The moral reasoning of public accountants in the development of a code of ethics: the case of...

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The moral reasoning of public accountants in thedevelopment of a code of ethics: the case ofIndonesiaLindawatiUniversity of Wollongong

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Recommended CitationLindawati, The moral reasoning of public accountants in the development of a code of ethics: the case of Indonesia, Master ofCommerce (Hons.) thesis, School of Accounting and Finance, University of Wollongong, 2002. http://ro.uow.edu.au/theses/2305

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The Moral Reasoning of Public Accountants in the Development of a Code of Ethics: the Case of Indonesia

A thesis submitted in partial fulfilment of the requirements for the · award of the degree

HONOURS MASTER OF COMMERCE

From

UNIVERSITY OF WOLLONGONG

By

LINDAWATI, M COM (Ace)

DEPARTMENT OF ACCOUNTANCY 2002

ABSTRACT

The Moral Reasoning of Public Accountants in the Development of a Code of Ethics: the Case of Indonesia.

Lindawati

This thesis explores the role of moral reasoning in influencing the implementation of codes of ethics as standards and guidance for professional audit practice by Indonesia public accountants. This study focuses on two important aspects of influence: (i) the key factors of professional public accountants in implementing a code of ethics as a standard for audit practic.e, and (ii) the key activities performed by public accountants as moral agents for establishing awareness of professional values. Two theoretical approaches/ models are used as a guide for exploring the influence of moral reasoning of public accountants. These are: (i) the model of moral development by Kolhberg (1982), and (ii) a model of the AICP A Code of Conduct, especially the five principles of the code of ethics (1992). A case study approach is used to gather and analyse data. The primary data is collected from in depth interviews with 15 financial managers from different company categories. The interview data are summarised and analysed through the pattern coding technique proposed by Miles and Huberman ( 1994 ). It is used to compare the resultant factors and activities to the suggested theoretical patterns. The major research findings of this study are: (i) the key factors of professionalism of Indonesian public accountants are independence & objectivity; integrity; responsibility & public interest; due care; scope and services, and (ii) the key activities for establish the willingness of public accountants to be more professional in practice. These findings support the following conclusion (i) moral development is an important component in influencing moral reasoning of the individual public accountant, (ii) the degree of professionalism in a public accountant is determined by the degree of the development of his/her moral reasoning, and (iii) moral reasoning of individuals influences both the Indonesia Public Accountant and the Financial Manager in building and improving the effectiveness of the implementation of codes of conduct. The theoretical contributions of this study include; (i) adding moral reasoning as an important component in creating an awareness of and guide to applying· ethics codes as part of the self regulation of public accountants, (ii) adding another key factor that influences the degree of professionalism of public accountant, (iii) adding knowledge to the accounting and auditing areas of the financial manager, and increasing the awareness of the need for ethics in business. Several limitations of the study are acknowledged. The study focuses on only one type of general standard audit of public accountant's (SPAP). Moreover, the researcher could not observe the actual dynamics between the public accountant and the financial manager, but had to rely on the user's/financial manager's perceptions in the implementation of a code of ethics

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expressed in the interview data and through supporting evidence. The study also suggests some fruitful areas for further investigation into other aspects of the role of moral reasoning in this important influence on achieving awareness between public accountant and financial managers within the implementation of ethics codes as standard professional practice in general, and on Indonesia's public accountant in particular.

CERTIFICATE

I, Lindawati, hereby certify that this work is my own and has not been submitted for a degree to any other university or institution.

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ACKNOWLEDGMENTS

This study would never finish without assistance of many people. First and foremost, I

am very grateful to my supervisor Professor Michael Gaffikin for his guidance, help and

encouragement during the entire period of this research. He worked feverishly to invent a

new language to critique my meagre linguistic efforts. My thanks also go to the staff of

Department of Accountancy at Wollongong University for their support.

I am thankful to the companies in Indonesia and individuals who participated in the

study. Without their co-operation this study would not have been possible.

I thank Kim Darisma for her constructive comments and suggestions regarding to

revisions of structure and grammar of my English languages. I am also thankful to

Robbyn Ngui, as International Student Adviser Student Services University of

Wollongong for her support and guidance in solving the problems of my life during my

study at University of Wollongong.

I am most thankful for the continuous support provided by my husband, Budiyono and

my mother, Mrs Nursiah, for her patience and help in taking care of my daughter,

Adinda, my son, Aldi and my little daughter, Aulia during the day, while I studied in

Australia. Finally, my deepest appreciation goes to Djoko Wintoro for his guidance and

reviewing the findings; his enthusiasm and support motivated me to complete this task.

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Last, but not least, I am very grateful to ALLAH Most Gracious, Most Merciful.

Alhamdullilah ya Robbal Alamin; praise be to God, the Cherisher and Sustainer of the

world.

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Table of Contents

Chapter 1 Introduction

Background ........ ........ ...... ...... ......... ......... .. ....... ..... .... .. ........... .. ... .. .... ...... .. · .... · · · · · · · · · · · · · · · 1 Theoretical Development ............ ........... . _. .. .. .......... ... .. ..... ... ..... .. .... ... .. ... .... ...... ..... ... .... .. 2 Statement of the Problem .... ... .... ...... ... .......... ... .... ... ... .... ..... .. ..... .. .... ........ .... .... · · · · · · · · · · · · · · 6 The Purpose of the Study .... ..... ...... .. ..... ..... .. ... .. ....... ... ... ... ... .. ... .... ........ ... ... .... ...... · · · · · · · · · 8 Study Approach ... .. ...... .... .......... ..... .... .. .... .... .... ..... ... ....... ..... .... .. .. .. ... .. ..... .. .... ..... .. ... .... . 9 Contribution of this Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Limitation of this Case Study ............ ..... .... ... .. .... ..... ..... ... ......... .......... ..... ..... ...... ... .... ... 11 The Structure of this Thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Chapter 2 Literature Review

Introduction . . . . . . . . .. . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Moral & Morality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Definition and Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 The Categories of Moral Perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 The General Role of Morals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Moral Judgment (Bad and Good Morals) ........ ..... .. .... .. ...... ...... ..... ..... ..... .... ........ .. 29 Summary .... ... ........ .. ....... .. .... ... .. .. .. ..... ........ ... .. .... .. .. .... .. ...... ... ..... .. ... .... ....... .. ... ... ... 33

The Role of Moral Reasoning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Definition and Characteristics ........ .. ........ ..... ..... ........ ....... ..... ..... ............... ........... 35 Theoretical Approach of Moral Reasoning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Process ofMoral Reasoning (Individual Moral Development) .. ... .. .. ...... ........ .... .. 39 Summary ... ... ...... .... ...... ... ..... ...... ... ..... ...... ..... ..... .... ... .. ........ .... ..... .... ........ ... .... ... ... . 46

Ethics in Accounting (Theoretical Perspectives) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 7 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . .. . . .. . .. . . . . . . . . . . 4 7 The Definition and Characteristics of Ethics ..... ..... .... .... ..... ......... ..... .... .............. .. 48 The Process of Ethics in Accounting ... .... ................... ....... ..... ................ ... ....... .. .. . 52 The Categories of Ethics in Accounting (Philosophical Foundation) .. ........ ... ...... 55 Implementation of Ethics in Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Contribution ofEthics to Accounting. ........ .... .... .... .... .. ...... ..... ..... ..... .... .. .. .. .... ..... . 65 Summary .... .... ..... .. ... ... ....... ... .. ... ... ..... .... ..... .. ..... .. .. ........ ... ... ... ... .. ..... .. .... ....... ... .... . 67

Ethics in Public Accounting Practice (Applied Ethics) ... ....... ...... ... .. ... ....... .. ...... ... ..... .. 68 Introduction .... .... ....... ... ...... .. ....... ... ... ...... .... ... ......... .. ......... .... .... ... ..... .... .... ....... .... 68 The Importance of Ethics in the Public Accounting Profession... ..... .... ..... .... ....... 70 The Development of Professional Ethics of Public Accountants. .... ... .. .. ... .. ... .. .... . 73

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The United States Code of Professional Conduct . . . . . . . . . . .. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Principles of Professional Conduct. .... ............ ........... .... ...... .. .... .......... .... .. 78 Rules of Professional Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Summary... ..... .. .. ..... ... ...... ..... ........ ... ........ .. .. ....... ..... .... ... .... ... ................... .. ....... ... . 83 Conclusion . . . . . .. . . . . . .. . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . .. . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Chapter 3 Research Method

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Research Method Employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Sample ... .............. ...... ....... .... .... ... .... ... .. ......... ......... .... ......... .. ... .. ............. ... ..... ... ... 88 Case Study . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . 90

Case Study Design ... ..... . :. .. .. .... .... ...... ......... .. ... ........ ..... ......................... .. .... .... .. ............ 91 Validity of Case Study Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Issues of Case Study . ... . .. . . ... .. . . . . . . . . . . . .. .. . . . .. ... . .. . . .. . . . . . . . . .. . . .. .. . . .. . .. ... .. .. . . .. . . . .. . . . . . . . .. .. 95 Summary ........ ..... .. ....... .. ...... .. ... ............ ...... ....... ... ... .. ... ... ..... ... ... .. .... .... ...... ...... .. ... 95

Data Collection . . . . .. .. . .. . . . .. .. .. . . . .. . . . . . .. . .. . . . . . . . . . .. . .. . . .. . .. . . .. . . . . . . . .. . . . . .. . . . .. . .. .. . .. .. . . . .. . . . . .. . .. . . . . . . 95 Sources and Technique of Data Collection .... .. ... .. .. ...... ............................... ...... ... 96

Interviewing . . .. . . .. . . . .. .. .. .. . . . .. .. . . . .. . . .. . .. . . . .. . . . .. . . . . .. . .. . .. . . .. . . . . .. . .. . .. . .. . . . . .. . . . . . .. . .. 97 Interview Techniques .............. ........... .... ................ ...... ... ........ .. ... .... .... .... . 97 Interview Structures .. ... ... ............ ... .......... ....... ........ ....... ...................... .. .. .. 100

Summary ....................................................................................... ......................... 102 Research Design .. .. . . .. . .. . . .. .. . . . . . . . . .. .. .. .. . . .. . .. .. . . . . . . . .. .. . . . . . . . . . . .. . . .. . . . . .. .. .. .. . .. .. . .. . . . .. . . .. . .. .. . .. .. . 103 Data Analysis ........................................................................................ ..... ... ............ ... .. 107

Techniques of Analysis .. ... .. .. .... .... ...... .............................................. ..... .. ..... ... .. ... 108 Conclusion . . . . .. . . . .. . . . . . . . . .. . .. . . . . . . . . . .. . . .. . .. . . . .. . .. . .. . .. . .. . . . . . . .. .. . . . . .. .. . . . . . . .. .. . . . .. . .. .. . . . . .. . .. .. . . . . .. .. . 109

Chapter 4 The IAI and the Development of Public Accounting in Indonesia

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 History and Development of the IAI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

A Brief History of the IAI ... ........ ... .......... .............. .. ....... ............ .......... .... ......... ... 114 Membership ofIAI ... ...... ... ...... ... .... ............ ....... ..... ... .. .... .... .................... ...... .... .. .. 116 Scope and Nature of the Public Accountant's Work .. .... .......... ...... ..... .. ...... ..... .. ... 117

The Role and Responsibility of Public Accounting ....................................................... 122 The Development of the Ethics Code in Indonesia .... ... ........... .. .... .... ... .. ... .. ... .. .. ...... .... 124

Assertion of Ethics Profession .. ... ..... ...... .. ....... .. .... ... .. ... .. ... .. .. .... .. ......... ...... ....... .. . 125 The Principle of Ethics ........ .. .... .... .. ... .. ... .. ..... ....... ..... .... ..... .... ......... ... ....... ... ....... . 129 The Rules of Ethics ..... ...... .. ......... ...... .... ........... ..... ... ... ... ... .... ...... ........ ....... .. ......... 131

Conclusion ... .... ...... ....... .. .... ... ... ......... ... .... ..... .. .... .. ..... ...... .......... ..... ... .... ...... .... .. .. .... ..... 135

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Chapter 5 Analysis

Introduction ....... ....... ... .. ... .. .. ... ........... .... ... ... ...... .. ...... ......... ... ... ...... ..... ... ... ... .. .. ..... .... .... 137 Data Descriptions .. ... .. ............. ............ ... ...... .. .... .... .. .... ....... .. .. ....... ... ....... ..... ............. .... 138

The criteria of interviewees respondent ........ ...... .... ... ..... .. .... ...... ..... .............. .... ... . 139 Ethics Codes for Accountants in Indonesia .. ..... ... .... ...... .. ..... .. .... ... ..... .... ... ... ........ 140 Implementation and Interview Results .. .... ... ..... .... ....... ......... .. ..... .. ..... ..... .. ... .... .... 142

Meas~~:i~:(. ::: : :: :: ::::::::::: : :::::::::::: : :::::::::::::: :: : :: : : :::::::::::: : : ::::: :: ::: ::::::: : :: : : : ::::: : : : ::: : :: : : : :: : : i ~~ The Utilities of Measurement ............... .. ... .. .... ........ ..... ........ ... ... .. .... ... ... ............ ... 159 Types of Standard Measurement ... ..... .... ... ... ...... .. .... .. ... ..... .. ... .... ..... .. ..... .. ... ... ... .. . 159

The Principles of the Ethics Code Model as Standard Measurement ... ... ..... 160 The Individual Moral Development Model as Standard Measurement ... ..... 164

The Results of Measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 7 The Result of Measurement in Family-Owned, State-Owned, and Foreign-Owned Companies ....... .... ... ... ......... .... ........ .. ..... ..... .... .. ... .. ....... .... ..... ..... .. 168 General Result of Measurement in Indonesia .... ... .. ... .......... ..... .. .. ........ .. ... ... .. ..... .. 178 Implementation and Obstruction of the Code of Ethics .. .... ......... ...... ... ... ... .. ... .... . 179 Obedience of the Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

Summary .. .... ....... ... ........ .. .. .... ..... .... .... ....... ............ ......... ............ ...... .... ... ... ......... .... .. .... 183 Analysis .... .. .. .... ... ....... ..... ..... .... .. .... ..... .... ..... ..... .... ..... ... ... ............. ... ........... .... ... ... .... .... . 185

Professional Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 Individual Approach .... .... .. ... ........ ........ ... ........ ...... ......... .. ... ........ .. .... .... .... ..... ....... 197 Summary .. .............. ... .. .... .... ... .. ... ...... .. .... ... ..... ..... .. .. ... ... .... .... ... .. ....... ... .. ...... ...... ... 206

Chapter 6 Research Findings and Conclusion

Introduction .. ........ ... .. ... ..... .......... .... .. ... ........ .... .. .. .. .... ... ... ..... ........... .. ...... ..... .... .. ..... ...... 214 Research Finding ....... .. ... ..... ...... .. ...... ...... .... .. .............. .... ... ... .. ..... ... ..... ... .............. .... .. .. 216

The influence of moral development on the moral reasoning process of the public accountant in implementing the principles of the code of conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 The level of the public accountant' s moral reasoning as a moral agent ... ........ ..... 220 The key activities performed by both the Indonesia Public Accountant and the Financial Manager to build and improve the effectiveness in the implementation of the principles of the code of conduct in developing and achieving professional practices ........ ....... ....... .. ... ... ... 221

Establishing a conducive cultural condition ... ... ....... ... .. ..... ..... .. ...... ....... .. ..... 222 The existence of control from a professional body (IAI), government, and the public .. ... ... ... .. .... ....... ............. .. .. ... ...... .. ...... .... .. ..... .... ... 223

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Importance of this research ...... .. ... .... ....... .... .. .......... ..... .. .... ................. ..... .... .. ........ ....... 224 Theoretical Contributions ...... .............. ... ..... ........ ... .. ..... ... .... ... ....... .... .. .... ... .. .. .. .... 225

Contribution Theory for the Ethics Codes ........ ....... ..... ... ....... ... ............... ..... 225 Contribution for Moral Development Theory ........ .. .. ... .. .... .. ...... ............ ... ... . 227 Contribution Towards Audit Practice in Indonesia's Companies ...... .. .... ... ... 228

General Contribution Towards Audit Practice in Indonesia ................. 228 C .b . .!:'. F. . 1 ontn ut10n 1or mancia Managers ...... ..... ... .... .... .. ... ...... ... ... .. ....... .... 231

Methodological Consideration .... ......... .. ......... ......... ...... .. ... ...... ....... ......... ... ... ...... 231 The Limitations of the Research .. .. ................. ............ .... .. ... .... ................. ... .. ....... ..... ... . 232 Future Research .. .... ..... ... ..... ....... ..... ......... ..... .......... .... ......... ........... ... .. ... ...... .... .... .... .... 233 Conclusion .. .. ................ ... .. ... ...... ... ....................... ... .. .. .... ....... ..... .. ... .. .......... ..... .. ..... ... .. 234

Bibliography .. .. .... .. .. .... .... ... .... ................... .... ... ... .... .. ............. ... .... ......... .. ... ... ... ... ... . 237

Appendices

Appendix 5 .1 Appendix 5.2

Appendix 5.2.1 : Appendix 6 .1

Appendix 6 .1.1 :

Appendix 6.1.2 : Appendix 6 .1. 3 :

List of Interview Questions ........... ... ... ........... .. .......... .. .... ..... .... .... ... 257 Reasons Companies within determines auditor's criteria to perform audit practices ...... ........ .. ... ..... ..... .. ....... .... .... .................. 259 Summary of Key Reasons for issuing auditor's criteria .... ... .. .... .... 261 Reasons for companies to use the Principles Code of Conduct (Five Ethics Codes of Public Accountant's in Indonesia) by auditor ............. ......... .. .. .. .. .............. ....... .... .... .. ... ....... 262 Summary of Key Reasons for Independence & Objectivity of Auditor .. ......... .... .. ... .. .. .. .. .. .... .......... ..... ...... ..... .... ... ... 264 Summary of Key Reasons for Integrity of Auditor ... .. ... ... ...... .. ...... 266 Summary of Key Reasons for Responsibility of Auditor

··· ···· ··· ·· ··········· ·············· ···· ········ ······ ··· ···· ··· ······ ····· ······· ······ ·· ··· ·· ···· ··· ··· · 269 Appendix 6.1.4 : Summary of Key Reasons for Due Care of Auditor .. ............ ...... .. .. 271 Appendix 6.1.5.: Summary of Key Reasons for Scope and Services of

Auditor ................. ... ... ...... .... ... .... .... .. .................... ... .... .... ............. ... 274

List of Tables

Table 3.1 Table 3.2 Table 3.3 Table 3.4 Table 4.1

Tactics For Case Studies ........ ... .... .. ... ........... .... ..... .... ....... .. .. ..... ..... .. .. ..... 92 Interview Question Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Summary of Variables ............. .. ... ... ... ........ ..... ....... ..... ..... ... ......... ........ ... 105 Overview of Dependent Variables .. ........ ....... .. ....... .... .. ..... .... .. ... .. ........... 105 The Six Assertions of Professional Ethics .... .. .... ... ... .... ... .. ... ......... .... .... .. 126

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Table 5.1

Table 5.2

Table 5.3

Table 5.4 Table 5.5

Table 5.6 Table 5.7

Table 5.8 Table 5.9

Table 5.10: Table5.11:

Table 5.12: Table 5.13 :

Table 5.14 :

The Reasons for selection criteria of auditors by interviewees from FOCs ........ .... ................ ............. .... .... .. ..... .. .... .. .... ...... 150 The Reasons for selection criteria of auditors by interviewees from SOCs ..... ......... ..... ..... ......... .... .. .... ................. .............. 150 The Reasons for selection criteria of auditors by interviewees from FrOCs ..... .. .... .. ... .. ... ......... ... .... ..... ..... ... ....... ..... ........... 150 Summary of Key Reasons for Issuing Auditor's Criteria ........... ....... .. .... 151 The reasons for auditors to implement the first ethics code (Independence and Objectivity) by FOCs, SOCs, and FrOCs ................. 152 Independence and Objectivity ....... .. .... .. .... .. ... .. ... ......... ... ..... ..... .... ........ .. . 152 The Reasons for auditors to implement the second ethics code (Integrity) by FOCs, SOCs and FrOCs ..... .. .... .. ........ ..... .. ............... 153 Integrity ... ................. .... ... ...... ......... ...... ........ ...... ...... .... .. ... ... .... ... ..... ..... ... 153 The Reasons for auditors to implement the third ethics code (Responsibility) by FOCs, SOCs and FrOCs ........................................... 154 Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 The Reasons for auditors to implement the fourth ethics code (Due Care) by FOCs, SOCs and FrOCs ................................................... 155 Due Care .. ... ......... ... ... .... ........... .. ....... .... .. ...... ...... ..... ....... ........................ 155 The Reasons auditors to implement the fifth ethics code (Scope and Services) by FOCs, SOCs and FrOCs .. ...... .. .. ......... ............ .. 156 Scope and Services ..... ..... ... ..... .. .... .... ........ ......... ....... ............. ... ..... ...... .. . 156

List of Diagrams

Diagram 3 .1: The Research Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Diagram 4.1: The Framework of Ethics Code ofW ...... .... ... .. ....... .... .............. .... ...... 128 Diagram 5 .1: Flowchart of The Relationship between Professional

Approach and Individual Approach .......... ............... .... .. .... .. .................. 213

x

Background

CHAPTER I

INTRODUCTION

Page 1

An auditor is an accounting professional, who supposedly performs his/her duties in a

professional manner. This can be achieved by applying standards or principles of

accounting and auditing correctly, and abiding by the ethical codes. These regulations

and guidelines have been specifically prepared and enforced by professional bodies

on their members. They are intended to avoid any fraudulent conduct and improve

professional quality as well as a commitment to solving problems. For example, the

ability to cope with difficult situations in a manner beneficial to clients is a reflection

of professionalism (Nixon, 1994, p.2).

Currently, there are many debatable issues related to the extent that public

accountants have rendered their services -- such as providing information in the form

of financial reports to the users. In fact, as one of economic agents, public

accountants so . frequently face complicated situations that they are tempted to choose

their self-interest (for the client's benefit) rather than the public interest (observing

rules of conduct). This is a moral dilemma that often poses great difficulties for

accounting professionals. For this reason, in order to cope with this dilemma,

regulations, standards, principles and ethical codes, devised by professional bodies

Chapter 1 .. . Introduction

are needed by all public accounting practitioners as guidelines for serving society

(users).

In principle, professional accounting body ethical codes have seven aspects, which

need to be considered. In the USA, the AICPA have listed these as independence,

objectivity and integrity, public interest, responsibility, due care and scope and nature

of services (AICPA, 1992). Therefore, professional ethics are more than just

instrumental to the maintenance of a moral, ethical and honest image among the

public: professional bodies need to ensure that the trust of society is upheld. The

maintenance of high professional ethical standards relies on an understanding of the

moral reasoning process. This moral reasoning process forms part of the entire moral

consciousness of an individual's belief system and from which a decision is made

when an individual is facing difficult dilemmas (Au and Wong, 2000). Hence, in this

thesis, the moral reasoning process of professional accountants is investigated by

utilising the theory of ethical development.

Theoretical Development

Most public accountants would think it ridiculous to expect their actions to damage a

client. However, it is possible that as a result of strictly following the professional

Code of Conduct a public accountant could allow clients to be defrauded . . Hence,

most public accountants who desire to protect a client from harm may find that

following the Code would lead to a moral conflict.

Chapter 1 ... Introduction

On one hand, taking care of client interests disregarding existing ethical rules or

values ethics can be considered as prioritising self-interest. The practice can be

related to improving financial benefit of public accountants. On the other hand

placing a higher priority on public interest (users) by upholding the ethical rules and

values might cause harm to clients, which could even encourage them to get involved

in more fraudulent conduct. Consequently, these different conditions will create a

moral confli.ct for public accountants. Therefore, the quality of actions chosen by

professional accountants is determined· by how far they understand the meaning of

and utilise codes of conduct and the principles underlying them. Moral reasoning as, a

development process of moral levels of public accountants (from cognition-judgment

to moral action) will influence decision making of public accountants in action.

Moral reasoning can be defined as the arguments about how people should act or give

reasons to justify or criticize behaviour. The reason is offered to show why that kind

of action is believed to be wrong or why that judgment is thought to be correct. Thus,

moral reasoning involves offering reasons for or against moral beliefs in an attempt to

show that those beliefs are either correct or mistaken. (Fox and DeMarco, 1990, p.4).

Furthermore, the definition of moral reasoning is an argument that means a reason or

a series of reasons that aims to support a particular claim, which is called the

conclusion. Hence, these arguments consist of reason and conclusion (Thompson,

1998, p.5). For example, in particular ethical issues, moral reasoning arises from

demonstrating an action or behaviour which is led by thought that stimulates a

question "What ought I to do", not "What shall I do", and several issues such as,


considering the consequences of various courses of action, or some weighing of the

conflicting responsibilities, and attempting to come to a conclusion on the issues

(Thompson, 1998, p.6). From the definition above, it can be concluded that reasoning

consists of three points of view, such as; (a). Thinking about what peoples should do

and why peoples should do it; (b ). Forming ideas to describe and evaluate actions,

and ( c ). Judging a particular action by means of a general rule.

Additionally, moral reasoning is an argument of an individual that has the objectives

of explaining the process by which ethical decision making of that individual is made,

or describing a process of establishing behaviour or action based on individual moral

judgment (cognition-judgement-action process). Thus, the moral reasoning process

of an individual can also be understood by examining how individuals internalize

moral standards (Adams, Malone, James, 1995, p.3).

In principle, theoretical development of moral reasomng can be explored by

describing a model individual's moral development from some scholars. According to

Kohlberg ( 1976), moral development occurs at three levels with each level having

two distinct stages. These stages determine the level of moral reasoning used by

individuals in distinguishing right actions from wrong actions. Level 1: Pre

conventional contains Stage 1 - Physical consequence of actions, avoidance of

punishment; and Stage 2 - Satisfaction of one's own needs. Level 2: Conventional

involves Stage 3 - Desire to please others and Stage 4 - Respecting authority and

preserving the rules of society. Level 3: Post-conventional embraces Stage 5 -

Chapter I ... Introduction

Morality of contracts, individual rights and democratically accepted law and Stage 6

- Universal moral and ethical principles (Kohlberg, 1976). Furthermore, Kohlberg

maintains that these stages are sequential such that a person does not enter into a later

stage until the person has passed through each of the previous stages.

However, Gilligan criticized Kohlberg for his focus only on justice and argues,

instead, there is also ethics of care, which may be the framework that females are

more likely to work from. Moreover, Johnson' s Moral Imagination Model argued

that action is the reflection of a conscious form of character and motivations.

According to Johnson (1993) the moral imagination model proposes ways that ethics

education can lead to appropriate moral action through strengthening character and

self awareness, developing ethics sensibility, cultivating ethical reasoning and critical

thinking skills, engendering qualities of emotional empathy, and understanding the

effects of organizational policies and economic incentives on ethical behaviour. In

addition, other scholars such as Sweeney (1995) argued that moral development

theory attempts to explain the cognitive framework underlying individual decision

making in the context of an ethical dilemma.

Based on statements of objectivity of moral reasoning it can be underlined that moral

reasoning is influenced by levels of an individual ' s moral development. Thus, the

higher the individual moral development, the higher her level of moral reasoning.

Consequently, the higher level of moral reasoning will influence an individual ' s

ethical decision making on behaviour or action and hence supports an individual's


choice to apply rules of code of conduct with full awareness. Obviously, the

implementation of a mle or ethics codes is similar to establishing performance of

individual ethical decision-making.

Thus, the process of moral reasonmg is precisely a process of individual moral

reasoning toward a consciousness of ethical decision making to be made to create

actions or behaviour in society. Moreover, ethical decision-making has been

influenced by personal variables (gender, age, socio politic, socio economic and

ethics education), and professional variables (firm size, culture, and job satisfaction).

Therefore, a decision of ethics (judgment good or bad and wrong or mistake) should

need the highest moral level that can be achieved with individual moral development

and some variables involved.

Statement of the Problem

Not much is known about an auditor' s need of moral reasoning as a basis for moral

argument to achieve the process of ethical decision making in performing an audit of

financial reports or providing other services to users. Therefore, this study is

essentially exploratory. In this thesis, moral reasoning in the context of moral

argument is defined as the arguments of people about how people should act or give a

reason to justify or criticise a behaviour. Suggestions are made to show why one kind

of action is believed to be wrong or why a judgment is thought to be correct. (Fox and

DeMarco, 1990) Moreover, another definition of moral reasoning is a process of

deciding whether an action, or decision is right or wrong (Thomspon, 1998). As a


result, this definition of moral reasoning implies that there are three points of view

such as, thinking about what people should do and why people should do it; forming

ideas to describe and evaluate actions; and judging a particular action by means of a

general mle. Thus, this thesis focuses on two important aspects: (i) an investigation of

the extent that the moral reasoning of public accountants influences the

implementation of ethical codes, especially a Code of Conduct, that consists of

responsibility; independence and objectivity; integrity; public interest; due care; and

scope and nature of services (AICP A, 1992), and (ii) an analysis of the problem

solving to improve the effectiveness of the implementation of ethical codes (Code of

Conduct). This leads to major research questions:

1. To what extent public accountants' consciousness determined an appropriate code

of conduct in Indonesia?

2. What actions will improve the effectiveness of the implementation of principles

of a code of conduct in providing audit services and other services to users?

The propositions of this study are expressed in the following terms:

1. Consciousness of public accountants is defined as the extent to which moral

reasoning of public accountants influences ethical decision~making Gudgements

of good or bad and of right or wrong behaviour) towards the upholding of a

principle codes of conduct.

2. The principles of a code of conduct that contain seven ethical codes of

professional accountants that address moral and ethical behaviour regarding

activities, attitudes, and procedures involved in most aspects of professional

conduct.·


3. The attributes of codes of conduct by which the major duties of accountants will

be designed to monitor and measure performance of public accountants.

4. The key factors of the level of moral reasoning of professional public accountants

are defined in respect of the increase of the level of individual moral development

of public accountants.

5. Key effectiveness is defined as the adherence of public accountants to appropriate

codes of conduct, and consequently, the improvement of implementations of

codes of conduct is achieved.

The Purpose of the Study

The purpose of this study is to investigate the role played by moral reasoning in

influencing the ethical decision-making process of public accountants in

implementing codes of conduct (ethics codes). In other words, it investigates the

relationship between moral development and ethical decision making in the context

of a public accountant's ethical code in developing countries where social, political

and economic environments are influenced by a high level of corrupt, collusive and

nepotistic culture. The investigation focuses on two critical aspects: the development

of moral reasoning of public accountants as moral agents, and the key activities they

perform to improve the implementation of a code of conduct.

Kohlberg' s individual moral development model (1982) is used to identify and

investigate the influence of moral reasoning by public accountants in relation to the

development of professional ethical codes of practice. The stages of the principle


code of conduct development proposed by the AICPA (1992) are used to identify the

improvement of effectiveness of implementation of the principle code of conduct by

public accountants in developing and achieving professional practices.

Study Approach

Ethics have recently become an interesting topic in accounting (Francis, 1990; Alam,

1991; Gambling and Karim, 1991; Chua and Degeling, 1993 ). Various researchers, in

essence argue that ethics should be cohesively implanted in accounting practices,

particularly in auditing practices, because ethics clearly signals and distinguishes

right from wrong, good from bad, and justice from injustice. Thus, the importance of

its presence in accmmting lies primarily in its real effects on an individual society.

Further, many researchers who study ethics in an accounting and auditing context use

empirical research or quantitative method to describe the behaviour of accountants in

public accounting (Ponemon and Gabhart, 1993; Bernardi, 1994 who tested

accountants reactions to specific auditing problems), as well as in industry

(Etherington and Schulting, 1995, who were interested in assessing the moral

development of CMAs and comparing the moral development of male and female

CMAs ). However, quantitative approaches have tended to neglect qualitative factors

in the implementation of ethics in accoimting. This is a major issue, which this thesis

will investigate by conducting qualitative research, in the form of a case study.

In this thesis, the discussion regarding implementation of ethics in accounting

practices focuses more on the specific scope of ethics in ethical codes or principles of

Chapter I .. . Introduction

conduct for professional public accountants (AlCPA, 1992), and utilises qualitative

method to resolve the ethical codes problem. According to Lemon ( 1996), qualitative

research is several lines of empirical research that enable researchers to examine the

behaviour of professional public accountants in relation to culture, social issues,

gender issues, environmental issues, employment issues such as downsizing, codes of

conduct and corporate morality.

In this thesis, a qualitative approach is used to explore the existence of problems. A

case study is used to explore the factors that influence the consciousness of

professional public accountants in performing with principle codes of conduct, and

how professional public accountants improve effectiveness in the implementation of

suitable principles codes of conduct. According to Wintoro (2000, p.18) there are 3

basic reasons for this. First, the case study is a rigorous research method for exploring

individual behaviour, especially the relationship between individuals (Orum, Feagin

and Sjoberg, 1991; Hamel, 1992); and uses primary and secondary data in answering

the research questions (Yin, 1994 ). Secondly, the case study is a relevant research

method to use in the early stage of research on particular topics (Hill, 1993). Thirdly,

the relationship between the public accountant and client can be considered as a

business relationship (Kozak and Cohen, 1977; Lewin and Johnston, 1997).

Contribution of this Study

As a result, this study contributes, at least, three things. First, it helps develop the

knowledge through the introduction of new variable, namely, the level of


consciousness of moral reasoning through an individual moral development model,

and of the key effectiveness in improving the implementation of codes of conduct.

Second, at the practical level, this study is expected to provide a confirmation of the

high level of awareness of public acco1mtants to perform consistently with ethical

codes. Empirical evidence is provided of the factors of the level of awareness of

public accountants as proposed by Kohlberg (1982) in their individual moral

development and empirical evidence is provided supporting an improvement in the

implementation of codes of conduct.

Third, it contributes to regulation or justice/law by providing useful information for

the regulators of public accountants in Indonesia that issue regulations or rules to

increase the implementation of codes of conduct in practice; increase the rules and

penalties of accounting bodies and government on public accountants that have

behaved fraudulently; and for public accountants who will demonstrate their

awareness of the need to improve and establish appropriate codes of conduct.

Limitation of this Case Study

The limitation of this research is related to the Indonesian case study and the data

collection methods. First, in a case study, the implementation of principles of codes of

conduct by public accountant is very specific. This is because Indonesian society is

strongly influenced by social, political, cultural and economic conditions that

characterise nearly all developing countries, in particular the culture of collusion,


nepotism and corruption that strongly influences almost all business activities.

Moreover, Indonesian society is one of the Asian countries so influenced by Eastern

culture that it is quite difficult to become an open-minded society, and hence is not

open to all business activities. Therefore, the findings of this research are too limited

to be generalised. Secondly, the primary data are only gathered through the

conducting of semi-structured interviews with clients (users). The researcher

obviously could not observe at first hand, the actual implementation of principles of

codes of conduct by public accountants, because the information discussed between

clients and public accountants is confidential and unavailable to outside persons.

Hence, the information merely reports regarding their auditing practices. Therefore,

the researcher must accept the statements they make and the data analysis must be

limited to the interview results.

The Structure of this Thesis

This thesis is presented in six chapters. Chapter 2 develops the establishment of the

underlying theories of morals and morality, especially moral reasoning, the

development of ethics in accounting (professional ethics), and how ethics contributes

to the professional accountant (CPA). Studies related to each variable are reviewed

and characteristics are identified for use in the study.

Chapter 3 is a discussion of the research method employed. The validity and

applicability of the case study approach including the interview and questionnaire

design as well as the interpretation process are discussed. Then, chapter 4 is an


overview of the historical development of public accountants in Indonesia and

includes the process of the development and improvement of standards, principles

and regulation of the accounting profession, particularly ethical codes (principles

codes of conduct). The analysis, interpretation and discussions of each individual case

study of the implementation of principles code of conduct by public accountants in

Indonesia is presented in chapter 5. Finally, chapter 6 is a summary of the findings

and a discussion of recommendation and conclusions based upon the findings.


Introduction

CHAPTER2

LITERATURE REVIEW

Page 14

This chapter provides a literature review of the role of "morals", especially moral

reasoning by individuals in making ethical decision in action. Therefore, this chapter

is divided into 5 sections. The first section contains a literature review that discusses

morals and morality in general. The second section follows the development of

research on the role of mora~ reasoning in implementing judgments (ethical decision

making). This section reviews research relating to identifying theoretical approaches,

ethical decision-making and implementation, and also focuses on the process of moral

reasoning of individuals that can be explored through understanding of the

individual 's moral development model. The third section discusses research

associated with the development of ethics in accounting practices. And the fourth

section summarizes studies relating to applied ethics in public accounting. This

section addresses several issues related to ethical codes as fundamental for the

practice of professionals. The case of the development of a professional code of ethics

in the United States of America is used to illustrate some of the problems encountered

in developing a code and how these problems can be resolved. Finally, the last section

addresses the relationship between moral reasoning and ethical decision making in

the implementation of ethical codes by professional accountants.

Chapter 2 .. . Literature Review

Moral & Morality

Introduction

Page 15

Many recent philosophical papers have concentrated on the discussion about the

establishment of morals and morality. This discussion has been based on identifying

several aspects, such as attitudes, problems and principles, which determine the

concept of morals and morality. However, there has been no consistency in the use of

the words "moral" and "morality" in many disciplines. In fact, the words 'morals' and

'morality' have different meanings. According to Whiteley (1970, p.21) any

acceptable way of defining morals and morality must isolate something, which plays

a distinctive part in human life, and must enable us to distinguish matters of morality

(right and wrong) from matters of taste or preference and matters of convenience or

expediency. The difference between morals and morality is important to comprehend.

Therefore, this section provides a definition of morals and morality as well as a

discussion of the role, and the judgment of morals, in general.

Definition and Characteristics

What is Moral?

A definition of morals depends on the purpose the definition is intended to serve, and

in what contexts it is to be used. Furthermore, a definition of moral should not be

judged as correct or incorrect, but should be judged as suitable or unsuitable (Baier,

1958, p.12)

Chapter 2 ... Literature Review

Moral is defined as

The way in which in one combination it contrasts with one set of epithets, whereas in another combination it contrasts with a different set: a moral duty can be contrasted with a legal duty; on the other hand, moral considerations may be opposed to legal, prudential or aesthetic consideration (Wallace & Walker, 1970, p.14)

For Whiteley (1970), there are two possible ways to define 'moral ' . The first possible

way is that suggested by the etymology of moral, ethical and similar words. As an

example, the morality of a community consists of those ways of behaviour, which

each member of the community is taught, bidden and encouraged to adopt by the

other members. The second possible way of defining 'moral ' is based on an

individual (agent) viewpoint that means content of conscience. In other words,

morality is not only concerned with what people insist that I should do, but also

concerns what I insist that I should do.

