Today we’re going behind the scenes of your mind to understand something crucial: How do you actually make ethical decisions?
Here’s a sobering reality – even good people with strong values can make terrible ethical choices. Why? Because our brains are wired with hidden biases and shortcuts that can lead us astray. The good news? Once you understand these cognitive processes, you can make better decisions.
Let me start with a fundamental insight from Nobel Prize winner Daniel Kahneman. Your brain operates with two systems:
System 1 thinking is fast, automatic, and emotional – like when you immediately feel something is “wrong” about a financial transaction.
System 2 thinking is slow, deliberate, and logical – like when you systematically analyze whether that transaction violates GAAP.
The problem? In high-pressure accounting environments, we often rely too heavily on System 1 thinking, making us vulnerable to errors and ethical lapses.
Your brain comes pre-loaded with cognitive biases that can derail ethical decision-making. Let me highlight the most dangerous ones for accountants:
Incrementalism – This is the “slippery slope.” You agree to one small ethical compromise, thinking it’s just this once. But that first compromise makes the second one easier, and soon you’re in deep trouble. There’s no such thing as “immaterial” fraud.
Overconfidence Bias – We tend to overestimate our abilities and underestimate risks. In accounting, this might lead you to think you can “handle” an ethical gray area without proper consultation.
Conformity Bias – The pressure to go along with the group. When everyone else seems okay with questionable practices, it becomes easier to rationalize your participation.
Bystander Effect – The tendency not to report wrongdoing because you assume someone else will. Think about the Harvey Weinstein case or financial scandals where people stayed silent.
Here’s the key insight: These biases are hardwired into us from infancy. Yale research shows even babies have rudimentary moral preferences and biases. You can’t eliminate these biases, but you can recognize and manage them.
Now let’s talk about how people develop morally. Lawrence Kohlberg identified six stages across three levels:
Level 1 – Preconventional (Stages 1-2):
- Stage 1: “I follow rules to avoid punishment”
- Stage 2: “I do what serves my interests”
Level 2 – Conventional (Stages 3-4):
- Stage 3: “I want to be seen as a good person”
- Stage 4: “I follow rules to maintain social order”
Level 3 – Postconventional (Stages 5-6):
- Stage 5: “I follow principles that serve society’s best interests”
- Stage 6: “I follow universal ethical principles”
Here’s what matters for your career: Most accounting professionals should operate at Stage 4 or higher. If you’re making decisions based on “What will get me in trouble?” (Stage 1) or “What’s in it for me?” (Stage 2), you’re not ready for the responsibility that comes with being a CPA.
The goal is Stage 5 thinking – making decisions based on what serves the public interest, even when it conflicts with your personal or organizational interests.
James Rest gave us a framework for understanding ethical action. For moral behavior to occur, you need all four components:
1. Moral Sensitivity – Can you recognize an ethical issue when you see one? This isn’t as obvious as it sounds. In complex accounting situations, ethical issues can be subtle.
2. Moral Judgment – Can you reason through different courses of action and identify the ethically correct choice? This is where your knowledge of professional standards and moral philosophy matters.
3. Moral Motivation – Are you willing to prioritize ethical values over other values like loyalty to your boss or keeping your job? This is often where people fail.
4. Moral Character – Do you have the courage and persistence to follow through on your ethical intentions? Having good intentions isn’t enough if you lack the backbone to act.
Think of these as links in a chain. Break any one link, and ethical behavior fails. This is why Rest’s model is so powerful – it helps you diagnose where ethical breakdowns occur.
Your individual ethics don’t exist in a vacuum. Organizational culture has enormous influence on your behavior. Here’s what creates an ethical climate:
Tone at the Top – Leadership behavior matters more than written codes. Employees follow what leaders do, not what they say.
Values-driven Environment – Organizations that actively promote equity, diversity, inclusion, and belonging (EDIB) create stronger ethical climates. Why? Because they demonstrate respect for all stakeholders.
Let me quickly distinguish these terms:
- Equity: Ensuring fairness and equal opportunities for everyone
- Diversity: Having representation from different backgrounds
- Inclusion: Creating environments where diverse people feel valued
- Belonging: Making people feel genuinely connected and able to be authentic
Research shows that strong EDIB efforts lead to 56% higher job performance and 50% lower turnover. When people feel they belong, they’re more likely to speak up about ethical concerns.
When you face an ethical dilemma, follow this systematic approach:
Step 1: Identify the ethical and professional issues (Moral Sensitivity)
- What stakeholders are affected?
- What professional standards apply?
- What are the potential consequences?
