Bachelor of Arts, Metropolitan State University of Minnesota, 2003
Master of Business Administration, Argosy University, 2005


A Paper Submitted to Dr. Patrick Sheedy of Saint Mary’s University of Minnesota in Partial Fulfillment of the Requirements for the Degree DOCTOR OF EDUCATION



Copyright © 2006

Alyou Alem Tebeje




The aim of this study is to describe of face various ethical dilemmas face accountants, and managers during accounting practice. It argues with the ethical dilemma of accounting practice, deals with the various types of problems the authorities face when making decisions. Ethical dilemmas make individuals think about their obligations, duties or responsibilities. Managing ethical dilemmas in the workplace holds tremendous benefit for leaders and managers, and the ethical justification how to manage and resolve ethical dilemmas in the amounting practices. In recent years, managers face ethical choices, because of the accounting frauds. The paper focuses exclusively on the issue solving problems for better an ethical accounting practice. Why many a business collapses? What happens to greedy people in business practice? The paper also, discusses the fact pattern of the case against the auditors, examining legal statutes which govern the liability of auditing firms.

Research problem

This study is based on the hypothesis is that the CEO of People-Pride International (PPI) and the majority upper managers unexpectedly sell their share of the company. Imagine that the Attorney General of the United States investigation team comes into your office closes the door and says: “I think we have a problem”. The Attorney General Office very strongly felt about the need to maintain law and order. Accountants find themselves in a significant problem in their practices, and a more difficult situation created by the CEO and the upper level management. Numerous ethical and legal claims against the PPI and its outside auditors MSP LLP were filed.

The MSP LLP also maintains a code of ethics, and the plaintiffs’ case was based on the principle of misrepresentations of Generally Accepted Auditing Standards (GAAS). The plaintiffs’ did not charge the auditors with knowingly participating in the fraud. The main research questions to be answered are:

  1. What are the facts involving the PPI company?
  2. Did the auditors have information during the process?
  3. What factors may inappropriately influence the upper management client-auditor relationship?
  4. What are the ethical issues involving the accounting practice?
  5. How did the auditors should react to the fact involving their practice?
  6. What are the auditor ethical responsibilities?
  7. What did the auditors do ethically?
  8. What are the ethical dilemmas of accounting practice?


Ethical Dilemma of Accounting Practice


This paper discusses the auditors’ ethical responsibility and the ethical implications of several aspects of accounting practice. MSP LLP (independent auditing firm) ought to the following accounting practice ethical issues such as honesty, integrity, promise-keeping, fidelity, fairness, caring, respect for others, responsible citizenship, pursuit of excellence, and accountability.

These dilemmas can be highly complex and difficult to resolve. Easier dilemmas involve a right versus wrong answer. Most of the current discussion on ethical aspects of practical social issues has its origin in activities which concerns the need to shift business responsibility towards a morally and socially conscious ethics in the accounting practice. Everyday, everyone makes ethical choices, but many business leaders and mangers think they have to choose between being ethical and winning. Many of the business leaders believe that embracing ethics would limit their options, opportunities and the ability to succeed in business. The reality is the recent financial accounting scandals have generated unwanted and unfavorable publicity for CPAs, including those working as comptrollers or chief financial officers.

In recent years many executives have neglected their duties; due to their negligence dozens of companies and millions of workers and investors have been adversely affected. The ethical values provide basses for our society on how to work and live together in our community. The ethical practice standards have improved in the last decades, and also the degree to which business has not complied with established ethical standards has presented a real problem recently. Organizations keep maintaining good ethical programs. They have done this by recruiting and retaining top quality people and fostering a more satisfying and productive work environment for employees. Organizations can also do this by building and sustaining a company’s reputation within the community in which it operates this will help the company develop a good ethics among the employees.

Learning Objective:

The key learning objective is to know institutional, policies regarding ethical conduct; make an ethical judgment and decision based on an ethical choice, discuss professionalism and its implications in accounting practice, and become aware of the ethical dilemma in an accounting work environment, identify the ethical norms that have emerged historically in modern business practice and identify ethical problems that have emerged within management, accounting, finance, and marketing.

