Ethical Analysis Framework

A Case Study in Ethical Decision Making

Consider the following case. It provides a good example of the kinds of ethical dilemmas potentially faced by accounting professionals.

Oscar Gamble, Shields Corporation's Controller, is concerned that net income may be lower this year. As a result, he is afraid that upper level management might recommend cost reductions by laying off accounting staff. Gamble knows that depreciation is a major expense for Shields. The company currently uses the double-declining balance method for both book and tax purposes, and he is thinking of changing to the straight-line method.

However, this change would be highlighted in the income statement as a cumulative effect adjustment. Instead, he is contemplating increasing estimated useful lives and salvage values. That would decrease depreciation expense (and increase income). Best of all, this change in estimate will be handled prospectively and not be highlighted in the current or future years' income statements. Oscar thinks this approach could save his job and those of his staff.

What would you recommend to Oscar Gamble? On the one hand, it would seem that opting for changes in salvage values and useful lives could result in investors and creditors getting less useful information about Shield's income. On the other hand, Gamble may feel he has an obligation to protect his staff. Throughout Intermediate Accounting, we provide one or more cases, similar to this one, which raise ethical issues about subjects discussed in the chapter.

Ethical Analysis Framework

Is there a right way to analyze an ethical issue? For students who have had an ethics or philosophy course, they know that ethics is a personal issue. The study of ethics does not tell you what to do but instead presents a framework that can be used to study the ethical dimensions of various issues. An approach that is commonly applied in the area of business decision making is referred to as stakeholder analysis. In stakeholder analysis, a business decision maker is asked to consider a broad set of constituencies in making business decisions. Instead of focusing only on shareholders and maximizing shareholder wealth, management is encouraged to consider both the moral and social implications of their decisions in terms of how the decisions affect all stakeholders of the company. This broader set of stakeholders includes shareholders, as well as employees, suppliers, customers, the local community, and any other party that might be affected by the decision.

Why worry about these additional stakeholders? For one reason, it will help you develop a more complete analysis of the decision, not just the impact on the immediate parties. In the case above, Gamble appears to be focused on the profits of the company and keeping his and his staff's job. A more thorough stakeholder analysis might suggest that misstating the depreciation expense could lead to lack of confidence in Shield's financial reports, that if detected, could lead to a higher cost of capital and maybe even fines or other penalties. In the long run, Gamble, his staff, and other employees could lose their jobs in this scenario.

Specific Analysis Steps

Here are some specific stakeholder analysis steps that you can apply in the process of ethical awareness and decision making:

  1. Recognize an ethical situation or ethical dilemma. The first step is to know when you have a problem. To do that, you must develop your own personal ethics or conscience. Your ethics are a subset of society's values. They come from family, educational, and religious institutions as well as from social movements and from your own reactions to all of these inputs. Being sensitive to and aware of the effects (potential harm or benefit) of one's actions and decisions on individuals or groups is a first step in resolving ethical dilemmas.

  2. Move toward an ethical resolution by identifying and analyzing the principal elements in the situation. Seek answers to the following questions in this sequence:
      a. What parties (stakeholders) may be harmed or benefited?
      b. Whose rights or claims may be violated?
      c. Which specific interests are in conflict?
      d. What are my responsibilities and obligations?
    These questions should help you identify and sort out the facts.

  3. Identify the alternatives and weigh the impact of each alternative on various stakeholders. For instance, in financial accounting, which alternative methods are available to report the transaction, situation or event? What is the effect of each alternative on the various stakeholders? Which stakeholders are harmed or benefited most?

  4. Select the best or most ethical alternatives, considering all the circumstances and the consequences.

Some ethical issues involve one right answer. Other ethical issues involve more than one right answer; these require an evaluation of each and a selection of the best or most ethical alternative.


Robert Sack, a commentator on the subject of accounting ethics, noted that, "Based on my experience, new graduates tend to be idealistic…thank goodness for that! Still it is very dangerous to think that your armor is all in place and say to yourself, 'I would have never given in to that.' The pressures don't explode on us; they build, and we often don't recognize them until they have us." These observations are particularly appropriate for anyone entering the business world. In accounting, as in other areas of business, ethical dilemmas are encountered frequently. Some of these dilemmas are simple and easy to resolve. Many, however, are complex, and solutions are not obvious.

Businesses' concentration on "maximizing the bottom line," "facing the challenges of competition," and "stressing short-term results" places accountants in an environment of conflict and pressure. Basic questions such as: "Is this way of communicating financial information good or bad?" "Is it right or wrong?" "What should I do in the circumstance?" cannot always be answered by simply adhering to GAAP or following the rules of the profession. Technical competence is not enough when ethical decisions are encountered.

Doing the right thing, making the right decision, is not always easy. Right is not always evident. And, the pressures "to bend the rules," "to play the game," "to just ignore it," can be considerable. For example, "Will my decision affect my job performance negatively?" "Will my superiors be upset?" "Will my colleagues be unhappy with me?" are often questions faced in making a tough ethical decision. The decision is more difficult because a public consensus has not emerged to formulate a comprehensive ethical system to provide guidelines. This whole process of ethical sensitivity and selection among alternatives can be complicated by pressures that may take the form of time pressures, job pressures, client pressures, personal pressures, and peer pressures.

Throughout Intermediate Accounting, ethical considerations are presented for the purpose of sensitizing you to the type of situations you may encounter in the performance of your professional responsibility.