Thinking about Integrity

You were also advised to think about your own character and integrity— to ask yourself what a person of integrity in a highly ethical community would do in the particular situation. But cognitive biases can get in the way here too. First, if your thoughts about yourself are controlled by illusion rather than reality, how can you make a good decision about your integrity? The basic idea here is that individuals are likely to think positively about their own ethics. They will unconsciously filter and distort information in order to maintain a positive self image. Psychologists know that people have an illusion of superiority or illusion of morality. Surveys have found that people tend to think of themselves as more ethical, fair, and honest than most other people.51 It’s obviously an illusion when the large majority of individuals claim to be more honest than the average person, or more ethical than their peers. It’s a little like Garrison Keillor’s mythical Lake Wobegon, where all the children are above average. There isn’t a whole lot you can do here except try to be honest with yourself. But this kind of illusion can lead to bad decisions—when physicians take gifts from salespeople because they’re sure they’re ethical and their decisions won’t be affected, or when mortgage lenders selling sub prime loans convince themselves that what they’re doing is contributing to the American dream.

Second, the virtue ethics approach suggests that you rely on the ethics of your profession (or other relevant moral community) to guide you. But consider the accounting professionals in recent cases, as when Arthur Andersen auditors signed off on audits that misrepresented the finances of companies such as Waste Management, Enron, and Adelphia

Certified public accountants are supposed to be guided by the AICPA code of professional ethics. The code says that, as professionals, auditors have a responsibility to act in the public interest to provide objective opinions about the financial state of the organization—be free of conflicts of interest, not misrepresent facts, or subordinate professional judgment to others. Given human cognitive limitations, however, this expectation is probably unrealistic. Consider what is likely to go through an auditor’s mind when deciding whether to provide a negative audit opinion on the financial statements of a big client. Auditors work closely with their audit clients, often over a long period of time. By contrast, auditors have no personal relationship with the ‘‘public’’ they are supposed to represent. Therefore, as biased information processors, their thinking is likely to emphasize the potential negative consequences of a qualified (or negative) audit opinion for themselves and the client—not for the public. The negative consequences for themselves and the client are clearer and more immediate. The auditor who offers a qualified audit may very well lose the client (and the money associated with that client) as well as the personal relationships forged over time. On the other hand, the consequences for the public of a qualified audit opinion are more ambiguous and likely spread over more people and time. It isn’t clear how much specific members of the public will gain or lose, especially if the misrepresentation is deemed to be small or unclear. So auditors can easily rationalize a decision that is consistent with their own and their company’s self-interest and downplay the potential consequences to an ambiguous, unknown public.

What is a professional organization to do? It is important to recognize that auditors (and other professionals) are human beings who are affected by cognitive limitations and biases. Given what we know about these biases, here are some potential solutions. First, auditors should be discouraged from developing personal relationships or socializing with their clients. Companies should change auditors every few years to avoid forging such personal ties. Second, audit firms should work hard to sensitize auditors to the likely negative consequences of financial misrepresentation for their own firms and the public. The Enron bankruptcy contributed to huge financial losses to its employees and investors and to the ultimate demise of Arthur Andersen.

Regular attention to the importance of maintaining the integrity and longterm reputation of the audit firm is essential, as is the leader’s role in creating a strong ethical climate. The reward system can be used to send important signals about what’s expected. For example, auditors who turn down client business or risk losing a client by providing a negative audit opinion should be supported and reinforced for doing so. Those auditors who risk the reputation of the firm should be disciplined.