Moreover, the definition of moral from a linguistics perspective has several meaning

aspects, such as

Of or concerned with the judgment or instruction of goodness or badness of character and behavior; Conforming to established standards of good behavior; A rising from conscience; Having psychological rather than tangible effect; Based on likelihood rather than evidence; The principle taught by a story or event and Rules or habits of conduct, especially of sexual conduct (Encarta Encyclopedia. CD-ROM, Encarta Encyclopedia, January 1998).

Furthermore, Webster' s Dictionary (1992) defines moral as a concept dealing with or

capacity to make the distinction between right and wrong in conduct. In other words,


moral implies conformity with the generally accepted standards of goodness or

rightness in conduct or character. Donagan argued that,

Moral has known as intuitionism and 'has been widely advanced as connecting the conception of morality as a system of specific precepts binding upon rational creatures as such with the conception of it as an unselfconscious disposition of affection and conduct ( 1977, p.17)

It is clear that several interpretations of the definition of moral can be drawn together

into one important conclusion that moral involves a judgment of goodness or badness,

and rightful or wrongful behaviour. This judgment should exist within every

individual as a rational creature who possesses a conscience. And also, moral includes

the involvement of social constraints, which would encourage people to decide on

their judgment, thus the expected condition of their society would be established.

Several reviews of various definitions given above might provide an adequate

account of 'moral' as a term of approval, but provide a quite inadequate account of

'moral' as a classificatory term.

What is Morality?

Morality is "a guide to conduct acceptable to all rational people that means a code of

conduct that all rational men would accept" (Gert, 1973). Moreover, Baier (1958)

argued that moral quality or character, is the rightness or wrongness of an action and

also the character of being in accordance with the principles or standards of right

conduct. Additionally, Robber's argument (cf Baier, 195 8, p.314) about morality is


that it is a system of principles whose acceptance by everyone as overruling the

dictates of self-interest and is in the interest of everyone alike. Following the rules of

morality, however, is not, of course, identical with following self-interest. If it were,

there could be no conflict between morality and self-interest and there would be no

point in having moral rules overriding self-interest. In spite of this, it is also right in

saying that the application of this system of rules is in accordance with the reason

only in social conditions that is when there are well-established ways of behaviour.

Furthermore, morality has other definitions, namely: the quality of being moral; a

system of ideas of right and Wrong conduct and also Virtuous conduct (Encarta

Encyclopedia. CD-ROM, Encarta Encyclopedia, January 1998). Moreover, The

Webster Dictionary defines morality as the character of being in accordance with the

principles or standards of right conduct. MacDonald (1995) defines morality as a

system of rules that modifies our behaviour in social situations. It is about the doing

of good instead of harm, and it sets some standard of virtuous conduct.

In spite of the definitions of morality mentioned above, morality also can be defined

in accordance with several reasonable conceptions that will be used as a base of

thought and understanding. Morality is innate and underpins the development of some

concepts. According to Whiteley (1970, p.23) the concept of morality is a

sociological or political concept that defines rules in the life of societies. Therefore,

morality can be explored based on its function, its relationship with religion,

economics and government. Durkheim (cf Etzioni, A, 1988, p. 8) argued that,


"morality is a system of rules and values provided by society, imbedded in its culture

and that individual acquires these as part of the general transmission of culture".

Morality based on the psychological point of view is

A certain factor in the consciousness and conduct of individuals. It is a suitable concept for those who are concerned with, moral endeavor, aspiration and struggle with the nature, development and influence of the conscience. (Solomon, 1984, p.28)

Moreover, from the religious point of view as explained in the Western intellectual

tradition, the first reasonably clear conception of morality is as a standard for judging

systems of mores, or in other words, the concept of morality is based on common law

that applies to every rational and knowledgeable individual. This view seems to have

been formed by some philosophers, namely the Stoics, Cicero, Aristotle, and through

religious tradition (Donagan, 1977). At the beginning, the Stoics and Cicero

explained that before there was a written law that must be applied, naturally and

universally, there was established a highest law and truth that originated from the

highest substance or thing (a God) commonly called Zeus and Jupiter. They believed

that, every rational individual whom obviously possesses a divine mind would

automatically construct a divine law to be applied on their life regulation.

The Stoic ideal as described by Diogenes Laetius was,

To be in accordance with Nature, that is in accordance with the nature of man and that of the universe, doing nothing which the universal law is wont to forbid, that is, the right reason which pervades all things and is coextensive with Zeus (1998, p.2)


There is another similar argument mentioned by the scholar, Cicero (Cicereo, de

Legibus, II, 4, 10) argued that

Before there was a written law reason existed, having sprung from the nature of things, impelling (men) to right action, and summoning (them) from wrongdoing. This reason began to be law, not when it was written down, but it originated; and it originated simultaneously with the divine mind. Hence the true and supreme law having to do with commanding and forbidding is the right reason of Jupiter and highest. (cf Donagan, 1977, p.3)

The true and supreme law was held to be both willed by the highest of the gods and

enjoined by reason. These two characteristics are inseparable, because the divine law

expresses the divine mind, which is necessarily rational. Hence, t.he point of view of

moral philosophy, the one that is fundamental, is rationality (Etzioni, 1988, p.10).

However, since the birth and development of western religion, those descriptions of

law by the Stoics and Cicero mentioned above have been criticized by several groups,

especially the Christian and Jews. They place more emphasis on existing law and also

truth as originating from the divine commands that in the end actually originated from

the highest substance, that is God, as an expression of divine law. A divine command

expresses divine law if and only if it expresses divine reason. And if it can be

assumed, as it was by the Stoics, that human reason is in principle adequate for the

direction of human life, it follows that so far as it has to do with the regulation of

human life, the context of the divine law can be ascertained by natural human reason,

and its force appreciated, without any direct reference to the gods at all. By contrast,

divine commands that do not express divine law can only be known by revelation,

whether from the mouth of the god himself, or through intermediaries (Donagan,


1977, p.5). Thus, this universal or common code is what Jews and Christians came to

refer to as morality or the moral law and which also became known as the law of

nature and natural law. This is because they believed that the moral law applies to

people by virtue of his/her nature as a rational being, and is known to them primarily

by the exercise of natural human reason. The philosopher, Aristotle, also supported

those matters mentioned above The Aristotelian way believed that the conception of

morality as virtue is not an alternative to a conception of it as law. The conception of

morality as virtue presupposes that, in situations calling for moral choice, practical

wisdom can determine whether or not a given choice accords with a rationally

determined mean (cf Donagan, 1977, p. 7)

Even though, endorsed by the Stoics, and Jewish and Christian religious traditions,

the conception of morality as a common law to all rational creatures by virtue of their

rationality, is not religious-itself. Ultimately, morality is a system of laws or percepts,

binding upon rational creatures as such, the content of which is ascertainable by

human reason (Donagan, 1977). Basically, it can be concluded that the definition of

morality is a rule or as a system or laws which governs each individual on how to

morally behave, or rules or norms that are applied within society, that must be obeyed

by every rational individual consciously. From the discussion above, it can be seen

that moral and morality are different. Moral relates to conscience, character and

conduct of life, whilst morality relates to rules, law or systems that are commonly

applied within society to establish expected conditions.


However, further discussion in this study concentrates on the scope of morals,

because moral issues have the aim of exploring individuals as rational creatures, who

must be able to judge which is good or bad, and which is right or wrong for all their

desire and intention in their behaviour. In other words, individuals with morals should

be able to obey the applied rule or system consciously. Based on this line of

reasoning, comprehension of moral issues will be important.

The Categories of Moral Perspectives

Before further discussion in relation to the scope of morals, this chapter provides a

wider understanding of the difference of moral definitions when viewed from several

different perspectives or points of view. Preceding scholars have classified the

meaning of moral from several different perspectives of knowledge; philosophical,

psychological, social and economic perspectives.

First, the Philosophical perspective provides a consideration of the various kinds of

questions that arise in thinking about how one ought to live one's life, especially

finding out how to justify what is right, good, worthwhile, or just, and precisely what

such judgments means (Glickman, 1976, p.4). Philosophical perspectives argue that

because morality involves deliberation due to possible courses of action, a vast range

of empirical knowledge about action, desire, and reasoning is centrally relevant to

moral philosophy (Johnson, 1996).


Secondly, the Psychological perspective alleges to be a merely empirical discipline

describing contingent facts about how people actually are motivated, how they

understand things, and the factors that affect their moral reasoning (Johnson, 1996,

p.46). In other words, a psychological perspective means the psychology of human

moral understanding, which includes empirical inquiry into the conceptual system

that underlies moral reasoning. Moreover, the psychology of moral understanding can

give profound insights into the origin, nature, and structure of basic moral concepts

and into the ways to reason with those concepts. Thus, Johnson (1996, p.50) says that

a comprehensive moral psychology perspective includes at least the following types

of inquiry; personal identity; human behaviour and motivation; moral development;

conceptualization; reasoning; and affection. Moreover, moral psychology explores

what is involved in making moral judgments, and it will thereby cultivate in a certain

wisdom that comes from knowing about the nature and limits of human

understanding, a wisdom that will help us live morally insightful and sensitive lives.

Thirdly, another perspectives are the Social perspective. This explores morals as

human nature wherein individuals are assumed to be born with an unsavory

predisposition and not at all inclined to live harmoniously with one another. They

must be inoculated with values to develop their moral character, and authority is

needed to keep the lid on social order (Etzioni, 1988, p.8). This is similar to Parson's

description (cf Etzioni, 1988, p.8) that the core concept is functionalism. This means

that the acts of individuals are affected and evaluated in terms of their contribution to

the social order, which in tum is introduced into the individuals via socialization and


reinforced by social control. Social scientists (cf. Etzioni, A, 1988, p.9) have a simple

answer: that those who violate the values are either re-educated to embrace it, or

punished until they abide by it, and others are deterred from transgressing. Morality

motivates people to worry about public goods, to forgo free rides. It is clearly an

important way to shore up the commons and one that keeps the need for government

intervention low, including the need to generated inducements.

Fourthly, based on the Economic perspective that which is moral will be explored

with two paradigms, namely the neoclassical paradigm and the deontological

paradigm.

The neoclassical paradigm is a utilitarian, rationalist and individualist paradigm. It

sees individuals as seeking to maximize their utility and rationally, choosing the best

means to serve goals (Etzioni, 1988, p.2). The neoclassical paradigm is that people

seek to maximize one utility whether it is pleasure, happiness, consumption or merely

a formal notion of a unitary goal. These assume that people pursue at least two

irreducible "utilities" and have two sources of valuation; pleasure and morality

(Etzioni, 1988, p.3). Moreover, the model of the neoclassicists is self-oriented,

rational behaviour that is assumed to occur within the context of personality structure

and society. Additionally, other neoclassicists argued that moral commitments deeply

affects all behaviour, economic included (Wimich, 1984, p.994). The neoclassical

paradigm does not merely ignore the moral dimension but actively opposes its


inclusion. Thus, it is stressed that various individuals may have different rankings of

preference over a field of choice, but none can be deemed to be better (Etzioni, 1988).

Finally, the deontological paradigm emerged as a suggested paradigm that begins

with the multiple self as a primary concept, but went on to seek specific theorems

about the social and intrapsychic conditions under which one part of the self is more

powerful than the other. Moreover, the essence of the deontological position is the

notion that actions are morally right when they conform to a relevant principle or duty

(Etzioni, 1988, p.13). The deontological paradigm assumes that people have at least

some significant involvement in the community (neoclassical paradigm would say

"surrender of sovereignty"), a sense of shared identity and commitment to values; a

sense that "We are members of one another" (Etzioni, 1988, p.7). The deontological

paradigm assumes that individuals experience perpetual inner tension generated by

conflict among their various basic urges (or desires), among their various moral

commitments and between their urges and their moral commitments (Etzioni, 1988,

p.11). Deontology stresses that the moral status of an act should not be judged by its

consequences, the way utilitarian do, but by the intention. For example, a person who

sets out to defame another is acting immorally, whether or not the person succeeds in

actually damaging the one he or she seeks to defame. The deontology paradigm is

used as the criterion for judging the morality of an act, not the ends it aspires to

achieve, nor the consequences, but the moral duty it discharges or disregards (Guy,

1990; Etzioni, 1988)


Finally, the importance of the deontology paradigm is that a major source of the

conflict is in the self as commitment to discharge one' s duties and more generally to

act morally. There is more to life than a quest to maximize one's satisfaction.

From the several perspectives explained above, it could be concluded that human

beings can be moral creatures because there are several concepts underlying their

behaviour, or there are several issues involved. From the psychology perspective,

moral is a form of system that gives an argument as to how people actually think and

behave morally. As a result, this concept will produce reasoning for individuals

within every activity; so people can live more morally, rightful and sensitive lives.

Moreover, a philosophical approach explores how to create harmonious lives in

societies, with focus on how people ought to think and behave morally.

Consequently, moral behaviour can be achieved through the development of moral

character, and through the existences of rules or regulation, subsequently;

expectations of societies can be realized. Moreover, the economic perspectives

describes moral with two concepts. Similar to the definition of economic behaviour

the concept is maximalisations of utility with minimise of sacrifice; then moral can be

influenced by economic behaviour (self oriented). Hence, this matter sometimes is

biased to a few situations because moral only focused to satisfy self -interest.

Consequently, to balance this concept is the deontological concept, which is focused

on obligation or duty, oriented to attain harmonization of lives.


Therefore, morals could be described as the way of life of human beings whose lives

have been greatly influenced by their perspective, such as their understanding of

education and knowledge, which then evolves from the development of their moral

psychology, and their social economic condition which then evolves into the

development of their social morals. From the argument above it can be seen that the

role of morals is very significant and essential, particularly as guidance and

motivation for human beings to come to good and proper decisions in all their

conscious behaviour.

The General Role of Morals

As discussed before, the role of morals 1s very important for every individual

because, fundamentally, human beings always are in search of objectives and

satisfaction and fulfillment as individuals or as social creatures. Therefore, it can be

argued that there exists an approach or means that behaves as controller or balancer of

it all, which is described as morals. Then, naturally the role of morals is essential in

forming an expected condition in people lives by making good and proper decisions

and having good behaviour, according to the culture. As Buttler and Hume observed

(cf. Nielsen, 1974, p.191) the human being is a part of human society and people

normally tend to consider the welfare to others as well as their own welfare. Thus,

people are moral primarily because they have been conditioned to be moral.

In fact, many people often do what is right and what is wrong. It has been shown that

nature cannot be responsible for this fact, for human morality cannot consist in simply


following nature ' s prompting or inclinations. The cause of human beings' morals is

their moral reasoning. According to Baier (1958, p.258), there are within people two

forces, reason and desire, capable of pushing people in opposite directions, and

reason is always on the side of morality. Reason inclines us toward satisfying the

demands of morality; desire inclines us the other way. In other words, if reason is

stronger, people are moral; if desire is stronger, people are immoral.

Moreover, based on human psychology, human nature certainly means that people

have a conscience and this conscience not only causes people to act in certain ways,

but also is in fact a norm of action. Nielsen (1974, p.192) argued that conscience

guides as well as goads, the deliverances of conscience are both actions - evoking

and a source of moral knowledge. Also, conscience tells the moral agent what to do

even in specific situations. According to Baier (1958, p.260) people should be moral

because they will not be happy if they do not behave morally. Being moral is at least

a necessary condition for being happy. If people ignore the dictates of their

conscience, then they will not be happy. Therefore, morals that emerge by any reason

will have important roles in regulating or inventing balance, creating joyful and

peaceful relationships within the society.

Consequently, if everyone acts morally, or generally act morally, people will able to

attain more of what they want That means in a moral community more good will be

realized than in a non-moral collection of people. Hence, in the interest of realizing a

commodious life for all, voluntary self-sacrifice is sometimes necessary, but the best


possible life for everyone is attainable only if people act morally. Additionally, the

greatest possible good is realized only when everyone puts aside their own self

interest when it conflicts with the common good (Nielsen, 1974, p.200).

Finally, moral roles are required within the living of society, in order to regulate that

culture and way of life. But in some particular cases, especially when morals conflict

with a human' s personal interest, then sometimes morals is set aside and the role of

morals become unclear. Conversely, individual awareness is important, especially

when deciding moral judgments, in order for morals to have their role.

Moral Judgment (Bad and Good Morals)

It is clearly understood that morals have an important role to manage or maintain the

equilibrium between human being as social creatures and an individual that has

personal concerns. For that reason, in the determination of a moral decision it is

significant to determine whether it is a good or poor decision. Hence the undertaken

decision will result in a suitable behaviour that is conformable with a way of life.

According to some philosophers' perceptions, there are several different angles

regarding conceptualizing and comprehending moral judgment. One classification

claims a moral decision as a result of the existence of a pure reason from each

individual. That claim refers to the good reason that is decided by each individual in

his/her action and behaviour. As has been explained by Toulmin (1950) a moral

judgment asserts the existence or non-existence of good reason. The term 'good

reason' that is being used here is a reason for doing the action. Good reason means


unequivocally good reason for doing the action, and also it must refer to morally good

reason. Some scholars argue that moral decisions are established from the foundation

of the logical process of human beings ' ideas. Further, human beings have always

been challenged with sets of decisions that must be chosen, before something is done.

As has been explained by Baier (1958, p.265) moral judgments are practical

judgments which have four main logical features such as, (a) they can be mutually

contradictory; (b) they are capable of guiding a moral agent in the search of the

morally right thing to do, ( c) there must be good reasons why a moral agent should do

the morally right thing rather than opposite and ( d) we can know whether a course of

action is right or wrong even though we cannot perceive it by means of the sense.

Moreover, some scholars also explain that moral judgments containing 'ought' or

' should' are practical judgments in which a man advocates acting according to the

moral rules or moral ideals, for example doing morally right and morally good actions

(Gert, 1973, p.37).

Obviously, a rational human being has always aspired to decide all of his or her

decisions or actions that are based on good factors or lead to goodness: A morally

good person will have the rationality to choose with whom they live, unless they have

a reason. On the other hand, a morally bad person has no rationality to choose whom

they will live with, unless they have a reason. Consequently, all rational people would

choose a morally better person to live with. Thus all rational people would select the

moraHy good man or woman over the morally bad one. Therefore, rational people are


interested in the moral character of others because of the consequences for him/her

self and those for whom he/she is concerned (Amstrong, 1995; Gert, 1973).

However, in fact a human being, as a rational individual, has consciousness, within

his or her social life. Human beings will always be challenged by a condition where

they will decide whether to act in accordance with their expectation and satisfaction

as an individual or as a social creature. These conditions will sometimes persuade

human beings to be outside their boundaries of moral rule. Therefore, to decide a

moral decision within every human being's conduct is very important and required

before any actions or behaviour are taken. Moreover, this circumstance will, very

much, be affected by the human being' s point of view and the way of thought or

argument. Then, it will determine and also distinguish the use of the moral decision

approach. Besides, human beings are concerned with the determination of moral

decisions influenced by particular moral perspectives in which they have belief and

also moral reasomng as their arguments. According to Lumen

(www.meddean.luc.edu, February, 2001) moral reasoning is a process of the way of

thinking or argument to decide whether an action, judgment or decision is right or

wrong and good or bad. Consequently, these reasons or arguments can be used as the

basis of a person's judgment in making a decision of action rightly or wrongly in a

given situation. As a result, moral reasoning can be used to consider emphasizing

issues of a person' s character and virtue. However, the influence on a moral decision

or judgment is not only from moral reasoning it self According to Kohlberg and

Colby ( 19 87, p.16) the degree of moral perspective provides a general organization of


moral judgment and serves to inform and unite other more specific moral concepts

namely the nature of morally right or good, the nature of moral reciprocity or moral

rules, of rights, of obligation or duty, of fairness , of welfare consequences, and of

moral values. These moral values are obedience to authority, preservation of human

life and maintenance of contracts and affect ional relations. '

Additionally, Kolhberg' s moral judgment (1976) explores the level of socio-moral

perspective mostly predominant as to be the characteristic point of view from which

the individual formulates moral judgment. The perspective taken underlying the

moral considerations, are intrinsically moral in nature rather than of a logical or social

cognitive structure applied to the moral domain.

Moreover, according to other scholars, moral judgments have certain properties that

drive them to make moral judgments. They consist of judgment of value; social

judgments (i.e. judgment involving people); and prescriptive or normative judgments

(i .e. judgments of ought of rights and responsibilities rather than value judgments of

liking and preference) (Kuffman, 1987, p.10).

It could be underlined here that human beings' way of thinking to decide their morals

behaviour is based and influenced by the morals perspective and moral reasoning.

Moral perspective is a strong element in coloring human beings' ways of thinking in

determining their morals decision. On the other hand moral reasoning is a human

being' s argument about whether they can justify their behaviour. Hence, it is the point


of view that influences someone's argument or way of thinking that will, in the end,

shape or form behaviour, which will influence the moral decision that will be chosen

by the individual in his/her life. Therefore, it is the morals of an individual that

influence his or her point of view and the way of thinking or arguing. The argument

will go through a lot of escalations, transformations, and developments, in line with

the individual's process of escalation and development of his or her way of thinking.

Summary

From the beginning of this chapter, the subject has been the definition and concept of

moral and morality. It could be concluded that the definition of moral is dealing with

the capability of making the distinction between right and wrong in conduct; moral

implies conformity with the generally accepted standards of goodness or rightness in

conducts or characters. While, the definition of morality is the character of being in

accordance with the principles or standards of the right conduct. Therefore, moral is

the basis of justice, rights and goodness while morality is the effort to get there (to

become moral), and is the standards or regulation to become moral.

Why should someone be moral? As has been explained above, to regulate the living

of society, human beings always are challenged with the dilemma of living, which

involves the behaviour of decision-making on the basis of good or bad or right and

wrong, and also recognizing justice and injustice. Thus, human beings, as intelligent

creatures, have never been free from the foundation of conscience in deciding their

behaviour. It is important to put a moral factor as a foundation for human beings to


./

decide on their behaviour, in acting upon the arranged regulation within the society.

Or in other words, morals are important to be, and should have been within each

human being as an intellectual creature. Because based on morals, human beings

could achieve morality, which is the way of living as moral human beings.

In the end, several philosophy experts have mentioned that the behaviour of a human

being is motivated by a reason and desire, which will become factors of his/her

consciousness, decision and behaviour growth. In addition, a person's argument or

way of thinking as the basis of moral reasoning is the greatest influence on human

beings in developing action or behaving morally, or, in other words, moral reasoning

capability determines moral judgment.

The Role of Moral Reasoning

Introduction

The lengthy discussion above is about understanding "moral" and morality, the roles

and also the perspectives on what is moral, in general. Hence, the next discussion in

this thesis will continue with a more specific focus on moral reasoning. It is an

interesting subject because understanding moral reasoning is similar to the

development of moral cognition - moral judgment - moral action or moral behaviour

within each person. Additionally, according to Kohlberg (1976), moral reasoning can

be described as a logical argument of justice, the logic that one utilizes to figure out

what is fair or just, to balance the claims in a given moral conflict. Therefore moral '

reasoning is mostly utilized to comprehend how moral values or moral character of an


individual influence behaviour and action, especially when responding or arguing in

special circumstances.

Thus, before discussing issues that relate to moral conflict, it would be better to

comprehend the moral development of an individual in the context of the moral

reasoning process.

Definition and Characteristics

Too many definitions have been given by scholars, in respect of the arguments of

people as to what is appropriate to achieve: of what is good or bad. As Fox and

DeMarco (1990, p.4) argue, moral reasoning is the argument of people about how

people should act or give a reason to justify or criticize behaviour. The reason offered

is to show why that kind of action is believed to be wrong or why that judgment is

thought to be correct. Moreover, the other definition of moral reasoning is an

argument that means a reason or a series of reasons, which aims to support a

particular claim, which is called the conclusion. Thus, this argument consists of

reason and conclusion (Thompson, 1998, p.5). Besides, a definition of moral

reasoning from Kohlberg (1976) as an explanation of the process of the growth of an

individual in terms of moral development until the needs for ethical decision-making

is used. Hence, moral reasoning is a process of deciding whether an action, judgment,

or decision is right or wrong. Thus, from the definition above, it can be concluded

that moral reasoning has three points of view, such as; thinking about what people


should do and why people should do it; forming ideas to describe and evaluate

actions; and judging a particular action by means of a general rule.

Basically, moral reasomng is similar to argument of moral beliefs by every

individual. The development of the level of moral reasoning can be described by the

model's Individual Moral Development. According to Kohlberg (1976) the theory of

individual moral development is one of the most widely used approaches to the

examination or investigation and explanation of moral reasoning by individuals.

Consequently, there are some theoretical approaches based on a philosophical

approach, which can be used as basis to understanding of moral reasoning.

Theoretical Approach of Moral Reasoning

As mentioned above, exploration of moral reasoning is equal to explaining the

application of morality, because the nature of moral reasoning is most widely

described within ethical theory. Ethical theories usually, consist of a statement and an

explanation of such principles and an attempt to show why people are engaged in

moral thinking or behaviour (Fox and DeMarco, 1989, p.54). Furthermore,

philosophers usually divide ethical theories into three general subject areas, namely:

metaethics, normative ethics and applied ethics (cf Anderson, 2000). Then, moral

reasoning is a form of metaethics because metaethics investigates where our ethical

principles come from, and what they mean and focuses on the issues of universal

truths, the will of God, the role of reason in ethical judgments and the meaning of

ethical terms themselves (cf Anderson, 2000). Moreover, Fox and DeMarco (1989,


p.54) stated that in metaethics, philosophers take a position with respect to how we

reason in ethics and whether such reasoning can determine whether moral actions are

right and wrong. Therefore, metaethics merely describes reason as argument related

with the decision of good or bad behaviour. Explanation regarding the practical task

of determining the moral standards that regulate right and wrong conduct can be

dedicated to a theoretical approach based on normative ethics (cf Anderson, 2000).

Consequently, a theoretical approach that can be used to explore moral reasoning is

based on the psychological issue in methaethics, and is concerned with the

psychological motivation of moral actions. In this context the studies that can be

referred to be studies of a scholar' s moral reasoning such as Immanuel Kant (1724-

1804) asserting that only non-emotional rational choices can be moral, and the studies

of stages of development of moral thinking explored by Lawrence Kohl berg ( 1927-

1987), and others.

However, normative ethical theories mostly have a role in the establishment of

understanding practical ethics or applied ethics, such as conduct, rules, regulation,

principles or standards. There are three types of approaches of normative theories;

teleological ( consequentialist), with utilitarianism as a basic form taken by

teleological approaches; deontological (duty-oriented); and virtue-oriented (cf.

Anderson, 2000). First, utility in the sense used in utilitarianism refers to pleasure or

happiness, rather than general usefulness. The principle of utility is sometimes called

the pleasure principles, and utilitarianism the greatest happiness theory. There are two

parts in this theory; act utilitarianism and rule utilitarianism, whereas act-


utilitarianism judges on the . basis of particular acts, rule-utilitarianism judges on the

basis of the likely consequences of the greatest number following the rules in

question. Secondly, deontological (duty oriented) or non consequentialist approaches

explain that the right is taken to be the key to ethical behaviour then ethics becomes

oriented to ideas of obligation and duty, centering around the statement of principles

of behaviour, rather than the tracing of consequences. One of the scholars within this

approach is Immanuel Kant with formalism theory that means right is a rational

willing of one's duty for duty' s sake. Thirdly, the virtue oriented approach centers on

character traits that are morally valued, such as truthfulness, courage, compassion and

sincerity. Moreover, virtue is the cultivation of enduring traits (such as competence,

attentiveness, honesty, compassion and loyalty) through education, the influence of

role models, and the habitual exercise of those traits. Furthermore, virtue is claimed

as a more reliable basis in practice for morally correct action than is knowledge of

principles, rules or codes. Thus, virtues are generally reliable means for doing the

right thing; consequently virtue partly constitutes right actions (Anderson, 2000).

Therefore, in general, theoretical approaches to moral reasoning are based on ethical

theory with a focus on philosophical approaches, which describes knowledge of

moral reasoning itself (metaethics ). A theoretical approach to explaining how moral

reasoning in practice influences daily life uses a normative ethics approach, with a

focus on utilitarianism and deontologism that provide the basis for implementation of

ethical rule or principles.


Process of Moral Reasoning (Individual Moral Development)

The exploration of moral reasoning can employ at least two approaches: a

philosophical approach as shown above, which can be used as a foundation to

understand the theory of moral reasoning. The other approach is psychological and

explores the process by which the moral reasoning of every person influences their

moral judgment within action based on moral behaviour. Hence, in this part, a

psychological approach is used to explore moral reasoning, particularly in the process

of moral reasoning by an individual.

As explained before, a moral decision is never educed from a human being's way of

thinking and expectation as an individual creature. Obviously, to make a decision

about 'moral judgment' depends on the development process of morals within each

individual, his or her moral perspective. Besides, the practical applications of

morality theories can only be fully appreciated in the context of moral development

Thus, by understanding the process of an individual's moral development, it is clear

that there is a co-relation between cognitive judgment and action of morals, which, in

the end, will initiate moral reasoning for an individual's actions and behaviour.

Several social scientists have theorized about the chronology and order in which

people develop the ability to know right from wrong or good from bad. One moral

philosophers, Lawrence Kohlberg (1958), stated that an individual's cognitive

conception of morality is characterized by his or her level of moral development and

also argued that the theory of moral development is one of the most widely used


approaches to the examination of moral reasoning. Hence, the study of individual

moral development starts from the important moral cognition-judgment-action of

each individual accountant that is, the ways in which people reason about and justify,

on the basis of principle, their judgment, the ethical desirability of their actions. In

other words, the understanding of moral development from cognition-judgment

actions by using several moral concepts serves as a foundation for the moral

reasoning of a human being. In principle, there are several conceptual theories of

individual moral development that can be used in the investigation of moral

reasoning. One of these that have been published by one of the popular conceptual

theorists is Kohlberg' s justice-based theory (1969, 1976, 1981 , 1984). It is

empirically grounded and combines the moral philosophy of John Dewey with the

cognitive psychology of Jean Piaget. Kohlberg' s model is related to Mill's utilitarian

perspective in which moral action promotes the greatest happiness for all. Based on

his study, individual learning (cognitive development) is a necessary prerequisite for

moral reasoning (Selman, 1971 ; Kuhn, Langer and Kohlberg, 1971). Kohlberg's

theory (1969, 1976, 1981 , 1984) focuses on moral development. The theory also

explains that individuals have morals if they uphold "rightness". Moreover,

Kohlberg' s justice perspective is grounded in the tradition of social liberalism '

committing to personal liberty within a social contract model. In this model, it is

possible to specify some principles of conduct that can be mutually agreed upon by

rational members of society. The notion of personal liberty recognizes that

individuals have different views of the good life and should be allowed to have


autonomy to pursue different goals. From this perspective, human rights, liberty and

property are promoted by eliminating unnecessary restrictions on human activity.

Furthermore, there are six stages on three levels of Kohlberg's moral development

model that must be attained by individuals in order to achieve full morality. Namely;

level 1,the premoral or preconventional level; level 2, the conventional or moral level;

level 3, the postconventional or autonomous level (cf. LaMar, 1997)

The first level is the preconventional level of moral development in which

behavioural norms are viewed as external factors to the individual. There are two

stages on this level, the goodness of an action that is determined by its consequences,

where a self-centered individual defers to power and avoids punishment. And, the

individual seeks to satisfy the needs of others who will ultimately benefit from the

action. The second level is the conventional level, where norms are internalized by an

individual. On this level there are two stages; external forces determine the goodness

of behaviour, where the individual seeks to please and receive approval from others.

And, the individual begins to use external rules and social norms to determine right

action. The third level is the post-conventional level or principled morality, where an

individual complies with group norms only when they are consistent with individual

values and principles. This level consists of two stages that represent consideration of

social welfare in determining which rules to obey. At the first stage personal values

are used as means to evaluate rules or law. And at the other stage, the individual


evaluates behaviour on the basis of universal ethical principles. The right behaviour is

accepted by consensus among rational individuals.

However, Kohlberg's moral development has been criticized by Gilligan (cf LaMar,

1997). Gilligan's responsibility-based theory (1977, 1979, 1982) suggests that

individuals follow different paths of moral development. There are Kohlberg' s paths

of justice reasoning while another path focuses more heavily on the responsibilities of

individuals within specific social circumstances. Gilligan criticises Kohlberg' s theory

.because his focus is only on justice, and Gilligan argued that there is also the ethic of

care, which may be the framework that females are more likely to work from. For

example, connection, identification, support, care of others, balancing of other's and

selfs need all point to an ethic of caring for others (Niolon, 1998, p.2). Besides,

Gilligan (cf. LaMar, 1997) demonstrated through several studies that males and

females approach moral issues from completely different perspectives. Females tend

to base their moral actions on responsibility toward other people more than on

abstract principles. When, individuals make decisions, they can and should consider

their relations with and responsibilities to others. The right course of action is

determined through a discourse taking seriously the self-interests and others.

Gilligan' s theory is based on the notion of mutual responsibility among individuals.

As supported by Yuthas (1998, p.63) a moral individual is one who expands the

notion of self by assimilating responsibilities to self and other. Thus, moral

development culminates with responsible choices that recognize the need for


compass10n and fairness for one's self and others. Moreover, Gilligan's model

suggests that moral decisions are made within a specific contextual frame (Yuthas,

1998, p.61). The roots of Gilligan's theory can be traced back to Aristotle and Hume

(Meyers and Kittay, 1987; Baier, 1987). These philosophers stressed the importance

of virtue rather than justice in moral deliberation. Aristotle viewed humans as social

beings and suggested that moral decisions are the result of the careful cultivation of

character, rather than of mere application of abstract principles. Similarly, Hume

argued that reason alone couldn't inform moral decisions, but that moral sentiments

guide ethical conduct. Consequently, from the responsibility perspectives,

circumstantial and contextual factors circumscribe the application of moral principles.

According to Gilligan (1982) there are three levels in the individual moral

development model with each level having two stages. The first level 1s

preconventional, which is orientation toward self-interest, from selfishness to

responsibility. The meaning of preconventional stages in Gilligan's model suggests

that individuals focus on survival first through individual means and then through

instrumental exchanges with others. In this stage, morality is a matter of self-imposed

sanctions that promote survival of the self. The individual is concerned only with the

self. And the individual begins to perceive a conflict between self-interested

behaviour and responsibilities to others. The second level is conventional, which is

identification of goodness with responsibility for others, from conformity to a new

inner judgment. The meaning of the conventional level represents a shift in focus

from the self-interested needs of an individual to the needs of others with whom the


individual comes into contact. This level consists of two stages. First, an individual

begins to develop a strong concern for others, where goodness is equated with

sacrificing the needs of self for those of others. Second, the individual becomes aware

of the responsibilities to oneself. Thus, the individual in this level begins to balance

the needs of others with the needs of self The third level is post conventional, which

is focusing on the dynamic between self and others that seriously considers gender

differences when evaluating moral reasoning, judgment and actions. The meaning of

the post conventional level is that the conflict between the needs of the self and others

is resolved through the nation of responsibility. The individual accepts responsibility

for avoiding actions that harm the self or others. In this level there are two stages. In

the first stage the individual develops and modifies relationship with others in a

manner that incorporates the particular interests of the self and others. This

consolidation provides stability in the conflict that arises in the conventional stage. In

the second stage the individual adopts a principle of universal condemnation of

exploitation and harm to others. Thus, the individual in this level understands the

particularities of human relationship and attempts to maintain integrity without

neglecting the needs of others.

Some other scholars such as Sweeney (1995, p.215) argued that moral development

theory attempts to explain the cognitive framework underlying individual decision

making in the context of an ethical dilemma. Furthermore, Johnson ( 1993) (cf. Reiter

and Flynn, 1999, p.228) describes the assumptions underlying a cognitive moral

model as "Moral Law Folk Theory'', which reflects the objectivist belief that human


beings are rational animals with a dual nature of reason and animal desire. Under this

framework, moral reasoning provides a rational determination of the correct moral

stance and the summoning up of the willpower to act. As also explained by Trevino

(1992, p.452) cognition, judgment and action should be co-related due to the

individual's drive to achieve consistency between thought and behaviour.

However, many cases are difficult to resolve and evoke a development of a

theoretical model of a moral individual. As been explained by Reiter and Flynn,

(1999, p.217) another model of moral decision making has been developed by

Johnson with a moral imagination model that integrates character and virtue

philosophy, which focuses on the role of mental models and other imaginative

structure in decision making. According to Johnson (1993) the resulting moral

imagination model links moral reasoning with moral action through consideration of

moral character, mental models and ideals, and the operation of personal narrative in

interaction with the decision maker's past experiences and environment. In other

words the emphasis in the moral imagination model is more on action than decision

making with particular attention to the process, where action is the reflection of

conscious form of character and motivation. Moreover, the moral imagination model

proposes ways "that ethics education can lead to appropriate moral action through

strengthening character and self awareness, developing ethics sensibility, cultivating

ethical reasoning and critical thinking skills, engendering qualities of emotional

empathy, and understanding the effects of organizational policies and economic

incentives on ethical behaviour" (Johnson, 1993). Hence the moral imagination model


differs from the cognitive moral decision making model by emphasizing the role of

emotion in ethical thinking and action and the role of imagination and self reflection

in moral development (Reiter and Flynn, 1999, p.129).

Thus, the individual moral development models above can be employed to understand

the process of moral reasoning. These models explained an individual's behaviour or

actions, which characterize their levels of moral development. Moreover, these

models describe the relationship between cognition, judgment, and moral action to

produce individual behaviour or actions. Therefore, the cognitive moral development

proposed by Kohlberg, Gilligan, and Jonhson's moral imagination as metaphors for

understanding the morality of an individual serve as a conceptual bridge for the

theories of moral judgment and action followed.

Summary

Moral reasoning is a part of the cultivated theoretical approaches to "the moral" and

also elucidates the implementation of individual morality. As mentioned above, moral

reasoning is a process by which people generate arguments to make decisions

whether an act or act judgment is right or wrong. The reason about the actions of a

particular person suggest, whether people acted rightly or wrongly in a given

situation.

