ACCT 340 Week 4 Individual Research Paper Example

The Going-Concern Paragraph and 140 Jobs: Deontology and Utilitarianism in an Auditor's Hardest Report

Introduction

In late February, the audit senior on a small CPA firm's engagement for a family-owned furniture manufacturer finished her review of the company's cash flow forecast. Sales had fallen 22 percent over two years, the company had breached two covenants on its $6.8 million bank loan and the forecast assumed a refinancing that no lender had committed to. Under the auditing standards, facts like these call into question whether the company can keep operating through the coming year, which would require an emphasis paragraph in the audit report. The owner, whose grandfather founded the company, met with the engagement partner and the senior. He said the bank would read a going-concern paragraph as a reason to call the loan, the company would close and 140 employees, many of whom had worked there for decades, would lose their jobs. He asked them to give the company one more year.

This paper uses that case to compare deontology and utilitarianism, the two ethical theories the course asks students to examine most closely. It argues that a duty-based reading of the AICPA Code clearly requires the going-concern paragraph, and that a careful utilitarian analysis, one that counts every stakeholder and the long-run effects of the decision, reaches the same conclusion, even though a narrow utilitarian count appears to favor the owner's request.

Deontology and the Auditor's Duty

Deontology judges actions by whether they conform to duty rather than by their results. In Kant's formulation, a person should act only on a maxim that one could will every rational agent to follow, and should treat people always as ends and never merely as means (Mintz & Morris, 2019). Micewski and Troy (2007) argue that this duty-based approach gives business ethics a firmer foundation than calculations of outcome, because it holds that some acts are required or forbidden whatever their payoff, and it treats moral agents as responsible for their intentions as well as their results.

Applied to the audit, the categorical imperative asks whether auditors in general could adopt the principle "omit a required disclosure when the client says the consequences would be severe." If every auditor did so, audit reports would lose their meaning, since readers could never know whether a clean report meant the company was sound or that the client had pleaded hardship. The principle cannot be universalized. The second formulation points the same way. Omitting the paragraph would treat the bank, the company's suppliers and any future investors merely as means to the owner's goal, denying them information they rely on to make their own decisions.

The AICPA Code of Professional Conduct expresses these duties in professional terms. Its principles call on members to act with integrity, which requires honesty and candor and does not allow the public trust to be subordinated to personal gain; with objectivity, which rules out conflicts of interest and undue influence; and in a way that serves the public interest, honoring the public trust (American Institute of Certified Public Accountants [AICPA], 2014). An auditor who withheld a required paragraph because the client asked would subordinate the public trust to the client's interest. On a deontological reading, the decision is not close.

Utilitarianism and the Count of Consequences

Utilitarianism, associated with Bentham and Mill, measures an act by what it brings about, so the choice to make is whichever yields the greatest net good for all those affected (Mintz & Morris, 2019). It is attractive in business because it seems practical, and it is the reasoning the owner is implicitly using. A narrow utilitarian count looks like this: the paragraph may trigger the loan's recall, the company may close, 140 employees and their families suffer and the owner's family loses its business. Against that, the benefit of the paragraph is that the bank receives information it might be able to infer anyway. On this count, omitting the paragraph seems to produce more good.

But utilitarianism requires counting all the consequences for all the stakeholders, including those that are less visible. The bank, which lent depositors' money on the strength of audited statements, would be denied information precisely when it most needs it, and if the company failed a year later the bank's loss would be larger. Suppliers extending credit would be misled. The 140 employees might be better served by a bank that negotiates a restructuring now than by a company that hides its condition until its cash runs out. The audit firm would risk its license and its reputation, harming its other clients and staff. Most broadly, every report the firm issues would be worth less if auditors were known to omit paragraphs under pressure. Rule utilitarianism, which asks which general rule would produce the best results if followed consistently, makes this point directly: a practice of honest going-concern reporting produces far better outcomes than a practice of omitting it when clients object. The narrow count weighs 140 jobs against a paragraph; the full count weighs them against the reliability of every audit report the profession issues.

How Accountants Actually Reason

If both theories, properly applied, require the paragraph, why do auditors sometimes yield? Research on ethical judgment suggests that people do not reason with one theory at a time. Reidenbach and Robin (1990) developed a multidimensional ethics scale on which respondents judge an action against several philosophical standards at once, including justice, relativism, contractual duty and consequences. Cohen et al. (1993) validated and extended the scale with accounting and business respondents and found that individuals' ethical evaluations drew on several of these dimensions together. In practice, an auditor facing the furniture maker's owner feels the pull of justice toward the employees, of duty toward the public and of consequences on all sides at the same moment.