Ethical environment of accounting

The problem facing People-Pride International, the CEO and the higher level managers knew about PPI financial condition.  The accounting firm is performing its tasks daily in an environment governed by a complex set of rules, principles, and practices. In performing their tasks they are asked to take a certain role. Specific responsibilities of the accounting profession are expressed in the various codes of ethics promulgated by major organizations such as the American Institute of Certified Public Accountants (AICPA). The AICPA’s first principle of professional conduct states their responsibilities clearly, that members should exercise sensitive professional and moral judgments in all their business practice. Unfortunately, market pressures also forces the creation of situations where ethical issues such as independence and integrity are questioned making it imperative that the AICPA create guidelines from which the evolving in accounting profession must base it.

Ethical values

Ethics plays an increasingly important role in business today, professional ethics relates to how people behave in relation to their chosen career. Doctors, lawyers, accountants, engineers and other professionals are expected to behave a certain way or follow specific codes of conduct. Ethics is essential in the accounting profession. Ethical values provide a foundation to society on how to function, live and work within the society, (Timmons, 1999).

Accountancy attempts to create accurate financial reports that are useful to managers, regulators, and other stakeholders such as shareholders, creditors, or owners, (Schute & Zanardi, 2003). An ethical accounting practice is the basis for business. For example companies of Enron, WorldCom, and Tyco make it apparent that the costs of engaging in unethical business practices (Niskanen, 2005). Business people may engage in unethical business practice to make money. Unethical business practices may also be found criminally liable for violation of securities, tax, and other laws. Unethical practice violations may lead to fines and imprisonment. The massive unethical accounting practice, scandals have swept the business sector in the last several years. In addition, whose wrongful conduct may be the subject revocation or suspension license from practicing accounting.

Ethics, often called moral philosophy, is philosophical thinking about morality, moral problems, or moral judgments (Timmons, 1999). An example might be where a professional duty to whistleblower conflicts with a sense of loyalty to a company. Companies have corporate ethical responsibility to each of its stakeholders.  The ethical practice in accounting has raised some ethical questions the objectivity, and responsibility of members how to act in accordance. Most companies are greedy to make money, but in business ethics, greed is unacceptable, and unethical behavior will destroy a firm’s ability to make money.

The ethics of business has come a long way since the last century. The ethical values, standards and expectations of business practice have improved. (Bragg, 2001)Today, individuals in management accounting and financial management constantly face ethical dilemmas. The circumstances seem to fit the individual-versus-community (Shapiro & Stefkovich, 2005), because they seem to have some conscious sense of vision, some deep core of ethical values, which gives them the courage to stand up and make the tough choices.

(Callahan, 2004) In 1965 corporate CEOs on average made 50 times more than the typical worker, today the average is approximately 300 times. Today, almost anything goes in the business world; we need to find concrete ethical systems to enforce. We need to investigate our sense of right and wrong in the business world. We find that we measure our actions against some standard such as right or wrong. (Callahan, 2004) Managers and executives are unclear about their ethical standards, practitioners of management accounting and financial management. They have an obligation to the public, their profession, the organization they serve, and themselves, to maintain the highest standards of ethical conduct. (Riahi-Belkaoui, 1992) Free access to information is vital to the success of moral development and moral reasoning of accountants to a level.

Ethical perspectives in decision making

Analyzing evaluates an ethical situation is important as it applies more appropriate and ethical perspectives. The ethical dilemmas often unfold from the stories leads to better understanding, and decision making process. By contrast, if you join in a cover-up of the problem, then you make it your own problem (Souryal, 2003). In cases of accounting fraud, executives who help cover it up are treated at least as harshly as those who engineered the fraud in the first place.  Utilitarianism as an approach to resolving moral issues argues that we should seek to produce the best consequences overall that are possible for each situation where our action will have a significant effect. (Anderson, 1996) Mill argues Utilitarianism in ethics, which we should each act so as to promote the greatest happiness for the greatest number of people.

Ethics and Accounting Practice

Ethics has always been significant for accounting professionals and the constituencies they serve. CPAs have developed a reputation as trusted business advisors, in part due to the general perception that accounting professionals behave ethically. Society has placed laws upon us to make sure we abide by the right standards (Hartman, 2003). Accounting is an ethically precarious profession, and to be an effective accountant and especially an auditor, one must understand something of our human nature. Therefore, the profession must equip its members with a strong sense of ethical awareness. This is accomplished through education and regulations in ethics. This may be found as an effective way to ensure that our businesses and our accountants are doing their jobs ethically. There are various procedures of ethical accounting practice.

