ACCOUNTING & INTEGRITY CAPACITY ACCOUNTABILITY

Dr. Joseph A. PetrickExecutive Director

Institute for Business IntegrityWright State University

2007 Dayton Accounting ShowThe Ohio Society of CPAs

May 23, 2007

Raj Soin College of BusinessWright State University

• The only Accounting Department in the country whose students have won the IMA National Case Competition on 5 different occasions.

• Business student teams won the National Intercollegiate Ethics Bowl in 2002 and in 2004 were National runner-up champions.

Agenda

A. Accounting and Rebuilding Stakeholder Trust B. Integrity Capacity Model for Professional Development

1. Accounting Process Integrity Capacity2. Accounting Judgment Integrity Capacity3. Accounting Developmental Integrity Capacity4. Accounting System Integrity Capacity

C. Microeconomic and Macroeconomic Improvements1. Improved Microeconomic Moral

Accountability2. Improved Macroeconomic Moral

AccountabilityD. New Agenda for Responsible Leadership in Accounting

Organizations & Accounting Ethics

• AICPA Standards & JEEP• IMA Standards• Global & Industry Standards• SEC Standards• SOX Accounting Oversight Board• Independence Standards Board (ISB)• State Societies of CPAs & NASBA• Others: GAO, DOL, ASB, FASB

among others.

Corporate Reporting Supply Chain(DiPiazza: PricewaterhouseCoopers, 2002)

Rebuilding Accounting Stakeholder Trust

1. Renewed Spirit of Transparency and Assurance

a. Tier 1: Global GAAP

b. Tier 2: Industry-Based Standards

c. Tier 3: Company-Specific Information

2. Culture of Accountability

3. People of Integrity

Integrity Capacity Theoretical Model

The individual and collective capability for repeated process alignment of moral awareness, deliberation, character and conduct that demonstrates balanced judgment, enhances sustained moral development, and promotes supportive systems for moral decision making.

Instrumental Value of Integrity Capacity

Accounting Integrity Capacity

ReputationalCapital

Sustainable Competitive Advantage, Public Trust & World-Class

Performance

Dimensions of Accounting Integrity Capacity

1. Accounting Process Integrity Capacity

2. Accounting Judgment Integrity Capacity

3. Accounting Developmental Integrity Capacity

4. Accounting System Integrity Capacity

Accounting Process Integrity Capacity

The alignment of individual and/or collective accounting moral awareness, deliberation, character, and conduct on a sustained basis, so that enhanced reputational capital results.

Accounting Process Integrity Capacity

MORAL AWARENESSPerceptionSensitivity

MORAL DELIBERATIONAnalysisResolution

MORAL CHARACTERCognitive Readiness to ActVolitional Readiness to Act

MORAL CONDUCTResponsibleSustainable

Virtues That Build Professional & Organizational Character

1. Intellectual Virtues

2. Moral Virtues

3. Social Virtues

4. Emotional Virtues

5. Political Virtues

Accounting Judgment Integrity Capacity

The balanced and inclusive use of key ethics theories and their subordinated cognate theoretical resources in the analysis and resolution of individual and/or collective accounting moral issues.

Accounting Judgment Integrity Capacity (R2C2)

External

Internal

Control

Flexibility

Achieve Good Results

Follow Right Rules

Build Virtuous Character

Enhance Supportive Contexts

Positive & Negative Zones of Accounting Professional Moral Judgment Integrity (R2C2)

Character

Context

ResultsRules

Negative Zone

AmoralProfessionalism

Negative Zone

Positive ZoneWastes Energy

DisruptsContinuity

DestroysCohesion

OffendsIndividuals

StiflesProgress

NeglectsPossibilities

SlowsProduction

AbdicatesAuthority

CollectsInformation

Maintains Structure Provides Structure

Initiates Action

AcquiresResources

Envisions Changes

FacilitatesInteraction

Shows Consideration

Accounting Judgment Integrity Capacity Based on Four Human Nature Drives

Character

Context

ResultsRules

Negative Zone

AmoralProfessionalism

Negative Zone

Positive Zone

DRIVE TO DEFEND

DRIVE TOACQUIRE

DRIVE TO LEARN

DRIVE TO BOND

Context

Results

Character

Rules

Flexibility

ExternalInternal

Control

(INVOLVEMENT)

(ADAPTABILITY)

(EFFECTIVENESS)

(CONTINUITY)

