Gray Areas in Accounting

November 8, 2010 BY danariely

Every profession is bound by written and unwritten rules and policies; some of them are set by organizations while others are an integral part of the occupation you choose. For example, doctors have to swear by the Hippocratic Oath, lawyers cannot divulge any privileged attorney-client conversations, and priests cannot reveal what was said to them in the confessional. The same kind of ethical code exists in the profession of accountancy because it is a means of public service. As Robert H. Montgomery put it, Accountants and the accountancy profession exist as a means of public service; the distinction which separates a profession from a mere means of livelihood is that the profession is accountable to standards of the public interest, and beyond the compensation paid by clients.”

However, accountants are plagued by deep ethical dilemmas – there may be times when their employers ask them to twist and tweak the financial position of the company because they’ve had a bad year. The usual spiel given is that they’re definitely going to rake in the profits in the months that follow and that the deficits that have been covered up this year will more than be taken care of in the years to come. So the accountant is left wondering if he/she should be loyal to their professional ethics or show loyalty to the company that has hired them.

To overcome this type of problems, ethics is taught as a subject when you choose to study accountancy, because you are responsible not just to your employer, but also to the general public who believe in your reports and statements and take important decisions based on your word. An important question here if course is how effective are ethics classes, and even if they are successful how long would their influence last (a week? a month? a year? 2 years?).  It is hard to believe that taking one or two classes on ethnics while studying accountancy is going to have a long term effect, and most likely higher standards and more strict definitions of continuing are needed (and maybe also higher frequency of education).

In other cases accountants are torn between reporting misbehaviors that are going on and between minding their own business – should they open up a can of worms and be at the center of a controversy or just take heart in the fact that they were true to the ethics of their profession? This type of cases present the “action inaction bias” where in general people view their own actions as much more important than inactions – which means that accountants are more likely to care about their own actions than about reporting the actions of others.  Yet, accountants must remember that they are accountable for not just their actions, but also their non-actions, if either tend to affect the public adversely.

Overall the study of accountancy, and understanding its challenges is not only important in its own right, but it also provide an important case from which to view problems of conflicts of interest


This guest post is contributed by Omar Adams, he writes on the topic of online accounting degrees . He welcomes your comments at his email id: omaradams47@gmail.com.

How to commit the perfect crime

June 5, 2010 BY danariely

There is a certain perverse pleasure in contemplating the perfect crime.

You can apply your ingenuity to the hypothetical issues of choosing a target, evading surveillance and law enforcement, dealing with contingencies and covering your tracks afterward. You can prove to yourself what an accomplished criminal mastermind you would be, if you so chose.

The perfect crime usually takes the form of a bank robbery in which the criminals cleverly bypass all security systems using neat gadgets, rappelling wires and knowledge they’ve acquired over several weeks of casing the joint. This seems to be an ideal crime because we can applaud the criminals’ cunning, intelligence and resourcefulness.

But it’s not quite perfect. After all, contingencies by definition depend on chance, and therefore can’t ever be perfectly thought out (and in all good bank-robber movies, the thieves either almost get caught or do).  Even if the chances of being caught are close to zero, do we really want to call this a perfect crime? The authorities are likely to take it very seriously, and respond accordingly with harsh punishment. In this light, the 0.001 percent chance of getting caught might not seem like a lot, but if you take into account the severity of punishment, such crimes suddenly seem much less perfect.

In my mind, the perfect crime is one that not only yields more money, but is one where, if by some small chance you did get caught, no one would care, and the punishment would be negligible.

So, with this new knowledge how would you go about it?

First, the crime would need to be obscure and confusing, making it difficult to detect. Breaking a window and stealing jewelry is too straightforward. Second, the crime should involve many people engaging in the same type of crime so that no one can point a finger at you. This is why looting, though easy to detect, is much more difficult to get a handle on than a single robbery. Third, your crime will need to fall under the shady umbrella of plausible deniability so that if you do get caught, you can always say you didn’t know it was wrong in the first place. With this kind of defense, even if the public cares, the legal system may let you off easy. Moreover, plausible deniability allows you to apologize in the aftermath and ask forgiveness for your “mistake.”

If you really want to go all out, do something you can spin in a positive light, and maybe even create an ideology around it. This way you can then explain how you’re actually on the side of progress. Say, for instance, you’re “providing liquidity” and “lubricating the market” and thereby helping the economy – even if it happens to be by taking people’s money. You can also resort to opaque and promising-sounding language to make your case; you’re “restoring equilibrium,” “eliminating arbitrage” and creating “opportunity” and “efficiency” across the board.

Basically, just bottle snake oil and tell them it will cure, rather than cause, blindness.

Something to avoid, on the other hand, is anything involving an identifiable victim with whom people can sympathize and feel sorry for. Don’t rob one little old lady blind, or any one individual for that matter. It’s part of human nature that we care so much about blue-collar crime, even though the average burglary only costs about $1,300 (according to 2004 FBI crime reports), of which the criminal only nets a few hundred. Crimes like burglaries are the least ideal crime: they’re simple, detectable, perpetrated by a single or just a few people. They create an obvious victim and can’t be cloaked in rhetoric. Instead, what you should aim for is to steal a little bit of money from as many people as possible—little, old or otherwise — it doesn’t matter, as long as you don’t reverse the fortune of any one individual. After all, when lots of individuals suffer just a bit, people won’t mind as much.

So, what is the ideal crime?  Which activity is difficult to detect, involves many people, has plausible deniability, can be supported by an ideology and affects many people just a bit?  Yes, I think you know the answer, and it does involve banks…

Seriously, what we have here is a problem with our priorities. We have tremendous regulations for what is legal and illegal in the domain of possessions and blue-collar crime. But, what about regulations in banking?  It is not that I really think that bankers plan and plot crimes for a living (I don’t), but I do think they are continuously faced with tremendous conflicts of interests, and as a consequence they see reality in a way that fits their own wallets and not their clients.  The recent turmoil in the market is just a symptom of this conflict of interest problem, and unless we remove conflicts of interests from the banking system, we are going to be part of a long stream of perfect crimes.

This blog post first appeared on a website for a new PBS show called Need To Know