A selection of interesting research and articles we found recently on ethics in accounting and finance.

How fair is actuarial fairness?
Insurance is pervasive in many social settings. As a cooperative device based on risk pooling, it serves to attenuate the adverse consequences of various risks (health, unemployment, natural catastrophes and so forth) by offering policyholders coverage against the losses implied by adverse events in exchange for the payment of premiums. In the insurance industry, the concept of actuarial fairness serves to establish what could be adequate, fair premiums. Accordingly, premiums paid by policyholders should match as closely as possible their risk exposure (i.e. their expected losses). Such premiums are the product of the probabilities of losses and the expected losses.

This article presents a discussion of the fairness of actuarial fairness through three steps: (1) defining the concept based on its formulation within the insurance industry; (2) determining in which sense it may be about fairness; and (3) raising some objections to the actual fairness of actuarial fairness. The necessity of a normative evaluation of actuarial fairness is justified by the influence of the concept on the current reforms of public insurance systems and the fact that it highlights the question of the repartition of the gains and burdens of social cooperation.

Read further: Xavier Landes. 2015. How Fair Is Actuarial Fairness?
Journal of Business Ethics, 128(3), 519-533.

Difficulty and meaning of ethical work for financial controllers

François-Régis Puyou and Eric Faÿ propose a new perspective on the difficulty and meaning of ethical work for financial controllers. This is achieved by drawing on concepts from Michel Henry’s phenomenology of life in the field of business ethics. The French philosopher Michel Henry (1922–2002) is distinguished by his identifying two modes of appearing: ‘intentionality’ (appearing of the world through representations) and ‘affectivity’ (appearing of life). Henry suggests that relying only on abstract representations constitutes a specific ideology that causes individuals at work to ignore the actual experience of being affected, and hinders the appearance of life to guide their actions, in turn hindering ethics. Empirical illustrations are provided by a case study that explores the practices of management accountants in a travel retail corporation.

By observing the empirical practices of management accountants, a body of professionals whose role is largely dependent on information technology, abstraction and technical expertise to trace organisational flows and transactions, the authors shed light on the difficult ethical issues associated with their role of surveillance and control of other managers’ work.

The case study illustrates a wide range of everyday working practices among management accountants. Some convey the impression that they lack empathy and consideration for other individuals, while others engage in close cooperation and ethical practices despite the constraining configuration of their role. A significant result of this research is that it illustrates and interprets, based on Henry’s phenomenology, a wide range of working practices. Consistent with Henry, they argue that the source of business ethics lies beyond professional standards, codes and values.

Further details are at: François-Régis Puyou and Eric Faÿ. 2015. Cogs in the Wheel or Spanners in the Works? A Phenomenological Approach to the Difficulty and Meaning of Ethical Work for Financial Controllers.
Journal of Business Ethics, 128(4), 863-876.


How do CFOs’ incentives and earnings management ethics affect financial reporting?
Despite regulatory reforms aimed at inhibiting aggressive financial reporting, earnings management persists and continues to concern practitioners, regulators, and standard setters. To provide insight into this practice and how to mitigate it, Cathy Beaudoin, Anna Cianci and George Tsakumis  conducted an experiment to examine the impact of two independent variables on CFOs’ discretionary expense accruals.

One independent variable, incentive conflict, was manipulated at two levels (present and absent)—i.e., the presence or absence of a personal financial incentive that conflicts with a corporate financial incentive. The other independent variable was CFOs’ earnings management ethics (“EM-Ethics,” high vs. low), measured as their assessment of the ethicalness of key earnings management motivations. Results showed that incentive conflict and EM-Ethics interact to determine CFOs’ discretionary accruals such that (a) in the presence of incentive conflict, CFOs with low (high) EM-Ethics tend to give into (resist) the personal incentive by booking higher (lower) expense accruals; and (b) in the absence of an incentive conflict, CFOs with low (high) EM-Ethics tend to give into (resist) the corporate incentive by booking lower (higher) expense accruals.