ACCOUNTING PARTNER EXTREME CONCERN FOR PROFITS

DILBERT CEO LACK OF JUDGMENT INTEGRITY CAPACITY

Ranges of Moral Judgment Evaluation using R2C2 ™

Quantitative Qualitative Anchors Ranges 0 – 1 Extremely Unacceptable

Under-emphasis

2 Unacceptable Under-emphasis

3 Minimally Acceptable Emphasis

4 Below Average Emphasis

5 Average Emphasis

6 Above Average Emphasis

7 Optimal Emphasis

8 Unacceptable Over-emphasis

9 – 10 Extremely Unacceptable Over-emphasis

Judgment Integrity Capacity Graph & Global Accounting Ethics Communication

Accounting Developmental Integrity Capacity

The organizational and extra-organizational cultural cognitive improvement of individual and/or collective accounting moral reasoning capabilities from a stage of self-interested connivance, through a stage of external conformity, and onto a stage of internalized commitment to moral principles.

Accounting Cultural Context: Moral Development Stages

Principled Integrity

Democratic Participation

HOUSE OF COMPLIANCE

HOUSE OF MANIPULATION

Allegiance to Authority

Popular Conformity

Machiavellianism

Social Darwinism

(Conformity)

(Connivance)

HOUSE OF INTEGRITY

(Commitment)

Accounting System Integrity Capacity

The development and alignment of the moral infrastructure within the organization and the shaping of the external moral environment of the accounting organization to provide a supportive context for sound moral decision making.

Internal System Integrity Capacity

Organizational Moral Environment

• Compliance-Based Systems• Prevent Criminal Misconduct

• U.S. Federal Sentencing Guidelines

• Sarbanes-Oxley Act

• Professional Association Standards

• Integrity-Based Systems• Enable Responsible Conduct

Compliance-Based Organization Internal Systems

1. Establish compliance standards and

procedures

2. Assign high level individuals to oversee

program

3. Exercise due care in delegating

discretionary authority

4. Communicate and train

Compliance-Based Organization Internal Systems

5. Monitor, audit, and provide safe reporting system

6. Enforce appropriate discipline with

consistency

7. Respond to offences and prevent

further misconduct

8. Comply with SOX requirements

9. Comply with professional standards

Integrity-Based Organization Internal Systems

1. Moral Leadership at the Top

2. Ethics Needs Assessment &

Compliance Standards in Place

3. Ethics in Strategy and Structure

4. Integrity Steering Committee

5. Statement of Values/Written

Code of Conduct

6. Ethics Policy and Procedure Manuals

Integrity-Based Organization Internal Systems

7. Ethics in Selection, Socialization, and Performance Subsystems

8. Ethics in Appraisal, Rewards/Recognition/Incentive,and Development Subsystems

9. Ethics in Communication Processes and Work Attitudes

10. Ethics Training and Education Programs11. Ethics in Decision-Making/Meeting

Processes

Integrity-Based Organization Internal Systems

12. Organizational Integrity AdvisorResponsibilities

13. Ethics Reporting, Whistleblower Protection and Conflict Resolution Processes

14. Enforcement Processes of Ethical Standards

15. Ethics Monitoring, Auditing & Improving Subsystems

16. Ethics System and Quality Work Process Control and Improvement

External System Integrity Capacity

1. Domestic External Moral Environment• Corruption Elimination and/or Control• Industry & Professional Standards• Proactive Positive Stakeholder Relations &

Triple Bottom Line Accountability

2. Global External Moral Environment• Corruption Elimination and/or Control• Industry & Professional Standards• Proactive Positive Stakeholder Relations &

Triple Bottom Line Accountability

Improved Microeconomic Moral Accountability

A. Individual Accountability Improvement1. Demonstrated Process Integrity Capacity2. Demonstrated Judgment Integrity Capacity

B. Partner Accountability Improvement1. Demonstrated Developmental Integrity Capacity2. Demonstrated System Integrity Capacity

Improved Macroeconomic Moral Accountability Improved Macroeconomic

Moral AccountabilityA. Professional Association/Industry

Accountability Improvement1. More rigorous quality control & enforcement2. Partner with competent stakeholders for reform3. Strengthen accounting professional education

B. Political Economy Accountability Improvement1. Financial markets & statistical variation2. Types of capitalism/forms of economic democracy3. International accounting harmonization

New Agenda for Responsible Leadership in Accounting

• National commission with task forces on improving microeconomic levels of integrity capacity accountability

• International commission with task forces on improving macroeconomic levels of moral accountability

• Integrity capacity building skills in mainstream accounting professional education

ACCOUNTING & INTEGRITY CAPACITY ACCOUNTABILITY

Dr. Joseph A. PetrickExecutive Director

Institute for Business IntegrityWright State University

2007 Dayton Accounting ShowThe Ohio Society of CPAs

May 23, 2007