The big five accountancy firms – KPMG, Pricewaternhouse Coopers, Ernst & Young, Andersen and Deloitte & Touche are increasingly pressured to ethical and professional responsibility to hold their corporate value (Niskanen, 2005). The accounting dilemmas are more visible after Enron’s failure. The accounting firms often face difficult ethical dilemmas of controlling frauds. Having an ethical policy is good business practice; it requires ethical principles on the part of the audit firms to make accounting principles meaningful. Besides providing a license to operate, having an ethical policy can also help to protect and enhance corporate reputation. Ethics policies are also an important aspect of socially responsible investment and can stand companies in good position.

An accounting firm, for whatever reason, did not detect the problem, or chose to ignore it. Either way, the situation has ruined thousands of lives, and changed the way people views accounting firms. The first and most obvious ethics was essential in the accounting profession, ethical responsibility to its clients, employees, shareholders, suppliers and the community each of its stakeholders. Accounting practice preparing or auditing year-end financial statements, financial management or the registrant’s independent auditor becomes aware of misstatements in a registrant’s financial statements.

The ethical perspectives or modes of ethical thinking are applicable through out the accounting cycle. Each Statement of Financial Accounting Standards adopted by the Financial Accounting Standards Board (FASB) states. The auditors of financial statements determine whether amounts and items are material to the financial statements. The assessment of materiality requires that one views the facts in the context of information.

In the case of MSP LLP accountants faces an ethical dilemma based on the facts were given wrong information from the CEO and the upper management. In general accountants by accepting certain roles, they also have at the same time the obligations ethical responsibilities (Bragg, 2001). By ethics, it is meant the concern with the moral judgments involved in making moral decisions about what is morally wrong and right or morally good and bad.

The auditors’ role is to audit an organization’s internal control policies, practices, and procedures to assure that controls are adequate to achieve the organization’s mission. An external audit unit may also play a role in auditing a governmental entity’s internal control and this external auditor may examine and suggest improvements to a governmental entity’s internal control (Bragg, 2001).  The external auditor may discover weaknesses in the internal control procedures that will affect the accounts. The auditor should report these weaknesses to the trustees. The role of the external auditor and the quality audit services is to help understand the issues and reinforce continued trust in the Firm. Legislation and rules and regulations won’t result in better audits. The actions of people, including their commitment to providing clients with high quality service, integrity and professionalism, will make a difference (Fusaro & Miller, 2002). Among other things, it establishes a new oversight mechanism for the public accounting profession creates new rules for the auditor and client relationship, institutes new criminal penalties for corporate finance-related crimes

Companies such as Enron and WorldCom overstated their earnings by billions, and their bankruptcy cost investors an estimated billions (Denhart & Grubbs, 1999).  . From Enron to WorldCom, the poor accounting practices and poor management judgment have shattered investor confidence (Fusaro & Miller, 2002). To survive, publicly traded companies now must re-establish investor confidence. The first attempt at re-establishing investor confidence was the certification of financial statements and disclosure controls and procedures. But investors don’t worry only about numbers. A skittish market reacts to hints of fraudulent activity, complex accounting, lack of visibility into the drivers of earnings results and projections, complicated cash-flow reporting, operational and financial surprises, and unknown business risk. The market demands systems that connect diverse data flows and support real-time answers to financial questions.

Today, most practitioners of accounting individuals in accounting and financial management constantly face ethical dilemmas. Enron became synonymous in popular culture with corruption and was incorporated in political speeches (Fusaro & Miller, 2002). Auditing firms have come under increased scrutiny since the collapse of the Enron Corporation. Enron used accounting practices to hide company debt. They allowed senior officers to cash out stock options while employees’ 401(k) accounts were frozen Those companies assured employees of financial stability yet declared bankruptcy shortly after they file for bankruptcy (Fusaro & Miller, 2002). They decided to waive a code of ethics, knowingly misappropriating funds of clients, falsifying bank records or providing misleading statements.

