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Scott Fleming, Ph.D. CPA CMA Assistant Professor of Accounting College of Business & Economics West Virginia Univers

Scott Fleming, Ph.D. CPA CMA Assistant Professor of Accounting College of Business & Economics West Virginia University Scott.Fleming@mail.wvu.edu office (304) 293-7896 home (304) 636-7669 cellular (304) 614-3573. Ethics: Education of Accounting Students. Two Days of Business Headlines….

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Scott Fleming, Ph.D. CPA CMA Assistant Professor of Accounting College of Business & Economics West Virginia Univers

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  1. Scott Fleming, Ph.D. CPA CMA Assistant Professor of Accounting College of Business & Economics West Virginia University Scott.Fleming@mail.wvu.edu office (304) 293-7896 home (304) 636-7669 cellular (304) 614-3573 A.S. Fleming, Ph.D. CPA CMA

  2. Ethics: Education of Accounting Students A.S. Fleming, Ph.D. CPA CMA

  3. Two Days of Business Headlines… • Ex-WordCom chief, Bernard Ebbers, starts jail term 9/26/2006 • Fastow gets 6 years for Enron role 9/26/2006 • Panel subpoenas 5 investigators for HP hearing 9/27/2006 • Fugitive ex-Comverse Technology CEO nabbed in Namibia 9/27/2006 • Tyson Foods settles discrimination dispute 9/27/2006 • HealthSouth, investors finalize fraud settlement 9/27/2006 Highlights The Importance of Ethics A.S. Fleming, Ph.D. CPA CMA

  4. In Academia Today… Rules & Regulations Post Mortem Analyses Research FOCUS OF TODAY’S DISCUSSION • Codes of Conduct • SOX • Circular 230 • Enron • WorldCom • Global Crossing • Empirical • Case Studies • Behavioral • Multi-Focus Approach To Ethics Education A.S. Fleming, Ph.D. CPA CMA

  5. In The Classroom… We Must Demonstrate And Reiterate “Right” from “Wrong” then Teach Consequences • Legal Outcomes and Instinctive Behavioral Actions A.S. Fleming, Ph.D. CPA CMA

  6. Does This Work? • Study by Mohammad J. Abdolmohammadi (2002)* • Accounting Master Students • Individual ethics • Professional ethics • Business ethics • Using pre- and post- Defining Issues Test Scores (DIT) • Small classes saw greater benefit • Younger students saw greater benefit • Males saw greater benefit Case Study Approach * Ethical training in graduate accounting courses: Effects of intervention and gender on students’ ethical reasoning, Research on Profession Responsibility and Ethics in Accounting, Vol. 10 p. 37 • Significant Change In Students’ Ethical Reasoning Scores A.S. Fleming, Ph.D. CPA CMA

  7. Why Focus on the Behavioral Aspect? • Ethical Dilemmas Are Caused By Actions • These Actions May Be Instinctive, Cultural, etc. • People May Not Know They Commit These Actions • Knowing These Behaviors and Susceptibility To These Behaviors May Prevent Dilemmas A.S. Fleming, Ph.D. CPA CMA

  8. Research Into Ethics and Fraud… Research Reality Society Classroom Cultural Changes & Political Climate • Benefits Students, The Profession, and Ultimately, Society A.S. Fleming, Ph.D. CPA CMA

  9. Divided Fiduciary Responsibilities… Tax Practitioner The Client Auditor The Public Accountant The Firm • Common Theme: Behaviors in Judgment and Decision Making A.S. Fleming, Ph.D. CPA CMA

  10. Prospect Theory… Developed By Daniel Kahneman & Amos Tversky, 1979 Prospect Theory: An Analysis of Decision under Risk, Econometrica, V. 47-2, 263-292 Example 1: Which Would You Choose? Option A 80% chance for $4,000 Option B 100% chance for $3,000 • Developed As An Alternative To Expected Utility Theory A.S. Fleming, Ph.D. CPA CMA

  11. Each Theory Points To A Different Solution… Expected Utility Theory Option A: $4,000 x 0.80 = $3,200 Prospect Theory Option B: $3,000 80 % of the Subjects Chose Option B (76/95), While 20% Chose Option A (19/95) Why? A.S. Fleming, Ph.D. CPA CMA

  12. Now, Add “Framing”… Option A Sure gain of $240 Option B 25% chance to gain $1000 And 75% chance to gain $0 Example 2: EU Value: $240 $250 84% 16% Results: Similar Results In A “Gain” Situation Tversky & Kahneman (1986) Rational Choice and the Framing of Decision, The Journal of Business, V. 59-4, part 2, S251-S278 A.S. Fleming, Ph.D. CPA CMA

  13. What About “Framing” In A Loss Situation? Option A Sure loss of $750 Option B 75% chance to lose $1000 And 25% chance to lose $0 Example 3: EU Value: -$750 -$750 13% 87% Results: Subjects Are Risk Seeking In Loss Situation Tversky & Kahneman (1986) Rational Choice and the Framing of Decision, The Journal of Business, V. 59-4, part 2, S251-S278 A.S. Fleming, Ph.D. CPA CMA