Recently, there have been three types of moral growth versions based on Kolhberg' s

model, which pointed out that the growth of morals is embarked on three steps. These


three steps, pre-conventional, conventional and post-conventional, are theoretically

based on the claim that the growth of morals is the result of individual rights that

focus on fairness, rules, and justice. Nevertheless, Gilligan has criticized Kolhberg's

theory and renewed this theory by adding a point of view of the existence of the

perspective of care within the moral development of individual. Finally, according to

Johnson (1993), there exists another model that discusses an individual's moral

development based on the emotional role within the action and the role of

imagination, and self-reflection contained within moral development. Therefore, the

individual development of a human being's moral or human being's moral reasoning

depends on cases or events being encountered and which will influence model

selection of either the Cognitive Moral Development process model or the Moral

Imagination process model.

Ethics in Accounting (Theoretical Perspectives)

Introduction

In the previous section, morals have been explored generally from the psychological

and philosophical approaches. The exploration of moral theories above is one part of

objectivity morals role in this thesis. Obviously, the interpretation of the process

produces individuals' character or morals through their moral reasoning and that can

be shown by observing the development of the moral consciousness of moral

judgment and lastly moral action of the individual. A concept of moral is fundamental

for human nature in life in that it provides people with rules in order to behave

morally.


However, not only does the development of the moral process relate to the character

of an individual, it also touches upon knowledge or science, such as accounting. In

the accounting field, the role of morals is particularly very important and useful,

because accounting, like other sciences -- law, medical, and nursing -- requires

professionalism and needs fairness and clearness of rules or norms to regulate

professional accountants' practices in providing services to publics. Consequently,

the influence of a moral role can be explored by describing the functions of morality

in accounting. As explained by Guy (1990), morality is the rules of "the moral".

Hence, morality is a rule or regulation that must be applied by every professional

accountant. Further, ethics has become an interesting topic in the accounting arena

(Francis, 1990; Alam, 1991, Gambling and Karim, 1991; Chua and Degeling, 1993;

Schweiker, 1993; Triyuwono and Gaffikin, 1995). Many researchers, in essence

stated that ethics should be cohesively entrenched in accounting practices because

ethics can distinguish right from wrong, good from bad, justice from injustice. Hence,

the importance of the attendance in accounting lies primarily in its real effects on the

life of individuals in society. Therefore, discussion in this study will focus on the

understanding and development of ethics in accounting based on a theoretical

perspective.

The Definition and Characteristics of Ethics

The previous discussion regarding applied ethics in accounting explains what ethics is

and how the process of ethics exists in accounting, especially in the implementation

of accounting practices as well as contributions to the accounting knowledge. This


thesis will start by exploring the definitions of ethics and the relationship between

ethics behaviour and morality.

The understanding of Ethics (often called Morality) comes from Greek, ethikos and

the Latin equivalent rnoralis, referring to custom. But morality sometimes is used to

refer to what one does (or standards held as a result of custom), whereas ethics often

is restricted to the philosophical study of morality (Solomon, 1984, p.4). According to

Fox and De Marco (1990, p.6) the words "ethics" and" morality" are sometimes used

interchangeably to mean the same things, but they are sometimes used differently.

Morality is used to refer to the customs or practices of a person or group, whereas

ethics is used to refer to the rules of principles explicitly held or stated by that person

or group. Thus, Solomon (1984, p.4) stated that morality is considered so central to

ethics that the one is virtually defined in terms of the other. Morality is indeed one of

the central concerns of ethics, and moral principles do comprise some of the most

important restrictions and demands on our way of life. The understanding of morality

and ethics are generally the same, which means as a principle or standard of right

conduct applied to distinguish the rightness or wrongness of an action. Furthermore,

the application of morality and ethics in accounting fields serves as a particular

system of such principles or the system of code of moral that must be applied in order

to achieve the point of truths within accounting fields themselves.


According to Guy ethics is defined as

Both a process of inquiry and a code of conduct. Ethical inquiry consists of asking the questions of what is good and what is evil, what is right and what is wrong. As code of conduct, it is a sort of inner eye that enables people to see the rightness or wrongness of their actions (1990, p.15).

Moreover, according to other scholars the tenn 'ethics' refers to a system or code of

conduct based on moral duties and obligations that indicate how we should behave; it

deals with the ability to distinguish right from wrong and the commitment to do what

is right (Cottell and Perlin, 1990).

Thus, understanding ethics only is not enough if it does not explain ethical

characteristics, because it gives more details about ethical obligations of accounting

that relate to morally behaving persons. The characteristic of ethics of accounting is

derived from the idea of ethical commitment, which is the component of an ethical

person. As been explained by Albrecht (1992, p.15), and also, Guy (1990) these are

things such as, Honesty and Integrity; Promise-keeping; Fidelity; Fairness; Caring;

Respect; Responsibility; Excellence and Accountability. These ten characteristics can

also be said to be the guiding values that serve as the foundation for ethical decisions.

The definition of each characteristic is as follows. First, honesty is an ethical value

that means truthful and not deceiving or distorting. Secondly, integrity means using

independent judgment and avoiding conflicts of interest, restraining from self-

aggrandizement, and resisting economic pressure. It means being faithful to one's

deepest beliefs, acting on one' s conviction and not adopting an end-justifies that


ignores principle. Thirdly, promise keeping is different than honestly. People may be

honest in making a commitment but they may later break that promise. So promise

keeping has to do with keeping the commitment. Fourthly, fidelity or loyalty is a

difficult characteristic because every person has so many loyalties. In fact, they are

the cause of most ethical problems. The real problem lies in sorting out loyalties and

understanding what can legitimately be expected from every individual as a loyal

person. And one has to understand where their loyalty lies. Such loyalty becomes a

major challenge for a person desiring to be ethical. Fifthly, fairness means being

open-minded, willing to admit error and not overreaching or taking undue advantage

of another's adversities, and it means avoiding arbitrary or capricious favoritism.

Sixthly, caring is caring for others. This characteristic absorbs all ten of the ethics

principles such that it precludes a lack of respect for the autonomy of the other person

to make decisions about their own lives. Seventhly, respect is respect for others that

mean every person may respect their autonomy and respect them as a human being.

Eighthly, responsibility is responsible citizenship requires participating, being law

abiding, and being someone who is part of a community. It means actions should be

in accord with societal values. Ninthly, excellence is the pursuit of excellence that

implies that every person do their job well, for example, an ethical obligation to be

informed and to be prepared. Tenthly, accountability is the final item on the list of

ethical characteristics, that means accepting the consequences of one's actions and

accepting the responsibility for one's decisions and their consequences.

Nevertheless, ethics is something easy to say but hard to do, because it deals with the

ability to distinguish right from wrong, and the commitment to do what is right has


five reasons to say that such as; self-deception; self-indulgence; self-protection; self

righteousness and faulty reasoning (Albrecht, 1992, p.18)

The Process of Ethics in Accounting

This section discusses the process of ethics development in accounting, particularly

related to the question how ethics emerges in the accounting field. As we know it, the

accounting profession deals with the production and the verification of accounting

information deemed vital to users ' decision making and to an efficient working of

capital markets and national economies. Moreover, the complete reliance on the

resulting accounting information derives from the belief held by the general public

about the high moral standards used by accountants in the accomplishment of their

duties. As a result, the rules or regulation need to be erected through the existence of

standard, principles and ethics, so that accounting has certain morality. Since it

involves many different rules one of which is ethics, accounting morality is still in its

early stage of development and hence debatable (Belkaoui, 1992). According to

Belkaoui ( 1992, p.1) morality in accounting fields has five aspects including fairness,

ethics, honesty, social responsibility and truth. Thus, ethics is just one among those

aspects that spells out the role of morality in accounting. Each of those aspects can be

explained as follows. First, fairness is an expression of the neutrality of the

accountant in the preparation of financial reports. Suggested for the first time by Scott

in 1941 (cf.Belkaoui, 1992, p.3), fairness has served as a principle of accounting and

become an implicit ethical norm, through the statement 'Accounting rules, procedures

·and techniques should be fair, unbiased and impartial and should not serve a special


interest'. In general, the fairness concept implies that accounting statements have not

been subject to undue influence or bias. Fairness implies that the preparation of

accounting information has been done in good faith and has employed ethical

business practices and sound accounting judgment in the presentation, production,

and auditing of the accounting results. Therefore, fairness has been generally

associated, in accounting and auditing, with a connotation of either neutrality in

presentation or justice in outcome, and hence has played a moral role in accounting.

That moral dimension of fairness in matters of distribution may easily be associated

with the market for entitlements, or the reliance on a veil of ignorance concept and

the creation of a just institution, or as a guarantor and implementer of the rights to

freedom and well-being of all persons affected by the activities of the firm and a basis

for the creation of institutional and accounting arrangements to guarantee these rights.

(Belkaoui, 1992, p.13) Secondly, ethics is a complex set of rule, principles and

practices constraining accountants when performing their daily tasks, which ask them

to take a certain role. In performing these roles, accountants face formal or legal rules

of behaviour but also elements created by specific situations. In addition to these

roles, at the same time accountants also accept the r~sulting obligations and moral

responsibilities of roles (Guy, 1990). Hence, by ethics, we mean the concern with the

moral judgments involved in making moral decisions about what is morally wrong

and right or morally good and bad. It cannot be denied that ethics in accounting is

fundamental to the credibility and reputation of the integrity of the accounting

profession and discipline. Therefore, the work of accountants carries real

responsibilities. Their words and actions in rendering opinions relate not only to the


technical competency but also to the moral standards and the code of ethics governing

the profession.

Thirdly, honesty is essential to the conduct of accounting to maintain the trust put by

the general public in the profession of accounting as a guarantor of truth. However,

fraud can result in absence of honesty in accounting. Unfortunately, fraud in the

accounting environment is on the increase, causing enormous losses to firms,

individuals and society and creating a morale problem in the workplace. Corporate

fraud, fraudulent financial reporting, white-collar crime and audit failures are

examples of definitely immoral conducts. Thus, the credibility of the profession and

the field as guarantor of integrity of financial recording systems will suffer more

unless drastic measures are taken to make the accountant and the auditor face the

fraud problem as a major concern. Hence, the immorality of the phenomenon should

be accentuated in special courses in the ethical problems of the profession (Belkaoui,

1992, p.18). Fourthly, social responsibility and social performance in general and

social accounting in particular is just another expression of the moral stand that

accounting and accountants can take to fulfill their social contracts requirements and

contribute to the public welfare (Belkaoui, 1992, p.182) However, failure to

participate in the social accounting fields will leave accountants in a moral dilemma

about their just contribution to society in general. Fifthly, truthfulness refers to a true

proposition that relates to a state of affairs that occur and also relates to the reporting

of the occurrence or existence of state of affairs. According to Belkaoui ( 1992, p.185)

the nature of truth in accounting in each of these roles evolves from truth as


correspondence for a rational/instrumental role either to truth as coherence or a

pragmatic view of truth in most of the other roles that recognize the social nature of

accounting, and where accounting is used either to mystify or legitimize and/or

discipline.

Therefore, the process of producing ethics is first on the need for a moral role in

accounting fields, that an accounting morality be realized. In order that morality and

the rules of the moral continue to develop they must be part of the regulations or rules

and one of these rules must be ethics. Ethics is the obligation that must to be

undertaken by professional accountants in order to achieve credibility and a

reputation of integrity in the accounting profession and discipline.

The Categories of Ethics in Accounting (Philosophical Foundation)

Ethics in accounting is mostly influenced by a philosophical approach to the

foundations of morals or influenced by categories of the ethical perspectives of

philosophers. Because categories of ethics help comprehend more deeply the

philosophical foundation of morals, they provide an underpinning for the increasing

concern with ethics. As seen before, ethics has been the subject of systematic

investigation during over twenty five hundred years (Leys, 1968). From Plato's

Republic to Immanuel Kant's 18th Century Critique of Judgment (Cornford, 1945) to

John Rawls's 20th Century Theory of Justice, philosophers have struggled with

defining what right, good and just are (Guy, 1990, p.12).


According to Kant with "Categorical imperative" (cf Guy, 1990, pp. 13) people

should behave in such a manner that if every-one else acted the same way, every-one

would benefit. Moreover, the contemporary philosopher John Rawls with the

"distribution of justice" (cf. Guy, 1990, p.12; Belkaoui, 1992) focused on the best

way to achieve equal amounts of liberty for everyone and, in the face of inevitable

inequalities, sought a principle, which would maximize the condition of the least

advantaged. Therefore, the philosophical approach is our basis in building a deeper

understanding of ethical issues, which are facing the modem accountant. Derived

from the philosophical approach, categories of ethical perspectives have four ethical

systems that have dominated the way the humankind thinks about ethics. Those

systems are the utilitarianism perspective, the deontology perspective (Cottell and

Perlin, 1990; Guy, 1990; Belkaoui, 1992) and the ethical realism perspectives (Cottell

and Perlin, 1990) and also the shari'ate ethics perspective (Triyuwono and Gaffikin,

1995). Thus, these four systems will categorize ethics of accounting suitable for the

theoretical approach that will be discussed in this study.

First, the utilitarianism perspective is a teleological approach to ethics that means the

promotion of the best long-term interest of everyone concerned should be the moral

standard. Such perspective looks to the consequences of acts for moral justification. It

attempts to maximize good (or pleasure, or right) over harm (or evil, or wrong).

Utilitarianisms claim that rights and duties have no independent standing that they

derive from the goal of maximizing the overall good (Guy, 1990; Cottell and Perlin,

1990; Belkaoui, 1992; Encarta Encyclopedia, 1998). Moreover, it is assumed that the


moral worth of actions is determined solely by the consequences of the actions.

Utility refers to social happiness, based on the states of mind of the individuals

involved (Encarta Encyclopedia, 1998). Utilitarianism can be best understood as a

system of ethical balance. Here the desire is to find the balance of good consequences

as opposed to bad consequences. Utilitarianism manifests itself in two major forms.

The stronger of the two is a so-called act-utilitarianism. That is, the moral agent

considers the consequences as the only action under consideration. The other system

is called rule-utilitarianism in that the moral agent considers a set of rules by which

life should be lived. The basis of accepting or rejecting a rule is whether the

consequences of everyone following the rule will result in the maximum probable

good consequences (Guy, 1990; Belkoui, 1992; Cottell and Perlin, 1990). Rule

utilitarianism can be regarded as a weaker form of utilitarianism than act

utilitarianism. A rule utilitarian when confronted with a situation, in which it believes

that a binding by the rule will not in the present case be most beneficial, will simply

modify the rule (Cottell and Perlin, 1990).

However, critics of utilitarianism have pointed out many flaws. One is the apparent

ability of utilitarianism to justify the imposition of great suffering on a few people as

long as a benefit is derived by many people. The other is the difficulty of defining the

probable benefit, called "utility" (Cottell and Perlin, 1990).

Secondly, deontologism, as discussed by Plato, Kant and Rawls, means duty (Guy,

1990; Belkaoui, 1992; Cottell and Perlin, 1990). It holds that right action is


independent of consequences. Deontological theories focus instead upon the

correctness of the action itself The assumption is that there are duties, rules and

principles that are inherently valuable and should never be violated (Guy, 1990;

Belkaoui, 1992; Cottel and Perlin, 1990). In addition, deontology maintains that an

action's or rule's consequences are not the only criteria for determining the morality

of an action. Moreover, deontologists look to the features of the act itself, regardless

of the consequences. They emphasize maxims, rules, and principles. The

deontologists insist that morals are based upon fundamental principles and not upon

mere results (Cottell and Perlin, 1990; p.5) Nevertheless, deorrtological theory is anti

utilitarianism, in that an action is morally correct if it is rooted in a true moral

principle. A moral person has a duty to take the right action regardless of

consequences (Guy, 1990, p.13). And the premier deontologist was Immanuel Kant

who prescribed a just society that could come about only if all persons based moral

decisions upon the categorical imperatives. That means one should take what one

would wish everyone to take in all circumstances, irrespective of the consequences of

the single, individual action. In spite of the categorical imperatives, Kant added the

practical imperatives, which means, when considering actions, one must treat all

person, including oneself, as an end and never as means. In fact, deontological

perspectives with respect to Kant's ideal moralities have pointed out that both the

categorical imperative and the practical imperative can clash with human welfare and

even prescribed action that leads to human suffering (Guy, 1990). Moreover, Ross

identified seven prima facies duties that he believed to be intuitive. They are fidelity,

reparation, gratitude, justice, beneficence, self-improvement and non-maleficence.


Ross contended that adherence to these duties was the preferred moral course of

action irrespective of the consequences foreseen in particular circumstances (cf.

Cottell and Perlin, 1990, p. 7).

On the other hand, it can be seen that utilitarianism and deontologism together

constitute the two major ethical systems with which most modern ethics deals (Guy,

1990; Cottell and Perlin, 1990; Belkoui, 1992) with the deontological view

concentrating upon the action itself. The thrust for the moral agent is to do his other

duty. Out of this comes a right for both himself/herself and for others in society.

Finally, the goal of a more ethical society is reached because in the ideal everyone is

doing his other duty.

Thirdly, ethical realism is an ethical system that resolves the conflicts between

utilitarian and deontological ethics (Cottell and Perlin, 1990, p.9). Ethical realism

begins with the premise that moral concepts possess truth status. Ethical realists point

out that their doctrine does not deny truth status to science. Rather it says truth status

in science and truth status in ethics is different matters. No contradiction need exist

between science and ethics, nor is it necessarily considered a superior mode of

thought ( Cottell and Perlin, 1990, p.11 ). Therefore, if ethical realism can be accepted

as a valid doctrine for the application of moral concepts, the transition to ethics in

accounting is a neutral one.


Besides, derived from ideas of many scholars ' point of view (Dillard, 1991 ; Francis,

1990; Morgan, 1988), accounting is not value free , but a social construction, which

develops and changes in the social sphere. In other words, the appearance of

accounting is greatly influenced by the values in which it socially grows and is

practiced (Triyuwono, 1995). Namely, values are the surface [ideology] frame, which

will reflect different reality on appearance of accounting. Since reality is constructed

in relation to ethical values, accounting should also be based upon ethics, unless the

reality will be reflected in other presentations and in turn will mislead those who are

interested in it.

The last, yet important, category of ethics perspectives is shari 'ate ethics (Triyuwono

and Gaffikin, 1995). It is to guide individuals in creating Tawhidic (shari 'ate ethics),

which entrap members of society in "Devine networks" and make them self

consciously merciful to all creatures in the form of adoration.

From ethics' philosophical foundations, categories of ethics in accounting are formed

in accordance with perspectives of values utilized and obligated duty and also

religious values. Obviously, ethics in accounting has been grouped based on thinking

and approaches of four systems. Therefore, implementation of ethics elements in

accounting will reflect the four systems of ethical perspectives. Besides, an ethical

perspective will guide an accountant's behaviour (reality appearance accountant) in

performing her or his practice in a professional way. Ethics always maximizes the


values and virtue that can be expected to establish neither the accountant's

professional responsibilities nor individual responsibilities.

Implementation of Ethics in Accounting

This section deals with the understanding of ethics that includes the process of the

rise and development of ethics, where some theories of an ethical approach will be

used. Subsequently, it also discusses the completion of ethics in accounting.

Ethics in accounting relates to society, the profession and our individual client

situations. In the professional world, accountants are heavily relied upon in the area

of control. As experts in control, it is essential to consider the degree the control

systems drive people to do things that destroy themselves. Experts in accounting have

an obligation to ensure that accounting serves society and not the companies for

whom they work. Hence, the implementation of ethics as a system or as a code of

morals for a particular profession in the work place is highly required, especially in

the accounting practices. Moreover, the implementation of ethics in accounting will

establish an ideal, proper and objective condition in practice for a professional

accountant. One way of implementing ethics in accounting is to use the deontological

view of ethics and use a code of ethics for each professional accountant as well as

define their ethics in utilitarian terms (Guy, 1990; Belkaoui, 1992). Thus, the code of

morals, which naturally is called a professional code of ethics, is essentially a set of

rules or percepts designed to induce an attitude and a kind of behaviour on the part of

practitioners of the profession concerned, which will encourage public confidence


(Loeb, 1978, p. 87). In fact, nobody ever sat down and wrote what she or he thought

would be an ideal code of behaviour for accountants. Because, most of the rules were

developed as a result of incidents, which came before the governing bodies of the

accounting societies, and which they feared might impair public confidence in the

profession if repetition were not prevented in the future (Loeb, 1978, p.89).

However, in the USA it can be seen that each of the main accounting professional

bodies has in fact a code of ethics, in that it contains Principles of Professional

Conduct which are enforceable through the Rules of Performance and Behaviour and

through the interpretation of the various senior level committees of the AICP A. They

are: Responsibilities of members; The Public Interest; Integrity; Objectivity and

Independence; Due care; Scope and Nature of Sen;ices (Belkaoui, 1992, p.30).

Therefore, the focus on ethical modes for the implementation of ethics in accounting

is strongly recommended by the profession and associated units (Guy, 1990, p.33).

In addition, another scholar argued that there are six principles of professional

conduct in the code. They deal with the members' responsibilities as professionals,

their obligation to act in a way that serves the public interest, the need for highest

sense of integrity in the performance of professional responsibilities, the need for

objectivity and the need for independence in the performance of auditing and other

attestation service, the need to exercise due care in the professional responsibilities,

and last the requirement that members in public practice observe the principles of the


code in determining the scope and nature of services to be provided (Mintz, 1992,

p.5).

On the other hand, in reality, ethical codes in accounting have various limitations. As

explained by Belkaoui (1992, p.33) these limitations are:

• Codes of ethics make the rules the central focus of morality. Being ethical means

simply following the rules rather than having a moral character.

• Ethical codes are either too vague or too detailed, making them difficult to apply

• Ethical codes can make it easier for individuals to hide behind rules as an excuse

for making desired decisions.

• Ethical codes can be enforced by punitive and coercive actions as they are more

closely related to prevailing law and regulation rather than pure ethics themselves.

• Ethical codes may be used by professionals to limit the supply of practitioners and

to restrict competition.

Thus, the implementation of ethics in accounting is realized in the form of ethical

codes, which explain the principles of professional conduct of accountants. Further, a

theoretical approach as the basis for the process of ethics codes are the deontology

paradigm but with utilitarian terms in describing ethics codes. In actual, ethics codes

in accounting are far from being perfect and have many weaknesses. Many cases,

which, relate to contain ethics cannot be resolved the problems through ethical codes

alone. Considerable frauds still exist in the fields of accounting and auditing; such as

issues concerning the collapses of big companies in USA and Australia. In Australia,

IffiI Insurance Ltd, which is the second largest general insurer collapsed in March


200 l , and in December 2001 , one of USA' s the biggest Corporations, ENRON Corp

with Houston-based energy as conglomerate experienced bankruptcy as well .

According to Backover (2002, p.1) there are 2 factors affecting the collapse of 1-illI

Insurance Ltd and ENRON Corp, namely:

1. Close ties. At 1-illI insurance Ltd, three board members were former Andersen

partners. And at ENRON Corp, two top finance executives previously worked at

Andersen That raises questions about auditor independence.

2. Creative Accounting. Whereas ENRON hid liabilities to boost its balance sheet,

HIH attempted to pad profits as major parts of its business eroded.

Hence, the basis of the points mention above, the reasons for bankruptcy are the result

of accountants ' violations in the implementation of the principles and standard ethics

codes as proper guidance to professional accounting.

In addition, Luke (2002, p. 1) stated that a corporate collapse has put the accounting

profession in its worst crisis since the 1970s, when the failure of the Penn Central

railroad and other large firms led the industry to devise a self-regulatory accounting

profession neither individual nor body/firm.

Therefore, in performing accountants ' professional responsibilities, the principles of

ethics codes are expected to become the guidance of accounting and auditing

practices, because the principles of the ethics codes as codes of professional conduct

significantly influence the behaviour and judgment of professional accountants

(Badawi, 2002, p. 73 ).


Contribution of Ethics to Accounting

As mentioned above, the fact that implementation of ethics in accounting in the form

ethics codes has many imperfections does not necessarily mean that ethics does not

have a role in accounting. Rather, ethics have made various contributions to

accounting knowledge. According to Hoffman, M (cf. Cottell and Perlin, 1990, p.xi)

the ethical thing to do is not always in the best interests of the firm. To state this

truism is not to solve a problem, but to present a set of challenges. How are individual

accountants to think, and act, when they encounter moral conflicts? How can the

persons act professionally and retain integrity? And how can be the profession as a

whole respond to the challenges posed by values conflict?

Ethics for accountants have a lot to do with the way individuals respond to the

expectations of the community, and more importantly, the way they express their

search for those expectations (Guy, 1990). Moreover, ethics in accounting will

influence professional accountants where professionalism refers to the conduct, aims,

or qualities that characterize or mark a profession or a professional person. The

cornerstone qualities of accounting professionals are competence, objective and

integrity. Moreover, accounting professionals are guided in their behaviour by the

code of ethics that have been established by professional associations. Consequently,

the existence of ethics in accounting will provide several contributions to the

development of accounting as knowledge (based on the philosophical perspectives)

(Chua, 1986; Chua and Degeling, 1993; Baker, 1999), and also to the development of


accounting profession as a living being professionalism (based on psychological

perspectives) (Kohlberg, 1976, 1982; Gilligan, 1982; Johnson, 1993).

From the psychology perspectives, ethics is a way of life, involving the whole person

and becoming an almost instinctive way of dealing with the moral ambiguities that

confront us daily in our lives (Albrecht, 1992). As individuals, as firms, and as a

profession, we must constantly keep in mind that ethical behaviour coupled with

intelligent and competent service is the foundation of accounting and auditing.

Responsibility to the public for objective financial reporting must always come first

(Albrecht, 1992, p.42). The development of a professional accountant as an individual

being could be recognized by individual moral development (Kohlberg, 1982;

Gilligan, 1982; Johnson, 1993), which is the decision-making foundation (Rest, 1986;

Paine, 1991) in their reasoning and expectations. Whereas, other contributions, as

observed from a philosophy perspective, refer to the founding and the development of

a code of professional ethics, which contains auditing rules and principles, to which

accountants are obligated to conform (Cottell and Perlin, 1990, Belkaoui, 1992; and

see also, Chua, 1986; Triyuwono and Gaffikin, 1995; Mackie, 1977; Guy, 1990).

Besides, according to Carey and Doherty (1966, p.3) a code of professional ethics is a

voluntary assumption of self-discipline and beyond the requirements of the law. It

serves the highly practical purpose of notifying the public that the profession will

protect the public interest. The ethics code also provides members of the profession

with guides to the type of behaviour, which the historical experience of the profession

as a whole has indicated is most likely to attract the confidence of the public (Windal


and Corley, 1980). Then, the rule of ethics is the foundation of public confidence.

Public confidence may be even more important to a certified public accountant than

to other professionals. The accountant must have not only the confidence of those

who become her or his clients but also the confidence of those who rely on her or his

reports. Therefore, a code of ethics is a practical working tool. It is as necessary to a

professional practitioner as her or his theoretical principles and technical procedures.

Without a system of professional ethics she or he would be incomplete (Cattell and

Perlin, 1990).

Thus, it is clear that professional ethics may be regarded as a mixture of moral and

practical concepts with a spri:r:tlding exhortation to ideal conduct designed to evoke

right actions on the part of members of the profession concerned, all reduced to rules

which are intended to be enforceable, to some extent at least, by disciplinary actions

(Albrecht, 1992).

Summary

The lengthy discussion of ethics in accounting has shown that it involves its

definition, perspectives, theoretical background, as well as its implementation and its

contribution in accounting. Ethics has a big impact on the development and

establishment of standards and regulation, in the form of a professional code of

ethics, which is applicable to all professional accountants. Moreover, the role of

ethics is useful to the development accountant professionalism in cultivating

accounting knowledge. Basically, the growing and changing are characteristic of rules


of professional conduct. As long as the process of accounting knowledge develops

and the practice of accounting becomes more widespread, more varied and more

complex, ethical questions will arise that have not arisen before. Consequently,

patterns of ethical concepts change as a profession develops Hence, ethics as the

realization of moral behaviour is expected to be useful for solving ethical dilemmas,

and as a foundation or even the way of life for the professional accountant.

Besides, ethics could be used to understand more deeply the existence of morals

within the individual professional accountant, by observing the willingness in

performing their accounting ethics, especially in applying the professional code of

ethics. Thus, the next explanation of this study is on ethics observed from its

application (Applied Ethics) within accounting practice.

Ethics in Public Accounting Practice (Applied Ethics)

Introduction

In this part, the discussion will explore ethics with a focus on the implementation of

ethics (applied ethics) in accounting practices. Moreover, the role of ethics influences

professional accountants in daily practical work when they face problems related to

ethics.

Currently, the accounting profession is at a critical juncture in development, with

many of its long-standing traditions challenged by an evolving workplace and work

force. In an environment of increased competition and maturation of traditional audit


and tax practices, accounting firms have become more diversified and specialized. A

wave of mergers, acquisitions, financial scandals and bankn1ptcies has swept the

accounting services industry. Moreover, technological changes have also affected the

way business is transacted, including the types of services accountants perform and

the skill and staff they require. According to Windal and Corley (1980, p. xiii) any

profession must be aware of what it means to be professional and what is demanded

by way of commitment from the individual. Hence, the accountant has a key role and

it is essential that he or she be keenly aware of its significance, its requirements and

responsibilities and be prepared for and committed to their fulfillment.

In other words, these conditions will bring about conflicts of value, disagreements

about codes, regulations and dilemmas of loyalty encountered every day by

professionals. Moreover, among others duties, accountants are pledged to the truth

telling and have clear responsibilities to exercise good judgment and honesty in their

professional work as for example when professional duties come into conflict with

moral principles and how they are to sort out such problems. Thus, this section will

explore the importance of the ethical role in professional accounting and what ethics

codes should be applied and acted upon, since, the code of conduct (The Ethics Code

of Professional Accountants) is expected to provide a solution to accounting problems

encountered daily, and also serve as a basis or principle for accountants in performing

accounting practices, especially in audit practice.


The Importance of Ethics in the Public Accounting Profession

Before describing the utility of ethics in the accounting profession, also called

professional ethics, it is better to understand more deeply the accounting profession

and the position and implementation of ethics in accounting.

Public accounting is one type of accounting - one classification of those working in

the discipline of accounting. The public accountant has for many years regarded

himself or herself as professional, equal in every respect to the more uniformly

recognized professions of law or medicine. Professional bodies are concerned about

public image, a most powerful component being the integrity of the practitioner.

Efforts continue to be undertaken to enhance that image, which needs to be verified

by actual behaviour. Hence, the society has perceived the public accounting

profession as one in which practitioners can be trusted to adhere to the profession's

established standard of behaviour (Cottell and Perlin, 1990, p.23). As a result,

accountants have professional responsibilities, which require professional ethics to

explain the subject of standards and rules for them, to carry out their everyday tasks

as practitioners, in providing services to society.

According to Loeb (1978, p.39) professional ethics form a small part of a complex

system of discipline which civilized society has imposed on itself through laws,

customs, moral standards, social etiquette and rules of many kinds, enforced in many

ways. While people are to live together in peace, discipline is necessary to restrain the

predatory instincts with which people are born. Moreover, professional ethics is a


system of morals that always exist in the affair of a group, and can operate only if this

group protects them (members) by authority. It is made up of rules, which govern

individuals, compel them to act, and impose limits to their inclinations and forbids

them to go beyond those limits (Loeb, 1978, p.43). The existence of professional

ethics as the realization of a r,eal decentralization of moral life is expected to be

utilized to legitimately make laws for him or her, and also to limit the extent to which

the individual is left to his or her own devices and freed from all social constraint.

Therefore, professional bodies have shaped their professional ethics into standards or

regulations, which must be applied by members in carrying out their task as

accounting practitioners, in the form of rules that are called professional codes of

ethics.

As explained before, a code of ethics is a set of rules or percepts designed to induce a

type of behaviour on the part of practitioners of the profession concerned that will

maintain public confidence. Furthermore, the ethics codes also provide members of

the profession with guides to the type of behaviour, which the historical experience of

the profession as a whole has indicated is most likely to attract the confidence of the

public (see also Backof and Martin, 1991). It is expected that they would be able to

carry out their responsibility properly, and be employed to resolve everyday practical

ethical dilemmas. In addition, the code of ethics offers confidence to society on the

propriety of the given information, and on the given accounting services. For

instance, when people need a doctor, or a lawyer, or an accountant, they seek

someone whom they can trust to do a good job not for themselves, but for them (the


clients). They have to trust him/her, since they cannot appraise the quality of his

service. They must take it on faith that he or she is competent and that their primary

motive is to help them (David, Kantor and Greenberg, 1994 ). Thus, professionals are

accepted as persons highly skilled in some science or art, who desire to serve the

public and who place service ahead of personal gain. Furthermore, professionals must

display a professional attitude toward his or her work based on ethics codes.

However, the professions have actually borrowed the word ethics from general usage

and have applied it in the narrowed sense of the basic principles of right action for

members of the profession concerned. Right actions for a professional will of course

include conformity with moral standards, but will not also include behaviour designed

for practical as well as idealistic purposes (Albrecht, 1992). Hence, ethics codes of

professional bodies may be designed in part to encourage ideal behaviour, which

basically the code is intended to be enforceable. Therefore, the utilization of ethics in

the form of professional ethical codes is important, because they are rules to regulate

and to guide the public accounting profession in doing professional work. As

explained by Cottell and Perlin (1990) that code of professional ethics is a practical

working tool. Besides, according to Frankel (1989, p.111) there are several other

positive benefits that may be provided by professional ethics codes such as;

• A code can be a basis for the public expectation and evaluation of professional

performance.

•

•

Codes can enhance the profession' s status and the public trust of the profession

Codes can foster pride in the profession and strengthen professional identity


• A code can serve as a deterrent to unethical behavior

• A code can serve as a legitimate source of support for a professional against

improper demands by others.

• Codes may serve as a basis for adjudicating disputes related to ethical issues

Obviously, it can be concluded from some of the arguments above about the

importance of ethics for public accounting profession that ethics codes address moral

and ethical behaviour regarding activities, attitudes, and procedures involved in most

aspects of professional conduct.

The Development of Professional Ethics of Public Accountants

As a profession, accounting needs rules as guidelines that regulate and manage

professional work style and responsibility. All of these regulations are included

within professional codes of ethics that are a part of professional ethics, generally.

In the USA, the AICP A, as a professional organization, adopts ethical codes that

implicitly employ rules of utilitarianism. (Beets, 1999, p.309) This concept

emphasizes the centrality of rules in defining ethical behaviour while promoting the

greater universal good. This type of utilitarianism specifies that the organization must

determine and adopt rules that will promote the greatest benefit for the largest number

of people. And then, it must determine whether an act is either following or violating

the rules (see also Starr, 1983, p.103). The professional code of ethics has

experienced a dramatic evolution within a changing professional environment. Its


purpose is to restrict certain actions of members of the AICP A that would be

considered harmful to members of the profession, clients, or the public (Nixon, 1994).

The evolution of the code of ethics has been especially evident during the past

decade, with the most recent changes coming in 1996. The development of the code

itself, took so much time and has always been continuously improved. It began in

1907, when the AAPA (American Association of Professional Accountants)

published a formal article on professional ethics in the organization's by laws in an

attempt to address a level of competition that many considered unprofessional,

including display advertising, competitive bidding, and contingent fees. While this

article wasn't formal rules and enforced, it was one of the first attempts to establish

professional ethics for accountants and fostered a related profession-wide discussion.

Then, the period 1919-1964 was one in which of the development of ethics codes that

is The AAP A (American Association of Professional Accountants), then recognized

as the American Institute of Accountants (AJA), adopted a formal code of ethics,

including eight rules of conduct and methods of enforcement (Backof and Martin,

1991, p.10). In 1932, the AJA, now called the AICPA (American Institute of Certified

Public Accountant), its successor organization, developed and adopted rules of

conduct, which were specifically intended to limit competition among public

accountants. And during 1960, the federal government, most notably the Department

of Justice began questioning the anti-competition components of the AICPA code and

the professional immunity from antitrust laws enjoyed by the accounting profession.

The AICPA' s Division of Professional Ethics began an intensive review of the Code


of Professional Ethics. The review was conducted by a special committee on code

restatement appointed by the Professional Ethics Division (Higgins and Olson, 1972,

p.33). During 1972, the special committee on code restatement of the AICPA

professional Ethics Division presented a revised ethics code on membership. While

the ethics code in effect at the time was primarily a list of rules, the proposed revision

divided the ethics code into three sections; ( 1) a series of philosophical essays that

discussed ethics concepts in the accounting profession; (2) specific, enforceable rules

of conduct and (3) the interpretation of the rules, explaining their scope and

application. Then, both the essays and the rules were grouped under five headings:

independence, integrity and objectivity, competence and technical standards,

responsibilities to colleagues, to clients, and other responsibilities and practices

(Higgins and Olson, 1972). During 1980 to 1996, the AICPA 's code of Professional

Ethics continued to create change and improvement in every rule. For example,

following 1980, the AICPA Division of Professional Ethics began a review of the

rules of the Code of Professional Ethics, with the intention of anticipating future

government attack on the ethics rules. Some rules were identified as possible future

targets of antitrust challenges, and modifications were considered to reform those

sections of the code to comply with the decision of the US Supreme Court (Bialkin,

1987, p.106). And during 1990 - 1996, the AICPA made many revisions, especially

related to Rule 302 (Contingent fee), Rules 503 (Commission) as well as Rules 505

(Form of Practice and Name).


As explained by Deborah Owen

Referral fees and commission raise potential conflicts of interest between the public accountant (CPA) and his client, which could result in damaging financial consequences. The competitive effects of prohibiting such fees are not clear- either on the face of it or in terms of how the prohibitions actually operate- and good economic evidence as to both is lacking (Beets, 1999, p.304).

The AICPA Council authorized a change to Rules 505 to allow new freedoms with

regard to accounting firm ownership. The existing rules permitted members to

practices only as proprietorships, partnership or professional corporations but the

proposed rule would allow members to practice public accounting in any form of

organization permitted by state law, including general corporation and limited

liability companies. (Beets, 1999, p. 305).

Therefore, from this discussion on the development of professional ethics in public

accountancy and also the history of the AJCP A Code, it is apparent that the primary

ethics code of the US accounting profession is not the result of collective ethical

concerns of AJCPA members. Instead, the history of the evolution of the code has

been characterized by the AICP A acquiescing to agencies of the federal government,

as they demanded revision of ethics rules that were considered harmful to industry

competition, and also considering objectivities of code that meant guidelines for

accounting practitioners.


