The Rational Auditor and Moral Norms: The Code of Ethics for Professional Accountants Lip Service or Self-Binding Agreement?

Abstract

Since the public has vehemently debated financial scandals like Enron or WorldCom numerous articles asked for ethical responsibility from auditors. The financial scandals were also seen as ethical scandals. A Code of Ethics with moral content could be a potential remedy but the crucial question is: Why should a rational and egoistic auditor obey moral norms contained in a Code of Ethics? The paper discusses if moral norms and the Code of Ethics can be justified under the assumption that a Rational Egoist, i.e. a purely selfishoriented individual, has to be convinced. Furthermore, evidence is presented which shows that human behaviour is driven by a mixture of selfish and altruistic motives. For example altruistic sanctions can effectively discipline free-riders in public good experiments. The moral reputation of the auditing profession can be interpreted as an impure public good which has to be protected against free-riders within the profession. Exactly because the empirical evidence shows that the human nature is neither truly altruistic nor truly egoistic there is a need for moral norms in general or a “Code of Ethics for Professional Accountants” in particular, otherwise they would be superfluous. In this sense the Code of Ethics is neither a pure lip-service nor a strict self-binding agreement: The truth lies between these two exterme positions.