  14. Prospect Theory… People Underweight Outcomes That Are Probable in Comparison To Outcomes That Are Certain Value Losses Gains People Are Risk Seeking in a Loss Situation, And Risk Averse in a Gain Situation A.S. Fleming, Ph.D. CPA CMA

  15. Accounting Research… Taxpayers’ Prepayment Positions and Tax Return Preparation Fees Jackson, Shoemaker, Barrick, & Burton (2005), Contemporary Accounting Research, Vol. 22-2 p. 409 Findings: Tax return preparation fees are higher for taxpayers in positive prepayment positions than for taxpayers in negative prepayment positions • Positive relation to statement above • Stronger for taxpayers who receive refunds that are less than fees than it is for taxpayers who receive refunds that are greater than fees • Stronger for taxpayers in negative prepayment positions than for taxpayers in positive prepayment positions Consistent with Prospect Theory: A.S. Fleming, Ph.D. CPA CMA

  16. Additional Studies… A Note on the Relation between Frames, Perceptions, and Taxpayer Behavior Jackson & Hatfield (2005), Contemporary Accounting Research, Vol. 22-1 p. 145 • Taxpayer frames have a direct effect on taxpayer behavior A.S. Fleming, Ph.D. CPA CMA

  17. Additional Studies… Capital Budgeting with Taxes under Uncertainty and Irreversibility Niemann & Sureth (2005), Jahrbücher für Nationalökonomie und Statistik, Vol. 225-1 p. 77 • Proving neutral tax systems under risk aversion A.S. Fleming, Ph.D. CPA CMA

  18. Additional Studies… An empirical investigation into alternative theories explaining taxpayer behavior Flynn (2003), Drexel University, 173 pages, AAT 3087154 • Initial results do not support house money effect, the breakeven effect, or prospect theory, but shows subjects are inherently conservative A.S. Fleming, Ph.D. CPA CMA

  19. Additional Studies… Tax Evasion and Equity Theory: An Investigative Approach King & Sheffrin (2002), International Tax & Public Finance, Vol. 9-4, pg. 505 • Control questions are consistent with prospect theory, but general results are consistent with expected utility theory A.S. Fleming, Ph.D. CPA CMA

  20. Confirmation Bias… The Influence of Client Preferences on Tax Professionals’ Search for Judicial Precedents, Subsequent Judgments and Recommendations Cloyd & Spilker (1999), The Accounting Review, Vol. 74-3 p. 299-322 Findings: Subjects’ information searches emphasized cases with conclusions consistent with the client’s desired outcome over cases inconsistent with the clients desired outcome Confirmation Bias Can Result in Inaccurate Assessments of Authoritative Support and Lead To Overly Aggressive Recommendations A.S. Fleming, Ph.D. CPA CMA

  21. Additional Studies… The Influence of Biased Tax Research Memoranda on Supervisors' Initial Judgments in the Review Process Barrick, Cloyd, & Spilker (2004), Journal of the American Taxation Association, Vol. 26-1 p. 1 • Supervisors are more persuaded by an unbiased memo for non-appropriate positions • Supervisors are also more persuaded by a biased memo for appropriate positions • Supervisors act to correct confirmation bias by requesting more rework of staff who prepare biased memos than of staff who prepare unbiased memos A.S. Fleming, Ph.D. CPA CMA

  22. Additional Studies… Tax Professional Decision Biases: The Effects of Initial Beliefs and Client Preference Kahle & White (2004), Journal of the American Taxation Association, Vol. 26-Supplement p. 1 • Contrary to the psych literature & previous tax literature (but consistent with the auditing literature), tax professionals act opposite to confirmation bias predictions • Client preference has a more substantial effect on tax professional judgments when the evidence being reviewed confirms the professionals’ initial belief than when it disconfirms their initial belief A.S. Fleming, Ph.D. CPA CMA

  23. Additional Studies… The effect of staff accountant objectivity in the review and decision process: A tax setting Hatfield (2001), Journal of the American Taxation Association, Vol. 23-1 p. 61 • Objectivity judgments made by partner / manager level accountants are influenced by whether the staff accountant’s research report confirms their initial opinion • This affects the manner in which the report is incorporated into a client recommendation • Preference for client-favorable outcomes is found to affect the weight given to staff accountant research reports A.S. Fleming, Ph.D. CPA CMA

  24. Additional Studies… Confirmation bias in tax information search: A comparison of law students and accounting students Cloyd & Spilker (2000), Journal of the American Taxation Association, Vol. 22-2 p. 60 • Law students and accounting students are victims of confirmation bias (in examining information search behaviors) • Law students are less prone to the bias in certain situations • The nature of academic training influences the extent to which researchers are subject to confirmation bias A.S. Fleming, Ph.D. CPA CMA