The United States Code of Professional Conduct

In the USA, professional ethics of public accountants is managed by the AICP A,

which, as mentioned above, has categorized the code into three parts that guide

accounting practitioners in fulfilling the needs and trusts of clients. There are codes of

ethics, codes of conduct and codes of practice, with each having different meanings

from one another, although sometimes they are referred to as though they were the

same.

According to Calhoun et al (1999, p.127) codes of ethics and codes of conduct are

used interchangeably. However, codes of ethics tend to describe the qualities an

organization aspires to achieve, whilst codes of conduct describe expected behaviour

and what is considered unacceptable behaviour. Besides, a code of practice may

contain ethical principles that relate to technical standards and it is often addressed to

customer/clients in terms of standards that the members of the occupation/profession

have a duty to uphold. Thus, this study will concentrate on the code of conduct,

because it is one part of the AICPA's division of the code of ethics of the profession.

Moreover, the code of conduct is much more specific in detailing exceptions and

particular circumstances and is ·practical in nature, dealing with the relationship with

the customer or client (L'Etang, 1992). The importance of the code of conduct as a

guide to practices and implementation of ethical standards in the practical work of the

professional has been expounded earlier, by many researchers (Frankel, 1989; Backof

and Martin, 1991; Beets, 1991 ). Thus, being a professional means being capable of

maintaining higher standards of the code of conduct and having the ability to resolve


difficult situations in a problem involving ethics. The AICP A as organizer and

composer of the code of conduct has been through a long process of composing and

perfecting it, where the ethical framework for the public accountant is represented in

the Code of Professional Conduct. According to AICPA (1992) the Code of

Professional Conduct consists of two sections: The Principles and The Rules. The

Principles provide the framework for the Rules, which govern the performance of

professional services by members. The Principles are what CP As are striving to

implement as they provide professional services, and the rules are enforceable

standards. (Calhoun, Oliverio and Wolitzer, 1999, p.113)

Principles of Professional Conduct

These Principles of the Code of Professional Conduct of the AICP A express the

profession' s recognition of its responsibilities to the public, to clients, and to

colleagues. They guide members in the performance of their professional

responsibilities and express the basic tenets of ethical and professional conduct. The

principles call for an unswerving commitment to honorable behaviour, even at the

sacrifice of personal advantage (AICPA, 1992). In the AICPA' s Code of Professional

Conduct, as amended 14 January 1992. The Principles of Professional Conduct are

identified as follows. First is responsibility: this means members should exercise

sensitive professional and moral judgments in all their activities. Moreover, they

perform an essential role in society and have responsibilities to all who use their

professional services and they also have a continuing responsibility to co-operate with

each other to improve the art of accounting, maintain the public confidence, and carry


out the profession's special responsibilities for self governance (Article I, AlCPA,

1992). Second is the public interest: this means Members should accept the obligation

to act in a way that will serve the public interest, honour the public trust and

demonstrate commitment to professionalism. Since, discharging their professional

responsibilities, members may encounter conflicting pressures from among each of

these groups. In resolving these conflicts, members should act with integrity,

objectivity, due professional care and genuine interest in serving the public (Article

II, AICPA, 1992). Third is integrity: as an element of character fundamental to

professional recognition, which is measured in terms of what, is right and just.

Moreover, integrity requires a member to observe both the form and the spirit of

technical and ethical standards; circumvention of these standards constitutes

subordination of judgment and also it requires a member to observe the principles of

objectivity and independence and of due care. Thus, to maintain and broaden public

confidence, members should perform all professional responsibilities with the highest

sense of integrity (Article ill, AICPA, 1992). Fourth is objectivity and independence:

that means members should maintain objectivity and be free of conflicts of interest in

discharging professional responsibilities. Moreover, members in public practice

should be independent in fact and appearance when providing auditing and other

attestation services. Objectivity is a state of mind, a quality that lends value to a

member's services. It is a distinguishing feature of the profession. The principles of

objectivity imposes the obligation to be impartial, intellectually honest, and free of

conflict of interest. Independence precludes a relationship that may appear to impair a

member's objectivity in rendering attestation services. For a member in public


practice the maintenance of objectivity and independence reqmres a continuing

assessment of client relationships and public responsibility. In providing all other

services a member should maintain objectivity and avoid conflicts of interest (Article

IV, AICPA, 1992). Fifth is due care: this requires a member to discharge professional

responsibilities with competence and diligence. It imposes the obligation to perform

professional services to the best of a member' s ability with concern for the best

interest of those for whom the services are performed and consistent with the

profession' s responsibility to the public. Moreover, members should be diligent in

discharging responsibilities to clients, employers and the public. Diligence imposes

the responsibility to render services promptly and carefully, to be thorough, and to

observe applicable technical and ethical standards (Article V, AICPA, 1992). Sixth is

the scope and nature of service: that means members in public practice should

observe the Principles of the Code of Professional Conduct in determining the scope

and nature of services to be provided (Article VI, AICPA, 1992).

Therefore, adherence to the six principles of professional conduct as the foundation of

work and practice will create public accountants (CPA) who always maintain their

professional credibility.

Rules of Professional Conduct

These rules consist of the standards by which the CPA must comply or else face

possible disciplinary· proceedings. The guidance provided by the AICP A with respect

to the rules includes "Interpretations of the Rules". These interpretations provide


guidance by which members can apply the specific rules. First, Independence,

Integrity and Objectivity, means public accountants (CPA) will be independent with

respect to the services provided. Interpretations of this rule indicate that independence

is impaired if there is any material or direct monetary interest in the company for

which the services are provided. However, the public accountant (CPA) of course has

independence as long as they do not do the following: act as an equivalent member of

management or employee, perform ongoing control activities that affect the execution

of transactions, maintain custody of assets and prepare source documents on

transactions. Besides, in regard to integrity and objectivity, the Rule states that in the

performance of any professional service, a member shall maintain objectivity and

integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent

facts or subordinate his or her judgment to others. The interpretation extends the

obligation to a member who is dealing with his or her employer's external accountant,

indicating that the member must not misrepresent or fail to disclose material facts

(AlCPA, 1992). Secondly, general standards and accounting principles mean

members are to comply with the standards issued by the F ASB (Financial Accounting

Standards Board). Standards specifically addressed include professional competence,

due professional care, planning and supervision and also sufficient relevant data.

Moreover, competence refers to the member's having the ability to conduct the

services properly according to the professional standards (AlCPA, 1992). Thirdly,

responsibility to client means members in public practice shall not disclose any

confidential client information without the specific consent of the client. Additionally,

it deals with confidentiality of client information and contingent fees. Moreover,


members in public practice shall not perform for a contingent fees any professional

services for or receive such a fee from a client for whom the member or the '

member' s firm performs. Further, he or she shall not prepare an original or amended

tax return or claim for a tax refund for a contingent fee for any client (AICPA, 1992).

Fourthly, responsibility and practices to others covers a wide variety of topics

including discreditable acts, advertising, commission, and forms of organization. The

interpretations of discreditable acts are as follows; retaining clients records after a

demand is made for them; discriminating on the basis of race, color, religion, sex,

age, or national origin in employment practices; failing to follow standards or

requirements in audits of governments; negligence in the preparation of financial

statements; failing to follow governmental or regulatory requirements in performing

attest or other such services; soliciting or disclosing a question from the Uniform

CPA Examination. Moreover, regarding advertising members may not use false or

deceptive advertising or coercion in their solicitations. In addition, commissions and

referral fees state that members will not recommend a service or a product to a client

for a commission when the members are providing audit, review, or compilation

services or an examination of prospective financial information is performed. Forms

of organization means members may practice public accounting only in a form of

organization permitted by state law or regulation whose characteristics conform to

resolutions of Council (AICPA, 1992).

Basically, the rules are interpretations of principles or standards of obligation that

must be applied, so the rules will be useful to support the implementation standards


code of professional conduct by professional accountants. As a result, violation and

fraudulence become diminished. However, although the code of professional conduct

has provided guidance for accounting practitioners, some have argued that the code

has been used as a window dressing public relations screen to minimize criticism and

bolster public confidence (Collins and Schultz, 1995, p.34; see also Frankel, 1989;

Starr, 1983; Kultgen, 1982). Therefore, the AICPA, as a professional accounting

body, has produced many rules that are the code of professional conduct, and which

the AICP A should be continually concerned to improve and complete as the code is

based on issues ofcurrent cases or problems that may be difficult to resolve.

Summary

From the above lengthy discussion regarding applied ethics or ethics in practice, the

following conclusions can be drawn. Ethics of professional accountants can be

explored as a code of professional conduct, which is useful as a foundation or

guideline for the professional in creating a professional attitude to his/her work.

Moreover, the importance of ethics' role to professional accountants indirectly will

affect the groWth and development of morally aware accountants. Obviously, codes

of ethics have undergone a long process of development and refinement. In the USA,

the AICPA, acting as the gathering medium for professional accountants, has issued

regulations that are mandatory on its' members. This regulation is known as the code

of conduct or code of ethics.


The AICP A has the most fully developed standards of professional conduct found in

accounting. Over the past two decades these standards have received considerable

scrutiny from both the public and the courts. The AICP A has been astute in its degree

of flexibility in maintaining control over standards while being willing to alter the

standards themselves. The latest evidence of this is the code of professional conduct,

published in 1992, that contains 2 major parts, of which one part explains the

principles of the code, and the other explains rules of conduct. Both of these

regulations must be applied by professional accountants within the performance of

their practices.

Conclusion

The discussion above began with the understanding of what is moral, to what extent

the role of moral reasoning through individual moral development theory influences

the decision making of ethics, and also the implementation of ethics in accounting by

every accountant. Actually, this has always been part of the development of the

morale of the individual accountant, when she/he willingly makes an ethical decision.

Ethics is different from law because it involves no formal sanction. It is different

from etiquette because it goes beyond mere social convention. It is different from

religion because it makes no theological assumptions. It is different from aesthetics

because it is aimed at conduct and character rather than object. It is different from

prudence because it goes beyond self-interest to include the interests of others. It is

different from finance and marketing and governing and parenting and carpentry, in


that it does not involve a special purpose or special role as its point of departure (Guy,

1990, p.5).

Thus, ethics is both a process of inquiry and a code of conduct. While ethical inquiry

consists of asking the question about what is good and what is evil, what is right and

what is wrong, a code of conduct is a sort of inner eye that enables people to see the

right or wrong of their actions. Ethics found within professional accounting could be

said to be the professional ethics of accountants. According to Loeb (1978, p.3)

professional ethics have philosophical and sociological implications. The

philosophical view involves questions of morality, what is wrong or right, while the

sociological perspective is concerned with the question of professional self-regulation

and control.

However, in fact, many scholars have utilized other implications namely

psychological implication (Jack and Jack, 1989; Kohlberg, 1981; Gilligan, 1982; See

also Driver, 2001 and cf Bertha, www.usafa.afmil/dfpfa/ CVs/Bertha/Psyhero.html).

They argue that a closer relationship between philosophy (more specifically, ethics)

and psychology causes both fields to benefit, since, psychology philosophy would

benefit by knowing how the mind works when assimilating ethical dilemmas, and

psychology and philosophy in tum would benefit by knowing what exactly constitute

an ethical dilemma, a virtue etc. After all, a professional code of ethics, which is the

shape of professional ethics, can be viewed as a guide to accountants of a professional

community in performing their professional role. Consequently, as members of a


http://www.usafa.af.mil/dfpfa/

profession, accountants are subject to the laws of the larger community, and at the

same time, subject to the moral code of his/her professional community (Loeb, 1978).


Introduction

CHAPTER3

RESEARCH METHOD

Page 87

This chapter outlines the research method adopted in this study to address the research

problems posed in the introduction chapter. Methodologies can essentially be classified

as either qualitative or quantitative. Whilst quantitative methodologies deal primarily

with numerical data, qualitative deal with predominantly verbal data (Bickman and Rog,

1997). Therefore, the type of methodology that is chosen will depend on the nature of the

data required to answer the research problems.

In this study the data are principally verbal, so a qualitative research methodology will be

used. The qualitative method that was chosen was the case study. The case study design

selected for this research is multiple cases. Six cases are selected for this study, which

parallel the contents of the code of ethics of US accounting, namely Responsibility to

Client; Public Interest; Integrity; Independent & Objectivity; Due Professional Care;

Scope and Nature Service (AICP A, 1996). At least five different ethical codes were

identified for measuring and identifying the effect of moral reasoning on the

implementation of ethical codes. Subsequently, the comparison among these different

cases will also be conducted at the end of the research analysis.

Chapter 3 ... Research Method

Interviews are a direct form of data gathering. A researcher can use the opportunity

during an interview to clarify responses that may be vague or misleading. The interview

is a communication process between an interviewer (researcher) and an interviewee

(respondent) conducted with the intention of ascertaining information. The process

involves asking questions intended to focus on the issue under investigation. The

interview technique is an essential instrument in case study research and this section

delves into the literature, which provides the background for conducting interviews.

Research Method Employed

This section will elucidate the method of the research process that started from

determining the type of research method, classification of data, data collections, research

design until analysis of data with the use of technical analysis as in that adopted by Yin

( 1989). Thus, the methods of the research process will be explained step by step as

follows.

Sample

A sample is a subset of the population. It comprises some members selected from the

population. In other words, some but not all elements of the population would form the

sample (Sekaran, 1992, p.227). Therefore, by studying the sample, the researcher would

be able to draw conclusions that would be generalizable to the population of interest.

There are some reasons for using a sample rather than the entire population foremost

amongst which is that it is practically impossible to collect data from, or to test or to


examine every element involving several hundreds and even thousands of elements. Even

if it were possible, it would be prohibitive in terms of time, costs and other human

resources. Moreover, Sekaran (1992) argues that studying a sample rather than the entire

population is also sometimes likely to lead to more reliable results, mostly because there

will be less fatigue and hence fewer errors in collecting data, especially when the

elements involved are many in number.

The different types of sampling strategies depend on the extent of generalizability

desired, the availability of time and other resources, and the purpose for which the study

is done. In this study, the sampling strategies employed were the unrestricted or simple

random type, in which every element in the population has a known and equal chance of

being selected as a subject (Sekaran, 1992, p.237). At least five of six alternative

approaches were identified by the AICP A ( 1996) for identifying and measuring

consciousness of moral professionalism consistent with the Principles of the Code of

Professional Conduct variable; Responsibility; Public Interest; Independent, Integrity &

Objectivity, Due Professional Care and Scope and Nature Service.

The first approach employed was to determine the moral reasoning of public accountants

that will be investigated, based on the level of the individual, then to establish the other

variables of a professional' s responsibility to the public with the · code of conduct as an

indicator. This data collection approach was used because it offers access to users

(companies) at a time of their choosing and requires only a limited amount of their time.

Moreover, the subjects, who were best suited to the case study, could be identified and

directly approached.


The selection of the general companies (user perceptions) was based on the types or

categories of companies such as, foreign owned companies, state owned companies and

family owned companies, where it is assumed that these companies give heterogeneous

information about the criteria that are used to determine public accounting and the

information about a public accountant's performances in audit practices. In addition,

criteria of a simple random type are limited by the consistent users of public accountancy

within a range of two years that is appropriate for the rule of the government to be

implemented by independent auditors. The individual cases were selected as

representative of each of the four variable alternatives. To minimize the possible

researcher bias, established research methods as suggested by Yin (1989) and Sekaran

( 1992) were employed in designing and conducting the research.

Case Study

Case studies offer the opportunity to explore the role of moral reasoning in influencing

the decision making on ethics by public accountants in carrying out their professional

jobs (auditing practices). The observation is focused on the issue of ethics and the

relationship with clients, where each company under consideration in Indonesia is

surveyed _(using the user perception). Although this type of study also offers some degree

of flexibility, it still requires attention to be paid to the details for the preparation and

conducting of the case study. According to Smith, Whipp & Willmott (1988, p.97) the

case study method requires attention to the issue of design and theory. Hagg and Hedlund

(1979, p.137) proposed that a more rounded holistic case study might be achieved

through the use of a variety of techniques and methods for data collection.


The ability to focus on issues within a real-life context allows for further refinement of

theories. Such benefits may be derived from the support the findings give to a theory or

by providing additional information to improve the knowledge base. A case study also

offers an opportunity for the development of a large-scale longitudinal study.

Hagg and Huedlund ( 1979) concluded that case studies are useful to test theories in real

life situations. They argued that for a theory to be universally applicable it should be

detectable in all cases. A case study may serve to confirm or modify a theory. Here the

premise is that the framework for the case study is predicated upon the variables

established by the theory. However, case study research does not treat these as finite.

These enable a wider view to be taken of the data collected and may provide

identification of other variables of significance.

Case Study Design

The techniques that are most commonly used in case studies (field research) may be

identified as, participant observation, unstructured interviews and conversations and the

use of documentary evidence (Burgess, 1984, p.214). This offers some insight into the

approach to data collection in a case study. Thus, these procedures have been employed

in the actual case study and are further discussed in the methodology section.

The concern for generalisability seen by Hagg and Hadlund (1979) places too great an

emphasis on data and observations, while neglecting the importance of theory building in

generating knowledge. According to Yin (1989, p.38) there were two ways of

generalizing result such as, statistical generalization and analytical generalization.


Statistical generalization draws an inference about a population based on empirical data

collected from a sample. Analytical generalization uses a previously developed theory as

a template with which to compare the empirical results of the case study. Yin (1989)

addressed the issues of validity in conducting case study research. Specifically, Yin

(1989, p.36) referred to the importance of data collection in relation to the design of tests

to establish construct validity and reliability of case studies. The suggestions proposed by

Yin (1989) are summarized in table 3.1.

Table 3.1 TACTICS FOR CASE STUDIES

Validity Case Study Research Phase

Construct Use multiple sources of Data Collection . evidence.

Establish chain of Data Collection. evidence .

Have key informants Composition . review draft study.

Internal Do pattern matching. Data analysis.

Do explanation building. Data analysis.

Do time - series analysis. Data analysis.

External Use replication logic in Research design . multiple case studies.

Reliability Use case study protocol. Data collection.

Develop case study Data collection . database.

Source: Adapted from Yin (1989, p.41)

Chapter 3 .. . Research Method

Validity of Case Study Research

A case study is useful when the focus is on issues within a real-life context and the

researcher intends to observe events as they occur. Since the phenomenon being studied

involves contemporary events, a case study approach appeared to be appropriate.

For the results and conclusions drawn from case study research to have validity, Yin

(1989) proposes that attention should be given to four aspects of quality such as,

• Construct validity

• Internal validity,

• External validity

• Reliability

Construct validity requires the operationalizing of measures for issues being studied. In

this study questions were selected from previous research, which had focused on the

issues. Additionally, the questions of interview were revised before the initial interview

to assure terminology and issues were consistent within the code of conduct.

Internal validity is concerned with the establishing of causal relationships. Multiple

sources of evidence allows matching of relationship, information was collected from

interviews and available documentation to improve the internal validity.

External validity is concerned with generalizability of a study' s findings. Questionnaire

survey results are usually generalized through the use of statistics. Results of case studies

rely on analytical generalizations that are generalizing on a broader theory. Multiple case


studies can improve external validity by providing evidence of replication. This study

employs a theoretical model and multiple cases to enhance generalizability.

Reliability is concerned with the minimizing of error and biases in the study.

The operations of the study should be capable of being repeated with the same or similar

results being achieved. This can be achieved in a case study by the use of a protocol and a

database (Yin, 1989). The case study protocol is a written schedule of how the study is

conducted. The database for this study was developed using multiple sources of evidence,

company documents and records, interviews, and direct observation. This evidence was

enhanced by the support of case study notes and materials of question. The data was

analyzed by pattern matching which relies on theoretical propositions or models.

Yin ( 1989) suggested a design for application in multiple case study research where steps

form the basis for the construction and application adopted for this study. The steps

proposed by Yin (1989, p.57) include, develop theory referred to; select cases; design

data collection protocol; conduct case studies; write individual case reports; draw cross

case comparisons and write a cross case report. Moreover, Scapens (1990) states that case

studies offer the opportunity to test theoretical concepts in a real life context. According

to Scapens (1990, p.260) researchers have used normative models, positive theories, and

in some instances interpretive and critical approaches. In addition, the concern for

generalizability may be warranted when there is reason to believe that case studies do

generate knowledge and add to the formulation of theories. Thus, the approach to be used

in this thesis is a multiple case study consisting of individual cases and cross case study

analysis, where each case study is representative of a particular ethics codes.


Issues of Case Study

Examples of case studies in the accounting field are varied and offer some credibility for

the use of the case study approach as a means of establishing just what is happening in

the work place.

As explained by Orum, Feagin and Sjoberg (1991), the case study is a rigorous research

method for exploring the relationship between individuals. Moreover, the case study is a

relevant research method to use in the early stage of research on a particular topic (Hill,

1993 ). In addition, the case study method has been used to explore several business

relationships. For example, Wintoro (2000) uses it to explore trustee-investment manager

relationships; Kozak and Cohen (1997) explore distributor-supplier relationship, and also

Lewin and Johnston ( 1997) explain the marketing relationship.

Summary

The case study is one of many ways of doing social science research, including the

traditional disciplines (psychology, sociology, political science, anthropology, history and

economics), which offers the opportunity to gain rich insights into the application of

theory. The research method, procedure and steps proposed by Yin (1989) for a multiple

case study approach provide enhanced validity for the findings of this thesis.

Data Collection

The preparation for doing a high-quality case study starts with good preparation in

choosing the data sources and techniques of data collections. Both will be explored in

detail.


Sources and Technique of Data Collection

Data can be collected in a variety of ways, in different settings and from different

sources. There are two data sources in research methodology that is primary data and

secondary data. The primary data sources are individuals, focus groups and a panel of

respondents specifically set up by a researcher whose opinions may be sought on specific

issues from time to time. The secondary data sources are from company records or

archives, government publications, industry analysis offered by the media and in some

cases, the environment or particular settings and events, which may in themselves be

sources of data.

Techniques of data collection include face to face interviews, telephone interviews,

computer assisted interviews; questionnaires that are either personally administered, sent

through the mail or electronically administered; observation of individuals, events with or

without videotaping or audio recording and a variety of other motivational techniques

such as a projective test (Sekaran, 1992, p.189).

In this study, the data sources used are primary data on the information of individual

employment and records of the company as well as external data, especially of (W) the

Indonesia Accountant Association publications such as the SAAP (Standard Audit

Accountant Public). Moreover, the technique of data collection used is face-to-face

interviews with the manager of finance of each company studied.


Interviewing

One method of collecting data is to interview respondents to obtain information on the

issue of interest to the researcher. Yin (1989) states that one of the most important

sources of case study information is the interview. The definition of the word interview is

a kind of conversation with a purpose. Robson (1994, p.229) states that it is a flexible,

adaptable way of finding things out. The human use of language is fascinating both as

behaviour in its own right, and for the virtually unique window that it opens on to what

lies behind our actions. Thus, the interview appears to be a quite straightforward and non

problematic way of finding things out.

Interview Techniques

Interview techniques are far more complex than merely asking the right question.

According to Fowler and Mangione (1990, p.87) the importance and value of the data

being collected in an interview is directly related to the interviewer. Interviewing requires

understanding of communication and behaviour for conducting an interview. It is

important to stimulate interaction with the respondent, creating a free flow of dialogue.

To speed discussion, the interviewer should take the initiative to establish rapport with

the interviewee. This may be achieved by a discussion of complex, ethical issues.

Clarification of terminology and concepts provide both parties with a basis of

understanding. However, a limitation of interviewing is the possibility of the interviewer

influencing the interviewee's response. This limitation may be reflected in the selection

of the questions and the verbal presentation during the interview. Having established an

initial rapport, an interview needs to progress with questions. Kerlinger (1987, p.441)


suggested that there is a need to reduce interviewer bias by adopting a flexible approach

to the design of questions in the instrument. Furthermore, some degree of formalization

should be maintained but that the interview should be conducted in manner that allows

for as much information on the research issue as possible to be collected.

Boyd, Westfall and Stasch (1989) point to personal interviews as the most versatile and

flexible method of obtaining information. Personal interviews may rely on a set number

of questions or areas to be addressed, which may be referred to during the interview for

prompting. These may be questions of a specific nature or topic area that require

discussion.

Procedures for the conduct of an interview depend on the design of the questions. The

different types of question identified by Huseman, Galvin, Prescott, Penrose and Hatfield

(1986, p.376) are represented in Table 3.2. Moreover, the implications are important for

both the interviewer and the interviewee. The recognition of the potential of questions to

direct discussions or gain further insight is an important part in the process of preparing

for the interview.


Table 3.2 INTERVIEW QUESTION DESIGN

Type of Question Open

Closed

Neutral

Leading

Loaded

Mirror

Probing

Description Broad in its scope and usually requires more than a few words in response

Restrictive and generally require a brief and limited response

Phrased so that possible responses are not indicated/ alternatives are presented in a balanced fashion. Designed to guide the interviewee in a certain direction.

Usually puts an emotive proposition in such a way that it is difficult for the interviewee to either agree ar disagree. Reflects the previous answer of the interviewee.

Based on the response of the interviewee it seeks to probe deeper into the issue/area

Advantages 1. Greater opportunity for observation. 2. Easy to answer 3. Suggest interest by interviewer.

1. Less training of interview. 2. Less time to answer 3. Easier for interviewer to control. 4. Easier to analyse the answers. 1. No attempt is made to direct the interviewee's response.

1. Allows for verification of relevant information.

Identifies topics about which the interviewee feels strongly.

1. Draws out additional information. 2 . Reduces bias in the interviewee's response. 3. May provide a more complete response. 1. Draws out additional information. 2 . Provides an insight into the .interviewee's interpretation of a question. 3. May explain basis.

Page 99

Disadvantages 1. More time required. 2. Quantification of information is difficult. 3. More difficult to control the interview. 1. Provides too little information 2. Inhibits comrmmications 3. Interviewee does not have the opportunity to provide additional information

1. Tends to put words in the mouth of the interviewee. 2 . May result in biased responses. 1. Inhibits the free

flow of information. 2 . Should be left to

skilled interviewers.

1. May be misdirected.

May not prove to be the right issue.

source: Adapted from Huseman et al (1986, p.376)


Page JOO

Interview Structures

The interviews may take several forms. Most commonly, case study interviews can be

unstructured or structured, and could be conducted either face to face or by phone. In the

unstructured interview the interviewer does not enter the interview setting with a planned

sequence of questions. The objective of the unstructured interview is to raise some

preliminary issues so that the researcher can formulate a good idea of what variable needs

further in-depth investigation (Sekaran, 1992).

In contrast, Sekaran ( 1992) states that structured interviews are those conducted by the

interviewer when the interviewer knows exactly what information is needed and has a

predetermined list of questions that will be posed to the respondents. The questions are

likely to focus on factors that were raised during the unstructured interviews and

considered relevant to the problem. Moreover, the same questions will be asked of every

body in the same manner . .

The interviewer should be concerned with asking the questions properly, recording

responses accurately, and probing meaningfully (Emory, 1985, p.162). The means to

achieve these aims are stated by Emory (1985) as:

1. Establishing a friendly relationship with the respondent to gain cooperation.

2. Establishing in the mind of the respondent that the study is important and

worthwhile by explaining the purpose of the study.

3. Introductory explanations should be limited, as too much information can

introduce a bias into the respondent's answers.

4. Interviewer appearance and action are critical in making a good first

impression on the respondent.


Page JOI

5. The interviewer needs to make certain that the answers adequately satisfy the

question's objectives.

_ Needs to know the objectives of each question.

Needs to practice and assess conducting of interviews under controlled

conditions.

6. Probing questions should be neutral and appear as a natural part of the

conversation.

Provide insight into the purpose of questions and suggestions such as how

to probe for more information.

Definitions should be included to allow for explanation and interpretation in

a standardized manner.

Emory (1985) argues that the interview must be allowed to flow, and provide cohesion in

the interview process. The initial interview should be an icebreaker to gain the confidence

and acceptance of the person being interviewed. Under this approach notes would be

taken during the interview and greater detail added immediately after the conclusion of

the interview, rather than taking copious notes during the conversation. This should allow

the interview to go through more than just the narrow topics to be examined.

Additionally, it should provide time for the interviewer to assess the attitude of the

interviewee as well as the relevance of the specific information being conveyed.

Thus, according to Huseman et al (1986, pp.380-382) the structure is suggested as

consisting of six phases, planning, establishing rapport, stating the purpose, asking the

questions, answering questions and summarizing. This provides a guide in the

preparation to conduct interviews in order to gather data.


Summary

The interview approach adopted for this phase of research is that advocated by Sekaran

(1992), Yin (1989), and Emory (1985). Reliance on information was placed on interviews

with managers of finance of 20 companies and additional data from accounting reports,

documentation of companies and also from external data sources such as the publication

ofIAI and SPAP.

Personal interviews provide the opportunity to obtain responses that give insight into

areas that might otherwise not be addressed. The interview schedule is designed to

provide a set number of areas that need to be addressed, for example, code of conduct;

such as independently, objectivity, integrity, due care, responsibility, public interest and

scope and services. While these aspects of the interview are discussed there is flexibility

in the design of the questionnaire to allow for candid responses to be recorded.

The initial interview is used as an icebreaker to gain the confidence and acceptance of the

person being interviewed. Notes are examined and extended immediately after the

interview rather than continuously during the conversation. This allows the interview to

go through more than just the narrow topics considered to be of interest. Additionally, it

provides time for the interviewer to assess the attitude of the interviewee as well as the

relevance of the specific information being discussed.

In this study, two interview techniques are used. They are the unstructured interview and

the structured interview. The unstructured interview is used to establish preliminary

issues. The structured interview follows a set of predetermined questions considered


relevant to the research. All interviews are designed to elicit responses regarding the

central issues of the study, where clarification is requested by respondents during

interviews, the clarification pertaining to the specific issue being addressed.

Research Design

Past studies have established various approaches to identify the variables used in this

study. The literature review chapter provides the sources for the analysis of the data

gathered. The measurement process involves categorizing variables in the following

areas.

This study is designed to investigate the role of moral reasoning of public accountants in

the implementation of ethical codes in Indonesia. In doing so, two groups of variable

category are used in this study: independent variables and dependent variables. The

independent variables are the level of individual moral development of public

accountants in Indonesia. Furthermore, the dependent variables are five parts of the code

of professional conduct of the AICPA, namely: independence and objectivity; integrity;

due care; public interest and scope and service of nature. As a consequence, the

operational definition of code of conduct will be described. First, independence and

objectivity means the auditor should maintain objectivity and be free of conflicts of

interest as well as independent in fact and appearance when providing auditing and other

services, such as, fairness, no relationship with the client and no investment. Secondly,

integrity means the auditor should maintain and broaden public confidence,

confidentiality of client information, contingent fee and also perform all professional

responsibilities with the highest sense of honesty. Thirdly, due care means auditors


should continually improve competence and quality of services as well as determining the

other services to be provided based on a principle of a code of conduct. Fourthly, public

interest means the auditor should accept the obligation to act in a way that will serve the

public interest and honour the public trust. Fifthly, scope and service of nature is a

condition where the auditor should provide another service to the public (client) based on

the principles of the code of conduct (management consultant, tax consultant). Then,

variables of each code of conduct will be shown in a table/appendix. In addition, the

operational definition of individual moral development is a model of a theory of

processes of moral development of the auditor that can be used to explore the rise of

moral reasoning. As a result, auditors can make decisions regarding ethics in the real

professional work. Hence, there are three levels in the model of individual moral

development, which will be employed in this study, such as, pre-conventional level;

conventional level and post conventional level (Kohlberg, 1976). Additionally, four

variables will be analyzed with the use of the data collection of the survey and

observation in the following areas. To answer the research question use of a multiple case

study with four cases studies (based on the principles of the code of conduct, AICP A,

1996) and three typologies of companies (foreign owned companies, state owned

companies and family owned companies) will be used.

These variables are operationalizing in the interview schedules used. The details are

given in the appendix. To enhance the analysis, process questions pertaining to variables

are repeated in interview schedules. In some instances the request for the same

information was made using a different form and approach.

Chapter 3 .. . Research Method

Table 3.3 SUMMARY OF VARIABLES

Classificatory - Dependent variables.

Variables - Independent variables.

Independent Professional Public Accountants Variables in Indonesia.

Dependent Variables - Independent & Objectivity. - Integrity. - Public Interest. - Due Care. - Scope & Services of Nature .

Performance & - The code of pro fessional

Measurement conduct in Indonesia called SPAP

Variables (Standard Auditing of Public Accountant) - MID (Moral Individual Development)

Table 3.4 OVERVIEW OF DEPENDENT VARIABLES

Variables of independent, 1. Independent objectives and integrity 2. Objectiv ity and integrity (Rule 101-102)

Variables of Professional 1. Competence Due Care (Rule 201-204 ) 2. Auditing Standard

3. Accounting Principles 4. Forecast

Variables of Responsibility 1. Confidential client to Client (Rule 301-302) Information

2. Contingent fee

Variables of Responsibility 1. Encroachment to Colloquies (Rule 401-402 ) 2. Offers of employment

Scope and Nature Service 1. Act discreditable (Rule 501-505) 2. Solicitation and Advertising

3. Commission 4. Incompatible Occupations 5. Form of Practice & Name

Source : Adapted from Loeb, S.E., 1978, pp.114-116


Diagram 3.1 THE RESEARCH DESIGN

PURPOSE OF THE STUDY

PROBLEM STATEMENT

UNIT OF ANALYSIS (POPULATION TO BE STUDIED)

1---------------------+---r-----"---------------Exploration of case studies

TYPES OF INVESTIGATION

-----------------Causal relationships Linkages & Topologies

EXTENT OF RESEARCHER INTERFERENCE

------------------Minimized by use of established research

DATA COLLECTION METHOD ~-------------

Observation Interviews

Implementation of ethics code of Professional Public Accountants in Indonesia

SAMPLE DESIGN !.------------------

2 Case studies 3 Topologies

TIME HORIZON 1---1----4------------------

Twelve months

STUDY SETTING !------'~--'----------------- ..

-

Contrived

MEASUREMENT ~----------------

Categorising Coding

1. FEEL FOR DATA 2. RELEVANCE OF DATA 3. CASE COMPARISONS 4. INTERFERENCES DRAWN

Sources: Adapted from Sekaran (1992, p.67)

Page 106


Data Analysis

The data sources for this study are twenty companies in Indonesia, with three kinds of

particular company types, foreign companies, government companies and family

business. First, the procedures involved phoning and e-mailing the companies and

advising them of the research and obtaining tentative interest in the completion of the

survey. Having made this initial contact, the survey and a letter explaining the nature of

the study were then sent to each company. The Manager of Finance or Assistant Manager

was directed to self assess the external auditor (audit firms) because of their experience

with audit considerations of the company.

The interviews were an opportunity for the manager of finance and the researcher to

establish a working relationship. It involved summarizing the research issues and the

approach to be employed. The schedule provided a point of reference during the

interview. Questions were directed to the topics listed on the schedule, which also

accommodated the topics being addressed in any order.

Interview techniques used were face-to-face interviews, with the use of a tape recorder

and also predetermined questions. The questions were designed to confirm issues of the

ethical code. A schedule of questions is presented in the appendix. At these interviews

copies of the criteria of the auditor, the objectivity of the audit, the integrity of the

auditor, procedures of the auditor and due care of the auditor were obtained and or

discussed. All the data gathered from the interview was then analyzed with the methods

suggested by Yin (1989). Finally, the categories results are analyzed using a cross case

study technique.


Techniques of Analysis

As mentioned above, the data analysis consists of examining, categorizing and tabulating

the evidence in conformity with the thesis. So the analytical techniques used were those

of pattern matching and explanation building as suggested by Yin (1989).

Pattern matching involves the comparison of the findings with the predicted pattern of

specific variables as defined for the classificatory variable. Lack of precision is a

limitation in this method, as interpretive discretion is exercised by the researcher in

deciding whether a pattern has been matched or not. The use of multiple cases enhances

the use of pattern matching by providing theoretical replication. Cross-case results

provide more robust explanations.

Explanation building is the analysis of the case study data presented in narrative form. I

The explanations attempt to stipulate a set of causal links about some observed

phenomena. Limitations of this type of method include the fact that links may be

complex and difficult to measure in any precise manner and narratives may tend to drift

away from the issues. To minimize the possible limitations, the case study evidence is

examined with constant reference to the theoretical propositions and possible· alternative

explanations. A chain of evidence, which can be followed, is created for each case.


Conclusion

The multiple case study approach provides a focus on the nature and existence of the

linkages between key variables in the theoretical model. A multiple case study approach

also enhances the explanatory power of the findings. Interviews have been shown to have

reliability and validity when attention is paid to design and application. The use of

multiple data collection techniques, including observations and interviews provided

enhanced support for the analysis of the theoretical model.


CHAPTER4.

THE IAI AND THE DEVELOPMENT OF PUBLIC

ACCOUNTING IN INDONESIA

Introduction

The objective of national growth is to establish an evenly fair and prosperous society

materially and spiritually based on the five principles of "Pancasila" and the "1945

fundamental act". For that reason, each Indonesian citizen is to devote his or her

profession and ability to the nation. Training and advancement of the accounting

profession will develop dedication and this profession of national growth, which in turn

contributes to the development of Indonesian, its individuals and its society.

With respect to training and advancement, a co-coordinating institution that represents

accounting as a whole is required to determine a quality standard, to enhance and uphold

the code of ethics, to maintain grade and honour, to nourish morals and high integrity, to

build confidence in an accountant's outcomes, as a communication, consultation and co

ordination instrument, and also as a medium intended for other necessary co-operative

efforts. Therefore, all accountants unite in one organization entitled the Indonesian

Accountant Institute (W). This chapter will briefly discuss public accounting in

Indonesia, which began with the historical establishment of the W, its development, its

membership, its scope of operation, and ultimately its established regulations based on

Chapter 4 ... The IA! and It's Development

the environment of Indonesian cultural and the principles of political and economic

background.

History and Development of the IAI

The long progress of the IAI' s founding has not avoided political and economic

background influences.

In 1511, the Portuguese were the first Europeans to control Indonesia in order to secure

spices and to monopolise their supply. Under the Portuguese, a system of governing each

group according to its own law was adopted. When the Portuguese power disintegrated,

the control of Indonesia was briefly under Moslem rulers.

