Observations of Ethical Perceptions and Professional Rules: The Case of Turkey F.N.Can (Simga) Mugan...

Observations of Observations of Ethical Perceptions Ethical Perceptions

and Professional and Professional Rules: The Case of Rules: The Case of

TurkeyTurkeyF.N.Can (Simga) MuganF.N.Can (Simga) Mugan

Middle East Technical UniversityMiddle East Technical UniversityDepartment of Business AdministrationDepartment of Business Administration

Ankara, TurkeyAnkara, Turkey Vienna Workshops for REPARIS March 14 - 15, Vienna Workshops for REPARIS March 14 - 15,

2006 2006

REPARIS Vienna Workshop March 15-16, 2006 2

Business EthicsBusiness Ethics

►““Clear standards and norms that help Clear standards and norms that help employees to distinguish right from employees to distinguish right from wrong behavior at work”wrong behavior at work”The Ethics Resource Center –The Ethics Resource Center –Sauser,Jr.2005, p.345Sauser,Jr.2005, p.345


What determines ethical What determines ethical behavior?behavior?

►LawLaw►Professional Codes of ConductProfessional Codes of Conduct►Organizational PoliciesOrganizational Policies►Morality – cultural/religionMorality – cultural/religion► Individual traitsIndividual traits


Rules and ApplicationsRules and Applications

►Professional Rules of conduct – what Professional Rules of conduct – what should be doneshould be done

►Auditors / accountants – applying the Auditors / accountants – applying the rules diligently rules diligently Virtue – necessary to apply the rules in Virtue – necessary to apply the rules in

different situationsdifferent situations►HabitHabit►Strength of characterStrength of character►Conflict of interestConflict of interest►CultureCulture


Virtuous AuditorVirtuous Auditor

► The virtuous auditor would make sureThe virtuous auditor would make sure that the research had been donethat the research had been done that there was full understanding of both sides of that there was full understanding of both sides of

the issue the issue that consultation had been done with peers that consultation had been done with peers that things have been discussed with clientsthat things have been discussed with clients that he or she had taken the time to understand that he or she had taken the time to understand

what was going on…what was going on…► The virtuous auditor would consider all of The virtuous auditor would consider all of

the implications of the issue at hand before the implications of the issue at hand before reaching a decisionreaching a decision. . (Libby and Thorne, p.5 (Libby and Thorne, p.5 http://accounting.uwaterloo.ca/ethics/libby-4.dochttp://accounting.uwaterloo.ca/ethics/libby-4.doc


Fundamental PrinciplesFundamental Principles

IFACIFAC► IntegrityIntegrity►ObjectivityObjectivity► Professional Professional

Competence and Competence and Due CareDue Care

► ConfidentialityConfidentiality► Professional Professional

BehaviorBehavior

TURMOBTURMOB► SameSame► SameSame► SameSame

SameSame


Rules- Public AccountantRules- Public AccountantIFACIFAC► Professional Professional

AppointmentAppointment Client acceptanceClient acceptance Engagement AcceptanceEngagement Acceptance Changes in Prof.Appt.Changes in Prof.Appt.

► Conflict of InterestConflict of Interest► Second OpinionSecond Opinion► Fees and remuneration Fees and remuneration ► MarketingMarketing► Gifts and HospitalityGifts and Hospitality► Custody of Client AssetsCustody of Client Assets► Objectivity-all servicesObjectivity-all services► Independence-Independence-

Assurance EngagementsAssurance Engagements

TURMOBTURMOB► Rules are not as Rules are not as

specific as IFACspecific as IFAC

► No rules on second No rules on second opinionopinion

► Similar rules for fees Similar rules for fees and marketing and giftsand marketing and gifts

► No rules on custody of No rules on custody of client assetsclient assets

► samesame► SameSame


Additional Rules StatedAdditional Rules Stated

►forecastingforecasting►unjust competitionunjust competition►employee transfersemployee transfers►expressing opinion on other expressing opinion on other

auditors/accountantsauditors/accountants


Possible PenaltiesPossible Penalties

► Warning – Warning – ► Severe Warning –Severe Warning –► Forcing to forego “sworn” titleForcing to forego “sworn” title► Banned from practiceBanned from practice


Rules – Internal AccountantsRules – Internal Accountants

► IFACIFAC►Defined rules for Defined rules for

professional professional accountants in accountants in business business

► TURMOBTURMOB►No clear-cut rulesNo clear-cut rules


Research on Ethical Sensitivity- Research on Ethical Sensitivity- Research -1Research -1

► Ethical perceptions of auditors and other Ethical perceptions of auditors and other professionals compared using vignettes (Simga-professionals compared using vignettes (Simga-Mugan, Onkal)Mugan, Onkal)

