The American Accounting Association Seven-Step Ethical Decision Model Each case is analysed using a seven-step model, shown below. 1. Determine the facts What? Who? Where? When? How? What do we know or need to know that will help define the problem? Define the ethical issue List the significant stakeholders. Define the ethical issues. Identify the major principles, rules and values (For example; integrity, quality, respect for persons, profit) Specify the alternatives List the major alternative courses of action, including those that represent some form of compromise or point between simply doing or not doing something. Compare values and alternatives – see if there’s a clear decision Determine if there is one principle or value, or combination, which is so compelling that the proper alternative is clear. Assess the consequences Identify the short and long, positive and negative consequences for the major alternatives. The common short run focus on gain or loss needs to be measured against the long-run considerations. This step will often reveal an unanticipated result of major importance.
Make your own decision Balance the consequences against your primary principles or values and select the alternative that best fits. Source: Courtesy of the American Accounting Association.
Application of the American Accounting Association model John Smith, the chief financial officer (CFO) of Dropout Fones Pty Ltd, has discovered a significant misstatement that overstated assets in this year’s financial statements. The misleading financial statements are contained in the company’s annual report which is about to be issued to banks and other creditors. After much thought about the consequences of telling the managing director, Jack Frost, about this misstatement, John gathers up his courage and tells him. Jack says, ‘What they don’t know won’t hurt them. But just so we set the record straight, we’ll adjust next year’s financial statements for this year’s misstatement. We can fix it next year when we make more profit. Just don’t make that kind of mistake again’. Required: Using AAA’s ethical decision model, work through this situation to determine what John should do.