The Dutch arrived in 1596, similarly for the purpose of securing spices. In 1602, to

consolidate and to protect Dutch investment in Indonesia, the Dutch established the

Dutch East India Company (VOC). Besides being an economic entity, the VOC had full

power to govern and exercise all rights of sovereignty over Indonesia. This tradition is

reflected in many large state enterprises in Indonesia today, which have the dual

authority of commerce and sovereignty in their business dealings. When the voe was

formed in 1602, Indonesia for the first time in its history of corporate law, saw the

formation of a "company limited by shares" by foreign investors. As there was no strong

centralized authority in Indonesia, the foreign investors were free to form entities and act

according to their own law. To eliminate competition, business was to be conducted

according to law determined unilaterally by the VOC so as to confer to the Dutch virtual

Chapter 4 ... The JAi and It's Development

monopolistic business rights in Indonesia, mainly to determine who the buyers were and

to regulate the types and quantities of production. Deprived of political and economic

participation, Indonesians confined their activities to smallholding agriculture, primarily

to serve Dutch economic ambition.

In 1795, Indonesia came under French rule when Napoleon Bonaparte over-ran Holland

and in 1811 Indonesia fell to the British and came under the rule of the British East India

Company until 1816. After the end of the French occupation of Holland, the British and

the Dutch signed a convention in London in 1814, in which it was agreed that Dutch

colonial possession existing since 1803 should be returned and consequently, the Dutch

reclaimed Indonesia from the British.

The Dutch returned to Indonesia in 1816 and stayed until 1949, when Dutch sovereignty

over Indonesia was terminated with the signing of the Hague Treaty. The period of

Dutch occupation was marked by the exploitation of both the people and the resources of

Indonesia, with important political and economic powers held by the Dutch.

Between 1942 and 1945, Indonesia was occupied by the Japanese. All property

belonging to Europeans and Chinese was confiscated and the economy was transformed

to support Japanese military ambitions. After the Japanese surrender, a proclamation of

independence was issued on 17 August 1945.

From the seventeenth century until almost the end of the nineteenth century,

book.keeping and accounting practices followed the Dutch pattern and were dominated

Chapter 4 .. . The !AI and It's Development

by Dutch accountants. However, towards the end of the nineteenth century, with more

individual activities generating greater demand for more accountants, many European

accountants came to Indonesia to work in mills and factories that were processing

commercial agriculture products. Nevertheless, despite all these developments the

accounting profession was largely closed to the Indonesian.

Bookkeeping was first taught to Indonesians in Indonesian High Schools and Special

Schools (schools specialising in trade and commerce) before World War II. But even

then, it was only limited to the upper class Indonesians (Abdoelkadir, 1982). This

situation did not change until the onset of the Second War, and until then, the accounting

profession was the private domain of the Dutch. The only way an Indonesian was able to

become a registered accountant at that time was to qualify as a member of the Dutch

Institute.

In 1954, Law No.34 was enacted to govern the use of title "Akuntan" or Accountant.

Prior to this law, anyone could call herself or himself an accountant. However, under this

law, the title of accountant could be used only by those who had earned a master's

degree in accounting from a State University or from other accredited institutions; or

who had earned a master's degree from an unaccredited institution and also passed an

examination administered by an "Expert Committee", appointed by the Ministry of

Education and Culture. The Law required new accountants to register with the

Directorate of State Accountants of the Ministry of Finance upon graduation from an

accredited institution or to pass the "Expert Committee" examination. In 1953, The

Chapter 4 ... The !Al and It's Development

University of Indonesia became the first tertiary institution to offer a programme of study

leading to a master' s degree in accounting under the Dutch system. Prior to this, those

who wished to acquire a professional accounting qualification had to go to Holland. In

1957, the first batch of four Indonesian graduates was produced. (Abdoelkadir, 1982).

Finally, the initiative to form an Indonesian professional accounting body was taken by

Prof. R. Sumardjo Tjitrosidojo in 1957, with the creation of the IAI or the Indonesian

Accountant Institute.

A Brief History of the IAI

The development of the accounting profession in Indonesia is divided into two periods;

pre-1957 and post-1957. This study covers the important developments in both of these

periods, with emphasis on the reasons and influences for each development.

YEAR

1954

1957

DESCRIPTION

Law No.34 was passed concern.mg the use of the title "Akuntan"

(Accountant)

1. Indonesia revoked the Hague Treaty of 1949 that led to nationalisation

of all Dutch companies in Indonesia. By the early 1960s, all foreign

enterprises were nationalised.

2. On 23 December 1957, formation of Ikatan Akuntan Indonesia or

Indonesia Accountant Institute (IAI).

1959 Ministry of Justice approved the Articles of Association of IAI submitted

on 19 October 1958.

Chapter 4 ... The !AI and It's Development

1960 University Graduate Compulsory Service Act, No.8, 1961 was enacted

1963 First W Congress

1967 1. Law No. 11967, Investment ofForeign Capital (PMA) was passed.

2. Minister of Finance allowed a foreign accounting firm to establish joint

partnership with an Indonesian accounting firm.

1968 1. Law No. 6 in 1968, Investment of Local Capital (PMDN) was enacted.

2. Another foreign accounting firm was allowed to establish joint

partnership with an Indonesian accounting firm.

1971 Notice 76 was passed by the Minister of Finance, revoking the joint

partnerships of Indonesian and foreign accounting firms.

1972 Notice 25 in 1972 from the Minister of Finance created a committee to

develop the money and capital market (BAPEP AM).

Second W Congress was held in January 1972.

1973 Third W Congress was held in December 1973, which led to the

adoption of Indonesian Generally Accepted Accounting Principles (PAI),

Generally Accepted Auditing Standards (NPA) and the Code of Ethics.

1976 1. Statement of the President, No. 52, 1976 on the establishment of the

capital market.

2. W became founding member of ASEAN Federation of Accountants

and W's representative attended the gth Asian and Pacific Accountant

Conference.

1977 Consortium of Economic Science was formed to establish uniform

curricula for students of the master's degree in accounting.

Chapter 4 ... The IA! and It's Development

1978 IAI-SAP (Public Accountant Section) set up to guide the practice of

public accountants, and to specifically update accounting principles and

auditing standards.

1979 Minister of Finance issued Law No. 108/KMK.0711979 setting the terms

of reference for the assignment of public accountants to conduct the audit

of business enterprises which are obliged to pay corporate tax. Generally,

if financial statements were audited by public accountants the company

was entitled to a tax concession.

1980 As at 30 October, 208 practising permits had been issued.

1982 Fourth IAI Congress was held in October. During the Congress, The PAI

IAI Committee (Committee of Indonesia Accounting) was formed. The

Committee published several exposure drafts.

1984 IAI hosted the fourth ASEAN Federation of Accountants ' Conference in

October.

1986 Fifth IAI Congress was held in August. The Minister of Finance Decree

No. 763 covers the licensing of Public Accountants.

And regularly, W conference held every four years in the month of September.

Membership of IAI

Only those graduates recognised under Law No. 34 of 1954 are eligible for admission to

the IAI. Since 1960, the number of accounting graduates from the State University and

STAN has been 5,269. In 1960, the IAI had 30 members. The number rose to 513 and

2,175 in 1970 and 1980 respectively. By 1990, there were 3,316 members and 4,839 in

Chapter 4 . . . The !AI and It 's Development

1996. Up to now, its membership has reached 5,032, distributed in 20 branches of the

IAI Indonesian - wide. Despite that, the number of current IAI members is far below its

potential that is more than 22,000 accounting graduates in Indonesia, with a great

distinction in the number between male and female. Further research has shown the

number of female public accountants, running their own or partnership public accountant

office are less, compared to the number of male public accountants (directory of IAI

KAP, 1999-2000).

However, most female accountants decided to be internal accountants, educational

accountants and staff of the Public Accountant Office. This tendency is a result of the

condition of Indonesian culture (Partriarchi culture), religion and the level of risk in the

public accounting area. The majority of the IAI members work in government

departments followed by numbers of IAI members who work in private companies,

public accounting offices (KAP) and universities. The age range of most of IAI members

is in the productive age between 20 to 50 years old a characteristic of IAI members

shows that most of them hold an important position in government departments,

government owned corporations, private industries and public companies.

Scope and Nature of Public Accountant's Work

Public accountant work area

A public accountant is an accountant who has obtained authorization from the Minister

of Finance to perform public accounting operations. A public accountant performs

unbound services in general audit, special audit, attestation and review of company


financial reports. On the other hand, a public accountant could also perform unbound

services in the consultation area, taxation and other services related to accounting (ch. 1

& 2 Indonesian Republic Minister of Finance instruction No. 43/IavfK.017/1997-Ps 1

&2 Policy of Financial Minister RI No. 43/KMK.017/1997). As a professional

practitioner, a public accountant could also provide services as follow:

1. Atestasi (attest)

Characterized atestasi service is that in which public accountants are obligated to

give their assertion on a written statement of a operational company in accordance

with all material of the determined criteria. This atestasi service could be sub-divided

in to 4 categories that are examination audit, review and procedures that have been

agreed on.

2. Non-Atestasi

In this non-atestasi service, a public accountant has no obligation to give his or her

assertion on a statement in accordance to the determined criteria. Main categories of

non-atestasi service are accounting, taxation and management consultation services.

Public accountant office work area

A public accountant's office is an institution that has obtained authorization from the

Minister of Finance to act as a medium for public accountants to perform their profession

(ch. 1 Indonesian Republic Minister of Finance No. 43/KMK.017/1997-Ps.1.Policy of

Financial Minister RI No.43/KMK.017/1997).

Chapter 4 .. . The JAi and It's Development

Forms of public accounting offices

1. Private

Page 119

A private public accountant's office uses the name of the public accountant

himself/herself as the office's name, with that person acting as the director and person in

charge on the office.

2. Partner

A public accountant's office in the form of a partnership uses as many names as possible.

For example; public accountant's office, that consist of three names of public

accountants, with responsibilities and leadership by a minimum of two public

accountants. Moreover, a public accounting office (KAP) could also collaborate with

other public accountants or other public accountant offices in correspondent form,

technical co-operation or other affiliate relationships in conformity with the effective

regulations.

As explained above, in fact, the number of females who own public accountant offices

whether private or partner is not comparable in relation to the number of female

accounting graduates and registered female public accountants (W, 2000).

Public accountant office (KAP) activities

A public accounting office performs various main activities that can be categorized as

follows:

Chapter 4 ... The !AI and It 's Development

1. Atestasi service

Atestasi service includes all activities where the public accountant office issues a

written report, which affirms conclusions on reliability of the other party's written

assertions. Atestasi service could be divided into 3 types, that is historical financial

report audit, historical financial report review and other astestasi services (e.g.

atestasi on prospective financial report and projection, statistical data on the

organization's result of investment, etc).

Beside those services, a public accountant could also perform other services such as

taxation services, management consultation, accounting service and bookkeeping

service for companies with limited accounting staffs.

2. Peer review

Peer review is a study performed on a public accounting office in order to evaluate

whether a public accounting office (KAP) has satisfactorily developed quality

control, as required by the IAI Statement of Standard Quality Control No. 01 which

states that "Every public accountant office must have a quality control system and

describe quality control factors and other issues in relation to effective

implementation of the system. Every public accounting office must implement the

public accounting office's quality control in all auditing services, atestasi,

accounting and review standards which have been set in the Professional Public

Accountant Standard (SPAP) released by IAI".


The purpose of the Peer Review is to evaluate whether a public accounting office

has established and implemented adequate quality control policy and procedures as

required by the auditing standard.

The Peer Review has a very important role in upholding the code of ethics because

an intensive Peer Review, would mean auditing quality improves. With improving

auditing quality, public trust in the public accounting profession would also increase.

In other words, peer review encourages enhancement in implementation of ethical

public accounting practices in Indonesia.

In Indonesia, the Peer Review is performed by a professional and BPKP -

(Department of Financial Control and Development). The Peer Review performed

by the professional which is handled by a Quality Control Team formed by the IAI

and BPP (Department of Controlling Accounting Body) compartment Accountant

Public IAI. On the other hand, the Peer Review performed by BPKP is actually the

function and authority possessed by the body itself

The purposes of the Peer Review could be described as follows:

1. For the related public accounting office, the reviewed public accounting office will

benefit if they can apply quality control "good judgment" and procedure in their

office environment. Hence, they could enhance their system of work into a better

and more efficient one, and also expand their credibility.


2. For the profession, by helping a public accounting office to comply with the Quality

Control Standard and expand credibility, the office could gain affirmation from all

sides for credibility, which in turn will give a more solid position to the public

accounting profession itself.

The Role and Responsibility of Public Accounting

The role of the accounting profession is important because it acts as a party responsible

for the genuineness of the financial information given to society. The accounting

information' s role in society is acting as an effective communication medium between

investor and creditor on one hand, and corporation management on the other.

The strategic role of the accounting profession, as a medium between management as the

source of information, and creditors or investors as the users of information, requires the

accountant to perform their task better, to be good manner, respect the valid regulations,

and be able to provide strategic prediction. Furthermore, accountants are expected to be

able to give advice and solutions for any financial problems encountered by the leaders

of the company in its performance. Therefore, they must have a high degree of

dedication and always carry out the accounting profession' s code of ethics, and never act

to the detriment of the country and society in general.

Considering their great role, the accounting profession also has a great responsibility in

keeping the faith that has been given to it by society. This responsibility is not merely .a

Chapter 4 .. . The JAi and It 's Development

moral individual responsibility and respect for the professional standards; it also includes

legal and social responsibility as a citizen of the nation.

According to Sarwoko ( 1996) in the broad-spectrum it could be concluded that the

responsibility of public accountants in performing their task could be divided into 3

criteria as follows:

1. Moral Responsibility (Moral Individual)

Holding moral responsibility while performing their task to derive objective and

wise decisions (competent, objective and due professional care). Accountants

must be morally responsible in giving complete and sincere information on the

performance of a corporation to the authority when required, even if there are no

penalties for the action.

2. Professional Responsibility (Ethics I Moral Philosophy)

Every member holds professional responsibility to the association of the

profession by obeying the standards of the profession issued by the association,

and not forgetting the profession's code of ethics as a standard measurement in

obedience to regulations that regulate relations wit}i clients, soCiety and between

accountants (rule and principles of professional conduct).

3. Legal Responsibility (Law and Order)

Every member holds a responsibility outside of the profession of standards limit

that is responsibility to the law applied in the society, as a good citizen of the

nation. As a good citizen, while performing their professionalism, an accountant

must comply with the law applied in the country where they operate.

Chapter 4 ... The !AI and It 's Development

With these three kinds of responsibility, the accountant is expected to be courageous and

sincere (fairness) in expressing the whole facts of a corporation's management behaviour

in a more complete and comprehensive manner compared to that ordinarily done by

traditional auditing.

The Development of the Ethics Code in Indonesia

Professional ethics for public accounting practice are issued by the IAI as the

organization of the accountant professions called Indonesia Accounting Code of Ethics.

It is the guidance for all members of IAI to perform their tasks in a responsible and

objective manner.

Previously, the Indonesian Accounting Code of Ethics had been designed long before the

first IAI congress, but it was first legitimated in the second IAI congress in January 1971

(Hoesada, 1996, p. 174). This code of ethics was then perfected in the IAI congress in

1998 and in the fifth congress in 1986. Before 1986, professional ethics issued by the IAI

were called the Indonesian Accountant" Institute Code of Ethics (Ethics Code of W),

which then in the IAI congress in 1986 was changed to the Indonesian Accounting Code

of Ethics, and is still valid.

The formula of the recent code of ethics was mostly derived from the formula of the code

of ethics created in the sixth IAI congress and was added by entries from the outcomes of

a One Day Seminar of Indonesian Accounting Code of Ethics Revision on 15th June,

Chapter 4 . . . The IA! and It 's Development

1994 and from the discussion at the Committee of Indonesian Accounting Code of Ethics

Conference in the year 1994 in Bandung. The recent Indonesian Accountant Code of

Ethics contains 8 chapters, 11 principles and 6 professional ethical assertions.

Assertion of Ethics Profession.

The need has increased for further collaboration in developing a code of ethics as a result

of queries from accountants and practitioners on professional ethical behaviour. The

Indonesian Accounting Committee on the Code of Ethics has formulated six professional

ethics assertions, which were authorised by the seventh IAI' s conference in September

1994. The Indonesian Accounting Committee on the Code of Ethics formulates these

assertions based on an agreement with a committee composed of the elements from

public accountants, management accountants, government accountants and education

accountants. Every violation of the accountant's code of behaviour must be accountable

to the Public Accounting Profession Monitoring Body or IAI' s respected Assembly.

Furthermore, the current applicable assertion of professional ethics could be utilized as

interpretations and ethical rules, before the new interpretation and ethical rules are

published as a substitution. The six assertions of professional ethics could be described

as follows (7th IAl conference in 1994) see also table 4 .1

Chapter 4 .. . The !Al and It 's Development

Table 4.1 THE SIX ASSERTIONS OF PROFESSIONAL ETIDCS

ASSERTION OF PROFESSIONAL ETHICS

No. Topic

1. Integrity, objectivity, and independency.

2.

3 .

4.

5 .

6.

Professional competence.

Disclosure of confidential information of client.

Advertising of public accounting office.

Communication of public accountant.

Change staff/partner of public accounting office to the other.

Contents

• Financial relations with client.

• Position within company. • Relationship outside

auditing practice. • The other service of audit

client. • Family and private

relationship. • Other fee of

professional service. • The acceptance of goods and

services from client. • Awarding of goods and

services to client.

• High professional competency.

• Maintain professional competency.

• Obligation, prohibition, and responsibility.

• Counterfeit and misleading advertisement.

• Permitted advertisement.

• Replacement accountant. • Former accountant.

• Accepting public accounting office.

• Other information.

Chapter 4 .. . The !Al and It's Development

7

At the Eighth W congress in September 1998 in Jakarta, some changes were made to

the code of ethics. These are:

1. Eliminating the Committee of Code of Ethics from the organization' s structure.

2. The draft of the Indonesian Accounting Code of Ethics includes Principle of Ethics,

Rules of Ethics and Rules of Ethics Interpretation.

And lately, an extraordinary Meeting of Members was held by W-Public Accountant

Compartment (W-KAP) on the 5 May 2000 which drafted 5 main parts of the Rule of

Ethics and the newest framework for W Code of Ethics (see also Diagram 4.1).

However, a long and tough debate has always taken place in every congress of the Code

of Ethics Committee. This shows that to achieve one decision from different opinions in

relation to the code of ethics is not easy. Up until now the code of ethics is a continuing

process to be updated and adapted to recent improvements and conditions. The

Indonesian Accounting Code of Ethics improves continuously.

Chapter 4 ... The JAi and It 's Development

Diagram 4.1 THE FRAMEWORK OF ETIDCS CODE OF IAI

HEADQUARTER

OFIAI

IAI-PUBLIC

ACCOUNTING

COMPARTEMENT

100 200 Independency General

Integrity Standard Objectivity Accounting

Principles

THE ETHICS

PRINCIPLES

THE ETHICS

RULES

300 400 Responsibility Responsibility

to to Client Clients and

Colleagues

INTERPRETATION OF THE

ETHICS RULES

QUESTION AND ANSWER

Page 128

1. Responsibility Profession. 2. Public Interest. 3. Integrity. 4. Objectivity. 5. Competency & Due Care of

Professionalism. 6. Confidentiality. 7. Professional Attitude. 8. Technical Standards.

-

500 Responsibility THE

MEMBER OF And CO:MPARTE MENT

Other MEETING Practices

-

J MEMBER OF ASSOCIATION OFINDONES IAN ACCOUNT AN T

-AL PROFESSION

STAFF IN STANDARDS AUDITING PUBLIC ACCOUNT AN T

-

Chapter 4 ... The JAi and It 's Development

As explained before, the latest Public Accounting Code of Ethics based on the last W

congress has stated that the Indonesian Accounting Code of Ethics includes the Principle

of Ethics, Rules of Ethics and Rules of Ethics Interpretation. The Principle of Ethics

provides foundations for the Rules of Ethics, which regulates its members in providing

professional services. The Principle of Ethics is authorised by the congress and

applicable to all members, while the Rules of Ethics is authorized by the Members

Assembly Meeting and only applicable to the members of the related assembly.

Furthermore, the Rules of Ethics Interpretation is an interpretation of the Rules of Ethics

issued by a body established by the assembly, and the interpretation is derived from

members' and other related parties' opinions. This interpretation is used as guidance for

the Rules of Ethic implementation without limiting its scope and application (8th W

Congress, Sept 1998). Moreover, the current assertion of the profession's ethics is

applicable as an interpretation and/ or Rule of Ethics until a new rule and interpretation is

made available to replace it.

The Principle of Ethics

The Profession's Principle of Ethics in the Indonesian Ethics Codes states the

recognition of the profession in its' responsibility to the public, accounting service users

and partners. This principle provides guidance to members in accomplishing their

professional responsibility. This principle requires a commitment to behave respectfully,

even though the condition necessitates providing to increase the professional benefit of

accountants. The Principle of Ethics includes:

1. Professional Responsibility.

Chapter 4 ... The JAi and It's Development

While performing their professional responsibility, every member must always

employ their moral and professional judgement every time they conduct their

tasks.

2. Public Interest

Every member is obliged to always present in the main part of their public

service, respect of public trusts and shows commitment to their professionalism.

3. Integrity

To maintain and improve public trust, every member must satisfy his or her

professional responsibility with the highest integrity possible.

4. Objectivity

Every member must hold on to their objectivity and avoid any interest collision in

fulfilling their professional responsibility.

5. Professional Competency and conscientiousness

Every member must perform his or her professional service conscientiously,

competently and persistently. Additionally, they have a responsibility to preserve

their professional knowledge and skill on the required level to certify competent

professional service benefit to the clients or job giver, based on the most recent

practice, legislature and technique improvement.

6. Confidentiality

Every member must respect the gathered information confidentiality while

performing their professional service and not utilize or reveal that information

without any agreement, except if there are professional rights or obligations or

law that require it

Chapter 4 . . . The IA! and It's Development

7. Professional Behaviour

Every member must consistently behave to maintain their good profession,

reputation and stay away from any conduct that could discredit their reputation.

8. Technical Standard

Members must perform their professional services according to the relevant

technical and professional standards. In compliance with their skills and

conscientiously, every member must hold the responsibility to perform the tasks

given to the service beneficiary, as long as the task is not violating integrity and

objectivity principles.

The Rules of Ethics

The Rules of ethics regulates the members in performing their professional service. This

rule of ethics is authorized by the Member of the Compartment Meeting, and must be

applied to all members of the Association of Indonesian Accountant-Public Accountants

Compartment (W- Compartment Public Accountant) and professional staff who work in

a Public Accountant Office as an IAI-KAP's member or non-member.

For example, if professional staffs that work in a Public Accountant Office as non

members of W-KAP are violating the Rules of Ethics, in this position the head of that

particular office has an obligation to act towards the violation.

Chapter 4 .. . The !Al and It 's Development

The Public Accounting Compartment's Rule of Ethics contains several elements that can

be classified as follows (source from the result of Members Extraordinary Meeting on 5

May 2000),

1. General comprehension of client, financial report, public accountant, public

accountant office · (KAP), Indonesian Accountant Institute (IAI), Indonesian

Accountant Institute - Public Accountant Compartment (IAI-KAP), membership

of the Public Accountant Office or Compartment (KAP) and the appropriate

public accountant practice.

2. Independency, integrity and objectivity.

Jndependency

While performing their professional task, each member of a Public

Accountant Office (KAP) must represent their mentally independent

behaviour as mentioned within the Professional Public Accountant

Standard published by Indonesian Accountant Association. The mentally

independent behaviour mentioned before must include independence in

facts as well as independence in appearance.

Integrity and Objectivity

While performing their tasks, each member of the Public Accounting

Office must represent their integrity and objectivity, be unbiased from any

conflict of interest and must not allow any factors of material miss

statement that has been acknowledged or subordinate the consideration to

another party.

Chapter 4 ... The !Al and It 's Development

3. Comprehension of General Standard, Accounting Principle and Obedience on

Standard

General Standard

General standard could include professional competency, professional

accuracy and comprehensiveness, and also planning and supervision.

Accounting Principles

Members are not authorized to state their opinion or give their assurance

on whether another entity' s financial reports or financial data have been

represented in accordance to the current accounting principle. Members of

the Public Accounting Office are not authorized to state that he or she

could find any material modification needed on financial reports or

financial data to suit it with the current accounting principles.

Obedience on Standard

A member of the Public Accounting Office who performs tasks of an

auditing service, atestasi, review, compilation, consultation, taxation or

other professional service is obligated to comply with the standards which

are published by the Standard Regulation Body founded by Indonesian

Accounting Association (IAI).

4. Responsibility to Client

A member of the Public Accounting Office holds responsibility to his or her

clients in relation to the following instances: Prevent any client's classified

information (confidential client's information) from disclosure; professional fee

that decides the amount of fee as well as the " contingent fee " to be charged.

Chapter 4 .. . The JAi and It 's Development

However, the member of the Public Accounting Office is not authorized to offer

any fee if the offered fee could harm the profession credibility and neither to

charge any contingent fee if the charged contingent fee could drive down

in dependency.

5. Responsibility to partners in one profession.

Every member must maintain profession credibility by not producing any

statement or behaviour that could harm his or her partner's reputation.

Moreover, each member must perform written communication between public

accountants, and even more important, to the preceding public accountant when

taking over any auditing task from that public accountant. Furthermore, other

public accountant is being appointed with different type, period and purpose for

the same years-book.

6. Responsibility and other practice

a. Discrediting statement and behaviour

Every member is not allowed to conduct any behaviour and statement that

could harm the reputation of the profession.

b. Advertising, promotion and other marketing activity

While engaged in public accounting practice, every member is allowed to

seek clients by advertising, performing marketing promotion and other

marketing activities, on condition that the activity will not jeopardize the

reputation of the profession.

c. Commission and referral fee

Chapter 4 . . . l'he !AI and It 's Development

Every member is not allowed to charge/collect any commission when the

condition of the comm1ss10n charging/collecting could decrease

independency. A referral fee 1s only allowed between similar

professionals.

d. Form of organization and The Public Accounting Office (KAP) name

Every member can only perform public accounting practices in the form

allowed by the valid regulations and-or will not mislead and put at risk the

profession' s credibility.

Conclusion

The development of public accounting in Indonesia explores the history of the IAI

including membership, the scope and nature of the public accountant's work, the

responsibility of being a public accountant and the development of a code of ethics in

Indonesia.

Public accountants, as members of the IAI, have many works that focus on the scope and

nature of services to publics. Hence, they have to be responsible to the public in general

and responsible to himself or herself as a profession. Therefore, there is a need for

regulation, rules or standards as guidance to achieve professional standards and improve

professional responsibilities .. Thus, the ethics code as a part of the code of professional

conduct has been regulating and become standards for their professional practices.


However, it can be seen that the long progress of the IAl in it self has been influenced by

a political and economic background. The development of the accountant professional in

Indonesia began with the foundation of the IAl in 1954. This initiated the establishment

process of recent standards and principles of professional practices, especially principles

of the ethics code. Consequently, the IAl, as a gathering mediwn for all professional

accountants, has always worked strenuously to gain high credibility for the quality of the

service given by the profession to society. This foundation of thought has motivated the

formation of a Public Accounting Code of Ethics, which constantly has been updated and

developed to cope with development in the world of business.

At present, every practice and profession is busy with efforts to implement the

accounting profession's code of ethics. These efforts need to be improved and supported

by all related parties. New steps are required to further encourage obedience to the

accountant's code of ethics by gaining conceptual and practical opinion from

professional accountants in addition to and as a perfection of the code of ethics. Finally,

the role of government, society or the public and the profession itself has involved

establishing a process culminating in the principles of a code of ethics.


Introduction

CHAPTERS

ANALYSIS

Page 137

The previous chapters discuss the roles, the duties, and the responsibilities of auditing

firms or public accountants in the implementation of the code of professional conduct.

This chapter also examines the effect of consciousness on professionalism and the moral

theory approach - particularly moral individual reasoning - to measure the level of

consciousness in behaviour as well as the case of study method to explore the

performance of auditing practices.

This chapter analyzes the results of the exploratory research on public accountants'

performance of auditing practices in three different types of companies in Indonesia. The

exploration uses the model of the AICP A Code of professional conduct and the moral

reasoning theory approach. The focus is on the upholding of ethics codes, responsibilities

and duties by the Indonesian public accountants. In doing so, primary and secondary data

are used. The secondary data are derived from the annual consortium and directory of

W- Indonesia, while the primary data are obtained from interviewing 20 financial

managers from 3 different category companies.

Chapter 5 ... Analysis

This chapter is organized as follows. The next section deals with data description on five

ethics codes, which provide a sketch of the performance of ethics codes in Indonesian

companies (case report). It, then, presents a discussion of an ideal measurement, which is

in line both with the accounting body' s rules and standard and with the measurement

results of those three types of companies. The final section discusses the analysis that

makes use of two approaches, namely: the individual analysis using the approach of

moral theory (i.e. moral reasoning), and the other is a professional approach with special

reference to the existing standard rules and ethics code (SP AP).

Data Descriptions

In this section, various aspects of Ethics Codes of accountants and auditors will be

discussed. The discussion is based on the data collected in various ways from some

sources such as in-depth interviews, observations, documents and minutes/times. This

will provide a basis for the analysis in the subsequent sections. The discussion are about

four parts: the profile of financial managers under study; the development of Ethics

Codes for Public Accountants in Indonesia such as, independence & objectivity, integrity,

responsibility & public interest, due care, scope and services; the degree to which the

Ethics Codes of Accountant are applied in practice in Indonesia; and the investigation of

the interviews based on the user perception. Subsequently, this Ethics Codes is concerned

with five sorts of Ethics Codes that are applied to these three categories of companies.

They are family-owned companies, state-owned companies, and foreign-owned

companies. Finally a conclusion will be provided.


The criteria of interviewees' respondent

The interviewed respondents were selected from those who were directly involved in the

financial management of the companies, more specifically the financial managers. It used

the following selection criteria; financial managers who had experience in the financial

management of the company, adequate knowledge of finance and accounting, were

responsible for the accuracy and correctness of the annual financial report of the

company, and had worked for more than four years and had a good reputation in the field

of accounting or finance. Twenty financial managers were then selected randomly and

sent a letter asking about their availability for an interview. Fifteen out of twenty

financial managers agreed to be interviewed for the purpose of this study. The rest were

rejected for the reason .that they were busy and had no time.

Furthermore, the companies under study are divided into three main categories, namely:

family-owned companies (FOCs), state-owned companies (SOCs), and foreign-owned

companies (FrOCs ), to make a comparison in regard to the extent of the financial report

of each company category audited by external and independent auditors in accordance

with the existing ethics code. This division is also intended to find out which company

group is more consistent in applying the ethics code or otherwise. The 15 financial

managers selected in this exploration consist of 5 financial managers of FOCs, 5 of SOCs

and 5 of FrOCs. Prior to the findings on the implementation of the Ethics code, it is

worth discussing the development of the Ethics Code in Indonesia.


Ethics Codes for Accountants in Indonesia

Basically, every individual professional freely caters their service to the public and needs

to earn both the government's and society' s trust as well as be trustworthy themselves. It

means they are obliged to conserve the given trust and behave in accordance with

society' s wishes. For this purpose, every professional organization needs to set rules that

regulate and guide its members' professional behaviour. This set of rules in a profession

organization is often referred to as the Ethics Code.

The Association of Indonesian Accountants (IAI) has for a long time had its own Ethics

Code that provides guidance to its members in delivering their professional services to

the public. The Code, agreed upon at the seventh congress of IAI in Bandung on 20

September 1994, contains a set of rules, which were originally taken from the previous

Code introduced in the sixth congress, with various modifications. This new version of

the Code comprises two major parts. The first part contains chapters on rules of

behaviour and their implementation, supplements, improvements, conclusion, and

legalization. The second part deals with the details of the main part under a special name

the Statement of Profession Ethics.

Moreover, the substance of this code includes various rules on professional behaviour,

which are supposed to be followed by accountants. In general, this code outlines the rules

in respect of the attitude, professional skill, responsibility, and special conditions, while

the Statement of Profession Ethics includes, integrity, objectivity and independence,

Chapter 5 .. . Analysis

f.J

professional skill, revelation of client's secrets, the advertisement of the public

accountant's office, and transfer of staf£'partners from one accountant office to another.

In the context of this code this study puts more emphasis on the rules contained in the

Statement of Profession Ethics, which have been included in the Indonesian Auditing

Standard of Financial Report. These rules include independence and objectivity,

integrity, responsibility and public interest, due care, and scope and services.

The five rules above included in the Statement of Profession Ethics are interrelated with

each other and are intended to develop and maintain highly regarded professional

practices. Independence, the first rule, is considered as a comer stone and deeply

embedded credo in the accounting profession which is difficult to prove and easy to

challenge. This value demands that each professional member should focus on the

accounting evidence as it is the only basis for opinion formulation and not to be tempted

by any interest that is likely to bring him/her away from that relevant evidence.

Moreover, objectivity, the first rule, guides each member to be fair and just in rendering

professional services to the public, in the sense that the opinion to be granted is in

accordance with the available evidence. Thus, independence and objectivity are two sides

of the same coin in the accounting profession. The second principle, integrity, refers to

attitudes or the character of individual accountants that have a lot to do with the

maintenance of the public trust given to them. Responsibility and public interest, the

third principle, is intended to make sure that an auditor is responsible for the services

rendered to the client in terms of quality and to the public in general in that the public


interest it is not damaged by the service. Here, the public interest is above individual or

group interests so, a service to serve an individual or group client's interest cannot violate

public interests. The fourth principle, due care, relates to competence and carefulness in

the profession. While the last principle, scope and services, deal with professional

activities other than auditing in which an auditor is allowed to get involved as long as the

first four principles are not violated. Indeed these five principles constitute an integrated

set of a moral code of conduct, which must be upheld simultaneously by an accountant if

he/she is to be a professional one.

Agoes Sukrisno, in a comm1ss10n session IAl (1996), explains that every single

profession that renders a service to the public must equip itself with an ethics code that

involves a set of moral principles that will guide and regulate the professional behaviour

of those that belong to that profession. This ethics code is needed in order to maintain the

trust given by the public to the profession and the more the professional standards

increase and satisfy public needs greater trust is gained.

Implementation and Interview Results

In order to know further about the accountants' implementation of the Ethics Code,

especially auditors, an exploratory research is conducted on the extent that the code is

upheld. The study also aims at knowing whether differences in the degree of

implementation exist among the three different categories of companies under the study,

namely: FOCs, SOCs, and FrOCs.


In doing so, 15 interviewees, all financial managers, were selected from all company

groups for an interview. This interview was expected to reveal accurate and correct

information about the implementation of the Ethics Code from the users' point of view.

The interview proceeded as follows. A face-to-face interview that took a week was first

conducted with 5 financial managers from the FOCs. The same interview was also used

for the other 5 financial managers each from the SOCs and FrOCs. This was a one -hour

interview using a tape recorder to record all information. It was guided by a questionnaire

that consists of two parts (see appendix 5 .1 ), each having a different emphasis. The first

part contains only one general question that identifies the qualification criteria of a public

accountant. The second part comprises questions that investigate the respondents'

reasons for these qualification criteria, which directly corresponds to the Ethics Code of

public accountants. More specifically, the questions in the second part were categorized

into 5 sections following the five principles of the Ethics Code that must be upheld by

public accountants. These five principles are: Independence & Objectivity, Integrity,

Responsibility & Public Interest, Due Care, and Scope & Service. Every ethics code has

as much as four questions to allow the financial managers to explain its advantages (see

appendix 5.1). Moreover, from the given questions it describes a feature of the meaning

and the using of ethics code, particularly, from the users' point of view.

The interview results reveal that the financial managers (the respondents) from different

company groups have different perceptions of these five principles. Accordingly, the

interview results are presented according to the company group so that the data

identification and comparison among different groups can be made more easily.


Interview Results

The interview results are as follow. First, the interview with 5 interviewees from different

companies within the FOCs reveals that when they choose public accountants they base

their decision on whether these accountants implement the following principles;

5 interviewees ( 100%) required independence principle to be implemented; 4

interviewees (80%) required due care; loyalty was chosen by 3 interviewees (60%); good

services by 3 interviewees (60%); confidential by 4 interviewees (80%); and cheaper fees

by 5 interviewees ( 100% ).

Secondly, the 5 interviewees from the SOCs proposed quite different criteria in choosing

public accountants. These criteria were: professional skill (chosen by 5 interviewees =

100%); high integrity (required 4 interviewees= 80%); independent (by 5 interviewees=

100% ); loyalties (by 3 interviewees = 60% ); Time limitation (2 interviewees = 40 % );

objective (3 interviewees = 60% ); and Confidential (by 5 interviewees = 100% ).

Thirdly, the last 5 interviewe1es from the FrOCs presented the following criteria.

Independence by 5 interviewees= 100%; Objectivity by 5 interviewees =100%; Integrity

by 5 interviewees =100%; Professional skill by 4 interviewees= 80%; Responsibility to

companies by 5 interviewees =100%; and Confidential by 5 interviewees= 100%.

It can be said from the above numbers that the FOCs put more emphasis on the cheap

price, loyalty, and good services in choosing public accountants, while the other company

groups (SOCs and FrOCs) stress the importance of professionalism in picking their


auditors. This difference is attributable to a suspicion that the financial managers from

the FOCs have much less knowledge of the Ethics Code of public accountants than those

from the other two. To prove that this suspicion is correct, then, further interviews

(interview part II) were conducted to investigate the reasons and criteria for choosing an

auditor's. Their answers will help uncover the degree of their understanding of the Ethics

Code.

The results of the interview part II are as follow. First, Independence and Objectivity

principles. The five respondents from the FOCs stated that these principles were

important and mandatory for every public accountant to be so honest that he/she would

be able to be fair and just in rendering auditing and carrying out their services to any

client, and even free from any internal also external influence so as to prevent their task

from bias. Fair and free auditors guarantee that the opinions they issue are trustworthy

and accurate. All of the 5 interviewees stressed the importance of fairness and freedom

from any influence as proxy for objectivity and independence.

The 5 interviewees from the SOCs expressed the same opinions regarding independence

and objectivity principles, but were more elaborate by giving some real examples. For

example, four of them (80%) said public accountants were not supposed to consider one

interest as more important than another; 5 of them ( 100%) required that they be free in

that they had no special relations such as family or ownership relations with the user

company; and also 5 of them ( 100%) stressed that they had to be fair in that they put the

public interest above any individual or group interests. Furthermore, they ( 100%)


believed that the implementation of these principles would guarantee a clear and firm

auditing system, although the use of public accountants from the government body

(BPKP), with the maximum practice period with a company for two years, might do the

same thing.