► Auditors-public 66Auditors-public 66► Non-auditors 52Non-auditors 52► using possible threats to fundamental principlesusing possible threats to fundamental principles► Inquired penalties as wellInquired penalties as well

Taken to courtTaken to court PublicizePublicize Forced to quitForced to quit WarnedWarned No penaltyNo penalty


Vignette -1Vignette -1

► Losing clientLosing client COS Inc., a publicly traded company, is one of the most COS Inc., a publicly traded company, is one of the most

important customers of a well-known auditing firm. COS important customers of a well-known auditing firm. COS faces some financial difficulties presently, and its faces some financial difficulties presently, and its managers are planning to survive by borrowing from the managers are planning to survive by borrowing from the banks in the last month of the year. All banks that COS banks in the last month of the year. All banks that COS applied for a loan require audited statements of the year. applied for a loan require audited statements of the year. One of the managers propose the following while One of the managers propose the following while discussing the audit plans with the auditing team:" We discussing the audit plans with the auditing team:" We were planning to acquire LES Co. in December. But they were planning to acquire LES Co. in December. But they are not in a hurry. If we talk to them and postpone the are not in a hurry. If we talk to them and postpone the acquisition until January, we will have more cash at the end acquisition until January, we will have more cash at the end of the year." COS reaches an agreement with LES Co. of the year." COS reaches an agreement with LES Co. After inspecting the financial statements, the auditing After inspecting the financial statements, the auditing company issues company issues an an unqualified opinion.unqualified opinion.



►Deliberate omission of a subsequent Deliberate omission of a subsequent event. Company management omits event. Company management omits information about a planned information about a planned acquisition from its financial acquisition from its financial statements and the auditor, knowing statements and the auditor, knowing this, issues an unqualified opinion. this, issues an unqualified opinion.



►No significant differences between auditors No significant differences between auditors and non-auditors regarding ethical and non-auditors regarding ethical sensitivitysensitivity

UnethicalUnethical EthicalEthical

AuditorAuditor 53% 30.3%

Non-Non-auditorauditor

56.6% 34.0%


Vignette -1 PenaltiesVignette -1 PenaltiesDifferencDifference in e in opinionopinion

AuditorAuditor Non-Non-AuditorAuditor

Taken to Taken to courtcourt

nsns 37.9 %37.9 % 30.8%30.8%

PublicizePublicize nsns 56.1%56.1% 53.8%53.8%Forced to Forced to quitquit

nsns 37.9%37.9% 30.8%30.8%

WarnedWarned nsns 50.7%50.7% 44.2%44.2%

No penaltyNo penalty nsns 24.2%24.2% 30.8%30.8%


Vignette -1 Gender (within Vignette -1 Gender (within accountants)accountants)

SignificanSignificantt

MaleMale FemaleFemale

Ethical Ethical SensitivitSensitivityy

nsns 55.2% (U)55.2% (U) 51.4 %(U)51.4 %(U)

Take to courtTake to court p<0.01p<0.01 56.7%56.7% 22.2%22.2%

PublicizePublicize p<0.02p<0.02 65.3%65.3% 50.0%50.0%Forced to quitForced to quit p<0.05p<0.05 46.7%46.7% 30.6%30.6%




Vignette-2Vignette-2

► Self-interest threat Self-interest threat Sam has been working in K&S auditing firm for the last two Sam has been working in K&S auditing firm for the last two

years. He is married with two kids. Although his wife is also years. He is married with two kids. Although his wife is also working, their monthly salaries are only enough to cover working, their monthly salaries are only enough to cover their monthly expenses. During the audit of one of their their monthly expenses. During the audit of one of their important clients, Tosnini Records, Sam notices that the important clients, Tosnini Records, Sam notices that the sales manager of Tosnini donates little amounts to the radio sales manager of Tosnini donates little amounts to the radio stations in the city to encourage them to play their records. stations in the city to encourage them to play their records. The sales managers tells Sam that all record manufacturers The sales managers tells Sam that all record manufacturers donate to the radio stations, and if Tosnini doesn't they donate to the radio stations, and if Tosnini doesn't they would have been at a disadvantage, and he also states that would have been at a disadvantage, and he also states that although there is a law to prohibit such donations, it is not although there is a law to prohibit such donations, it is not enforced. After listening to his explanations, Sam inspects enforced. After listening to his explanations, Sam inspects the law and its enforcement, and realizes that the manager the law and its enforcement, and realizes that the manager was correct about the enforcement issue, and he decides not was correct about the enforcement issue, and he decides not to tell the issue to his supervisors.to tell the issue to his supervisors.



►Failure to inform one’s supervisor. Failure to inform one’s supervisor. After verifying management’s claim After verifying management’s claim that everyone in the business pays that everyone in the business pays ‘kickbacks’ to get their records played ‘kickbacks’ to get their records played on the radio, staff accountant fails to on the radio, staff accountant fails to inform anyone in his firm about the inform anyone in his firm about the irregular payments he discovered irregular payments he discovered during an audit.during an audit.