Step 2: Identify and evaluate alternative courses of action (Moral Judgment)
- Generate multiple options
- Apply different ethical frameworks (utilitarian, rights-based, virtue ethics)
- Consider legal and professional requirements
Step 3: Reflect on moral intensity and virtues (Moral Motivation)
- How significant are the potential consequences?
- What virtues should guide your action?
- Are you willing to prioritize ethics over other considerations?
Step 4: Take action (Moral Character)
- Implement your decision courageously
- Monitor the results
- Be prepared to adjust if needed
Finally, let’s talk about the “Giving Voice to Values” approach. This assumes you’ve already decided what’s right – now how do you effectively communicate it?
When facing pushback, anticipate these common rationalizations:
- “Everyone does this” (Expected practice)
- “It’s not material” (Materiality excuse)
- “It’s not my job” (Locus of responsibility)
- “Just this once” (Isolated incident)
Your job is to prepare counterarguments. For example:
- Instead of accepting “It’s not material,” respond with “There’s no materiality threshold for fraud, and this sets a dangerous precedent.”
- Instead of “Everyone does this,” say “Our professional standards require us to be leaders, not followers.”
Here’s your action plan moving forward:
1. Practice recognizing your biases – When you feel certain about a decision, pause and ask “What biases might be influencing me?”
2. Develop your moral reasoning – Practice applying different ethical frameworks to accounting dilemmas.
3. Build your moral courage – Start small. Practice speaking up in low-stakes situations to build the muscle memory for when it really matters.
4. Understand your organization’s culture – Pay attention to what behaviors are really rewarded, not just what’s written in the code of conduct.
Remember: Ethical decision-making is a skill that improves with practice. The cognitive processes we’ve discussed today – biases, moral development, organizational influence – they’re not excuses for poor decisions. They’re tools for making better ones.
Your future clients and the investing public are counting on you to think clearly, reason ethically, and act courageously. The stakes are too high for anything less.
Case 2-1 A Team Player? (a GVV case)
Barbara is working on the audit of a client with a group of five other staff-level employees. After the inventory audit was completed, Diane, a member of the group, asks to meet with the other employees. She points out that she now realizes a deficiency exists in the clients inventory system whereby a small number of items were double counted. The amounts are relatively minor and the rest of the inventory observation went smoothly. Barbara suggests to Diane that they bring the matter to Jessica, the senior in charge of the engagement. Diane does not want to do it because she is the one responsible for the oversight. Three of the other four staff members agree with Diane. Haley is the only one, along with Barbara, who wants to inform Jessica.
After an extended discussion of the matter, the group votes and decides not to inform Jessica. Still, Barbara does not feel right about it. She wonders: What if Jessica finds out another way? What if the deficiency is more serious than Diane has said? What if it portends other problems with the client? She decides to raise all these issues but is rebuked by the others who remind her that the team is already behind on its work and any additional audit procedures would increase the time spent on the audit and make them all look incompetent. They remind Barbara that Jessica is a stickler for keeping to the budget and any overages cannot be billed to the client.
Questions
- In 300 words, explain how cognitive shortcomings play a role in Diane’s position.
- In 300 words, explain what Barbara should do if she reasons at each of the six stages of Kohlberg’s model.
- Assume you are in Barbaras position. In 300 words, what would you do and why? Consider the following in answering the question:
- How can you best express your point of view effectively?
- What do you need to say, to whom, and in what sequence?
- What do you expect the objections or push-back will be and, then, what would you say next?
Case 2-10 WorldCom
The WorldCom fraud was the largest in U.S. history, surpassing even that of Enron. Beginning modestly during mid-year 1999 and continuing at an accelerated pace through May 2002, the companyunder the direction of Bernie Ebbers, the CEO; Scott Sullivan, the CFO; David Myers, the controller; and Buford Yates, the director of accountingcooked the books to the tune of about $11 billion of misstated earnings. Investors collectively lost $30 billion as a result of the fraud.
The fraud was accomplished primarily in two ways:
- Booking line costs for interconnectivity with other telecommunications companies as capital expenditures rather than operating expenses.
- Inflating revenues with bogus accounting entries from corporate unallocated revenue accounts.
During 2002, Cynthia Cooper, the vice president of internal auditing, responded to a tip about improper accounting by having her team do an exhaustive hunt for the improperly recorded line costs that were also known as prepaid capacity. That name was designed to mask the true nature of the costs and treat them as capitalizable costs rather than as operating expenses. The team worked tirelessly, often at night and secretly, to investigate and reveal $3.8 billion worth of fraud.