  25. Game Theory… Developed By John von Neumann & Oskar Morgenstern Theory of Games and Economic Behavior (1944) Organized By John Nash (1950) Prisoner’s Dilemma… Fastow confess don’t confess 10 10 0 20 don’t 20 0 1 1 Skilling A.S. Fleming, Ph.D. CPA CMA

  26. Solution… • The Nash Equilibrium Solution is Confess / Confess • Suppose you are Andy Fastow. If you know the consequences, then you can reason that Skilling can do one of two things: confess or keep quiet. • If Skilling confesses and I don’t, then I will get 20 years. If I confess also, though, I’ll only get 10 years. Confessing is the best option. • If Skilling keeps quiet and I also keep quiet, then I will get 1 year. If Skilling keeps quiet and I confess, though, I won’t get any jail time. Again, confessing is the best option. Fastow confess don’t confess10 10 0 20 don’t 20 0 1 1 Skilling A.S. Fleming, Ph.D. CPA CMA

  27. Studies… Audit Misperception, Tax Compliance, and Optimal Uncertainty Kim (2005), Journal of Public Economic Theory, Vol. 7-3 p. 521 • Research introduces a small amount of uncertainty about the true audit probability • Find a unique equilibrium cutoff point, such that each taxpayer evades if and only if his perceived signal falls below this cutoff • When reducing uncertainty has no cost, the optimal uncertainty is indeterminate • When reducing uncertainty is costly, eliminating all uncertainty can never be optimal • Introducing a small amount of enforcement cost resolves the indeterminacy problem A.S. Fleming, Ph.D. CPA CMA

  28. Additional Studies… Tax Compliance as a Coordination Game Alm & McKee (2004), Journal of Economic Behavior & Organization, Vol. 54-3 p. 297 • Major tool of tax agencies to reduce evasion is the audit of returns • IRS uses “discriminant index function” (DIF) to audit those who deviate about the average • Individuals find it difficult to coordinate on the zero-compliance equilibrium • Pre-game communication (mimicking info in a tax guide) provides a mechanism to coordinate • The IRS can make subtle changes to the audit rule • A DIF rule is often able to achieve high levels of compliance A.S. Fleming, Ph.D. CPA CMA

  29. Belief Revision Model… Developed By Einhorn and Hogarth (1987) The Influence of Information Presentation Order on Professional Tax Judgment Pei, Reckers, & Wyndelts (1990), Journal of Economic Psychology, Vol. 11-1 p. 119 • Study on the effects of information presentation order on tax professionals’ belief revisions about ambiguous tax treatments • Two dimensions studied (1) judgment reasonableness, and (2) recommendation of tax treatment to client • Both dimensions affected by presentation order • Neither is affected by the client preference A.S. Fleming, Ph.D. CPA CMA

  30. Additional Studies… Tax Professionals Belief Revision: The Effects of Information Presentation Sequence, Client Preference, and Domain Experience Pei, Reckers, & Wyndelts (1992), Decision Sciences, Jan/Feb Vol. 23-1 p. 175 • Experienced tax professionals’ belief revisions are affected by the presentation order, but unaffected by the client preference • Inexperienced tax professionals’ belief revisions are affected by the client preference, but unaffected by the presentation order A.S. Fleming, Ph.D. CPA CMA

  31. Additional Ethic / Psychological Areas … Gender Biases Recency / Primacy Effects Group Think Persuasive arguments explanation Stereotypes Non-verbal cues Perseverance bias Lying / deception cues Cultural differences (domestic and international) … And Many More A.S. Fleming, Ph.D. CPA CMA

  32. Additional Studies of Interest… Hume, Larkins, Iyer (1999), On compliance with ethical standards in tax preparation, Journal of Business Ethics, Vol. 18-2 p. 229 Larkins, Hume, Garcha (1997), The validity of the randomized response method in tax ethics research, Journal of Applied Business Research, Vol. 13-3 p. 25 Schisler (1995), Equity, aggressiveness, consensus: A comparison of taxpayers and tax preparers, Accounting Horizons, Vol. 904 p. 76 Cloyd (1995), The effects of financial accounting conformity on recommendations of tax preparers, Journal of the American Taxation Association, Vol. 17-2 p. 50 Schisler (1994), An experimental examination of factors affecting tax preparers’ aggressiveness – a prospect theory approach, Journal of the American Taxation Association, Vol. 16-2 p. 124 Cuccia (1994), The effects of increased sanctions on paid tax preparers: Integrating economic and psychological factors, Journal of the American Taxation Association, Vol. 16-1 p. 41 Newberry, Reckers, & Wyndelts (1993), An examination of tax practitioner decisions: The role of preparer sanctions and framing effects associated with client condition, Journal of Economic Psychology, Vol. 14-2 p. 439 Christensen (1992), Evaluation of Tax Services: A client and preparer perspective, Journal of the American Taxation Association, Vol. 14-2 p. 60 A.S. Fleming, Ph.D. CPA CMA

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