Students in first-year accounting often leave with the impression that the numbers in financial statements are fixed and would be the same regardless who was producing them. This impression is fostered by assignments that always result in a right or wrong answer with no room for variation. Most students understand that GAAP are the set of rules, practices, and conventions that describe what is acceptable financial reporting for external stakeholders, but they may find it surprising that a single, normal, everyday accounting choice may be either ethical or unethical.

The difference between an ethical and an unethical accounting choice is often merely the degree to which the choice is carried out. The problem with many accounting judgments is that there is no clear limit beyond which a choice is obviously unethical. Thus, a perfect routine accounting decision, such as expense estimation, may be illegal if the estimated amount is extreme but perfectly ethical if it is reasonable. GAAP does not tell managers what specifically is normal and what is extreme. It is more like a speed limit sign that just says “Don’t Drive Too Fast!”

Here is an example lecture in six steps that illustrates the role of judgment in ethical financial reporting that you can use in class that any first-year student can understand.

This article is from the Accounting Instructors’ Report, an electronic journal that provides teaching tips and insights to those who teach accounting and other business courses.

Belverd E. Needles, Jr., Ph.D., CPA, DePaul University

Read Teaching Judgment and Ethics in First-Year Accounting: A Good Lecture.