufficient evidence to draw conclusions. Since
the supervisor is on sick leave, the firm should put another senior or supervisor be
assigned to the job. If that is not done, Sharon should ask the manager on the job to help
her.
18. Identify the ethical issues in each of the following situations and what your ethical
obligations are, assuming you are faced with the dilemma.
a. A consultant for a CPA firm is ordered by her superior to downgrade the
ratings of one company’s software package being considered for a client and
increase the ratings for another company, which is run by the superior’s
wife. What would you do and why?
The firm does not have to be independent on consulting engagements as it must
be on assurance and attestation engagements. However, the firm has an obligation
to disclose any conflicts of interests. The supervisor and his wife have a conflict
b. A tax accountant is told by his superior to take a position on a tax matter
that is not supportable by the facts in order to make the client happy. This is
a common practice in the firm and the likelihood of the IRS questioning it is
remote. Would you go along with your supervisor?
The tax accountant has an obligation to perform his work objectively and with
due professional care. Tax accountants share the same ethical standards as
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c. An auditor for a governmental agency concluded a contractor’s accounting
system was inadequate; her supervisor changed the opinion to adequate in
order to minimize the audit hours on the job and make the process seem
more efficient. Would you go above your supervisor in this matter and bring
your concerns to high-ups in the agency?
You should follow the guidelines in your agency’s contract audit manual and take
the matter above your supervisor’s level. If the concerns are still not taken
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 nonaccounting students prior to the auditing course.
The authors found that (1) accounting students, after taking an auditing course that
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 nonaccounting majors were compared prior to an auditing course;
and (3) there was a significant relationship between the students’ levels of ethical
development and the choice of an ethical versus unethical action. Do you think that
taking an Accounting Ethics course would affect your level of moral development
and ability to reason through ethical issues? Why or why not?
The results of the study show that ethical training can make a difference in behavior, 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 expectations of the profession uppermost in one’s
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20. Explain why the process of ethical decision making depends on a number of moral,
social, psychological, and organizational factors.
All ethical decision making is done by humans. Each human has his own values and
moral reasoning. We are influenced by society and the social norms accepted in our
culture. We work for organizations that set a tone at top and establish ethical expectations
21. Emotional self-awareness refers to understanding your own feelings, what causes
them, and how they impact your thoughts and actions. It is widely known that
ethical dilemmas involving other employees/managers are inherently emotional.
Researchers have found that such strong negative emotions as sadness and anger
influenced individuals to make less ethical decisions, and that emotional intelligent
individuals were able to make ethical decisions against the biasing influence of those
negative emotions. Explain how moods could influence the thought process and
ethical decision making. Have you made a decision you later regretted based on
your emotional response?
Making ethical decisions, decisions that involve what is morally right or wrong, can
be a challenge and a source of great discomfort, especially when emotional forces
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Research has also shown that working long hours under stressful situations influenced
individuals to make less ethical decisions. This is highly important to public firms whose
auditors are working long, stressful hours and would like to have a high ethical culture.
22. Windsor and Kavanagh propose in a research study that client management
economic pressure is a situation of high moral intensity that sensitizes auditors’
emotions and thus motivates their moral reasoning to make deliberative decisions
either to resist or accede to client management wishes. Explain how you think such a
process might work.
An auditor’s independent opinion is supposed to be emotionally detached and objective
in order to verify the accuracy and reliability of financial statements in light of the
regulatory oversight of corporate financial reporting. Yet auditors are employed by large
accounting firms which are economically dependent on the very companies that they are
23. The nature of accountants’ work puts them in a special position of trust in relation
to their clients, employers, and the general public, who rely on their professional
judgment and guidance in making decisions. Explain the link between professional
judgment and ethical decision making in accounting.
Past scandals like Enron, WorldCom and Waste Management, all with Andersen, LLP as
the auditor, illustrate how a CPA firm can lose sight of its professional obligations. While
examining a client’s financial statements, the auditors at Andersen knew that diligent
24. 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 that 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 most
common thing to see. Moral development of character requires the courage to act,
Extended Discussion
A classic story of a person struggling with his conscience on these very issues is the
tobacco industry whistleblower, Jeffrey Wigand. Wigand, previously the $300,000
research chief at Brown & Williamson (B&W), uncovered documents implicating B&W
and, indeed, the entire tobacco industry, in a plot to make cigarettes more addictive than
Ethical Obligations and Decision Making in Accounting, 4/e 19
After raising the issue within B&W, being treated badly as a result, and eventually
leaving B&W and signing a non-disclosure agreement, in 1994, Wigand broke his
confidentiality agreement and agreed to work as a consultant with CBS’s 60 Minutes
producer Lowell Bergman on a story about tobacco industry efforts to develop a “fire
safe” cigarette. Thus began a dramatic two years that would see Wigand become one of
the most famous “whistleblowers” (corporate informants) in American history. Driven by
a potent mixture of moral outrage and desire for revenge, Wigand slowly overcame his
For braving such hardships, and exposing such revelatory information about the tobacco
industry, Jeffrey Wigand will go down in American history as one of the most daring and
important whistleblowers of all time. His exposure of tobacco industry lies led directly to
stronger government curbs on the behavior of the tobacco industry. As an expert witness
in litigation, he helped to bring about the 1998 Master Settlement Agreement in which
tobacco companies agreed to pay billions of dollars to states to offset medical costs
incurred treating smoking-related illnesses. Wigand also founded a nonprofit called
Smoke-free Kids to educate children about the dangers of smoking. His dramatic life
Ethical Obligations and Decision Making in Accounting, 4/e 20
25.
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.
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, fair treatment of others, and 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, words, actions,