Judgment of facts in the decision making process

Companies can take as much risk as they want, make as many poor decisions as they want, and lose as much money as they want. Companies generally prefer to report a steady trend of growth in profit rather than to show volatile profits with a series of dramatic rises and falls. This is achieved by making unnecessarily high provisions for liabilities and against asset values in good years so that these provisions can be reduced, thereby improving reported profits, in bad years. They just have to report exactly how much they’re losing in enough time for shareholders to know that management is making dumb mistakes. It’s not illegal to make stupid mistakes, bad decisions or lose money you just have to report it in an accurate and timely fashion. This will vary depending on initial indications as to who may have been involved in the misconduct.

The CEO and the board members will be in charge of the process. They will report to the Audit Committee of the Board of Directors (Bryce, 2002). Absent any indication that the CEO and CFO participated in the wrongdoing, they will be closely involved in the investigation as well. The Audit Committee (or a lead director on that committee) must be looped in immediately. At every significant stage, management must keep the Audit Committee informed. It is the Audit Committee that must make the key decisions with respect to involving the outside auditors, restating prior financials, and issuing public disclosures.

The role of CEO and CFO are expected to fulfill the expectations to make the right decisions that minimize risk (Bryce, 2002). What should CEO do? On one hand, the CEO is a member of the decision making process. The CEO, CFO, and the board members will be involved in those decisions, provided that they clearly played role in the fraud. If the board members have reason to believe that the CEO or CFO may have participated in the violations, then the Audit Committees should include them from the investigatory process. I use the word customers because in ethical thinking there should be no distinction of rank within a company. There are no industry standards that are feasible, it is possible for every company to examine their practices as well as the attitude towards their customers/investors.

There will be companies that find that they are doing fine with share holders that are aware of their moral values. Yet other companies will find that they do have areas that need improvement. It is steps like these that start implementing changes. Once a few companies start to see the benefits of changes, it can help to encourage other companies to follow suit. After all, as seen in the case of Enron, WorldCom, other public financial companies’ mistakes in one department can cause the deterioration of an entire corporation. When the costs that are possible are taken into account, the changes required to rectify this are small in comparison.

The Higher-level executives should ask them selves: How can I use it to increase shareholder value? Do all of our employees understand how they impact shareholder value? “As CFOs prepare to meet these new regulations, many will look to technology solutions to support an overall financial compliance strategy. Analytic applications based upon a consistent data model will provide the information foundation for greater internal visibility, and decision support. Obviously, during this time the board members in a difficult position and is a decision that must be made by the Audit Committee.

If the Audit Committee has any reason to believe that the board members may have acted improperly, then it should exclude them from the process, relying instead on outside counsel to spearhead the investigation. (Phillips, 2001) In some instances, the facts will lie somewhere in-between: there will be uncertainty as to the blame of senior management. In that situation, the Audit committee should have the authority to either allow, or deny access to their files the process until they have been cleared. They should exclude potential implication while expediting the fact-finding with respect to them.

Accounting fraud investigations are very complex. If the company’s outside counsel is experienced in accounting investigations — and clearly understands that it owes its duties to the corporation (Bragg, 2001). The Audit Committee will review the annual financial statements, the Independent Public Accountant’s audit of and report on the financial statements, and the auditor’s qualitative judgments about the appropriateness, not just acceptability, of accounting principles and financial disclosures. On the other hand, if the Audit Committee has reason to believe that outside counsel may be beholden to management and protect them in the course of the investigation, then the committee should select another law firm as special counsel to the Board.

Accountants along with the corporations should avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. They should refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically (Riahi-Belkaoui, 1992). Accountants, especially auditors must refuse any gift, favor, or hospitality that would influence or would appear to influence their actions. As Hartman (2003) mentioned, Accountants should recognize and communicate professional limitations or other constraints that would prevent responsible judgment or successful performance of an activity, and they must be able to communicate unfavorable as well as favorable information and professional judgments or opinions. They should refrain from engaging in or supporting any activity that would discredit the profession.

Accountants and the management of the organization have a responsibility to communicate information fairly and objectively. (Bragg, 200) Disclose fully all-relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented is another responsibility accountants must remain be loyal. Every public company should be required to disclose to care deeply about how public policies affect real people outside the beltway (Phillips, 2001) Poor compliance with those policies is prevalent.