The organizational setting matters too. Ponemon (1992) found that moral reasoning scores among accountants in public accounting firms tended to be lower at higher ranks, consistent with firms selecting and socializing people whose reasoning resembled that of their superiors. An audit senior who sees the partner sympathizing with a client may conclude that firm culture favors accommodation. Governance can push back. Carcello and Neal (2000) found that among financially distressed companies, those with a higher percentage of affiliated directors on the audit committee were less likely to receive going-concern reports, which suggests that independence from management helps auditors resist pressure. The furniture maker has no independent audit committee at all, so the auditors' own independence is the only safeguard. For the audit senior, that makes her role larger than her rank. If she documents the evidence of substantial doubt clearly and raises it formally with the partner, the decision is placed on the record, where the firm's quality review and, if necessary, its consultation procedures can examine it.

A Christian Worldview

A Christian worldview shares deontology's insistence that some acts are wrong whatever their consequences, and grounds that insistence in the character of God rather than in reason alone. Scripture describes the righteous person as one who swears to his own hurt and does not change (English Standard Version Bible, 2001/2016, Psalm 15:4), keeping faith even when honesty is costly. Yet a Christian ethic also shares utilitarianism's concern for consequences, especially for the vulnerable. Love for the 140 employees is not irrelevant; it should shape how the truth is told. The auditors can include the paragraph and also urge the owner to approach the bank now with a credible restructuring plan, which may preserve more jobs than delay would. A Christian ethic thus holds duty and care together, rejecting both the cold application of rules and the calculation that permits deception for a good cause.

The comparison also shows where each secular theory needs correction. Deontology, taken alone, can make the auditor's duty feel like an obligation to an abstract rule, satisfied once the paragraph is written. Scripture frames truthfulness as a form of love for one's neighbor, which means the duty is owed to real people, including the bank officer, the supplier and the employee, and it invites the auditor to care about how the truth lands. Utilitarianism, taken alone, can make the employees' jobs a number to be balanced against other numbers. A Christian view refuses to treat any person as a figure in a calculation, which is exactly why it cannot accept deceiving the bank to protect the employees: both are neighbors, and neither may be sacrificed for the other.

Conclusion

The going-concern case shows the strengths and limits of both theories. Deontology gives the auditor a clear answer and the AICPA Code a firm foundation, though it can seem indifferent to the people affected. Utilitarianism takes those people seriously but leads astray when its count is narrow, and reaches the right answer only when it weighs every stakeholder and the long-run value of honest reporting. Research shows that real accountants reason with several standards at once and under organizational pressure, which is why independence and character matter as much as theory. In this case, both theories, properly applied, and a Christian worldview agree: the auditors should include the paragraph, and they should do so with care for the people whose livelihoods depend on what happens next. In practice, that means writing the paragraph accurately and without alarmist language, meeting with the owner to explain why it is required and encouraging an early, candid conversation with the bank. The paragraph is not a verdict on the company's future; it is an honest statement of present uncertainty, and honest statements give everyone, the employees included, the best chance to respond.

References

American Institute of Certified Public Accountants. (2014). AICPA code of professional conduct. Author.

Carcello, J. V., & Neal, T. L. (2000). Audit committee composition and auditor reporting. The Accounting Review, 75(4), 453-467. https://doi.org/10.2308/accr.2000.75.4.453

Cohen, J., Pant, L., & Sharp, D. (1993). A validation and extension of a multidimensional ethics scale. Journal of Business Ethics, 12(1), 13-26. https://doi.org/10.1007/BF01845782

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Micewski, E. R., & Troy, C. (2007). Business ethics: Deontologically revisited. Journal of Business Ethics, 72(1), 17-25. https://doi.org/10.1007/s10551-006-9152-z

Mintz, S. M., & Morris, R. E. (2019). Ethical obligations and decision making in accounting: Text and cases (5th ed.). McGraw-Hill Education.

Ponemon, L. A. (1992). Ethical reasoning and selection-socialization in accounting. Accounting, Organizations and Society, 17(3-4), 239-258. https://doi.org/10.1016/0361-3682(92)90023-L

Reidenbach, R. E., & Robin, D. P. (1990). Toward the development of a multidimensional scale for improving evaluations of business ethics. Journal of Business Ethics, 9(8), 639-653. https://doi.org/10.1007/BF00383391