Is It Time for Value-Centered Accounting?

By Zach Sumner – October 10, 2016
Is It Time for Value-Centered Accounting?

I remember learning in college about accounting scandals that rocked the business world. Greed and corruption fueled the rise and fall of Enron, WorldCom, Lehman Brothers and more. 

Learning about the motives of management to perpetrate those schemes was always interesting. More often than not, the glamour of personal wealth drove executives to break laws and put countless people in danger of unemployment. But even with executives presumably knowing the consequences, they still committed crimes. Why is that? Because they assumed what they were doing was only wrong if they were caught.

This view of ethics, by the way, is called consequentialism, the idea that something is right or wrong only based on the consequences. Of course, the problem with such a notion is that how something begins and how it turns out are two different things. Closely related to this ethical theory is utilitarianism, which holds something is right when it produces the greatest amount of good for the largest number of people. 

Of course, comparing two different kinds of good outcomes with each other and quantifying their relative impact is imprecise. Both ethical theories essentially hold that a thing is good when it works out, and bad when it does not.

Both utilitarianism and consequentialism are still held by business leaders today. In fact, an article entitled “In Defense of a Utilitarian Business Ethic” by Andrew Gustafson mentions utilitarianism is “widely used as a business ethic approach.” This leads to an obvious question: If Kenneth Lay had not been caught, and if Enron was somehow able to deliver substantive value to shareholders, would the fraud have been wrong?

Most people would instinctively say, “Of course it would still be wrong.” After all, fraud is fraud. The extraordinarily high level of public trust placed in the CPA profession is there for a reason: the vast majority of accountants, time and again, lead the way on modeling ethical behavior. However, under the circumstances above, utilitarianism and consequentialism would not be able to give such a clear-cut answer. Accounting deserves a vibrant ethicality in order to combat fraud. Enter Immanuel Kant.

Immanuel Kant was a philosopher who studied astronomy, metaphysics and political theory in the 18th century, but his most enduring impact was in ethics. Rejecting consequentialism, Kant advocated for morality based on what he referred to as universality

The concept is simple: If we would not like everyone in the universe doing what we are considering, it is wrong. This heuristic provides a simple way to gauge the propriety of possible actions. Kant would also say that we have a duty, both to ourselves and to those around us, to do the right thing. Kant referred to this as the categorical imperative, meaning the rightness of things can be measured against the moral duty we all have. Under this conception, even speeding would be considered immoral.

In other words, we should never do the wrong thing and we can determine the wrong thing by examining what we would like everyone to do.

So, in the Enron scenario, under Kantian ethics, even if the fraud had delivered value, even if it had enriched shareholders, even if the company had found its footing and never engaged in fraud again, it still would have been immoral. The reason why is simple — we wouldn’t want every company to commit fraud.

Such lively ethicality, were it adopted by the larger business community, would prevent another Enron. How would categorical imperatives and universality specifically effect the accounting world? Let’s call the nexus of Kant and accounting, eschewing the obvious portmanteau, value-centered accounting.

Understand value-centered accounting in theory and as a solution

Ethics has the reputation of being ethereal and is consequently viewed as not being terribly salient. Kantian ethics, however, is very concerned with practical application.

Take, for example, the idea of materiality. On the surface, it makes sense: value exists only in scale. What is valuable to me and what is valuable to a billionaire are likely two different things because the scale is clearly different. 

Kant would likely say the money entrusted to us engenders a responsibility to treat those funds very carefully. After all, we wouldn’t want everyone else in the world being careless with the funds entrusted to them. 

I previously worked for a private company that lived this out: my former boss and her manager once spent an entire afternoon looking for 53 cents. Admittedly, at least from a comparison of cost to benefit, that seems crazy at first. However, I think they understood these weren’t their cents to lose. In addition, imagine what the display of responsibility communicated to their respective staff.

Another aspect of Kantian ethics that could apply to accounting would be having zero tolerance for fraud. This is obviously present in the discipline already, but Kant would also advocate for an environment where staff members feel respected, where there is an atmosphere of teamwork and where people who do the right thing are rewarded. All of these satisfy the idea of universality. Us going out of our way to establish, model and reward ethical behavior is both practical and upright.

Kantian accounting would entail treating vendors well also. Paying people on time seems like a good thing if it happened universally. The old standard of giving a 2 percent discount if an invoice is paid in full within ten days of receipt, with the totality of an invoice being due thirty days from receipt is fine, but imagine if you gave a 1 percent discount if an invoice is paid within five days, with the totality being due 10 days from receipt consistently. Wouldn’t that be great? 

Obviously, firms can make the net thirty framework function just fine, but if we would like our customers to be so forthcoming with payment, perhaps it is an opportunity for us to be those customers to other firms.

Lean budgeting also comes into play. Spending money simply because you do not want it cut from next year’s budget is not an appropriate expenditure. Neither is assuming that because a department got by with so many dollars last year, they can get by with that same number of dollars this year. Both show a lack of concern about the other party’s needs and wants, and neither show a good-faith effort to solve each other’s problems. Universality shows up at inopportune times, doesn’t it?

A final example would be prompt refunds for customers. Have you ever heard those transcripts between customers and representatives from phone companies? They betray a shocking lack of empathy for the customers. The problem is not the policies or procedures: no company is perfect. The problem is the posture of these companies: to be so inflexible is to show that these representatives do not have the best interests of the customer at heart. 

If we requested a legitimate refund from a vendor, we should expect timely processing. Why would we not expect that from ourselves, as much as we can help it?

To conclude, none of this is able to be implemented immediately. If it were, maybe it would ruin the point. The purpose of ethics, like any sort of philosophy, is to struggle, and through the struggle, become better people, leaders and even accountants.

The dictates of the profession are challenging but simple: Ethical conduct, professionalism and competence.

Having poorly-defined ethical theories as foundational philosophies is beneath each of those dictates. If there is any industry which deserves a rock-solid morality more than accounting, I do not know what it could be.


Zach Sumner

Zach Sumner is the logistics coordinator for the E Foundation for Oklahoma in Oklahoma City, Oklahoma. A native of New York, Sumner moved to Oklahoma as a teenager and considers the state to be his adopted home. Sumner, who has been a member for more than one year, completed his Bachelor of Science in Accounting at the University of Central Oklahoma in May 2016.

Originally published in CPAFOCUS, the member magazine of the Oklahoma Society of CPAs. Copyright 2015. All rights reserved.