Accountants Honesty

Accountants’ Honesty

Accountants, like the ones who used to work for Arthur Andersen, are supposed to act as referees between companies and their shareholders. These accountants theoretically ensure that companies honestly report their business activities so shareholders can make informed investment decisions. Accountants, however, are hired by only one team, the companies. Consequently, accountants always face a conflict between their ethical obligations to ensure fair reporting and their desire to win favor by assisting the firms they audit.

Once a few accountants become dishonest, prisoners’ dilemma may ensure that honest bookkeepers are driven from their profession. Imagine a world where all accountants are completely honest. You live in this world and are competing for some auditing business. Would it be so bad if you promised to be a little helpful to some prospective client? After all, accounting rules are ambiguous. Why not promise that if hired, you will shade this ambiguity toward your clients’ interests?

Of course, once a few accountants start being overly helpful, others will have to either alter their ethics or perish. Now, to get a competitive edge you might have to go beyond shading ambiguity. Don’t worry, though: As long as the stock market continues to increase no one is likely to uncover your imaginative bookkeeping.

Dishonest bookkeeping can actually be a dominant strategy for accountants. If everyone else does it, and you don’t, then you will get little business, while if only you do it, then riches await. Of course, if everyone is dishonest, then no one gains a competitive edge, but prisoners’ dilemma could still force all accountants to adopt dishonest practices.

The collapse of Arthur Andersen will do much to solve this accountants’ dilemma. In essence, the SEC and plaintiff lawyers are going to impose the Mafia’s solution to the prisoners’ dilemma whereby the misbehaving player is terminated.