► Significant difference between the perceptions of Significant difference between the perceptions of auditors and non-auditors (p< 0.10)auditors and non-auditors (p< 0.10)


AuditorAuditor 72.7%72.7% 15.2%15.2%


64.2%64.2% 22.6%22.6%


Vignette -2Vignette -2DifferencDifference in e in opinionopinion



nsns 25%25% 35.8%35.8%


nsns 33.8%33.8% 34.0%34.0%


No penaltyNo penalty p <0.10p <0.10 22.4%22.4% 28.3%28.3%






nsns 75%75% 71.1% (U)71.1% (U)

Take to courtTake to court nsns 26.7%26.7% 23.7%23.7%

PublicizePublicize nsns 26.7%26.7% 28.9%28.9%Forced to quitForced to quit nsns 33.3%33.3% 34.2%34.2%




Vignette -3 Vignette -3

► Self-review threatSelf-review threat John , CPA, is the partner responsible from the auditing of John , CPA, is the partner responsible from the auditing of

Health Hospital. Auditing procedures were carried out, and Health Hospital. Auditing procedures were carried out, and the manager has prepared his report and proposed to the manager has prepared his report and proposed to issue an unqualified opinion. Sim is working in the issue an unqualified opinion. Sim is working in the consultancy section of the same company, and she is consultancy section of the same company, and she is helping the same hospital to choose a new computer helping the same hospital to choose a new computer system. John is very surprised to see that the hospital is system. John is very surprised to see that the hospital is going to purchase the computer system from an unknown going to purchase the computer system from an unknown company (Rambu). When he tells this to Sim, she says company (Rambu). When he tells this to Sim, she says that this company is faster, more trustworthy and cheaper, that this company is faster, more trustworthy and cheaper, and assures John that the decision was made by the and assures John that the decision was made by the hospital management. During dinner at home that night, hospital management. During dinner at home that night, he learns from his wife that his father in-law is the he learns from his wife that his father in-law is the manager of the company that provided venture capital to manager of the company that provided venture capital to Rambu, and that his father in-law told Sim that John would Rambu, and that his father in-law told Sim that John would be very pleased if Rambu gets the job. Next morning John be very pleased if Rambu gets the job. Next morning John reviews the audit working papers and signs the report.reviews the audit working papers and signs the report.


Vignette- 3Vignette- 3

►Failure to inform client of one’s own Failure to inform client of one’s own conflict of interest. Partner in charge of an conflict of interest. Partner in charge of an audit finds out that his father-in-law’s audit finds out that his father-in-law’s company has loaned money to a new company has loaned money to a new business that has received a major business that has received a major contract from the auditor’s client. He contract from the auditor’s client. He believes that new firm is inexperienced but believes that new firm is inexperienced but says nothing to the client. A bribe is says nothing to the client. A bribe is implied to be forthcoming from the father-implied to be forthcoming from the father-in-law’s company.in-law’s company.



►No significant difference between No significant difference between auditors and non-auditorsauditors and non-auditors


AuditorAuditor 66.7%66.7% 21.2%21.2%


69.8%69.8% 22.6%22.6%


Vignette-3Vignette-3DifferencDifference in e in opinionopinion



p<0.05p<0.05 19.4%19.4% 34.0%34.0%


p < 0.02p < 0.02 29.4%29.4% 49.1%49.1%








nsns 57.1 % (U)

73.7% (U)

Take to courtTake to court nsns 26.7% 13.5%

PublicizePublicize p<0.01p<0.01 46.7% 27.0%

Forced to quitForced to quit nsns 30.0% 28.9%

WarnedWarned nsns 60.0% 57.9%

No penaltyNo penalty nsns 23.3% 21.6 %



► Randy has two clients, Lipo and Hipo, that he Randy has two clients, Lipo and Hipo, that he audits. Hipo has signed a long-term contract audits. Hipo has signed a long-term contract with Lipo, and is now preparing to make a with Lipo, and is now preparing to make a large sum payment to Lipo. Randy knows that large sum payment to Lipo. Randy knows that Lipo is very bad financially. Therefore, Lipo is very bad financially. Therefore, although he knows that this payment will give although he knows that this payment will give a break to Lipo for a while, he thinks that it is a break to Lipo for a while, he thinks that it is a wrong move for Hipo considering the risks a wrong move for Hipo considering the risks involved. As an auditor, Randy informs Hipo involved. As an auditor, Randy informs Hipo about the possible danger.about the possible danger.



►Breach of client confidence. Auditor Breach of client confidence. Auditor divulges confidential information about divulges confidential information about one client to another client.one client to another client.