Ethics make profitable business as well as good moral judgments of conducting business.  Good ethics does not always translate into good business; because being ethical is not always a guarantee of success but over time people do understand how the organization does business. With a good ethics program in the organization, it would enable them to distinguish between the ethical and the merely legal. Asking whether something is legal is only the first step in determining whether it is ethical (Phillips, 2001). In fact, making an activity illegal may often be society’s way of ratifying its much earlier decision about what is unethical (Verstraeten, 2000).  At some point in life, ethics must be taught. People are not born with innate desires to be ethical or to be concerned with the welfare of others.

(Hartman, 2003) A formal ethics program is probably the most promising way to go about that. Employees of companies with strong ethics programs were much more likely to think highly of their company’s ethical performance, with the most dramatic difference seen in the more positive opinions about higher levels of management. Companies who train their employees concerning ethical issues that may surround the business will be most likely to report any misconduct within the company to the proper authorities. (Callahan, 2004)  Building a sustaining a company’s reputation within the communities in which it operates support in maintaining the trust of employees to ensure continued self-regulation, providing ethical guidance and resources for employees prior to making difficult decisions and aligning the work efforts of staff with their company’s mission and vision. The ethical standards that govern the profession; they gain a useful framework for evaluating ethical dilemmas; and they have the opportunity to address an ethical dilemma, make an ethical judgment, and defend their decision.


A true business value comes from strengthening finance, accounting, and management processes. I must say that I agree with the use of Sarbanes-Oxley Act law in determining moral responsibility. The Sarbanes-Oxley Act of 2002 was passed by congress with the express guidelines and process for corporate governance (Bryce, 2002). The Corporate Governance Guidelines reflect the Board’s commitment to monitor the effectiveness of policy and decision making both at the Board and management level. Sarbanes-Oxley Act is designed to increase corporate transparency and reduce the time between a material loss event, and when the event is reported (Bryce, 2002). It’s designed to improve internal controls around financial process, to increase the accuracy of financial reporting, not improve every possible control in how you do business. The goal of Sarbanes-Oxley is to force publicly traded companies to think about their response to internal and external pressures, and to provide checks and balances on that response.

Considering the importance of the issue, I would recommend further research on ethics education and how it can be implemented into our core curriculum.  Obvious reason for unethical business practice is looking a much larger profit (greed), wanting too much too soon leads to a major failure. Regardless of how well doing, you will always be dissatisfied, as there is always a bigger competitor or a more successful acquaintance. It is reasonable to assume that a firm would follow code of conduct is a guide for each employee, officers and directors to follow business principles.

The accounting profession to take a stand and announce to the world that ethical accountants will no longer be a part of the kind of unethical activity that takes place during the course of a normal antidumping investigation. If the various state and national accounting groups recognize the conduct described in this paper as unethical and a discredit to the profession, and take a firm stand, perhaps constructive change can take place. It is unlikely that change will take place otherwise.


I believe there is a major need for overhaul of accounting regulatory practices in order to gain the public trust once more. The situation in which you find yourself when confronted with a potential restatement is not one that you created. However, you are in a position to make it better or to make it worse. If you approach the investigation with ethics and integrity, and with experienced assistance, you can ensure that the situation does not get worse than it already is, and can start a process that will enable your company to move beyond it.

Finally, the professional responsibilities of accountants are broad-based; they must serve clients and user groups whose needs, incentives, and goals may be in conflict. Further, accountants must interpret and apply codes of conduct, accounting and auditing principles, and securities regulations. It seems most readily to fit the negative attitudes by some organizational members to other members of the organization members. One bad apple can spoil the whole tree. Of course, there will be an employment termination, fine, and imprisonment of those who were involved in the accounting fraud. There may be exceptions at lower levels, where the Court finding fraud in accounting practice, but certain employees were following orders and not personally deserving of blame. Management should maintain the trust of employees to ensure continued self regulation.

Companies need to legitimize an open dialogue concerning ethical issues and providing ethical guidance and resources for employees before making difficult decisions. Companies must spell out what the mission, vision and involve professional code of ethics. Companies that engage in ethical practices are usually those that demonstrate the ability to have successful long-term growth and establish important relationships with consumers, their employees, and their communities.  An effective ethics of an organization values long-term thinking into their decision-making process. Moreover, things will only get better when one needs only to consider doing business in a fair and ethical way.




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