Accounting Theory: Ethical Considerations and Historical Developments

This assignment delves into the ethical challenges faced by accountants, using a case study to illustrate dilemmas between upholding public interest and personal interests. It examines the application of ethical egoism, utilitarianism, and deontological ethics in decision-making, providing a comprehensive analysis of different ethical frameworks. The assignment also traces the historical evolution of accounting, from its early roots in Mesopotamia to the industrial revolution and the development of global standards. It highlights key developments, including the rise of professional organizations, the codification of accounting standards, and the impact of globalization and corporate scandals on the field. Furthermore, it explores how accounting theories have adapted to changing societal needs, from descriptive and process-oriented approaches to more explanatory and future-focused perspectives, with a focus on social responsibility and corporate governance. The assignment concludes by emphasizing the importance of ethical behavior and the evolution of accounting in response to societal changes.

ACCOUNTING THEORY
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Accounting Theory
Question 1
a) Based on the given situation, Joey (the accountant) faces the following ethical dilemmas.
 Upholding public interest or the interest of the organisation
In the given case, it is apparent that if Joey does not misrepresent the financial statements
of the organisation (i.e. Tube), then the banks would not extend financial assistance to the
company and thus the company can potentially face bankruptcy. As a result, there would
be loss of jobs of many people and potentially his own also. However, if Joey does comply
with Mary’s request, then his report would be misleading the bank into lending to a
company which is not financially sound. This could potentially lead to loss incurred by the
bank if it is not able to recover the money.
 Integrity towards profession or Personal interest
Failure to comply with Mary’s request could lead to loss of job. In that situation, Joey
could default on the outstanding mortgage obligations which could result in liquidation of
his house. On the other hand, incorrect representation of financial position and
performance of the company could bring disrepute to the profession. Infact it could
adversely impact the relevance of profession considering the role of trust and integrity.
This could hurt the future prospects of the accounting and audit professionals.
b) Ethical egoism refers to a normative position in ethics whereby it is advocated that moral
agents must act in their own interest or should serve self-interest. This concept is in sharp
contrast with ethical altruism whereby moral agents tend to have an obligation towards
helping others (Collins, 2012).
For the given situation, if ethical egoism is to act as the decision making principle, then
Joey should act in a manner which tends to serve his own interest irrespective of whether
the interest of other stakeholders is met or not. It is apparent that Joey’s self-interest is
served by complying with Mary’s request and thereby presenting a false report to the bank
officials. This would ensure that the company would get the bank loan and hence there
would not be retrenchments nor liquidation. As a result, Joey would continue to be paid

Accounting Theory
and not fired from his job. This will allow her to meet his mortgage obligations and
maintain the status-quo.
c) It is imperative to first define the ethical decision in accordance with utilitarianism. As per
this ethical principle, it is expected that the moral agent should act in a manner which
tends to produce the “greatest good for the greatest number of people” (Ghillyer and
Ghillyer, 2012). For the given situation, it is apparent that there are two decisions namely
to falsify the financial performance of the company or the present the true picture of the
company. The appropriate decision under utilitarianism would be one where the cost
benefit analysis would be favourable.
In case the report is falsified, the company would get the financial assistance and hence
would result in jobs being saved. Additionally, this would extend the benefit to the
respective families of the employees who are offering their services to the company
including Joey. The cost under this option could be the potential loss than the bank would
incur if the company is not able to repay the financial assistance for modernization.
However, it might be possible for the bank to recover some of the money from liquidating
the machines. Further, despite the default, the bank might not file bankrupt assuming that
the exposure would be limited. Hence, the costs seem to be contained especially in the
short run.
On the other hand, in case Joey decides the other alternative, in the short term, there would
essentially be no benefit as there would be significant retrenchments along with potential
liquidation that the firm might enter into. Thus, significant number of jobs would be lost
including his and this impact would extend to their families and also the economic system.
For instance, in case of Joey, loss of job could result in loan default and hence liquidation
of house.
Considering the above analysis, it is apparent that the correct advice based on
utilitarianism would be to falsify the report to the bank so that the much needed financial
assistance for modernisation is provided to the company.
d) In this case, the advice has to be tendered based on deontological ethics. The core belief of
this ethical theory is that people should not be used as means but rather an end in itself.

Accounting Theory
Also, it is essential that the concerned person should act in a manner that the same could
act as a universal law (Collins, 2012).
In the given case, if Joey decides to falsify the report for the sake of his own interest or
organisation’s interest, then as per deontological ethics, in such situation, the others should
also act in this manner. However, if every accountant starts safeguarding their respective
organisational interest in this manner, then there would be mayhem in the financial system
as loan defaults would be huge. Consequently, the banks would be very reluctant to lend
even to genuine businesses and hence expansion of genuine businesses would be adversely
impacted. Additionally, the accounting and auditing profession would also lose their
relevance considering that the trust of the client is paramount for maintaining the utility of
these professions. Hence, it is apparent that falsifying the report would not be an ethical
course of action in this case as this is not an action which can be converted into an
universal law.
Considering the above, the appropriate advice as per deontological ethics would be to
present a report which truly represents the financial performance and position of the
company.
e) The deontological ethical theory would be the most appropriate considering the fact that in
the recent past there have been various instances where the integrity of auditors and
accountants has been compromised. As a result, the action should be such that the
profession and the trust of the users should not be adversely impacted. Also, if Joey
compromises on this one instance, he would be expected to compromise in the future as
well which does not auger well (Ghillyer and Ghillyer, 2012).
Question 2
a) Accounting has been in practice since the Mesopotamian civilisation where it was used as
a recording transactions means and served trade transactions. A major breakthrough in
accounting was achieved in 1494 when Pacioli put in place the double entry system which
forms the basis of modern accounting. Accounting as a field has seen major developments
in the 19th and 20th century owing to the expanded use of accounting not only as a recoding
tool but rather as a tool for decision making (Boyns & Edwards, 2011).