►No significant differences between ethical No significant differences between ethical perceptions of auditors and non-auditorsperceptions of auditors and non-auditors


AuditorAuditor 42.4% 39.9%


38.9% 50.0%


Vignette -4Vignette -4DifferencDifference in e in opinionopinion



nsns 20.6%20.6% 20.4%20.4%


nsns 20.6%20.6% 29.6%29.6%








p<0.06p<0.06 51.7% (U) 35.1% (U)

Take to courtTake to court p<0.10p<0.10 26.7% 15.8%

PublicizePublicize p<0.07p<0.07 33.3% 15.8%

Forced to quitForced to quit p<0.05p<0.05 26.7% 15.8%

WarnedWarned p<0.03p<0.03 36.7% 23.7%

No penaltyNo penalty p<0.02p<0.02 33.3% 55.3%


Research -2*Research -2*► Sensitivity levels of accounting profession Sensitivity levels of accounting profession

staff to ethical principles examinedstaff to ethical principles examined Honesty and objectivityHonesty and objectivity Professional knowledge and competenceProfessional knowledge and competence ConfidentialityConfidentiality IndependenceIndependence ResponsibilityResponsibility Unjust competitionUnjust competition

► 67 accountants – Izmir67 accountants – Izmir►Questionnaire Questionnaire

* Professional Ethics and the research of sensitivity level of the accounting profession staffs to ethical principles- Ozkol, Kok,Celik,Gonen- Muhasebe ve Denetime Bakis, May 2005 107-124


Research -2 findingsResearch -2 findings►No significant effect ofNo significant effect of

GenderGender Professional titleProfessional title Work experienceWork experience

► Significant association is found between Significant association is found between Honesty and objectivity – and – unjust Honesty and objectivity – and – unjust

competitioncompetition Professional knowledge and competence – and – Professional knowledge and competence – and –

independence ; and unjust competitionindependence ; and unjust competition Confidentiality and unjust competitionConfidentiality and unjust competition

► Best predictors ofBest predictors of Independence-professional experienceIndependence-professional experience Unjust competition – professional experienceUnjust competition – professional experience


Research – 3*Research – 3*►Deviations from principles and the Deviations from principles and the

underlying reasonsunderlying reasons►74 randomly selected accountants out 74 randomly selected accountants out

of 187 in Balikesirof 187 in Balikesir►QuestionnaireQuestionnaire►Main findings:Main findings:

Lack of knowledge of ethical standardsLack of knowledge of ethical standards No significant relation between gender, No significant relation between gender,

income level, education and ethical income level, education and ethical sensitivity levelsensitivity level

* Ethics in the accounting profession, Gul and Ergun, Muhasebe ve Denetime Bakis, January 2004, 53-78


Research - 3Research - 3

► respondents agreed thatrespondents agreed that Reputation is more important than revenueReputation is more important than revenue Professional ethics become more important when Professional ethics become more important when

law can’t provide answerslaw can’t provide answers Virtue becomes more important when the above Virtue becomes more important when the above

two failtwo fail They need show more professional diligenceThey need show more professional diligence They show due care for their legal responsibilitiesThey show due care for their legal responsibilities They experience conflict interest between the They experience conflict interest between the

interest of their clients and the publicinterest of their clients and the public They do not fully believe that their colleagues They do not fully believe that their colleagues

show due diligence in their workshow due diligence in their work


Research -3Research -3► Reasons (in the order of importance) Reasons (in the order of importance)

ClientsClients Laws and regulationsLaws and regulations Cultural valuesCultural values Peer pressurePeer pressure Political viewsPolitical views

► want more guidance/pressure from the want more guidance/pressure from the chambers chambers e.g. unethical members should be banned/expellede.g. unethical members should be banned/expelled Ethical principles established by the chambers – not Ethical principles established by the chambers – not

sufficientsufficient Discourage and eliminate “unrecorded economy”Discourage and eliminate “unrecorded economy” Avoidance of unjust competitionAvoidance of unjust competition


Synopsis of ResultsSynopsis of Results

► IFAC and TURMOB rules similarIFAC and TURMOB rules similar►Virtue – more important than rulesVirtue – more important than rules►Rules with more guidelineRules with more guideline►Gender difference not so significantGender difference not so significant►Needs more educationNeeds more education►Cultural factors need to be reflected in Cultural factors need to be reflected in

the rulesthe rules


EducationEducation

►Who? When? Who? When? ► Principles or Rules?Principles or Rules?

Laws and ethical principlesLaws and ethical principles► Role of university curriculumsRole of university curriculums

Accounting professors or philosophers?Accounting professors or philosophers? Active vs passive learning stylesActive vs passive learning styles

► Role of professional bodiesRole of professional bodies Should emphasize social responsibilityShould emphasize social responsibility Guidance for conflict resolutionGuidance for conflict resolution More trainingMore training

Thank youThank you

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