Meanwhile, the five respondents from the FrOCs also maintained that the independence

and objectivity must become the ethic of every professional, especially public

accountants so that they work fairly ( 5 interviewees = 100% ); not to prioritize their own

or a certain group's interests over the others (5 interviewees= 100%); and not to have a

special relations, such as family or ownership relations, with the user company (5

interviewees=100%). They (100%) believed that these principles help public accountants

avoid both external and internal pressures as well as conflict of interests.

Second, Integrity principle. All five interviewees ( 100%) from the FOCs stated that

public accountants had to have integrity so that they are honest and trustworthy in

rendering services, firm in making decisions, that they can keep the client's

confidentiality, and the resulting opinion issued is objective. The interview with the five

respondents from the SOCs revealed the following. All of them believed that integrity is

a necessity to develop and maintain professionalism, because it strongly relates to

personal attitude and character that includes: honesty, in that everything stated is nothing

but the truth (by 5 interviewees = 100% ), firm and careful in performing auditing jobs

(by 3 interviewees = 60%), and loyal to the company and their profession (by 4

interviewees = 80% ). Moreover, the importance of the integrity principle is also shared


by all 5 interviewees ( 100%) from the FrOCs because it encourages auditors to be firm,

honest, loyal to their profession, and adherent to all available rules and standards set by

the profession. In other words the user companies expect that when the integrity ethic is

upheld by public accountants they will be honest, firm, and adherent to the existing rules.

Third, Responsibility principle. All interviewees ( 100%) from the FOCs perceived that

responsibility is related to situations where auditors are responsible in taking care of the

clients' interests, meeting the time frame agreed upon, and delivering all services (both

auditing and consultation) stated under the contract. Meanwhile, out of 5 interviewees

from the SOCs, four of them (80%) maintained that integrity means that auditors must be

responsible for all information they deliver to their clients and in improving the clients'

understanding of the financial report; and all ( 100%) stated that they had to be

responsible for satisfying the time frame set in the contract and in defending the public

interests in their auditing opinion. Furthermore, all interviewees ( 100%) from the FrOCs

argued that the auditor had to provide responsibility to take care of and maintain public

trust. Moreover, they give priority to the public interest over personal or group interests.

Similarly, they must also be responsible for the accuracy and correctness of all financial

information from audited financial reports. Four of them (80%) believed that

responsibility is also reflected in their ability to develop and maintain good relationships

among auditors.

Even though respondents from different company groups expressed quite different

perceptions about responsibility, they shared a common stance namely the biggest


responsibility of public accountants lies in the maintenance of public trusts and

prioritizing the public interests reflected in the financial information they issue.

Fourth, Due Care principle, one of the Ethics Codes, stresses capability and skill in

performing auditing practices. For all interviewees (100%) from the FOCs, due care has a

lot to do with persistence, consistency, and high motivation to duty, and is far removed

from carelessness, while all interviewees ( 100%) from the SOCs related this principle to

carefulness, thoroughness, persistence, and competence. This view is completely shared

by all interviewees (100%) from the FrOCs with an extra view that they can maintain

their competence by continuously improving professional knowledge. The key words

concerning due care principle are capability and competence.

Fifth, Scope and Service principle refers to the activities within the profession other than

auditing in which public accountants are permitted to get involved provided no rules are

violated. All interviewees ( 100%) from the FOCs maintained that the professional duties

of public accountants are not only confined to auditing but also covered such activities as

tax consultation and consultation on financial report preparation for company expansion

through public offering. In addition, 4 of them (80%) perceived that the scope also covers

training services on financial report preparation.

Meanwhile all interviewees ( 100%) from the SOCs also hold similar views, and in

addition to auditing practices, auditors can also provide such services as tax consultation,

consultation on how to accommodate changes in tax policy in the financial report, and


consultation on the financial report preparation m accordance with all rules and

standards.

Furthermore, for respondents from the FrOCs that principle is needed because of the

following reasons. They usually hire auditors not merely for auditing purposes but also

for other purposes such as consultations on tax (by 5 interviewees = 100% ), on standard

financial report preparation (by 5 interviewees = 100% ), and on how to develop and

expand the company (by 4 interviewees = 80% ).

Summary

Many differences of attitude, interest and background of each financial manager in each

company resulted in different implementations of the five principles of the ethics codes

in each company. Hence, there are many kinds of perceptions and opinions offered by

each group of companies in the interview result.

Even though they agree on some points, the interviewees from each company group offer

quite varied perceptions about the five principles in the ethics code for accountants.

These differences can be attributed to the fact that the interviewees belong to different

company groups, with each of them likely to have a different organization culture, which

in turn brings up distinct interests and objectives. The following tables summarize the

complete results of the interviews.


In this study, there are two parts of the interview results. First, the interview result is

about the reason for the selection criteria of public accountants/auditors by 15 financial

managers in three categories of companies. Second, the other interview result is about

perceptions of the five principles of the ethics codes by companies (users). The following

tables summarize the complete result of the interviews.

Table 5.1. The reasons for selection criteria of auditors by interviewees from FOCs

The five Financial Managers of "Family-Owned Companies"

Key reasons: • Good services by public

accountant (Auditor firm) • Loyalties, care and independent • Cheaper fees • Confidential

Table 5.2. The reasons for selection criteria of auditors by interviewees from SOCs

The five Financial Managers of "State- Owned Companies"

Key reasons: • Professional skill • High integrity • Independent • Loyalties • Time limitation • Confidential • Objective

Tables 5.3. The reasons for selection criteria of auditors by interviewees from FrOCs

The five Financial Managers of "Foreign-Owned Companies"

Key reasons: • Independence • Objectivity • Integrity • Professional skill • Confidential • Responsibility to user


The reason for the selection criteria of the public accountant/auditor by three categories

companies can be showed in table 5. 4.

Tables 5.4. (Appendix 5.2.1)

• Good services 5 interviewees= 33,3%

• Loyalty 15 interviewees = 100%

• Independent 15 interviewees = 100%

• Care 5 interviewees= 33,3%

• Cheaper fees 5 interviewees = 3 3 ,3 %

• Integrity 10 interviewees= 66,6%

• Objectivity 10 interviewees = 66,6%

• Professional skill 10 interviewees= 66,6%

• Limitation time 5 interviewees= 33,3%

• Confidential 15 interviewees = 100%

• Responsibility 15 interviewees = 100%

After this, the other interview results explain the perceptions of the five principles of

ethics codes for public accountant/auditor by three categories companies (users), which is

based on the SP AP (Audit Standard of Public Accountant).

However, it can be seen that these tables show that each company group provides

different reasons for the implementation of the five principles in the ethics code. This

possibly results from the differences in the management, the skill and capability of

internal accountants, and the complexity of bookkeeping. For example, the FOCs

normally have a more simple bookkeeping system than the SOCs and FrOCs because

they deal with simple transactions and each transaction only involves small values. For

this reason, what follows will summarize the results of the interview part II of the three

categories companies according to each principle in the ethics codes.


Table 5.5. The Reasons for auditors to implement the first ethics code (Independence

and Objectivity) by FOCs, SOCs and FrOCs (user perceptions)

The five Financial Managers of "Family- Key reasons:

Owned Companies" • Fairness

• Avoiding the relations that can make for bias and negative impact on audit result . .

The five Financial Managers of "State- Key reasons: Owned Companies" • Fairness

• Objective

• Independence

• No family relations, financial and any personal interest

• Auditor has limitation time max 2years to change regularly.

The five Financial Managers of "Foreign- Key reasons: Owned Companies" • Fairness

• Objectivity

• Independence

• No family relations, financial and any personal interest

• No priority towards self-interest and groups

• Free from conflict of interest .

Table 5.6. Independence and Objectivity (Appendix 6.1.1)

• Fairness 15 interviewees = 100%

• Free from bias and other negative impact 15 Interviewees = 100%

• Independence 10 Interviewees= 66,6%

• Obi ectivity 10 interviewees = 66,6%

• No relationships; family, business, financial and personal

10 interviewees = 66,6%

• No priority towards self-interest and groups 10 interviewees= 66,6%

• Time limitation to change regularly max 2years 8 interviewees = 50%

• Free from personality and conflict of interest 5 interviewees = 3 3 ,3 %


Table 5.7. The reasons for the auditor to implement the second ethics code (integrity) by

FOCs, SOCs and FrOCs (user perception)

The Five Financial Managers of "Family- Key reasons: Owned Companies" • Honestly

• Clarity

• Fittingness of Financial Report

• Client confidentiality

The Five Financial Managers of "State- Key reasons: Owned Companies" • Honestly

• Clarity

• Confidentiality

• Trustworthy

• High loyalty

The five Financial Managers of "Foreign- Key reasons: Based Companies" • Honestly

• Clarity

• Trustworthy

• Adhere to the rule of the standard auditing

• High loyalty to profession

Table 5.8. Integrity (Appendix 6.1.2)

• Honestly 15 Interviewees = 100%

• Clarity 15 Interviewees = 100%

• Client confidentiality 15 Interviewees =100%

• High Loyalty to profession 10 Interviewees= 66,6 %

• Fittingness of Financial Report 5 Interviewees= 33,3 %

• Trustworthy 7 Interviewees= 45%

• Follow the rule of auditing standards 5 Interviewees= 33,3 %


Table 5.9. The reasons for auditor to implement the third ethics code (responsibility) by


The five Financial Managers of "Family- Key reasons:

Owned Companies" • Responsibility to user (company)

• On time

• Responsibility to all services

The five Financial Managers of "State- Key reasons:

Owned Companies" • Responsible for punctual audit practices

• Responsible for user to understanding of financial report

• Responsible for objectivity of financial report information to public and user

• Responsible for result of financial report

The five Financial Managers of "Foreign- Key reasons: Owned Companies" • Responsible for maintenance of public

trust.

• Responsible for work relationship with others auditor

• Responsible for increase of public interest

• Responsible to give objective information to all users of the Financial report

Table 5.10. Responsibility (Appendix 6.1.3)

• Responsible for user (company) 15 Interviewees = 100%

• Responsible for other user of financial report 10 Interviewees= 66,6%

• Responsible for all services 5 Interviewees= 33,3 %

• Responsible for punctual of audit practices 10 Interviewees= 66,6%

• Responsible for maintenance of public trust 5 Interviewees= 33,3%

• Responsible for work relationship with others auditor 5 Interviewees= 33,3%

• Responsible to increase of public interest 5 Interviewees= 33,3%

• Responsible to give objective information to all users 10 Interviewees = 66,6% of the financial report .


Table 5.11. The reasons for the auditor to implement the fourth ethics code (due care) by


The five Financial Managers of "Family- Key reasons: Owned Companies" • Carefully

• Diligently

• Consistently

• High dedication

The five Financial Managers of "State- Key reasons: Owned Companies" • Carefully

• Diligently

• Consistently

• High dedication More professional

The five Financial Managers of "Foreign- Key reasons: Based Companies" • Carefully

• Diligently

• Competently

• Consistently

• High dedication

• Professional

• More improve of knowledge ability

Table 5.12. Due Care (Appendix 6.1.4)

• Carefully 15 Interviewees = 100%

• Diligently 15 Interviewees = 100%

• Consistently 15 Interviewees = 100%

• High dedication 15 Interviewees = 100%

• Professional 10 interviewees = 66,6%

• Competence 5 Interviewees= 33,3 %

• More knowledge ability 5 interviewees= 33,3%


Table 5.13.The reasons for the auditor to implement the fifth ethics code (Scope and

Service) by FOCs, SOCs and FrOCs (user perception)

The five Financial Managers of "Family- Key Reasons;

Owned Companies" • Tax consultation

• Correction of accounting system

• Consultation about expansion company

The five Financial Managers of "State- Key Reasons:

Owned Companies" • Resolve the problem of taxation

• Consultation for accounting system

• To give guidelines about standards of financial report.

The five Financial Managers of "Foreign- Key Reasons: Owned Companies" • Consultation for taxation


• Consultation for expansion I go public company

• Consultation to make financial report with right direction standards

Table 5.14. Scope Services (Appendix 6.1.5 .)

• Consultation for Taxation 15 Interviewees = 100 %

• Consultation for accounting system 10 Interviewees = 66,6 %

• Correction of accounting svstem 5 Interviewees= 33,3%

• Consultation for expansion of company I 0 Interviewees = 66,6 %

• Consultation for financial report with right direction standards

5 Interviewees= 33,3 %

• Consultation for guidelines of standards financial report 5 Interviewees= 33,3%


The result from the interview above can explain many different perceptions in each of

the company categories. The differences in perceptions emerge from the differences in

the interpretation of the financial manager of each company about the code of ethics,

which is regulated within SP AP (Standards Auditing of Public Accountant) in Indonesia.

Moreover, the differences in perception in the implementation of the code of ethics

emerge from the concept of interest in each company category. For example, family

owned companies have a basic concept that focuses on how to make maximum gain or

profit while maintaining their low overheads. Therefore, they often choose a public

accountant/auditor that had a lower fee.

The differences of interview result have proved many interpretations of users ( 15

financial managers) about the practices of public accountants/auditors in respect of the

application of ethics codes in each level of company. Furthermore, it suggests the extent

to which auditors/public accountants will faithfully apply the ethics code and in which

level of company.

Hence, the next discussion of this study explores the standards measurements of the

ethics codes. It can be expected to analyse obedience and disobedience of the ethics

codes by public accountants/auditors. Thus, the measurement of the implementation of

the ethics codes defines two big parts, the first being the measurement based on

professionalism of the auditor professional who can explain audit standards, called

SPAP, and the other is the measurement of the individual auditor's level of moral

reasoning in accordance to Kohlberg' s theory of the development of moral reasoning.


Measurement

Now we turn to the questions: to what extent have the auditors implemented these five

principles in delivering their services to user companies? In which company group do the

auditors tend to follow or ignore these five principles? To answer these questions

measurement of whether the auditors indeed follow or violate the Ethics Code will be

conducted. Here the measurement is divided into two categories. The first refers to the

measurement based on the auditing standards in Indonesia as contained in the SPAP.

The second is the measurement of observing the moral development of auditors with the

help of Kohlberg' s theory of moral development reasoning that recognizes three levels of

the moral development process.

The first measurement can be explained by referring to the ethics code contained in the

AICP A for the USA or SP AP for Indonesia which comprises five principles, while the

second measurement is related to the performance of auditors with their moral character

as explained in Kohlberg' s theory of individual moral development. Subsequently, this

study will present the utility, the types of measurement, the available measurement of

standards according to AICP A or SP AP that must be followed, and the measurement

standard based on the development of the moral individual. In addition, the advantages

and disadvantages of these measurements and how to use them correctly will be

presented so that their results are correct and valid.


The Utilities of lVIeasurement

The utilities of measurement are tools of measurement for evaluating obedience and

disobedience within the implementation of the ethics codes by public accountants in the

practice · of auditing financial reports and giving other services to the company or user.

Moreover, the standards measurement can be used to explained/show cases at varying

levels in these companies. The other measurement utilities are tools to give an indication

of the quality of the public accounting professional during the process of giving service

to the public. Furthermore, the standards measurement will be used to prove the

performance of the public accounting professional .

Therefore, in this study, two standards measurements will be used and those are the

standards measurement based on SP AP and the other the standards measurement based

on the development of the moral individual. Then, both standards measurements will be

discussed.

Types of Standard Measurement

As indicated above, two types of measurements will be used: the measurement based on

the ethics codes contained in the AICPA for the USA or SPAP for Indonesia (which

comprises five principles) and the second measurement being the one relating to the

performance of the auditors with respect to their moral character using Kohlberg' s theory

of individual moral development.


The Principles of the Ethics Code model as Standard Measurement

The first approach of standards measurement explains principles of the ethics codes as

the rule for accounting professionals in practice and as guidance for them in offering a

professional service, and to maintain professionalism within the accounting profession.

The public accounting/auditor must adhere to and apply the AICP A Code of Professional

Conduct adopted by SP AP in Indonesia.

Regarding the first measurement, the six principles of ethics code contained in the

AICPA Code of Professional Conduct (1992) are:

Responsibility. Members should exercise sensitive professional and moral judgements in

all their activities, perform an essential role in society with responsibility to co-operate

with each other to improve the art of accounting, maintain the public confidence and

carry out the profession's special responsibilities for self governance. Public interest.

Members must at all times safeguard the interest of their clients and employers, provided

that they do not conflict with the duties and loyalties owed to the community and its

laws. Integrity means members must be straightforward, honest and sincere in their

approach to professional work. Objectivity means members must be fair and must not

allow prejudice, conflict of interest or bias to override their objectivity and they should

maintain an impartial attitude. Independence implies members must, and should be seen

to be free of any interest which might be regarded, what ever its actual effect, as being

incompatible with integrity and objectivity. Due Care means members must perform

professional services with due care, competence and diligence. They should only perform

services that they can expect to complete with professional competence. Scope and


services means members in public practice should observe the Principles of the Code of

Professional Conduct in determining the scope and nature of services to be provided.

In fact, some parts of the AICP A code of professional conduct, which constitute as an

integrated set of rules and must be upheld by all public accountants, have been adopted

by the W in generating its own code of professional conduct for Indonesian public

accountants with various modifications and adjustments. However, the AICPA Code of

professional Conduct with SP AP has some differences in technical practice and

performance in accordance with the conditions and culture in Indonesia. This code of

professional conduct, contained in the SPAP, is divided into the following four categories

of activities in which public accountants are involved. They are: the Code of Professional

Conduct (CPC) as Auditing Standard; the CPC for Attestasi; the CPC for Accounting

Services and Review; and Audit Guides for Specific Industries. In addition, the auditing

standard in the SP AP is intended to be a guide for auditing historical financial reports

and to provide criteria and measurement of performance quality as well as objectives

achievable using the available procedures. The auditing standard includes the quality of

professional auditors, independence, and considerations used in auditing and preparing a

financial report. This auditing standard consists of three types of standard, which must be

upheld: the general standard, the fieldwork standard, and the reporting standard. Among

these three, the general standard is the best and is used as a measurement of the

implementation of the Ethics Code by public accountants in auditing practices in this

study. This is because it deals with personal issues, the qualifications of auditors,

auditing qualities, and it applies equally to both fieldwork and audit reporting. It also


explains that the public accounting profession has a certain code of professional conduct,

which guides public accountants to work in a way that avoids any degradation of

professionalism in the public's eyes. For example, with the independence principle, the

public perceives that independence strongly relates to personal quality and has nothing to

do with rules intended to be tested objectively (SPAP, 1994; pp.220-223).

Therefore, the general standard, which involves the ethics code servmg as a basic

guideline for public accountants in rendering their professional services, is influenced by

the 8 principles of the Ethics Code of the W. These principles include: profession

responsibility, public interests, integrity, objectivity, due care, confidentiality,

professional behaviour, and technical standards.

First, the principle of profession responsibility refers to the responsibility of members to

use moral considerations and professionalism in their practices. In other words,

professional responsibility means that each member must make use of professional and

moral considerations in any single professional activity. The first principle of the ethics

code is that the public accountant must be independent and this means that the auditors'

attitudes must have no self-interest, and avoid group of interests and conflicts of interest,

which would be detrimental to public perceptions. Secondly, the principle of public

interest is that the public accountant has an obligation to conform in his/her services to

the public, they must respect the public trust and be committed to professionalism. In

other words, public interest means that the public accountant is responsible for serving

and respecting the public interests as well as showing commitment to professionalism.


Thirdly, the principle of integrity is aimed at keeping and improving the public trust and

each member has to offer professional responsibility coupled with high integrity.

Fourthly, the principle of objectivity urges public accountants to be serious about

objectivity and to avoid conflicts of interest in fulfilling their professional

responsibilities. Objectivity of the auditor means the auditor will not be influenced by

particular sides' pressure or interest and self-interest (Congress W VII, 1999).

Consequently, the quality of the audit result will result in information in the financial

report with more clarity and fairness. Fifthly, the principles of competency and careful

professionalism are the responsibility of each public accountant who has to apply

professional services carefully with competency and diligence, and who has an obligation

to continually seek to improve his/her knowledge and professional skills. Thus, public

accountants must always seek to be careful, persistent, and competent in delivering their

services, and be encouraged to continuously maintain and improve their professional

skills and knowledge using the most recent techniques and rules available. Sixthly, the

principle of confidentiality obliges each accountant to respect confidential information

and not use or disclose information without agreement. Confidentiality refers to acts of

conduct that respect the confidentiality of information obtained during the auditing

process, and refers to the non-use or public revelation of the information for other

purposes without prior permission from the owner, unless there is a professional right or

law that states otherwise. The seventh principle, professional behaviour, demands that

public accountants behave consistently and abstain from any misconduct that may

jeopardize the profession's reputation. Finally, the principle of technical standards is

intended to confirm that the public accountant always meets the technical and


professional standards required by the profession. The public accountant is obliged to

apply the practice of services in accordance with the principles of integrity and

objectivity.

However, the eight principles explained above have meaning and definition similar to the

six ethics codes of the AICP A and in this study, the researcher underlines the eight

principles that have to be practised by a public accountant in Indonesia. In fact, this study

considers that out of these eight principles, five principles are most important and

relevant for the purpose of this study. They are: independence and objectivity; integrity;

responsibility; due care; and scope and services, which then serve as a measurement of a

public accountant's degree of professionalism. The five principles of the ethics codes

will be used as a measurement to rate the level of professionalism of a public accountant

and therefore, they will be used to analyse cases in this study. Moreover, the five

principles can explain what kinds of principles are most rarely applied in practices by

public accountants, based on user's perception.

The Individual Moral Development Model as Standards Measurement

As explained earlier, this research has two approaches of measurement to measure and

analyse and also to resolve the problem that relates to the ethics codes applied by a public

accountant in the three levels of categories of companies. The first approach is a

measurement using auditing standards with the five principles of the ethics codes. The

other approach is the use of the moral individual as a measurement standard and is '

influenced by the auditor' s conscience in respect of the ethics codes. In this measurement


approach Kohl berg' s theory of individual moral development will be used, because it is

suspected that one' s moral level in one way or another affects one' s consciousness in

upholding codes of professional conduct set by the profession. Moreover, moral

reasoning as one of the stages in the moral development process is also often said to be a

means or process to decide whether an action, judgement or decision is right or wrong.

This theory indeed explains how an individual ' s moral reasoning emerges and influences

consciousness, which in turn affects behaviour. Kolhberg (1976), the most influential

thinker in the field of moral reason, describes moral reason as the logic of justice; the

logic that ones utilizes to figure out what is fair or just, in order to balance the claims in a

given moral conflict. He also describes six stages of natural development in such forms

of justice logic, moving from a calculation of self-interest, to a calculation of social

interest, to reliance upon abstract universal logical principles of justice (as explained in

Chapter 2). Moreover, Kolhberg has clearly related moral reason to behaviour (Kohlberg

and Candee, 1984), emotion (Kolhberg, 1976), character (Power, Higgins & Kolhberg,

1989) and to values (Power et al, 1989).

According to Kolhberg' s theory (1969) as explained in Chapter 2, there are three parts of

the levels of individual moral development, and every part has two development levels of

morals. The first level, the pre-conventional level, responds to moral clues from the

social reference group. This explains two things. First, individuals tend to have an

obedience and punishment orientation; they are extremely self-involved where moral

behaviour is only in response to sanctions and rewards based on behaviour. Second, they


also have an instrumental relativism orientation, in that moral behaviour depends on the

desires of the individuals.

The second level, the conventional or moral level, points out that moral reasoning is

based on existing social norms as well as the rights of others. This means individuals

have interpersonal concordance orientations indicating that they have developed the

ability to emphazise and will no longer be selfish in their moral reasoning. This also

means that they have an orientation towards authority, law, and duty. At this stage moral

activity becomes a function following rules and has no association with the need for

personal approval. Finally, the third level, the post-conventional or autonomous level,

which is the most advanced level of moral reasoning, relies on universal principles in

approaching moral problems. This implies that individuals have a social contract

orientation, which relies heavily on noble principles such as equality and human dignity.

Another implication refers to the universal ethical principles orientations, which is rarely

reached. This orientation relies on principles that are self -generated and universally

applicable.

It, therefore, can be used as a measure to explain cases ofviolations of one or more of the

five principles of the ethics codes. Thus, it is used to measure the performance of public

accountants in audit practices in three categories of companies in Indonesia, based on an

explanation of the theoretical approach of individual moral development and the utilities

of ethics codes in SPAP. Finally, these two approaches, the ethics code and the moral

theory, as measurements are expected to answer the following questions. To what extent


have the auditors implemented the five principles of ethics code in delivering their

services to user companies? To what degree does individual moral development affect

the effectiveness of the implementation of these five principles of the ethics code? In

which company group do the auditors tend to follow or ignore these five principles?

Hence, the exploration of cases in the 3 categories of companies in Indonesia will be

described by using measurement results of the ethics codes practices.

The Results of Measurement

Findings within the area of auditing practice are explored, including whether the

implementation of ethics codes has complied with or violated the standard of the ethics

codes. The exploration will also explain in which group of companies this situation will

more likely apply. The public accountant's standard of ethics codes in Indonesia is

explained in SP AP (Auditing Standard of Public Accountant). The standard stands as a ("

guide to ethics codes implementation, and contains the five principles of the ethics codes.

However, the evidence, based on several interviews, has proven that there have been a

high number of violations of these ethics codes. It has been caused by the lack of

willingness on the part of the public accountant and the company (user) receiver of the

service to comply with the ethics codes. The evidence has also proven that there are

different levels of compliance of ethics codes between family-owned companies, state-

owned companies, and foreign-owned companies. Hence, this section will discuss the

result of these measurements, why they differ, and the basis of these differences.


This section will not discuss the measurement using the individual moral development

approach which serves as a basis for the establishment of an individual's moral

reasoning, and is crucial to explore to what extent an individual can develop conscious

behaviour. However, the individual approach will be discussed in another section as one

out of two approaches applied to measure the effectiveness of a public accountant in the

implementation standard of the ethics codes.

The result of the measurement discussed in this section will only be observed from a

certain point of view, that is the implementation of the ethics codes in each group of

companies (family-owned companies, state-owned companies, and foreign-owned

companies). Accordingly, the result is utilized to give illustrations and explain problems

in relation to the implementation of the ethics codes in Indonesia.

The Result of Measurement in Family Owned, State-Owned and

Foreign-Owned Companies

In this part, the result of measurement of the ethics codes in the three categories of

companies is obtained by comparing the standard of ethics codes and its operation within

them. Additionally, the standard of ethics codes is elaborated in order to give a direction

for measuring the public accountants performance. Moreover, the operation of ethics

codes within the three categories of companies is obtained by interviewing some

financial managers in these companies about the practice of ethics codes performed by

their public accountants. These comparisons, as a result of the measurement, will be used

to explain any violation of the ethics codes, which have created their own professional


regulations. Finally, the former will elaborate the standard, operation, and compression of

the five ethics codes in each category of the company.

Independence & objectivity; According to the general auditing standard in Indonesia

(SP AP), the first principle of the ethics codes mentions that an auditor must be

independent and have an objective attitude towards their audit or service to the society.

The operation of ethics codes is explained as follows: First, the five family-owned

companies, in the interview result (see-appendix 6.1.1) show that the auditors have

implemented the first principle by being fair (100%) and unbiased as well as free from

negative influences ( 100%) in rendering their services. This is in line with the general

auditing standard (SP AP) regarding the first principle.

However, the findings have also proven that the first principal of the ethics codes has not

been implemented entirely, because it has more than two characteristics. Hence, to be

fair and free of bias are not sufficient to comply with this first principal. There are more

characteristics of this first principal that have to be understood and applied such as the

following: not making their self interest a priority; not in any family, business or personal

relationship; not taking sides with interest groups and some other instances related to the

independence of the auditor. Moreover, the users' perception of independence as

independence of performance means independence in practical, financial report

disclosure, and other audit practices. Based on the ethics codes, an auditor must be

independent in appearance and performance. Therefore, the first principle of the ethics

codes has not been entirely complied with within the family-owned companies.


Secondly, the five state-owned companies, in the interview result (see-appendix 6.1.1)

illustrate that the auditors have implemented the first principle by being fair ( 100%) and

not taking sides with a certain party ( 100% ), not making their self interest a priority, not

in any family, business or personal relationship ( 100% ), unbiased as well as free from

negative influences ( 100%) in rendering their services. Companies included in this

category must have employed a public accountant provided by BPKP with a maximum

contract period of two years in order to maintain independence and objectivity (100%). It

is concluded that users in this category have a deeper perception and understanding of the

first principle of the ethics codes, than users in family-owned companies. Companies in

this category comply more with this first principle.

Thirdly, the five foreign-owned companies, in the interview result (see-appendix 6.1.1)

illustrate that the auditors have implemented the first principle by being fair (100%) and

not taking sides with a certain party ( 100% ), not making their self interest .a priority, not

in any family, business or personal relationship ( 100% ), unbiased as well as free from

negative influences (100%) in rendering their services. The interview has explained that

the users' perception of the ethics codes has been applied, to a greater level of

compliance, by their external auditor, compared to companies in the other two

categories, and it is therefore concluded that users in this category have the deepest

perception and understanding of the first principle of the ethics codes. Hence, the

companies in this category have the highest compliance with the first principle of the

ethics codes.


Finally, the three categories of companies have illustrated that the application of the first

principle of the ethics codes is not merely influenced by the capabilities, expertise and

experience of the public accountants, but also influenced by the users' understanding and

perception of the principle, because companies' wrong perception of the ethics codes can

lead to a condition for their public accountant to obstruct the ethics codes. In fact, from

the three categories of companies, it can be seen that the family-owned companies have

the highest level of obstruction than the state-owned companies-with a medium level of

obstruction-and the foreign-owned companies-with the highest level of compliance-

regarding the first principle of the ethics codes.

Integrity. According to the general auditing standard in Indonesia (SPAP), the second

principle of the ethics codes mentions that auditor must be honest and explicit in

implementing the ethics codes. First, the five family-owned companies, in the interview

result (see-appendix 6.1.2) show that the auditors have implemented the second principle

by being honest ( 100% ), explicit ( 100% ), and have maintained the clients' confidentiality

(100%) in rendering their services. This is in line with the general auditing standard

(SP AP) regarding the second principle.


illustrate that the auditors have implemented the second principle by being honest

(100%), explicit (100%), loyal to their company and occupation (100%), and trustful and

truthful about any financial information given to the society ( 100% ), as well as the

family-owned companies. The companies included in this category have also complied


with the general auditing standard (SP AP) regarding the second principle. Hence the

users ' perception is in line with the second principle of the standard of the ethics codes.

Thirdly, the five state-owned companies, in the interview result (see-appendix 6.1.2)

illustrate that the auditors have implemented the second principle by being honest

( 100% ), explicit ( 100% ), loyal with his or her profession ( 100% ), and obedient towards

the standard of the ethics codes (100%). The interview result from foreign-owned

companies has shown that the operation of the ethics codes is in line with the standard of

the ethics codes.

The integrity principle has been sufficiently applied according to the general standard of

ethics codes. The three categories of companies have implemented the third principle of

the ethics codes.

Responsibility. According to the general auditing standard in Indonesia (SP AP), the

third principle of the ethics codes mentions that the auditor must be responsible for their

quality of services, the confidentiality of any information given by the user, and not be

involved in more than one service in a period of time, which could affect their objectivity

and consistency (responsibility to maintain public trusts). An auditor must be able to

work simultaneously with another public accountant. First, the five family-owned

companies, in the interview result (see-appendix 6.1.3) show that the auditors must be

responsible to the company or user ( 100% ), responsible to maintain the period of service

that has been agreed upon ( 60% ), and responsible to all other services and consultations


( 100% ). The comparison between standards and the users' perception shows that there

are some differences in the implementation of the ethics codes. The differences lie in the

users' misperception of the meaning and classification of responsibilities, as for example:

the auditor's responsibilities to work simultaneously with other public accountants, and

the confidentiality of any information given during their service. Users have a shallow

perception of the meaning of responsibility.


illustrate that the auditors have implemented the third principle of being responsible for

any information they produce for the society ( 100% ), being responsible for maintaining a

period of service that has been agreed upon ( 100% ), responsible towards the public

interest ( 100% ), and responsible to clarity the financial report to the user or company

(100%). From the result of the interview, it can be underlined that the application of the

third principle of the ethics codes in the companies in this category has complied with the

standard, although the responsibility of the auditor to work simultaneously with other

public accountants is normally not acknowledged by the user. Basically, this third

principle of the ethics codes has been applied sufficiently, even though there have been

small and different perceptions by the companies with the standard.


illustrate that the auditors have implemented the third principle in being responsible to

work simultaneously with other public accountants ( 100% ), responsible to maintain

public trusts (100%), responsible for any information they produce for the society


(100%), and responsible to the public interest (100%). From the result of the interview, it

can be underlined that the application of the third principle of the ethics codes in the

companies in this category has complied with the standard. The users' perception within

the foreign-owned companies is similar to the standard.

By comparing the three different categories of companies, it can be concluded that users

within the family-owned companies have the least comprehensiveness in regard to their

application of the standard of ethics codes, while the state~owned companies have more

compliance with the standard of ethics code, compared to the foreign-owned companies

who have already complied with the standards of the ethics codes.

Due care. According to the general auditing standards in Indonesia (SPAP), the fourth

principle of the ethics codes mentions that the auditor must have competence and due

care as a public accountant. Competency is obtained by combining their education and

experience as a public accountant, while due care is interrelated to their competency as a

public accountant in performing their professional responsibility with full ability and

perseverance. First, the five family-owned companies, in the interview result (see

appendix 6 .1. 4) show that due care is interrelated to the carefulness of the accountant in

performing the task ( 100% ), consistency ( 100% ), and the dedication of a public

accountant in performing an audit or any other services (100%). Apparently, there are

several differences between the applied standard and the standard itself. These

differences appear from the lack of comprehensiveness by the users about the fourth

principle of the ethics codes. The users' perception has little understanding of the


meaning of due care being the competency and capability of a public accountant. The

principle of due care has not been entirely applied by the public accountant within this

category of the companies.


illustrate that the auditors have to be competent (100%), careful (100%), and have

perseverance ( 100%) in rendering their service. From the interview result, it can be

underlined that the application of the forth principle of the ethics codes in the companies

in this category has complied with the standard, although its application has not been as

broad as the meaning of due care itself


illustrate that the auditors have to maintain their professional service (100% ), maintain

and improve the profession's knowledge ( 100% ), and have perseverance in the service

audit ( 100% ). From the result of the interview, it can be underlined that the application of

the fourth principle of the ethics codes in the companies in this category has complied

with the standard. The users' perception within the foreign-owned companies is similar

to the standard.

Thus, it can be concluded that the users' perception within the three categories of

companies has few differences in regard to the application of the fourth principle of the

ethics codes, especially in family-owned companies.


Scope and Services. According to the general auditing standard in Indonesia (SP AP), the

fifth principle of the ethics codes mentions that the auditor must be able to provide other

services, as long as they will not disrupt and violate the other four principles of the ethics

codes. The types of scope and service include tax consultation, management advisory

service, and consultation on accounting systems. First, the five family-owned company,

in the interview result (see-appendix 6.1.5) show that the scope of services provided by

the public accountant includes tax consultation service ( 100% ), enhancing accounting

systems ( 60% ), and consultation on financial feasibility ( 60% ). From the result of the

interview, it can be underlined that the application of the fifth principle of the ethics

codes in the companies in this category has not complied with the standard, as there are

some companies that indirectly assert priority of company interest, and the other services

by the public accountant that violate the other four principles of the ethics codes as for

example, service to improve financial reports. Moreover, some companies are not fully

supporting the management advisory service. The fifth principle of the ethic codes has

not been fully applied within family-owned companies.


illustrate that the scope of services to be provided by the public accountant include a tax

consultation service ( 100% ), an enhancement of accounting systems ( 100% ), and

directing financial reports within accounting systems ( 100% ). From the result of the

interview, it can be underlined that the application of the fifth principle of the ethics

codes in the companies in this category has less compliance with the standard, which is

identical with the interview result from family-owned companies because they assume


that the auditor can provide them with a financial report enhancement service. The

application of the fifth principle of the ethics codes often creates a complicated situation

between the proper implementation of the other four principles.

Apparently, there are several differences between the applied standard and the standard

itself. These differences appear from the lack of comprehension of the users of the fourth

principle of the ethics codes. The users' perception suggests little understanding of the

meaning of due care within the competency and capability of a public accountant. The

principle of due care has not been entirely applied by the public accountant to this

category of the companies.

Thirdly, the five foreign - owned companies, in the interview result has shown that an

auditor has to be a taxation consultant (100%), a management advisory service consultant

in such a case as company expansion (I 00% ), and to be an accounting system consultant

in accordance with the financial report standard (100% ). This interview result illustrates

a more comprehensive perception of these companies concerning the application of the

fifth principle of the ethics codes than the companies in the other two categories. The

fifth principle of the ethics codes is applied comprehensively by companies in this

category according to the ethics codes standard.

The interview results from companies within these three categories have shown that there

are often perception differences between the companies and the ethics codes standard,

especially on the level of family-owned companies. There are several perception


differences in the state-owned companies, and a significant similarity on the application

of the ethics codes in accordance with the ethics codes standard in the foreign-owned

companies. One of the reasons is that financial reports in the foreign-owned companies

are normally managed by professionals in this field. Hence it could be underlined that

obstructions with the ethics codes are normally done in family-owned companies.

Normally, management in the company in this category has insufficient professional

expertise in several fields, and is concerned about the auditor' s fees when selecting

auditors. These auditors are normally employed for an extended period (Appendix 5.2.1).

Finally, from an in-depth look at the interview results .of the three categories of the

companies about the implementation of the public accountant's ethics codes, it is

understood that there are several levels of compliance or obstruction, which will be

analysed by means of two approaches. These are a professional approach and an

individual approach. Before starting the analysis, however, the compliance and

obstruction of the ethics codes practices in Indonesia will ~riefly be elaborated. In other

word, after the discussion about the condition for the implementation of the ethics codes

within the three categories of the companies based on the interviews result, which have

shown several cases of compliance and obstruction, then, the implementation of ethics

codes in Indonesia will be briefly described as well.