Accounting Theory
A key development in this context was an event named Industrial Revolution which
triggered in England and thereby led to emergence of the first global financial capital i.e.
London. The advent of industrial revolution led to setting up of manufacturing factories
and hierarchical organizations which fuelled the initial demand for accountants as book
keeping gained more importance. The work of the accountants in this era was quite
complex owing to the sudden spurt in the organisational size and the transformation of
accounting from a mere book keeping activity to providing input in order to reduce the
costs associated with manufacturing for maximising profits (Drury, 2016).
This becomes evident from a record available belonging to 1812 which highlights that the
cotton textile mills deployed cost records for the determination of types of manufacturing
costs (namely direct and indirect). As the demands from the accounting field grew, the
need was felt to develop accounting as a full-fledged separate profession. As a result, on
July 6, 1854, 55 Glasgow based accountants which represented the Institute of
Accountants made a petition to Queen Victoria so as to accord a separate professional
status to accounting. At the time, accounting was intermingled with other disciplines such
as actuaries or solicitation. As a result of this, the designation “Chartered Accountant”
found way into the accounting profession (Boyns & Edwards, 2011).
The challenging work environment also led to hosts of academic breakthroughs which
started becoming popular through the medium of books. A case in point was “Factory
Accounts”, a publication which was started in 1887 by an accountant and introduced
various new concepts such as marginal costing. It is noteworthy that this was not the only
publication and there were several publications at the time responsible for disseminating
knowledge at the time. Additionally various professional organisations were also formed
in the different parts of the globe which were dedicated to the profession of accounting
and aimed at providing answers to various challenges existing at the time (Heisinger,
2009).
As the industrial revolution spread to other nations in Europe, US and Japan, a need was felt
to codify the accounting standards so that dedicated subject matter and knowledge can be
created and can also serve towards evolution of field. This quest gained ground in the 20th
century when globalised agencies such as FASB and IASB were put in place so as to serve
the purpose of codification. Also, in the late 20th century, various accounting theories have
also been developed to facilitate research on the subject. With the increase in globalisation at

Accounting Theory
the end of 20th century, the harmonization of accounting standards became necessary which
has led to efforts such as conceptual framework which has minimised the differences between
accounting standards used globally (Drury, 2016).
.
b) The various developments in accounting and underlying regulation is the result of the
changing needs of the society. This is apparent from the limited role that accountants
played in the era preceding the industrial revolution when it was used mainly for recording
of trade transactions. However, due to industrial revolution , big factories came into
existence which produced not only for the domestic market but also for the foreign market
(namely colonies), Since these factories were driven by profit motive, hence the
accountants were needed to advice on lowering cost which led to their expanded role
(Boyns & Edwards, 2011).
Post the independence of the developing countries, there was increased globalisation and
hence it was felt that the global accounting standards should have a common accounting
framework which was named as conceptual framework. Also, in the latter half of the 21st
century, the environment concerns became significant since the accounting standards at
the time exclusively focused only on economic or financial performance. Thus, the need
was felt for social responsibility accounting which aimed at including the environmental
along with social impact of the businesses. These initiatives were in the form of Triple
Bottomline, Global Reporting Initiative and similar other initiatives (Heisinger, 2009).
However, towards the turn of the century, there were a host of corporate scandals and the
need for better corporate governance was felt. As a result, various changes have been
introduced in the accounting profession to minimise the underlying risk of such events as
besides the financial loss suffered by the shareholders, these incidents adversely impacted
the relevance of the accounting discipline (Mansell, 2013).
The various accounting theories have also adapted to the changing societal needs. In the
19th century, the accounting theories were essentially descriptive and were more process
oriented. Also, these were backward looking and lacked a forward looking focus since it
was not required at the time. Besides, the objective of the accounting was enhancing
profitability and thereby the theoretical underpinnings focused to capture various costs in
order to improve the same. This is in sharp contrast with the accounting theories in the

Accounting Theory
latter half of the 20th century which focused on providing explanations rather than just
highlighting the changes. Also, positive theories focused on listing how the accounting
practices should be and are normative in view. Further, the focus of these new theories
was on the future roles in the wake of the ongoing challenges which are being faced
(Drury, 2016).

Accounting Theory
References
Boyns, T. & Edwards, J.R. (2011) A History of Management Accounting, New York:
Roultedge Publications
Collins, D. (2012) Business ethics. Hoboken, New York: John Wiley & Sons.
Drury, C. (2016) Cost and Management Accounting: An Introduction. 6th ed. New York:
Cengage Learning.
Ghillyer, A. & Ghillyer, A. (2012) Business ethics now New York, New York: McGraw-
Hill.
Heisinger, K. (2009) Essentials of Managerial Accounting. 4th ed. London: Cengage
Learning.
Mansell, S. (2013) Capitalism, Corporations and the Social Contract: A Critique of
Stakeholder Theory Cambridge: Cambridge University Press.