The researchers also found support for a mediated-moderation model in which CFOs’ level of EM-Ethics influences their moral disengagement tendencies which, in turn, differentially affect their discretionary accruals, depending on the presence or absence of incentive conflict. Theoretical and practical implications of these findings are discussed in Cathy A. Beaudoin, Anna M. Cianci and George T. Tsakumis. 2015.
The Impact of CFOs’ Incentives and Earnings Management Ethics on their Financial Reporting Decisions: The Mediating Role of Moral Disengagement.
Journal of Business Ethics, 128(3), 505-518.


Sustained corporate corruption and processes of institutional ascription within professional networks
The last 20 years have seen some of the most dramatic cases of corporate corruption. One of the most striking features of these cases is the inability of professionals and professional firms to recognise and publicise corporate corruption. In this paper, Claudia Gabbioneta, Rajshree Prakash and Royston Greenwood  argue that professionals’ failure to detect corporate corruption may be the result of institutional ascription that occurs within professional networks.

Institutional ascription occurs as professionals ascribe probity and diligence to the behaviour of other professionals, and may contribute to sustain corporate corruption. Understanding the conditions and mechanisms that facilitate—or impede—institutional ascription is thus important and the authors offer suggestions for how this line of research might be advanced.

Read the full-text article for free: Claudia Gabbioneta, Rajshree Prakash and Royston Greenwood. 2014. Sustained corporate corruption and processes of institutional ascription within professional networks.
Journal of Professions and Organization, 1(1), 16-32.


Exposure to unethical practices increases tolerance in small accounting firms
Soheila Mirshekary and Rodney Carr investigate how exposure to unethical practices affects the personal attitude of accountants in small accounting firms towards unethical behaviours. This is an important topic for business because accountants in small accounting firms are in a position to influence the behaviour of the large number of businesses they serve. The main independent variable is a measure of exposure to a variety of different types of unethical practices. A regression involving the exposure variable onto personal attitude is carried out using data from owners/managers of small accounting firms in Australia.

Findings confirm a negative relationship between the amount of exposure and personal attitude towards questionable practices: increased exposure to questionable ethical behaviour is related to an increase in the level of acceptance of unethical behaviour. While such a finding is not unexpected, it suggests that other strategies need to be pursued to encourage ethical behaviour.

More details are at: Soheila Mirshekary and Rodney Carr. 2015. Effects of exposure to unethical practices on the personal attitudes of accountants in small accounting firms.
Journal of Management & Organization, 21(1), 98-106.


Ethics and quantitative finance analysts
Quantitative analysts or “Quants” are a source of competitive advantage for financial institutions. They occupy the relatively powerful but often misunderstood role of modeling, structuring, and pricing complex financial instruments in the capital markets. But Quants often function in a discipline free from ethical burdens. Models used to price complex instruments are usually beyond the mathematical understanding of financial sector participants who rely heavily on the integrity of the Quant who built them.

Although there has been some attempt to cover the ethics of mathematics applied to the capital markets, designing a set of rules to guide the ethical behavior of Quants cannot be made explicit and remains inexpressible. Because Quants generally experience a sense of detachment from moral obligation, there is a growing need to convert moral detachment into engagement. Jason West’s framework is indebted to key elements of Wittgenstein’s practical ethics philosophy and Rawls’ justice principle. The burden of balancing justice as fairness as defined by Rawls with the inability to explicitly articulate ethical rules as defined by Wittgenstein must fall to the Quant. He proposes that the threshold delineating the barrier between ethical detachment and engagement can only be defined by the Quants themselves. It is their moral duty to disclose their level of ethical engagement when their models are put into practice.

See: Jason West. 2015. Quantitative Method in Finance: From Detachment to Ethical Engagement.
Journal of Business Ethics, 129(3), 599-611