General Result of Measurement in Indonesia

There are several factors that can cause auditors to obey, and also violate the standard of

the ethics codes on which they have agreed. The ethics codes are contained within the


SP AP as a guidance for public accountants in performing their profession where they

provide accounting services to society and prioritise the society' s interest, and not less

importantly, to improve their professional expertise. As discussed earlier, from the

interviews result, it can be seen that there are several cases suggesting an insufficient

understanding of the ethics code, and these cases are often found in the family-owned

companies; such companies have insufficient knowledge of the meaning of the ethics

code, and consequently the public accountants have a chance to "cheat" on them by

breaking the rules. In fact, this obstruction is encouraged by two things, the opportunity

generated by the lack of knowledge of the ethics code on the part of the user (companies)

and unethical behaviour on the part of the public accountants. One way to solve this

problem is to improve knowledge of the users (companies) and eliminate the unethical

behaviour through introduction of sanctions by the accounting body. The next section

will outline various cases of violation as well as compliance with the ethics code at the

national level (Indonesia), their causes, and propose a way to attempt to eliminate the

undesirable aspects.

Implementation and Obstruction of the Code of Ethics

There are two possible reasons why someone could behave unethically. First, an ethical

standard between a single person and a public society might differ. Second, a person

might choose to behave as he/she wishes. Both reasons could cause a person to behave

unethically and if so resolution on this kind of behaviour is obviously desirable. When,

such behaviour is conducted by members of a profession, consideration of the


functioning of regulations is necessary. That is, whether they need to be defended, or

improved to conform with the societal environment that is ever changing and developing.

Generally, the code of ethics applies to the accounting profession as a whole. To

implement the code of ethics, there are several matters that must be done. They are,

o Perfection of the recent code of ethics and publishing an interpretation of the code

of ethics.

o Justification process by a Professional Inspection Body and also the Professional

Consideration Board, to give some sanctions such as letters of warning, temporary

dismissal from the W , and discontinuation of W membership.

o W must have one division to draw initiatives in respect of complaints to the

Professional Inspection Body or to the Profession Consideration Board on the code

of ethics violations.

Obstructions to the implementation of the ethics code are,

o Ambiguity in the behaviour of a professional member, which on one side rejects any

violation of the code of ethics, but on the other hand allows these violations.

o Reluctance by a professional member to report another professional member's

violation of the ethics code.

o Indistinct regulations on the sanction mechanisms and the process of justice for

violation cases within "Anggaran Dasar/AD (Main Budget)" and "Anggaran Rumah

T angga/ ART (Sub-Budget)".

o Ineffective functionality of the Professional Inspection Body and Professional

Consideration Board as a result of indistinct regulations within "AD" and "ART".


Obedience of the Code of Ethics

Generally, the evaluation performed by BPKP on the Public Accountant Quality Control

System shows that the current condition needs our attention. From the number of Public

Accountant Offices evaluated from the years 1994-1995, as many as 51 offices, there

were only 10 offices or 20% considered as "adequate". From the evaluation, the majority

of the offices are considered "adequate with exception" that means 36 offices or 71 % of

the total. To understand the term "adequate with exception", there are some aspects in

the managerial control system, which need enhancement even though the condition as a

whole is considered "adequate". There are some offices, which are considered "not

adequate": as many as 5 offices or 10% in all (National Convention on Accounting

1996).

Factors that classify Public Accountant Offices grades can be classified as follows :

o Inaccuracy in auditing performance.

o Inability in gaining knowledge of accounting.

o Carelessness in implementing the audit procedures needed.

0 Violation of the applicable regulation (SK (Decree) of Minister of Finance

No.763 .KMK.011/1986).

0 Behaviour that demonstrates negligence as an independence factor.

o Practices that express less or no supervision performed.

Findings on complaints also show that the public accountants' performance does not

satisfy their clients, not in terms of the quality aspect, but more in the form of the


http://No.763.KMK0

integrity and objectivity of the reported public accountant. Looking at the violated

substances, most violations relate to the performance considered as substandard. The

evaluation results of BPKP impress that within each year, there are always some cases of

the code of ethics violation committed intentionally, particularly in relation to the Public

Accountants ' Office independence in representing facts (National Convention on

Accounting 1996)

Affecting condition

Conditions of the violations of the ethics code are mainly influenced by external and

internal factors in the Public Accountant Office. Agoes, S ( 1996) asserts that the nature

of the external factors is uncontrollable, yet the nature of internal factors is in fact quite

controllable.

Some affecting external factors are,

o Lack of awareness in society (including members of the Public Accountant Office) in

conforming to the law.

o Dishonest practices by some entrepreneurs, which restrain the independence of the

public accountant.

o Relatively small rewards for audit jobs offered by middle to small class clients.

o The relatively low demand for services of the public accountant to companies,

particularly in the auditing area.

Affecting internal factors include,

o Lack of awareness by some members ofIAI-KAP in applying ethics while performing

their professional responsibilities.


o The quality of the audit job could sometimes not be guaranteed as a result of a lack of

good accountants employed.

o Public Accountant Office is more concerned with financial profits than maintaining

good credibility.

o Beliefs that the violation of the ethics code behaviour are less likely to be discovered

by other parties.

These factors mentioned above are just some possible factors that could affect the public

accountants' job performance. There are some other similar factors, but those have not

been mentioned. This state of affairs condition, however, should encourage all

accountants to seek a resolution and be responsible for facilitating efforts to be seen as a

respectable profession by society as a result of their members' ethical behaviour.

Summary

From the detailed analysis regarding the measurement results of the three categories of

companies, covering their compliance with and their violations of the five codes of

ethics, it is shown that the degree of non-complicity with the code mostly comes from

companies in the Family Business category. There are several reasons for this. First,

auditors are chosen based upon the amount of fee to be paid rather than their

professionalism. Another reason is that the companies do not understand the importance

of the ethical codes and as a result, auditors are encouraged to violate them. In spite of

poor understanding, other factor is that the auditors are not professional in the sense that


they do not get a clear picture of the accepted codes. The cases that occurred are

examples of the problems that ensue violations of these ethical codes.

Unlike the Family Business category (FOCs), the implementation of the code of ethics

for public accountants in Government-owned companies (SOCs) is much better. The

reason for this is that in spite of comprehensive understanding, the auditors are chosen

and managed by the government institution called BPKP. This institution has the

authority to conduct an investigation of all government-owned companies by giving

permission to utilize its auditors for less than two years. Certainly, the institution has a

high standard of auditors in terms of their professionalism. They are, therefore, more

responsible for the financial information provided to the companies since their

performance is periodically assessed. There are also many possibilities to disobey the

code of ethics since the supporting factors are wide open to them. For example, the

government-owned companies are always audited by public accountants from its

institution so that there is a chance for collusion between the auditors and the audited

compames.

Finally, foreign investing companies (FrOCs) are the best in the implementation of the

public-accountants' code of ethics. The first reason is that both the management and the

auditors are professional. On this level, auditors are often chosen from public

accountants based on their reputation in society, and highly recognized by the existing

bank, investors, and others. In spite of their professionalism, another possible reason is

that company shares in this category are traded in the market. Their performance is very


important and associated with market valuations. For these reasons, companies in this

category are more likely to implement the ethics code of the public accountants.

As mentioned above, there are many cases associated with violations by auditors of the

five codes of ethics in the companies in the three company's categories, FB (FOCs ),

Government-owned (SOCs ), and the foreign investing companies (FrOCs ). The following

section is devoted to analysing and explaining the phenomenon.

Analysis

The descriptions of the auditors' behaviour associated with the code of ethics in the three-

types of companies mentioned previously are caused by several factors including a poor

understanding of the code of ethics both from the user' and auditors' perspectives. In

Indonesia, the auditors' disobedience is mostly related to the first principle of the ethical

codes, that is, the auditors' independence (Agoes, 1996; p.173).

With respect to the phenomenon, this section is devoted to analysis by the employment of

two approaches. The first approach is called the professional approach and relates to the

existing standard of the ethical codes. The second one is called the individual approach

and utilizes the theory of moral reasoning. This analysis is expected to explain the

influential factors of individual morals on the effectiveness of the implementation of the

ethical code standards. In other words, this analysis is expected to describe the existence

of the interrelationship between the two approaches in explaining the effectiveness of the

code of ethics implementation in order to be professional. For these reasons, this analysis


is divided into two sub sections, Vis analysis using a professional and an individual

approach.

Professional Approach

This approach contains an analysis of the degree to which an accounting code of ethics is

designed to maintain the professionalism of the public accountant. This approach uses

the degree of professionalism of the accountants' profession to measure public

accountant/auditor practices, and also to explain the extent of their perception through

understanding and awareness in the implementation of the standards. Employing this

approach it is expected to explain the weaknesses of ethical-code standards because

violations of the standards are often caused by their weaknesses. Therefore, the

measurement used is the ethics codes standards to examine the auditors. The five ethics

codes standards can be concluded as the key factors of professional practices in audit.

With this approach, there is a possibility to review and revise the standards through a

comprehensive look at the practical codes of professional conduct in the AICP A, which

is the source of the establishment of code of ethics in Indonesia.

The professional approach used to analyze cases in this study is based upon the basic

guidance of the standards. The key factors of the professional approach is the

implementation of the standards that consist of five ethics principles that the public

accounting profession regulates and that guide auditors to achieve high professional

standards. The standards are also an indicator of the professionalism of the accountants.

It has been mentioned by academics that professional ethics can be measured by a code

Chapter 5 ... Aoolysis

of conduct in the form of an ethics codes. "The use of the code of conduct assists the

professional in its on going relationship with society and its desire for self-regulation"

(Cohen and Pant, 1991 ), "to resolve the tension between its pursuit of autonomy and the

public's demand for accountability, and to enunciate visibly its professional norms"

(Frankel, 1989). Moreover, "the code is a vehicle which assures the public client and

colleagues that members are competent, have integrity and that the profession intends to

maintain and enforce high standards" (Ward, et al, 1993), and also that "codes play an

important role in forcing members of the profession to question their values" (Meyer,

1987).

According to L'etang (1992), codes have three meanings or are of three types, "codes of

ethics which comprise a fairly short set of ethical principles expressed in the imperative

mode; codes of conduct which are more specific, practical documents and govern clients

relationships and codes of practice which are technical documents that define required

standards for members of the profession". According to the author, the approach used is

contained within the first type since the five principles of the ethics codes are expressed

in an imperative mode. In accordance with Frankel (1989), "the imperative mode

contains aspirations (ideals to which practitioners should strive), education (which can

help in dealing with ethical problems) and regulations (a detailed set of rules to govern

professional conduct and adjudicate grievances)". The standards can be used as an

underlying theory for measuring the degree of the accountants' professionalism.


The benefit of the ethical-code standard on public accountants increases their

professionalism in the form of obedience and awareness to implement the modes that

have been agreed upon by the accounting bodies (in Indonesia it is called W). In spite

of the benefits, the contents of the ethical-code standards emphasize the public interest

by pursuing the auditor's independence, objectivity, and integrity. However, a conflict of

interest may occur whether to accommodate the interest of the clients, the accountants, or

the public. The five principles of the code of ethics should be set up in such away that

they accommodate all interests. In other words, the regulations have an important role in

promoting healthy practices and satisfying the public interest. However, in fact, some

regulations need to be reviewed and revised to meet the current conditions in order to

achieve the goals and good audit practices.

Regarding the benefits of the code of ethics, this section intends to describe cases that

have happened in the three category of companies, Family Business (FOCs), government

owned (SOCs), and the Foreign-investing companies (FrOCs). Since many phenomenal

cases have been found in the Family Business category, this section begins with the

analysis in this category. The next analysis is also based upon the magnitude of cases,

therefore, the second analysis is analysis of government-owned companies. Finally, the

analysis of the foreign-investing companies is placed in the final part owing to the trivial

cases found in this category.

Investigations showed that in the Family Business category, there are many cases arising

from the FM (Financial Manager) being associated with the differences in the perceptions


of the ethical-code standards. Case 1 contains the independence of the public

accountants. The FM's perception of this particular case is that this principle is not

complete and is sometimes ambiguous. For example, an auditor's independence infers

that auditors have to be just, free from bias and other influential negative factors . In fact,

there are many important factors that should be addressed such as the relationship that

arises from relatives, business, or individuals with the companies. Referring to these

factors, the importance of emphasizing public interest above the other interests should

also be addressed and accordingly the question that arises regarding cases in the standard

1 of the code of ethics is

I. Have the auditors been free in the context of appearance instead of free in

per[ ormance?

The second case arises from the FM's perception as regards the third principle of the

ethics code, that is, the auditors' responsibilities. The result of the measurement revealed

that the perception of Family Business concerning the auditors' responsibility is not

sufficient in scope. This principle does not address the responsibility of each auditor as a

member of the accounting body/the professionals' public accountants (members of The

W). In this principle, the responsibility is merely emphasized as a responsibility of the

auditors to the companies (the responsibility of the internal auditors). It sheds very little

light on the responsibility of the auditors to the public and responsibility to the

accounting body as members' (the responsibility of the external auditors). Therefore, the

question that arises from this issue is


2. Have the auditors implemented the responsibility in a professional way particularly

the external responsibility?

The third case of the FM arises from the fourth principle of the code of ethics containing

the principles of conservatism, consistency, and high dedication as members of the

accounting body. This principle ignores the ability of public accountants to uphold

professionalism in performing their duties. This professionalism can only be gained by

their continual efforts to develop professional knowledge. The question of this issue is

3. Have auditors increased the quality of the audit or are they going to improve

knowledge and ability as a part of the professional workers in their area?

The fourth case arises from the fifth principle of the code of ethics and is about scope

and services. Based on the perception of the FM, the auditors serves not only to

investigate the financial statements but also as a consultant for the company in a variety

of financial aspects such as tax consultation, recording system and assessing the visibility

of the financial statement. Regarding this principle, FB looks merely at one side,

providing other services besides auditing without considering the implication of the

services on the four principles of the code of ethics. Most of the Family Business auditors

do not recognize what kind of services they can provide in addition to financial auditing.

The question is

4. Have the auditors provided other services under other principles of the ethical

codes? And to what extent is the auditor's duty as an auditor to audit the financial


report of the company as well as provide other services such as being a consultant in

various aspects?

The following explanation relates to the cases in the government-owned companies

(SOCs). These cases basically relate to the difference in the perception of the

accountant's ethical-codes standards. From the five principle of the code of ethics, there

are few principles that lead to a difference perception. The different perception of the FM

is caused by incomplete understanding of the principles in detailed form. The difference

in this perception, however, does not lead to a violation of the code of ethics

significantly.

Generally, the auditor of government-owned companies (SOCs) is chosen from BPKP.

Therefore, cases arising from companies in this category relate to the implementation of

the five principles of the ethics code are independence and objectivity of auditors as

members of the institution. In other words, how far can the auditors' independence and

objectivity be promoted clearly as their professional ethics in the institution. In this

category companies have the regulation of a time limitation to regularly exchange

auditors, that is, a two-year-maximum period of utilizing an auditor. Thus, the question

here is, "is the regulation sufficient to promote independence and objectivity? And are

there any other requirements like peer review?" In spite of the independence and

objectivity there are many cases that arise from the poor understanding as to what

services can be provided. From these issues, the questions are


5. Have the auditors in the institution (BPKP) been independent in appearance and

performance (in fact) under the sole time regulation of the maximum of 2 years of

auditing?

6. Have the auditors implemented the fifth principle, scope and services, properly?

As mentioned earlier, the cases in the compames in the foreign-investing category

(FrOCs) are not significant in the sense that they do not lead to violations of the ethical

codes. The FM of the companies in this category mostly states that they have a similar

perception in the ethical-code standards. If the employed auditors ·deviate . from the

ethical codes, they will utilize other public accountants or leave the existing auditors for

the institution/the big firm (accounting body) that have more capacity for correct

judgement. Since they utilize a credible public accountant, highly recognized, or

recommended by a bank (from the interview), there are few, if any, such cases regarding

violations of the code of ethics.

From cases that have been described in the form of questions, the violations of the code

of_ ethics occur in the Family Business category and are caused by the incomplete

understanding of companies to the auditor's practices that are confined by the standards

(assumption 1 ). Another cause is the fault of auditors to grasp the purpose of the ethical

code standards (assumption 2). More important than the previous cause is that auditors

take advantage of the companies that have less knowledge of the code of ethics

(assumption 3 ). The next cause is that the standards might not be ideal for

implementation in Indonesia (assumption 4). Last but not least, collusion, cronyism, and


nepotism are widely spread in Indonesia particularly in the government institutions. This

phenomenon is not an exception in the government institutions of BPKP (assumption 5),

and therefore, they find it difficult to promote healthy practices.

With respect to the five mentioned assumptions above, it is important to explore these in

order to find a solution or improvement. Regarding the first assumption, it is expected

that a Financial Manager and people who work in the financial area would have

substantial knowledge through continuous improvement in formal and informal

education. Moreover, the auditors should not choose work based only on the biggest fee,

while he/she neglects professionalism. Another recommendation is that the period of

contract between auditors and the companies is not too long, even though it is true that

the longer a public accountant stays in a company, the more adaptable he/she becomes to

the situation and problems confronting the company. This situation is expected to

stimulate the IAI into being sensitive, outward looking and able to anticipate the issue in

the field of work.

The second assumption addresses the issue of the ability of the auditors to understand the

meaning of the ethical-codes. An understanding of the ethics codes can increase and

improve the ability of the auditors through education and the obtaining of sufficient

relevant experience. The most important recommendation for the IAI that is currently

governing all Indonesian accountants to determining reliable criteria of accounting and

auditing for the establishment of public accountants professional in order to ease the

cases in their practices.


Another serious problem, is derived from the insufficient knowledge of the company that

results in the auditor violating the ethical codes, and needs to be solved. This condition

cannot be ignored since it will encourage the auditors to do the same thing in other

companies. Again, this is the responsibility of the W to alleviate this problem by giving

the proper sanctions to public accountant offices violating the ethical-code standards.

The fourth assumption is a problem that questions whether the standard fits with the

conditions in Indonesia and thus, fits overall the companies in every category. So far, the

five principles are generally described and so they can only be grasped by companies that

have knowledgeable people in the accounting and financial area (foreign-owned

companies). It is crucial to consider the structure and culture in each category of

companies in the establishment of professional ethics (Nicola, Kapelianis, 1999). In

Indonesia, the W is expected to reconstruct the regulations in the context of the

conditions of politics, economics and culture of the society.

The last assumption addresses the issue of collusion, cronyism, and nepotism occurring

in the BPKP as an institution that governs auditors of government-owned companies.

This phenomenon is no longer a secret for Indonesian society. The majority of

Indonesian people wonder about the credibility of accountants. These have been very

critical issues since the independence and the objectivity of accountants have been

questioned. To alleviate these issues, it is important to involve government in creating a

regulation associated with guidance in the fieldwork and to execute appropriate


punishment for the violation of the ethical codes. A violation of the ethical code is not

only a violation of the profession that will receive punishment from the Indonesian

accounting body, the W, but also a violation of the country's regulation. Hence, for this

reason, the development and improvement of the regulations, either from the government

or the accounting body, is expected to make professional every professional accountant.

From the above description, there are general solutions regarding the issues. First, it is

crucial to establish a conducive-cultural condition for behaving ethically, both among

public accountants and between the public accountant and people in the companies. The

importance of the organizational culture in the implementation of professional ethics is

reflected in the code of ethics and has been revealed by many authors (Epstein, 1979;

Murphy, 1988; Gandz and Bird, 1989; Raelin, 1991; Davis and Welton, 1991; Fritzche,

1991; Knouse and Giacalone, 1992). Organizations or companies should promote the

development of a conducive-culture. According to Gandz and Bird (1989), managers

exhibit model behaviour in an organization that has a conducive-culture for ethical

behaviour. In spite of the culture, organizations or companies "have to facilitate the open

discussion of ethical issues" (Murphy, 1988), "emphasizing the importance of sharing

ethical values" (Fritzche, 1991) and "using the company's stories and rhetoric to provide

employees with sanctioned or unsanctioned types of behaviour" (Knouse and Giacalone,

1992). Additionally, Berenbeim (1988) "stresses the importance of employee

involvement in the process of creating and implementing ethics". Finally, "the

development of a norm for moral behaviour is as important for the professional as well as

its individual members" (Frankel, 1989).


Secondly, it needs the presence of control from a professional body (IAI) and government

towards the accountants' practices in providing financial information for the audited

companies and public. This problem has been confirmed by Knouse and Giacalone

( 1992) emphasizing the importance of control for unethical behaviour. "This involves

expanding the traditional sphere of external and internal audits to include compliance

with ethical codes, and implementing a penalty system for violations". "Professions must

not only control deviant behaviour, but must be available to support members who are

subjected to demands, which are outside the tenets of the relevant professional codes"

(Frankel, 1989). Moreover, "society or the public has the right to evaluate professional

performance in the light of a moral as well as technical dimension and should be aware

of the effects of cultural values and socio-economic conditions on the ethical conduct of

professionals" (Cohen et al, 1992). In fact, the "self-regulating nature of the profession

and professionals' reluctance to whistle-blow on colleagues may make control difficult"

(Frankel, 1989). Hence, "penalties such as reprimand, termination, suspension or

demotion may be employed" (Benson, 1989). In Indonesia penalties should be given by

the W as an accounting body as well as by the government, which has an authority to

construct regulations for its society. In order to reduce the violations and to promote

easiness in control, awareness from the members or from professional accountants is

required. The awareness is reflected in their effort to increase the ethical behaviour of

individuals, which is very must influenced by various norms and values of society


The next section of analysis is a detailed explanation of their awareness as individuals

and professionals as well as, within implementing of the ethical codes as their

professionalism standards. In other words, this analysis is devoted to understanding how

far the implementation of the professional codes as a standard of individual ethical

behaviour is manifested in the form of the five principles of ethics.

Individual Approach

The discourse of awareness to behave correctly, to put honour first, and to be responsible

for all public interests cannot be separated from the role of individuals in implementing

ethical behaviour or professional ethics. The term professional is used to emphasize the

fact the accountants are a group of people who work in the same profession based on

their professionalism. As mentioned by many authors, professionals are viewed as being

highly credible, prestigious, wealthy and powerful members of society (Bayles, 1981 ;

Frankel, 1989, and Savan, 1989). "Because of their relatively high status in an

organization, professionals represent an authoritative symbol of social responsibility"

(Raelin, 1991 ); "When lapses in ethical behaviour occur, the credibility of the entire

profession is endangered" (Kerr and Smith, 1995). "Given their complete knowledge and

highly technical skills, professionals play a vital role in society, and their morality is

imperative". Additionally, Lennertz (1991) comments, that "profession is synonymous

with public purpose, intellectual tradition, and fiduciary relationships" . "A further

characteristic of a profession is its self regulation by a code of ethics" (Claypool at al,

1990) and "its role as a moral community" (Camenisch, 1983).


From these several statements opinions about professionals, it is clear that accountants

who are organized as a professional institution have a professional measurement standard

that is called a code of professional conduct, which is described in detail as a

professional-accountant code of ethics. The code of ethics is indirectly a form of

regulation, which is used to regulate them in order to improve their professionalism.

They have to be responsible for the correct implementation of the code of ethics

accompanied by awareness of it. In order to explain the degree of awareness and

compliance with the code of ethics, it is necessary to analyze the individual accountant

through an individual approach with an emphasis on moral reasoning, which is highly

dependent on the development of individual morals. Under this approach, the awareness

of public accountants can be improved and increased.

An individual approach is the approach emphasized by the genuine ethical behaviour

arising from their inner heart as a human being. In other words, the way of thinking is

influenced by the values, morals or inner heart coming from an individual person, which

is influenced by their conscience. These values may be derived from religion, or culture,

and may be influenced by an individual's personality. Then, the values and norm will

become the morals of the individual and become the basis of the way of life of the

individual. Hence, the key activities of an individual approach are explored on the morals

of an individual, that started from a level of individual moral development, stage of

moral development, process of ethical decision making (morals evaluation) to the moral

reasoning. The result of these explorations with this approach is to produce the values of

the public accountant_and her/his awareness as a professional individual.


Briefly, this section is devoted to explain the development of moral individuals as a

standards measurement to answer cases of relevance to a bad attitude of a professional

accountant, for example disobedience or violations of the ethics codes by auditors. In this

analysis, the understanding of the moral reasoning process is similar to knowing the steps

of an individual's moral development in order to create an awareness of the public

accounting professional, which is described by employing Kohl berg's Moral

Development theory

Before entering into in deep explanations, it is important to know the benefit of the

approach used. In general, the benefit of an individual approach is that it looks at the

development of an individual's morals, which has several stages of development. This

analysis is expected to explain the degree of professionalism in each category of

companies, and at what level of the accountants' moral development violations occur.

Another benefit is the power of this approach to explain factors affected in each level of

moral development and the ways to anticipate the violations made by individuals.

Lawrence Kohlberg (1982) has revealed the approach used in this study. According to the

author, his approach has three stages of which each stage has two levels of moral

development. The importance of this analysis is to give a back up analysis of the

professional approach, thus, it is crucial to explain violations made by the accountants.

The reason for this is that professional accountants who are confined by self-regulation in

the form of the ethics code must be influenced by two important factors, the regulations


and individuals who have a moral stage of development. In general, the development of

morals can also be utilized to examine the degree to which their inner heart is influenced

by morals. Therefore, an individual approach is appropriate.

According to Kohlberg (1969), the theory of moral development is "one of the most

widely used approaches in the examination of moral reasoning" which is used to examine

an individual's moral development based upon the level of age and education influencing

their way of thinking. The author explains that education plays a major role in their moral

development. His strongest statement to this effect is that "moral reasoning stops at the

same point that formal education stops".

As is mentioned earlier, Kohlberg (1969) recognizes three levels of moral development,

which encompass six stages. The first level is that generally found at the elementary

school level, called the pre-conventional level. Children up to ten years old usually

dominate this level. In the first level stage, people behave according to socially

acceptable norms because they are told to do so by some authority (e.g., parents or

teachers). The threat or application of punishment compels this obedience. That means

children are extremely self-involved and moral behaviour is only a response to sanction

rewards based on behaviour. The second stage of this behaviour is characterized by a

view that right behaviour means acting in one's own best interest. In other words, moral

behaviour depends on the desires of the individual.


The next level is called the conventional level. This level is mostly dominated by

adolescence, which is generally found in society. Now moral reasoning is based on social

norms as well as the rights of others. The first stage of this level is characterized by an

attitude, which seeks to do what will gain the approval of others. In other words, the

interpersonal concordance orientation indicates that the individual has developed the

ability to emphasize and is no longer selfish in their moral reasoning. The second stage is

oriented to abiding by the law and responding to the obligations of duty. It means that

moral activity becomes a function of following rules and is not associated with the need

for personal approval.

Thirdly, the level is called post-conventional. This is the most advanced level of moral

reasoning, which relies on universal principles in approaching moral problems. The first

stage in this level is called social contract orientation, which relies heavily on noble

principles such as equality and human dignity. It encompasses an understanding of social

mutuality and a genuine interest in the welfare of others. The next stage is called the

universal ethical principles orientation, which is based on the respect for the universal

principle and the demands of individual conscience. This means that universal ethics

adhere to values like truth, honour, integrity, which can be found in few people.

Regarding the stages, Kohlberg (1969) stated that "individuals could only progress

through these stages one stage at a time. That is, they could not jump stages". For

example, they cannot move from an orientation of selfishness to the law and order stage

without passing through the good boy or girl stage. They could only come to a


comprehension of a moral rationale one stage above their own. Thus, it is important to

present them with moral dilemmas for discussion, which encourages and creates a higher

stage morality and encourages moral development to be more directed. Another

important opinion of Kohlberg is that moral development can be promoted through

formal education and most moral development occurs through social interaction.

The next explanation relates to the benefit of knowing the process of moral development.

The reason for this is that if individuals have an understanding of the normal stages of

moral development, it should help him or her to develop or improve upon his or her own

moral values. This is especially true if the characteristics of highly moral people are

clearly described.

The benefit of knowing the first stage is that an individual decides what to do and what is

right, according to what he or she wants to do and can do without getting into trouble. To

be right, an individual must be obedient to the people in power and thus, avoid

punishment. It might make it"rightness". The benefit of knowing the second stage is that

an individual tends to be self-serving. People are less respectful towards the rights of

others but may give others the assumption that they will get as much or more in return,

instead of loyalty, gratitude or justice. In other words, right action consists of what

instrumentally satisfies one's own needs and people are valued in terms of their utility.

Moving to the next level, there are also two stages. Similar to the previous level, the

benefit of knowing the third stage is that people may shift from pleasing themselves to


pleasing others. People act to gain approval of others. Good behaviour is that which

pleases or helps others within the group. One earns approval by being conventionally

respectable and nice. The benefit of knowing the fourth stage is that individuals have

internalised society's rules about how to behave. People feel obliged to conform to

society's laws and customs, because it is important to do one's duty to maintain social

order. Leaders are assumed to be right; individuals adopt social rules without considering

the underlying ethical principles involved. Social control is, therefore, exercised through

guilt associated with breaking a rule, but the guilt in this case is an automatic emotional

response, it is not a ratim~.al reaction of conscience based on moral principles, and people

also believe that anyone who breaks the rules deserves punishment. Right behaviour

consists of maintaining the social order for its own sake. An individual will do his or her

duty consistently and a precedent must be maintained.

Finally, the last level consisting of two stages is the most important one. The benefit of

knowing the fifth stage is that people at this stage recognize the underlying moral

purpose that is supposed to be served by law and social customs. Thus, if a law ceases to

be serving a good purpose, people feel in a democracy .that they should be active and

change the law. Democracy becomes a social contract in which everyone tries

continually to create a set of laws that serves the most people best while protection is the

basis of everyone's rights. There is a respect for the law and a sense of obligation to live

by the rules as long as they are established in a fair manner and fulfil an ethical purpose.

Right actions tend to be defined both in terms of general individual rights and standards

that have been critically examined and agreed upon by the whole of society. The freedom


of the individual should be limited when it infringes upon someone else's freedom. In this

stage, people will live by the rules or try to change them. The benefit of knowing the

sixth stage is that people have considered many values and decided on a philosophy that

truly guides their life. They do not automatically conform to a tradition, culture or to

others' beliefs even if it influences their own emotions, intuitions or impulsive notions

that are related to a right or wrong attitude. Generally, they would like to choose

everything with right attitude for a more considered peaceful life in society. Therefore,

people can be expected to carefully choose basic principles to be followed, such as caring

for and respecting every living thing, feeling that we are all equal and deserve equal

opportunities. Consequently, they have enough strength to act on their values even if

others may think they are odd or if their beliefs are against the law. Thus, the third level

is called the principle of morality, in which is described moral development containing

ethical principles as a guide to behave in society.

After the benefits of each level have been understood, auditors or public accountants as

members of society who have the ability of a professional have to be in the third level

(post-conventional level), and therefore, have to uphold their own professionalism. These

stages focus on the different age levels and levels of education and designed to develop

of the morals of individuals. They have to implement universal ethical principles in

providing their services. An individual achieving this level acts out of universal

principles based upon the quality and worth of all human beings. A moral decision is

based on the quality of reasoning behind a person's decision, rather than whether or not,

some specific behavioural decision is to be made. The thinking process of this level is


used to decide what is fair and reasonable in a moral dilemma. According to Kohlberg

(1984), there are two steps, (1) understanding how each person involved sees the

situation and (2) imaging how each person would feel if placed in the other person's

situation. This emphatic process aims to find a reversible solution, one that would be

seen as equally just from each person's perspective and considered fair by a high

percentage of rational thinking people. It is logical for a professional public accountant to

try to be in the fifth or sixth stage. According to. fact, however, many violations of the

code of ethics made by public accountants have been revealed. Certainly, there are

several causes attributed to the violations of ethics codes, and the greater part of current

cases come from the behaviour of auditors with differing interests resulting in unhealthy

audit practices.

Every violation by auditors of the code of ethics must have underlying reasons. This

majority of these reasons arise from the unawareness of public accountants of the codes.

There are also some conflicts of interest of auditors. Then, the auditor faces the

complicated situation of choosing between priority to the individual's interests. This

decision will be determined by the moral consciousness of the auditor. Thus, it is clear

that the individual's moral have functioned as a foundation for behaviour in society

according to the individual's conscience. This study contains cases particularly in the

category FB of the companies and are analysed by utilizing the theory of individual moral

development of the auditors or public accountants. The purpose of performing this

analysis is to answer questions regarding the stages of moral development of auditors and

the extent to which then violate or comply with the code of ethics. In order to evaluate


and answer the question in each category of companies, a proper method of analysis

containing moral and individual moral reasoning (individual approach) is required.

Before discussing and solving the problems in the existing cases, this study has described

the problem found in the companies. As described previously, the cases mostly occur in

the companies in the Family Business category. In fact, there are six cases that have

occurred in Indonesia and they have not been solved. From these six existing cases, five

basic assumptions causing the violations of the code of ethics can be educed.

Summary

The individual approaches can be used to discuss cases of auditor violation in each

category of the company. Referring to the above six questions (six questions of

professional approaches), these questions can be grouped as questions (cases) of the

moral individual ' s values, because these questions relate to the level of consciousness

/awareness of the auditor in implementing the codes of ethics as self regulation and as

professional regulation. However, there is a great difficulty in the analysis in regards to

the individual ' s behaviour and how it has been clearly influenced by his/her moral

development and perceptions.

In this study, I will strive to discuss these cases based on the moral perception of the

public accountant from the financial manager' s point of view. Many reasons have been

found leading to the emergence of the six questions I have discussed above. In particular,

there are moral reasons on how auditors act the way they do, and these are clearly

influenced by the differences in the individual's process of moral development.


According to Kohlberg (1982), his conception of moral development is based on thinking

and logic, not on feelings for others and he believed that morals were based on the level

of age, education and wisdom. Even though, surely feelings can't be neglected as well

Thus, I have based my analysis of the auditor' s moral process development on the six

questions above. In this analysis, there are several assumptions that relate to the

emergence of the auditor's violations towards their code of ethics. Below are details of

the assumptions that emerge from their moral perceptions.

1. The auditor's assumption is that there would only be light sanctions from

accounting bodies if auditors commit violations.

2. Auditors often assume that they can earn more if they are more respectful towards

the rights of others.

3. The assumption is that auditors have to be nice to their clients in order to get their

clients' approval.

4. The assumption is that auditors need to adopt social rules without further

considering the underlying ethical principles involved.

Thus, the violations of the code of ethics are primarily based on the four assumptions

above. In other words, an individual's process of moral development is reflected by those

four assumptions that automatically become their moral reasoning determining their

behaviour. These four assumptions can be used as a reference in finding a solution to the

code of ethics violations.


The first assumption emerges because the accounting body has less discipline in

responding to the violation that occur. It can also be said that there are no clear rules in

regard to the mechanism for sentencing and the court process in regard to violation cases.

The individual 's moral process of development that emerges from punishment (stage 1)

cannot be applied in this case. The second assumption emerges because auditors assume

that if they act respectfully towards the rights of others, such as being loyal to a client,

they will get more respect as well as business from the client. In this case the assumption

tends to be self-serving. Additionally, the right behaviour is the behaviour that can satisfy

an individual ' s needs. Hence, an individual's moral process of development in this stage

will result in an awkward situation because on one side auditors have to be loyal towards

their client companies and on the other side, auditors also have a responsibility towards

· the public. Auditors, therefore, have to face moral dilemmas more often because there

are a lot of violations of their duty (stage 2).

The third assumption emerges because auditors assume that a morality occurs because

each person has to be nice towards others (stage 3). This condition makes auditors less

distinct in implementing the code of ethics. For example, auditors as professional

members often have to balance against two conflicting sides. On one side, auditors have

to reject every violation of the code of ethics, but on the other side, they have to allow

these violations. The other example would be the reluctance of auditors to report the

violations of their peers. The fourth assumption emerges because auditors as members of

society have to defend the social rules as well as law and order at their highest value. It is

obvious that auditors' morals are developed from the rules and cultures of their society.


In other words, auditors have been adopting a lot of social rules as part of their moral

process of development. As a matter of fact, auditors sometimes forget to apply the

importance of the principle of ethics in their practice. For example, an unethical social

environment relates to the theory of social psychology, whereby an individual is seeking

to conform to the environment and develop trust towards society. In this case, trust means

that if there are differences in their individual belief, auditors tend to refer to what is

"right" in society. Thus, the process of moral development until this fourth stage can be

one of the reasons why auditors make some violations of the code of ethics.

Above all, from the pre-conventional level to the conventional the developmental process

of the individual is not perfect and satisfying because there are many of weaknesses that

emerge from the auditor's behaviour. The auditor still does not possess a high level of

awareness in implementing the correct/right code of ethics.

Thus, exploring the fourth assumption above, several potential solutions can be generated

to anticipate the current company's conditions. Below are several solutions:

1. There has to be a clear and distinct sanction made by the IAI as a body of

professional accountants. Moreover, there is a good system of court processes by the

Profession Controller Council (BPP) and the Profession Consideration Board.

Although, sanctions could be given in several steps, such as a letter of warning,

suspension from membership of the IAI (Accounting body) and dismissal as a

member of the IAI.


2. The existing code of ethics needs to be reviewed and the interpretation of the existing

code of ethics, whether as an accusation case or complaint from the accountant's

peers or public in general, need to be published.

3. The hierarchy of needs has to be included in the implementation of ethics.

4. To implement the existing principles of ethics, we need the ability to identify some

ethical issues and make some predictions about the effects of some decisions, and

also be able to look at the ethical issues from different perspectives as well as in the

context of time, place and environment. The individual needs to be able to justify the

effect of his/her ethical decisions.

The solution being offered in this research focuses on how to apply these solutions in real

life so as to avoid these problems or at least minimize them. The first solution is to

motivate the individual/auditor to strive to get to the moral development in the level 3

(post-conventional), whereby moral reasoning occurs because of the social orientation

pressure on the equality and the rights and duties to self-governing. The awareness of

relative values and an individual's perspective, the greater focus being on the procedure

to get agreement in a constitutional and democratic way, which then develops as a formal

morality. Then, the moral development process will explain morality as a principle of the

conscience of the individual, comprehensive and universal. It will bestow a higher value

to the manner of an individual's life, degree and equality status. Hence, the development

towards these principles of morals or morality needs more education, experience and

wisdom, which can be established as the individual ages.


However, as explained earlier, there are some others solutions that can be anticipated in

the cases, such as; socialize ethical norm though, public notices and the mass media;

increase public care, public's awareness, government regulation or intervention and

establish clear sanctions of court or law if there are violations; increase the number of

professional managers and create greater awareness in the business world and every CEO

in understanding the ethics of business. From all the solutions above it can be expected

that professional accountants will apply the ethics code more consciously and more

effectively.

