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2002
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
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
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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
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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
Page 3
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,
Chapter 1 .. . Introduction
Page 4
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
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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
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Page6
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
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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.·
Chapter I ... Introduction
Page 8
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
Chapter 1 .. . Introduction
Page 9
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
Page 10
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
Chapter I ... Introduction
Page 11
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,
Chapter 1 ... Introduction
Page 12
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
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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.
Chapter 1 ... Introduction
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)
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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,
Chapter 2 ... Literature Review
Page 17
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
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Page 18
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,
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"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)
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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,
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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.
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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).
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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
Chapter 2 ... Literature Review
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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
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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)
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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,
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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-
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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.
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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
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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
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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
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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
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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
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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).
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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
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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
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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.
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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.
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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
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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
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(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
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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
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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 ).
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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
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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
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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
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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
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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.
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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
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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
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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
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• 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
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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
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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).
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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.
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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
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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
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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
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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
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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,
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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
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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.
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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
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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
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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).
Chapter 2 .. . Literature Review
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.
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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
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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.
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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.
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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.
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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)
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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
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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.
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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.
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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.
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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)
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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.
Chapter 3 ... Research Method
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.
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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)
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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.
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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.
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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
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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
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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.
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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
Chapter 3 ... Research Method
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)
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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.
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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.
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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.
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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
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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
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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
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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
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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.
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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.
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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
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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
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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:
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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".
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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.
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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
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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.
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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,
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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
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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.
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Page 12 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
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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
-
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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.
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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
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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.
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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.
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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.
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Page 134
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
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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.
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Page 136
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.
Chapter 4 ... The !Al and It's Development
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
Page 138
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.
Chapter 5 ... Analysis
Page 139
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.
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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
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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
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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.
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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.
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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
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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%)
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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
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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
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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
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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.
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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
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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.
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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 %
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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 %
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Table 5.9. The reasons for auditor to implement the third ethics code (responsibility) by
FOCs, SOCs and FrOCs (user perception)
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 .
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Table 5.11. The reasons for the auditor to implement the fourth ethics code (due care) by
FOCs, SOCs and FrOCs (user perception)
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%
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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 accounting system
• 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%
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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.
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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.
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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.
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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
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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
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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.
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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
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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
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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
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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
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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.
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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
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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.
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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.
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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.
Secondly, 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 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
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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
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( 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.
Secondly, the five state-owned companies, in the interview result (see-appendix 6.1.3)
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.
Thirdly, the five foreign-owned companies, in the interview result (see-appendix 6.1.3)
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
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(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
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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.
Secondly, the five state-owned companies, in the interview result (see-appendix 6.1.4)
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
Thirdly, the five foreign-owned companies, in the interview result (see-appendix 6.1.4)
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.
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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.
Secondly, the five state-owned companies, in the interview result (see-appendix 6.1.5)
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
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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
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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
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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
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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".
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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
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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.
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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.
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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
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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).
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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
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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).
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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.
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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
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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.
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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
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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
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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
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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
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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
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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)
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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
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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
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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.
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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
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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.
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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
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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.
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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
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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;
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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.
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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.
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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
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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.
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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.
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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.
Chapter 6 ... Findings and Conclusions
Page 229
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.
Chapter 6 ... Findings and Conclusions
Page 230
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.
Chapter 6 ... Findings and Conclusions
Page 231
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
Chapter 6 ... Findings and Conclusions
Page 232
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
Chapter 6 ... Findings and Conclusions
Page 233
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
Chapter 6 ... Findings and Conclusions
Page 234
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
Page 235
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
Chapter 6 ... Findings and Conclusions
Page 236
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.
Chapter 6 ... Findings and Conclusions
Page 237
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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
Page 258
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
Page 259
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
Providing alternatives of criteria's auditor
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
Providing alternatives of criteria's auditor
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
Page 261
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
Page 262
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
Financial Managers Interviewees
The five Financial Managers of "Family
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
The five Financial Managers of "Foreign
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
Page 264
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
Financial Managers Interviewees
The Five Financial Managers of "Family
Owned Companies"
The Five Financial Managers of "State
Owned Companies"
The five Financial Managers of "Foreign
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
Providing audit practices with honestly,
confidentiality, trusty, clarity and high
loyalty.
Key reasons:
• Honestly
• Clarity
• Confidentiality
• Trusty
• High loyalty
Providing audit practices with honestly,
trusty, confidentiality, clarity, high loyalty
to his /her job profession and adhere to the
rules.
Appendix
Page 266
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
The five Financial Managers of "Family
Owned Companies"
The five Financial Managers of "State
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
Page 268
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
Page 269
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
The five Financial Managers of "Family
Owned Companies"
The five Financial Managers of "State
Owned Companies"
The five Financial Managers of "Foreign
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
The five Financial Managers of "Family
Owned Companies"
The five Financial Managers of "State
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
• Consultation for accounting system
• To give guidelines about standards
of financial report
Appendix
The five Financial Managers of "Foreign
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 accounting system
• Consultation for expansion I go
public company
• Consultation to make financial
report with right direction
standards
Appendix
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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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