The tip was first provided in May 2022, by Glyn Smith, a senior manager in Internal Audit, who informed Cooper of the high level of capital expenditures. Cooper agreed with him that an audit of capital expenditures was in order. This was the first time the category of prepaid capacity had come up. Those contacted within the company could not adequately explain what prepaid capacity was, including the controller, David Myers. No one could explain why it was included in the capital expenditures account. Ultimately, everyone found out that it was a way to mask the fraud.
Soon thereafter, Cooper notified the companys audit committee and board of directors of the fraud. The initial response was not to take action, but to look for explanations from Sullivan. Over time, Cooper realized that she needed to be persistent and not give in to pressure that Sullivan was putting on her to back off. Cooper even approached KPMG, the auditors that had replaced Arthur Andersen, to support her in the matter. Ultimately, Sullivan was dismissed, Myers resigned, Andersen withdrew its audit opinion for 2001, and the Securities and Exchange Commission (SEC) began an investigation into the fraud on June 26, 2002.
In an interview with David Katz and Julia Homer for CFO Magazine on February 1, 2008, Cynthia Cooper was asked about her whistleblower role in the WorldCom fraud. When asked when she first suspected something was amiss, Cooper said: It was a process. My feelings changed from curiosity to discomfort to suspicion based on some of the accounting entries my team and I had identified, and also on the odd reactions I was getting from some of the finance executives.1
Cooper did exactly what is expected of a good auditor. She approached the investigation of line-cost accounting with a healthy dose of skepticism and maintained her integrity throughout, even as Sullivan was trying to bully her into dropping the investigation.
When asked whether there was anything about the culture of WorldCom that contributed to the scandal, Cooper laid blame on Bernie Ebbers for his risk-taking approach that led to loading up the company with $40 billion in debt to fund one acquisition after another. He followed the same reckless strategy with his own investments, taking out loans and using his WorldCom stock as collateral. Cooper believed that Ebberss personal decisions then affected his business decisions; he ultimately saw his net worth disappear, and he was left owing WorldCom some $400 million for loans approved by the board.
Betty Vinson, the companys former director of corporate reporting, was one of five former WorldCom executives who pleaded guilty to fraud. At the trial of Ebbers, Vinson said she was told to make improper accounting entries because Ebbers did not want to disappoint Wall Street. I felt like if I didnt make the entries, I wouldnt be working there, Vinson testified. She said that she even drafted a resignation letter in 2000, but ultimately she stayed with the company. It was clear she felt uneasy with the accounting at WorldCom.
Vinson said that she took her concerns to Sullivan, who told her that Ebbers did not want to lower Wall Street expectations. Asked how she chose which accounts to alter, Vinson testified, I just really pulled some out of the air. I used some spreadsheets.2
Her lawyer urged the judge to sentence Vinson to probation, citing the pressure placed on her by Ebbers and Sullivan. She expressed her concern about what she was being directed to do to upper management, and to Sullivan and Ebbers, who assured her and lulled her into believing that all was well, he said.3
On December 6, 2002 the SEC reached an agreement with Betty Vinson about her role in the WorldCom fraud and suspended her from appearing or practicing before the Commission as an accountant. In its Administrative Proceeding, the SEC alleged that: At the direction of WorldCom senior management, Vinson and other WorldCom employees caused WorldCom to overstate materially its earnings in contravention of GAAP for at least seven successive fiscal quarters, from as early as October 2000 through April 2002. The overstatement included improperly capitalized line costs to overstate pre-tax earnings by approximately $3.8 billion. The agreement went on to say: Vinson knew, or was reckless in not knowing, that these entries were made without supporting documentation, were not in conformity with GAAP, were not disclosed to the investing public, and were designed to allow WorldCom to appear to meet Wall Street analysts’ quarterly earnings estimates.4
Questions
- In 300 words, explain the role of cognitive shortcomings in the WorldCom fraud and how social and organizational pressures influenced Betty Vinson’s actions.
- The SEC action against Vinson was deemed “appropriate and in the public interest.” How was the public interest affected by what Vinson did and WorldCom’s actions broadly? Explain in 300 words.
- In a presentation at James Madison University in November 2013, Cynthia Cooper said, You dont have to be a bad person to make bad decisions. In 300 words, discuss what you think Cooper meant and how it relates to our discussion of ethical and moral development in the chapter.
Find something that interests you in Chapter 2 and write a 1 page word document discussion/reflection about it.
- Maybe something that happened in your personal/professional life that you can link to the chapter.
- Maybe you don’t agree with something in the chapter, and you want to explain why.
- Maybe there is a new approach to an ethical situations that you learned from the reading that you can describe.
This is your own personal reflection, so it should be completely done with your own thoughts and ideas. This exercise is intended to help you grow and learn as a professional. It is not meant to copy/paste verbiage from the book or anywhere else.