Finally, it can be concluded that these two analyses, are closely related. These two

analyses explore violations and obstructions of auditors in applying the rules (the ethics

codes) and in which auditors are mostly influenced by two points The first point is their

position as a part of a group of professionals (members of a professional accounting

body), to which they have to have obedience to the rules of professionalism (the ethics

codes), and the other side (second point) is their position as humans, in which they also

have the unwritten rules (way of life) of society and are mostly influenced by their

consciousness, culture and religion. From these conditions, there are some questions that

arise such as: does the public accountant/auditor apply the ethics codes without any

influence as an individual (position as citizen), how much do they understand of the

ethics codes as the self-regulation in professional practices, and how much their violation

and obstruction of the ethics codes impact on their position as a professional accountants.

Thus for answers to these questions or analysis of these matters a professional analysis '

(the first analysis) is used. The key factor of professional analysis is to see and measure


the public accountant from the rule point of view. That means the rules (the ethics codes)

establish every public accountant as a professional public accountant. Hence, the rules

(the ethics codes) as measurement standards for professionalism of public accountants

are ideal in every category of company.

Moreover, the second analysis is an individual analysis, in which there are the key

activities such as, increasing professionalism of public accountants with the use of

standards measurement from the moral development point of view, and to analyze

violations and obstructions of ethics codes with the use of standard measurements of

moral reasoning as a part of the process of individual moral development. Individual

analysis will be more related to personality, to create greater understanding of the reasons

for the violations of the ethics codes. Furthermore, individual analysis can lead to a

public accountant incorporating more ethics in their behaviour, being aware of the ethical

importance in individual life. This ethical awareness will be more effective in their

implementing ethics codes as the rules of their professionalism. However, these two

analyses, professional and individual, can be mutually complete.


Diagram 5.1: Flowchart of The Relationship between Professional Approach and

Individual Approach

The Key Factor of Professionalism of Public Accountants. (Professional Approach)

Key Activities of Professional Individual (Individual Approach)

I -- - ---; :-Independence and --+-: ----,

i Objectivity j ' ' ! l !- Integrity ! I I

l-Responsibility and · f ! Public Interest I I-Due Care I

The Level of Moral

Development

...

I-Scope & Services -+--.:_~=-.,j----==::::::§\:. The Reason of Moral Awareness on Public

Accountants

Stage of Moral Development

Moral Evaluation ------ (Process of Ethical

Decision Making)


CHAPTER6

RESEARCH FINDINGS AND CONCLUSION

Introduction

This study has explored two critical aspects of the relationship between the public

accountant's moral reasoning role and the implementation of the principles of the code of

conduct of professional ethics in auditing practices with emphasis on the ethics codes.

These two aspects are ( 1) awareness of the public accountant as a professional who has to

work at maintaining these ethics codes. This needs conciousness on the part of the public

accountant as a professional to implement these ethics codes (Code of Conduct) in the

provision of auditing services and other services to the public; (2) the process of moral

development which arises from the moral reasoning of the public accountant as the moral

agent, and also the key activities performed by the public accountant as the moral agent

to improve the effectiveness of the implementation of the ethics codes (Code of

Conduct).

This exploration uses as a guide the theoretical model based on the level of moral

reasoning that was developed by Kohlberg' s Individual Moral Development Model

(1982) in exploring the influence of the role of moral reasoning and its relationship in the

implementations of the ethics codes. The case data consist of primary and secondary

data. The primary data were collected by conducting interviews with 15 Financial

Managers from 3 categories of companies in Indonesia. The secondary data were clarived

Chapter 6 ... Findings and Conclusions

from the annual consortium and the directory of the W-Indonesia. The case data is

analysed by using pattern coding (Miles and Huberman, 1994) in order to find the

observed patterns of the key factors of the public accountant's willingness and by using

pattern matching (Yin, 1989) in order to match the observed patterns and their theoretical

patterns. The case data analysis results show the key factors of the public accountant's

awareness which include an improvement in the professional attitude of the individual,

improvement in awareness of moral issues within the social and government

environment, and the establishment of ethical business within organizations and

compames.

The exploration also uses the stages of The AICPA Code of Professional Conduct (1992),

and in particular the ethics codes as a guide for exploring the key activities that would

improve the effectiveness of the implementation of the principles of the ethics codes, that

regulate the professional public accountant. The public accountant's awareness and

performance as a professional individual has to be in accordance with the ethics codes,

and the key activities performed by the public accountant as a moral agent to improve the

effectiveness of the implementation of the ethics codes (code of conduct) show that the

individual conscience is an important component in the relationship between an

accountant and practice. The results of this exploration provide a good explanation to the

question "How far should a public accountant obey and apply the ethics codes within the

execution of his/her task in the companies for which they work?".

The researcher realizes that the results of these explorations are limited in relation to the

selection of Indonesian case studies, and the data collecting methods. First, the


relationship between each company and the public accountant is very specific. This is

because each category of companies has a different perception towards the

importance/usage of a public accountant's auditing. The findings of this research have

limitations and cannot be generalized. Second, the researcher obviously was not able to

observe at first hand the actual relationship between the public accountants of the 3

categories of companies and the financial managers of the company, as the information

discussed was confidential and unavailable to outside persons. Therefore, the case data

analysis is limited to the results of the interview. Third, this research is a perception of

the user, particularly the finacial manager of each company. Thus, the results of the

interviews are highly subjective and influenced by the user perceptions of the public

accountant. The case data analysis is limited to a classification of the financial managers

at different companies levels/categories.

The following sections summarize the main findings of this exploration, review the

conclusions of this exploration, discuss the contribution of this exploration, and suggest

future research directions.

Research Finding

This exploratory case study research has accomplished the three purposes of this study;

determining

1. the influence of moral development on the moral reasoning processes of the public

accountant in implementing the principles of the code of conduct.

2. the level of development of the public accountant's moral reasoning as a moral agent.


3. the key activities performed by both the Indonesian public accountant and the

financial manager in building and improving the effectiveness in the implementation

of the principles of the code of conduct in developing and achieving professional

practices.

The influence of moral development on the moral reasoning process of

the public accountant in implementing the principles of the code of

conduct.

The major duties of the public accountant include public services such as auditing,

mangement consulting, tax, and maintaining the public trust professionally. To ensure

these duties are performed well, the public accountant must have ethics codes as a moral

principle to control their deeds professionally. The ethics codes themselves, as a basic

regulation for the public accountant, should be purely implemented as it is the principle

by which public accountants carry out their services. As a matter of fact, in some

conditions enable public accountant to disobey and offend the ethic codes. These emanate

from auditors who lack a perception of the ethics codes, and the users who know the

ethics codes practice well. There is also the lack of the government's role in regulating

the code. This condition will obviously arouse an important moral conflict between

individual auditors. An auditor/public accountant hired by a company should not

prioritize the firm's importance over that of the public or the shareholders. From this

point it can be seen that there occurs some conflict in implementing the ethics codes

correctly. A code of ethics implies self regulation for those who use it, but it is possible to

be reversed, in fact, since there are unconsidered factors that create unethical conditions

Chapter 6 .. . Findings and Conclusions

such as: improper individual financial needs, with no relevant basic regulation, improper

behaviour and habits, an unethical environment, and the users ' lack of perception of the

code of ethics.

It is clear that the moral role played by the individual is extremely essential in order to

overcome problems concerning an existing offence. Automatically, moral development

influences the individual's moral reasoning process which at last gives effect to the

ethical decision making process. In other words, every decision made in executing the

ethics code is greatly influenced by the ethical decision making process involving

individual moral reasoning. It can be concluded that the moral role enables solutions to

be given for the ethical code problem. Based on the interview result, there are four major

factors considered in the moral development of the public accountant in implementing

ethics codes. These are;

1. moral behaviour depends on any punishment and the desires of the individual.

2. moral behaviour depends on social norms and the rights of others

3. moral behaviour depends on the law and responding to the obligation of duty

4. moral behaviour depends on a social contract orientation such as, equality and human

dignity, and also respect for universal principles such as, values, truth, honour and

integrity.

The public accountant, however, has a different perception from others as to what factors

are the most important in constructing moral behaviour. This is because moral

development can be promoted through formal education and social interaction.


Moreover, individuals have an understanding of the normal stages of moral development

and as to what should help them to develop or improve their own moral values. The

benefit of knowing the first stage above is that the individual decides what to do, and

what is right. To be right the individual must be obedient to the people in power and thus

avoid punishment, and to this end the individual tends to be self serving. The right action

consists of what instrumentally satisfies one's own needs and in terms of their utility

what is valuable. The benefit of knowing the second stage is that the individual has

shifted from pleasing themselves to pleasing others. People act to gain others' approval;

good behaviour is that which pleases or helps others within the group and individuals

have internalized society's rules about how to behave. Individuals feel obliged to

conform to society's laws and customs, because it is important to do one 's duty to

maintain social order. Individuals adopt social rules without considering the underlying

ethical principles involved. Thus, right behaviour consists of maintaining the social order

for its own sake. An individual will do his or her duty so that consistency and precendent

are maintained. The benefit of knowing third stage is that the individual recognizes the

underlying moral purpose that is supposed to be served by obedience to law and social

customs.

Thus, when a law ceases serving a good purpose, people in a democracy should be active

and change the law. Democracy becomes a social contract whereby everyone tries

continually to create a set of laws that will best serve the most people. Hence, the law and

a sense of obligation to live by the rules as long as they are established in a fair manner

and fulfil an ethical purpose. The right direction tends to be defined in terms of general

individual rights and standards that have been critically examined and agreed upon by the


whole of society. Finally, the benefit of knowing the fourth stage is that the individual

has considered many values and has decided upon a philosophy of life that truly guides

their life. Moreover, individuals choose basic principles to follow, such as caring for and

respecting every living thing, feeling that we are all equal and so deserve equal

opportunities. They are strong enough to act on their values even if others may think they

are odd or if their beliefs are against the law. Therefore, the fourth stage is called the

principles of morality or belief as this moral development contains ethical principles for

social behaviour.

The level of the public accountant's moral reasoning as a moral agent

The public accountant as a member of society, has the ability as a professional to be

involved in the four processes of the development of moral reasoning as an ethical

decision maker. As was mentioned earlier, Kohlberg (1969) states that the theory of

moral development is one of the most widely used approaches in the examination of

moral reasoning, which is used to examine an individual's moral development and which

is based upon the age level and the level of education. Education plays a major role in

moral development. Thus, the level of moral reasoning development is influenced by;

1. the age level

2. the education level

3. the environment or situational level

Age and education are the most influencial in achieving the quality and worth of all

human beings. A moral decision is based on the quality of reasoning behind the

person's decision rather than whether or not some specific behavioural decision is made.


The thinking process on this level of the development of moral reasoning is used to

decide what, in a moral dilemma, was a fair and reasonable action. According to

Kolhberg (1982), his conception of moral development is based on thinking and logic

and not on feeling for others, because morals were based on age, education and wisdom.

Moreover, in general, obedience to and violation of codes of ethics made by the public

accountant must have underlying reasons. These reasons arise from thinking

accompanied with a sense of moral social duty and a sensitivity of the individual's

conscience. Thus, the development process of moral reasoning is identical with the

processes of individual's moral development. These three criteria are important for public

accountants in the development of their moral reasoning.

The key activities performed by both the Indonesia Public Accountant and the Financial Managers to build and improve the effectiveness in the implementation of the principles of the code of conduct in developing and achieving professional practices.

The principle codes of conduct consist of five standards of ethics which the public

accountants regulate and which guide auditors towards attaining professionalism. The

principle codes of conduct are also an indicator of the professionalism of the accountant.

Therefore, it has been mentioned by academics that professional ethics can be measured

by a code of conduct in the form of the ethics code.

Thus, the public accountant and the financial manager of each category realize that their

relationship needs attention to improve the effectiveness of the code of ethics through

their interaction towards a similar perception (by all) of the ethics codes. They must


perform specific activities for building and improving effectiveness towards the

implementation of the ethics codes.

In this exploration, the public accountant and the financial manager perform activities to

achieve the same perception in the implementation of the ethics codes. On the basis of the

results of interviewing the financial manager of each company, the key activities for

achieving effectiveness of ethics codes are:

1. They have a substantial knowledge, especially in understanding the meaning of the

ethics codes by making continuous improvement through education and obtaining

sufficient experience in this area.

2. The period of contract between the public accountant and the companies is not too

long.

3. The ethical codes are appropriate to companies in every category in Indonesia.

4. Involving government to create a regulation associated with guidance in the field

work.

These four key activities are important in order to achieve and improve the effectiveness

of the ethics codes. General solutions regarding the achievement of effectivenes are:

1. Establish a conducive cultural condition for behaving ethically

2. The existence of control from a professional body (IAI), government, and the public.

Establishing a conducive cultural condition

The implementation of professional ethics that are reflected in the ethics codes is one of

the most important aspects of organizational cultures (Epstein,1979; Murphy, 1988;


Gandz and Bird, 1989; Raelin, 1991; Davis and Welton, 1991; Knouse and Giacalone,

1992). Organizations or companies should promote the development of a conducive

culture. Gandz and Bird (1989) state that a manager exhibits model behaviour in an

organization that has a conducive culture for ethical behaviour. Moreover, the

organizations or companies have to facilitate the open discussion of ethical issues

(Murphy, 1988), "emphasizing the importance of shared ethical values (Fritzche, 1991)

and using a company's stories and rhetoric to provide employess with sactioned and/or

unsactioned types of behaviour (Knouse and Giacalone, 1992).

The existence of control from a professional body (IAI),

government, and the public

Professions must not only control deviant behaviour, but also be available to support

members who are subjected to demands, which are outside the tenets of the relevant

professional codes (Frankel, 1989). Moreover, society or the public has the right to

evaluate prefessional performance in the light of a moral as well as a technical dimension

and should be aware of the effects of cultural values and socioeconomic conditions on the

ethical conduct of professionals (Cohen, et al, 1992). In fact, the self regulating nature of

the profession . and professional reluctance to whistle-blow on colleagues may make

control difficult (Frankel,1989). Hence, penalties such as reprimand, termination,

suspension or demotion may be employed (Benson,1989). In Indonesia penalties should

be given by the W as an accountant body as well as by the government that has the

authority to construct regulation for its society.

Chapter 6 .. . Findings and Conclusions

The effort to establish ethics codes for the profession has been set. The efforts need to

increase and be supported by all sides concerned. Moreover, there needs to be a new step

to stimulate compliance with the ethics code and conceptual and practical feedback to

make the existing ethics code perfect. There are some criteria to improve these

conditions, such as:

1. Control of public accountants by Dep.Keuangan, BPKP, BPP, DPP, and the Public

Accountant Compartment should be increased and properly managed.

2. Severe punishment/sanction of offenders to prevent negative actions.

3. An official statement for public accountants to inform them of the importance of

respecting ethical practice professionally.

4. Continuous up-grading by the W to improve professionalism.

5. The public accountant takes a concrete stap to control their staff violating ethics

codes as much as possible.

Based on the above description it is hoped that offences and violations can be avoided or

at least minimized as much as posible. Finally, the ethics code runs well and effectively

and it can be increased.

Importance of this research

The finding of this exploratory research provides an important contribution to the theory,

the research methodology, and audit practices in Indonesia's companies.


Theoretical Contributions.

This study is a study executed to examine how much further the public accountant can

implement the ethics code as self regulation in applying their duty. To reply to the

questions or describe the cases concerned the researcher uses two analytical methods to

figure out the conditions and problem solving as well as its solution. These are

professional analysis and indvidual analysis.

The theoretical contribution of this study is divided into two parts; first, the theoretical

contribution for a theory uses a professional approach viz the code of conduct

contribution, especially the theoretical contribution of the ethics code as used by the

public accountant. The other theoretical contribution is based on an individual approach.

This contribution relates to the public accountant's awareness on execute how to the

ethics code correctly that is the theoretical contribution that pertains to the individual's

moral development.

Contribution Theory for the Ethics Codes

Analysis of the professional approach uses the standards of the ethics codes as a

measurement to examine the auditor/public accountant. With this approach, it is possible

to review and revise the standards through a comprehensive look at the practical codes of

professional conduct. Thus the standards can be used as an underlying theory for

measuring the degree of an accountant's professionalism.

From this research it can be concluded that the professional approach used to analyze

cases in this study is based upon the basic guidance derived from the standards. The


standards consist of five principles of ethics for the public accountant to use, in order to

regulate and guide the auditors towards achieving professionalism in conducting their

professional activities.

The benefit of the ethical code standards on public accountants is that it increases their

professionalism in the form of obedience and awareness in the implementation of the

code that has been agreed upon by the accounting bodies (IAI). This awareness is

reflected in their effort to increase the ethical behaviour of individuals who are confined

to various norms and values. This obedience and awareness will also create an

effectiveness in applying the ethics code correctly. The standards of the ethics codes as a

regulation contain five principles. They should be set up in such a way that they

accomodate all interests and as regulations have an important role in promoting healthy

practices and satisfying the public interest. The standards of the ethics codes should be

revised and improved continually, so they are fit for the conditions within Indonesian

accounting overall, and serve companies in every category.

Thus, contributions of this research for the ethics codes are;

1. Continually perfecting the ethics codes as a regulation of the accounting body.

2. Validate 5 standards/principles of ethics codes applicable for each category of

companies.

3. Create an effective execution of these ethics codes through obedience to them and

consciously applying them properly.

4. Make the user and auditor/public accountant understand the importance of the

ethics code and clarify its meaning.


5. As a means of controlling their way of work (internal control system for public

accountants in their professional practice).

Contribution for Moral Development Theory

As has been described previously, the other analysis used to solve the problem cases is

individual analysis using the moral theory approach, especially individual moral

development. This is necessary in order to understand the developmental process from

the moral reasoning which automatically forms a basis for the ethical decision making of

the public accountant.

The theory of moral development used in this study is Kolhberg's theory (1982), which

explains that there are three levels of moral development: the pre-conventional level, the

conventional level and the post-conventional level. The contribution of theory derived

from moral development includes the moral contribution gained that creates awareness

and obedience in the application of the ethics code as self regulation for public

accountants based on the standards/principles accepted.

Thus, this theory relates to the public accountants' increasing awareness in conducting

their ethics codes as follows :

1. It creates a formal morality, that is, principles of conscience of the individual,

comprehensive and universal. It bestows a higher value in degree and equality of

rank to an individual's life.

2. The need to express these ethics to the public in order to increase public care, public

alertness, and public awareness.


3. The need for government regulation or intervention and explicit sanctions from the

court oflaw if there is a violation.

4. To increase the public accountant's professional practice.

5. To lead the public accountant towards more ethical behaviour and to be more aware

of the importance of ethics in individual life.

6. To increase awareness of the importance of ethics in business.

Finally, these two contributions, from the professional and the individual, complement

each other as they basically make the same contribution, to advancing the

professionalism of public accountants in relation to the public as their client, based on

their hightened awareness and integrity to not deviate in their practice. Accordingly they

succeed effectively and objectively in serving society.

Contribution Towards Audit Practice in Indonesia's Companies

In this section, the contribution of this study focuses more deeply on two parts, viz the

contribution towards the company/user, especially the financial manager and the general

contribution towards audit practices in Indonesia.

General Contribution Towards Audit Practice in Indonesia.

In the process of this research there are some findings concerning the ethics code

offences in Indonesia, based on DK & PP reports since 1982 - 1996, these are:

1. Publication (an order offering merit, paper advertisement, publishing bulletin KAP).

2. An objective offence (income reducing, marking up financial report)

3. A professional relationship offence.


4. An acceptance of another public accountant's refusal client.

5. Fee competition problems.

6. An accountant's changeable opinion without authentic evidence.

7. A public accountant being accused of being one sided.

Besides the above descriptions there are also some other conditions that influence

offences within the ethics code. These are both external and internal factors. The

externals are:

1. Society's lack of awareness (including public accountant member) to obey the

regulations.

2. The business's wrong practice that prevents public accountant independence.

3. The relatively small fee offered by low and middle level clients for auditing.

4. The small number of clients for public accountants deserving merit, especially in

auditing.

5. The absence of a time limit for hiring a public accountant, particularly for small and

middle scale firms.

6. Generally small and middle firms choosing an auditor from colleagues or friends.

The internal factors are:

I . The lack of awareness to prioritize ethics in running their profession on the part of

W - KAP members.

2. Audit job quality is sometime irresponsible because the auditor concerned is

unqualified.


3. There is no real attention on the part of the public accountant chiefs towards their audit

quality.

4. Prioritising the financial benefit in order to keep the public accountant's popularity.

5. The opinion that ethics has little or no possibility of recognized.

The above factors emerged as the researcher worked with files and paid close attention to

the practice of really embracing the ethics code. It can be argued that these two factors do

not wholly influence the public accountant's work, as there are other unquoted

probabilities. However, by using the two types of analysis previously described a solution

can be expected to overcome offences, or at least minimise deviations. The general

contribution tow~rds audit practices is as follows :

1. Increase and co-ordinate control of public accounting by financial departments,

BPKP, BPP, DPP and the Public Accountant Compartment.

2. Impose severe sanctions for ethics codes offences through the Wand government.

3. Emphasize the importance of the ethics codes and prioritize the professional ethics

codes for public accountants in written form.

4. The code of conduct to be continually upgraded by the W for their members in order

to develop good professionalism.

5. Pay more attention to their staff to press for solutions to the offence as much as

possible.

It is hoped that these five contributions can reduce and stop offences against the ethics

codes in order to reach more ethical conditions in the business world, especially in

Indonesia.


Contribution for Financial Managers

This research can be expected to increase and improve knowledge of accounting and the

importance of ethics in the business world. Moreover, financial managers need to

establish a greater culture of business ethics in their companies, because this condition

can assist in the implementation of accounting and auditing practices by public

accountants that are more acceptable. In addition, financial managers and public

accountants need to know and need to be aware of how important the performance of the

ethics codes as a standard of measurement is in professional audit practice as the

implementation of the ethics codes can add effectiveness and efficiency to their

businesses. Finally, conflict of interests can be minimized quickly.

Methodological Consideration

This is a case study of problems that pertain to a public accountant's ethics code of

practice from a user/company point of view. This research, moreover, supports the

suggestion of using qualitative research in order to learn how public accountants apply

their ethics codes well and effectively.

In this research, a case study is used to explore two aspects of the relationship between

the public accountant and the implementation of their ethics codes. These two aspects are

the key activities and the key factors of the public accountant. These are the key activities

for the development of the public accountant's moral reasoning as the moral agent to

implement the ethics codes consciously. The purpose of key factors performed by the

public accountant and financial manager are building and improving the effectiveness of

the ethics code implementation. By using the case study research method, the researcher


supports the use of the qualitative research method for research into the ethics codes as a

professional standard (Dean, 1997), because the case study is a rigorous research method

for exploring the relationship between individuals such as the public accountant and the

financial manager (Hamel, 1992), and for exploring a business relationship (Kozak and

Cohen, 1997).

The Limitations of the Research

The limitations of this research relate to the Indonesia case study selection. These were;

( 1) there was only one type of general standard audit for the public accountant (SP AP)

available; and (2) the data collection was restricted. The first limitation was because there

is many parts to the standards for audit by public accountants (SP AP) in Indonesia but the

research could only focus on one type of SP AP, viz the ethics codes of the public

accountant

The second reason is that the relationship between the public accountant and the financial

manager of the company is very specific. The major characteristics of most public

accountants in Indonesia are their lack of ethics codes knowledge and lack of awareness

in implementing audit practices. Moreover, the major characteristic of most financial

managers of companies in Indonesia is that they have little knowledge and experience in

understanding and preparing company financial reports. Added to this is the duration of

the relationship between the financial manager and the public accountant in some

categories of companies, particularly, family business companies which range for more


than 5 years, for government companies that have a maximum range of 2 years and for

foreign based companies that have a range of 1-5 years.

The third reason is that only a small number of financial managers had the available time

to be interviewed, and had experience in their areas. Finally, the primary data was

gathered through conducting semi-structured interviews with the financial managers.

Obviously, the researcher could not observe at first hand the actual implementation of the

ethics codes by public accountants in these companies. Therefore, the researcher has had

to accept the statements made by financial managers as correct.

Future Research

This thesis has explored the role of moral reasoning as an influence in the implementation

of the five ethics codes by public accountants. It has focused on two important aspects of

the relationship between public accountants as moral agents and the implementation of

their ethics codes as standards and guidance for professional audit practices. One

important result of this exploration has been a proposed model of moral reasoning to be

used -in the relationship between the professional public accountant and financial

managers. In relation to this model, two major research questions need further research

First, is the research question related to the public accountant professional as to what

extent the role of moral reasoning is needed by the public accountant to achieve

awareness as a practising professional public accountant. For example, whether an


unprofessional public accountant needs a moral level higher than the professional public

accountant in order to audit practices in a company.

Second, is the research question that related to the financial managers as to how a

financial manager manages his/her degree of awareness and builds conditions free of self-

interest. For example, if the performance of a financial manager were poor, how would

she/he maintain his/her degree of awareness and be free of self- interest.

Conclusion

In this research, there are two kinds of analysis used to solve the problem, professional

analysis and individual analysis. Professional analysis describes the cases taking place by

using some assumptions that generally relate to the ethics codes. Assumption 1 shows

how the user's immature perception responds to the public accounting ethics codes.

Assumption 2 implies that the public accountant has a lack of awareness and

understanding of the correct ethical codes' application. In assumption 3, the public

accountant makes use of the user's bewilderment to deviate from the ethics code. With

assumption 4, suitable ethics codes regulations are published for the company level, and

assumption 5 indicates that there is some collusion, corruption and nepotism within the

government public accountant organization itself (BPKP). From these five assumptions it

can be obviously seen that these can cause more offences. For the environment and the

individual these conditions allow both auditor and user to do so. The solution given to

overcome such conditions is to create conducive conditions for ethical behaviour among

public accountants and users, as well as to understand the organization's/company's

Chapter 6 ... Firuiings arui Conclusions

culture. The control, then for public accountant practice comes from the professional

bodies (W), government and society, in general. Finally it is necessary to increase the

public accountant's skill and quality in order to be more professional and to widen the

users' knowledge of the ethics codes as being an advantage.

The second analysis used is an individual analysis emphasising individual moral

development as their basic moral reasoning in choosing a course of action. In this case

there is a choice in executing the ethics codes as a public accountant's self regulation.

These two analyses complement each other. Individual analysis is an analysis used to

measure their moral level in influencing their awareness of their behaviour. The other

analysis is used to grade their moral development level as a personality that has moral

and ethical factors in behaviour pertaining to their professionalism. The two approaches

simultaneously measure and rate the auditor/public accountant in his/her application of

the ethics codes. An auditor/public accountant is the individual part and has his/her

professionalism connected to his/her professionalism. It is a must to measure his/her

ability and inability to use the ethics codes using two approaches, vis the professional

approach as a measurement value to know the level of his/her professionalism in

understanding his/her ethics codes and then by using the individual approach to grade

his/her moral development for giving his/her reasons for behaving morally towards

others.

From these two analyses it is hoped that there is an advantage and that they support each

other for by knowing someone's moral development process their lev.el of awareness in


executing ethics codes will be shown and so the public accountant can use the ethics

codes more effectively and objectively.

Thus, for overcoming the problem of the existence of an auditor's disobedience of the

ethics codes principles it is easier to discover a solution, as there are two sides observed

and discussed, viz. the individual and the professional. If there is an offence it doesn't

imply that the ethics codes are not sufficient or the human is wrong, but that both factors

play the same important role and they influence each other. Finally, the research findings

of this thesis provide useful information for~ (i) Indonesia's accounting body (IAI) which

issues regulations and is continually upgrading the code of conduct for the achievement

of good professionalism of accountants, (ii) the financial manager who needs to build and

improve knowledge of accounting practices, (iii) public accountants who will increase

professionalism in their practices. However, this study has limitations in data gathering

and there is still need for further research.


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Appendix 5.1: List of Interview Questions

Financial Manager Interviewees of Family Business, Government Companies and

Foreign Based Companies

I. General Questions on The Principles of The Code of Conduct (user perceptions)

I . Would you explain your reasons for determining the criteria for auditors or an

auditor firm to perform audit practices in your company?

II. Specific Questions on The Principles of The Code of Conduct (user perceptions)

A. Independence & Objectivity

I. Would you explain your reasons for the increase in objectivity of your auditor in

audit practices?

2. Would you explain how your auditor has been influenced and pressured by the

other institutions (Tax or Bank)?

3. Would you explain your argument about give to prize or reward for your auditor

even if they have some reason?

4. Would you explain how your auditor has a specific relationship with you or your

company?

B. Integrity

I. Would you explain how job quality of your auditor since working contract with

company?

2. Would you explain the service levels of your auditor?

3. Would you explain the level of consistency of your auditor in audit practices?

Appendix

4. Would you explain the re-action of your auditor if he/she have different mind and

accept criticise from financial manager?

5. Would you explain the re-action of your auditor if he/she knows about fraudulent

and cancellations to implementation of the auditing principles?

C. Responsibility and Public Interest

1. Would you explain the responsibility of your auditor to do audit practices for on

duty?

2. Would you explain the responsibility of your auditor with his /her colleagues in

perform audit practices?

3. Would you explain the responsibility your auditor has to him/her self as a

professionalism accountant?

4. Would you explain the responsibility of your auditor to the public (provide quality

of services with suitable fee ; independent auditor to take care integrity and

efficiency in audit practices)?

D. Due care

1. Would you explain the competency, carefully, and diligence of your auditor in

audit practices?

2. Would you explain how your auditor has increased his/her competency?

3. Would you explain to what extent your auditor understands and can resolve the

problems in your company?

E. Scope and Services

1. Would you explain the scope of services of your auditor?

2. Would you explain the scope of services of your auditor that make you the

happiest?

Appendix

Appendix 5.2. : Reasons Companies within determines auditor's criteria to perform

audit practices

Financial Managers Interviewees

The five Financial Managers of "Family

Owned Companies"

The five financial manager of "State

Owned Companies"

The reasons of determines auditor's

criteria

Providing alternatives of criteria's auditor

for serve good services, high loyalties,

care, independent in audit practices with

cheaper fees .

Key reasons:

• Good services by public accountant

(Auditor firm)

• Loyalties, care and independent

• Cheaper fees

• Confidential


based on good professional skill include

limitation time, high integrity, independent

and loyalties in apply their audit report.

Key reasons:

• Professional skill

• High integrity

• Independent

• Loyalties

Appendix

The five Financial Managers of "Foreign

Owned Companies"

Page 260

• Time limitation

• Confidential

• Objective


based on independence of self- interest,

have professional skill, objectivity, and

integrity due to audit practices and take

care with confidentiality.

Key reasons:

• Independence

• Objectivity

• Integrity

• Professional skill

• Confidential

• Responsibility to user

Appendix

Appendix 5.2.1. Summary of Key Reasons for Issuing Auditor's Criteria.

• Good services by auditor (5 interviewees= 33,3%)

• Loyalty ( 15 interviewees = 100%)

• Independent ( 15 interviewees = 100%)

• Care (5 interviewees= 33,3%)

• Cheaper fees (5 interviewees= 33,3%)

• Integrity (10 interviewees= 66,6%)

• Objectivity (10 interviewees = 66,6%)

• Professional skill ( 10 interviewees = 66,6%)

• Limitation time (5 interviewees= 33,3%)

• Confidential ( 15 interviewees = 100%)

• Responsibility (15 interviewees= 100%)

Appendix

Appendix 6.1. Reasons for companies to use the Principles Code of Conduct (Five

Ethics Codes of Public Accountant's in Indonesia) by auditor

A. Independent and Objectivity



Owned Companies"

The five Financial Managers of "State

Owned Companies"

Reasons for Independence & Objectivity

of Auditor

Providing audit practice with fairness,

objective, avoiding relationships that can

make bias of audit, free from relationship

with self-interest and groups,

Key reasons:

• Fairness

• Avoiding the relations that can make

for bias and negative impact on audit

result.

Providing audit practice with

independence, no family and financial

relationship, objective and avoiding any

interest from group and individual. And

also has limitation time maximum 2 years.

Key reasons:

• Fairness

• Objective

• Independence

Appendix


Owned Companies"

Page 263

• No family relations, financial and any

personal interest

• Auditor has limitation time max 2years

to change regularly.

Providing service and audit practice with

fairness to public uninfluenced by others

interest and avoiding conflict of interest or

any personal interest.

Key reasons:

• Fairness

• Objectivity

• Independence

• No family relations, financial and any

personal interest

• No priority towards self-interest and

groups

• Free from conflict of interest.

Appendix

Appendix 6.1.1. Summary of Key Reasons for Independence & Objectivity of

Auditor

• Fairness (15 interviewees= 100%)

• Free from bias and other negative impact (15 Interviewees= 100%)

• Independence (10 Interviewees= 66,6%)

• Objectivity (10 interviewees= 66,6%)

• No relationships with family, business, financial and personal (10 interviewees=

66,6%)

• No priority towards self-interest and groups (10 interviewees= 66,6%)

• Time limitation to change regularly max 2 years (8 interviewees= 50%)

• Free from personality and conflict of interest (5 interviewees= 33,3%)

Appendix

B. Integrity


The Five Financial Managers of "Family

Owned Companies"

The Five Financial Managers of "State

Owned Companies"


Based Companies"

Page 265

Reasons for Integrity of Auditor

Providing audit practices with honestly,

confidentiality and clarity.

Key reasons:

• Honestly

• Clarity

• Fittingness of Financial Report

• Client confidentiality


confidentiality, trusty, clarity and high

loyalty.

Key reasons:

• Honestly

• Clarity

• Confidentiality

• Trusty

• High loyalty


trusty, confidentiality, clarity, high loyalty

to his /her job profession and adhere to the

rules.

Appendix

Key reasons:

• Honestly

• Clarity

• Trusty

• Adhere to the rules

• High loyalty to profession

Appendix 6.1.2. Summary of Key Reasons for Integrity of Auditor

• Honestly ( 15 Interviewees = 100%)

• Clarity (15 Interviewees= 100%)

• Client confidentiality ( 15 Interviewees = 100%)

• High Loyalty to profession ( 10 Interviewees = 66,6 % )

• Fittingness of Financial Report (5 Interviewees= 33,3 %)

• Trusty (7 Interviewees = 45%)

• Adhere to the rule of standards auditing (5 Interviewees= 33,3 %)

Appendix

C. Auditor ResponsibiJity

Financial Manager Interviewees


Owned Companies"


Owned Companies"

Page 267

Reasons for Responsibility of Auditor

Providing audit practices with responsibility

to user (company), punctual to his/her job,

and responsibility to all of services (service

audit and consultant).

Key reasons:

• Responsibility to user (company)

• On time

• Responsibility to all services

Providing audit practices with responsibility

on objectivity of information financial report

to user and public; punctual responsibility of

audit; and responsibility to give client (user)

understanding of financial report

Key reasons:

• Responsible for on time audit practices

• Responsible for user to understanding of

financial report

• Responsible for objectivity of financial

report information to public and user

• Responsible for result of financial report

Appendix

The five Financial Managers of "Foreign- Providing audit practice with responsibility

Owned Companies" to all peoples use financial report (company,

public, investor /creditor); responsible to

maintenance of public trust; responsible to

work relationship with others auditor/ public

accountant, and responsible to public

interest.

Key reasons:

• Responsible for maintenance of public

trust.

• Responsible for work relationship with

others auditor

• Responsible for increase of public

interest

• Responsible to give objective

information to all users Financial report

Appendix

Appendix 6.1.3. Summary of Key Reasons for Responsibility Auditor

• Responsible for user (company) (15 Interviewees= 100%)

• Responsible for other user of financial report (10 Interviewees= 66,6%)

• Responsible for all services (5 Interviewees= 33,3 %)

• Responsible for on time of audit practices (IO Interviewees= 66,6%)

• Responsible for maintenance of public trust (5 Interviewees= 33,3%)

• Responsible for work relationship with others auditor (5 Interviewees= 33,3%)

• Responsible for increase of public interest (5 Interviewees= 33,3%)

• Responsible to give objective information to all users of financial report

(10 Interviewees= 66,6%)

Appendix

D. Due Care

Financial Manager Interviewees


Owned Companies"


Owned Companies"


Based Companies"

Page 270

Reasons for Due Care of Auditor

Providing audit practices with more care,

more diligence, consistence and high

dedication.

Key reasons:

• Carefully

• Di! igently

• Consistently

• High dedication

During their audit practice, auditor has to

careful, diligent, consistent with high

dedication and more professional.

Key reasons:

• Carefully

• Diligently

• Consistently

• High dedication

• More Professional

During their audit practices, auditor/ public

accountant has to careful, diligent,

competent, consistent, high dedication, and

more improved knowledge ability as a

Appendix

professional

Key reasons:

• Carefully

• Diligently

• Competently

• Consistently

• High dedication

• Professional

Page 271

• More improve of knowledge ability

Appendix 6.1.4. Summary of Key Reasons for Due Care of Auditor

• Carefully ( 15 Interviewees = 100%)

• Diligently (15 Interviewees = 100%

• Consistently ( 15 Interviewees = 100%)

• High dedication ( 15 Interviewees = 100%)

• Professional (10 interviewees= 66,6%)

• Competence (5 Interviewees= 33,3 %)

• More knowledge ability (5 interviewees= 33,3%)

Appendix

E. Scope Services of Auditor

Financial Manager interviewees


Owned Companies"


Owned Companies"

Page 272

Reasons for Scope Services of Auditor

Providing other services that support and

furnish information to financial report,

such as; t~x consultation, correcting of

accounting system and other consultations

which relevant to expansion or go public

company

Key Reasons;

• Tax consultation

• Correction of accounting system

• Consultation about expansion

company

Auditor/public accountant has to give

information and consultation about tax

rules, accounting system, and knowledge of

standards of financial report.

Key Reasons:

• Resolve the problem of taxation


• To give guidelines about standards

of financial report

Appendix


Owned Companies"

Page 273

Auditor/public accountant has to give

information about taxation rules,

consultation for make financial report with

right direction standard, and consultation

that relevant with expansion/ go public

company.

Key Reasons:

• Consultation for taxation


• Consultation for expansion I go

public company

• Consultation to make financial

report with right direction

standards

Appendix

Appendix 6.1.5. Summary of Key Reasons for Scope Services of Auditor

• Consultation for Taxation (15 Interviewees= 100 %)

• Consultation for accounting system (10 Interviewees= 66,6 %)

• Correction of accounting system (5 Interviewees= 33,3%)

• Consultation for expansion of company (10 Interviewees= 66,6 %)

• Consultation for financial report with right direction standards ( 5 Interviewees =

33,3 %)

• Consultation for guidelines of standards financial report ( 5 Interviewees = 3 3 ,3 % )

Appendix

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