Ethical Theory For Fraud Examiners

Ethical Theory for
Fraud Examiners
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ETHICAL THEORY FOR FRAUD EXAMINERS
TABLE OF CONTENTS
I. INTRODUCTION
Why Study Ethics? ....................................................................................................................... 1
Review Question .......................................................................................................................... 2
II. WHAT IS ETHICS?

A Definition of Ethics ................................................................................................................. 3
Ethical Problems ................................................................................................................... 3
Ethical Behavior .................................................................................................................... 4
Review Questions......................................................................................................................... 5
III. ETHICAL DECISIONS

Reflective Choice.......................................................................................................................... 6
Sources of Ethical Guidance ............................................................................................... 6
An Ethical Decision-Maker’s Role ..................................................................................... 7
Review Question .......................................................................................................................... 8
IV. MORALITY, ETHICS, AND LEGALITY

The High Road ............................................................................................................................. 9
Moral Philosophy ......................................................................................................................... 10
Legality ........................................................................................................................................... 10
The Complete Picture.................................................................................................................. 11
Review Question .......................................................................................................................... 12
V. MEANS AND ENDS ......................................................................................................... 13
VI. VALUES AND PRINCIPLES

Values ............................................................................................................................................. 14
Principles ....................................................................................................................................... 15
Review Question .......................................................................................................................... 16
VII. THE IMPERATIVE PRINCIPLE

Review Question .......................................................................................................................... 20
VIII. THE UTILITARIAN PRINCIPLE

The Role of Values in Utilitarianism ......................................................................................... 22
Act Utilitarianism .................................................................................................................. 22
Rule Utilitarianism ................................................................................................................. 23
Utilitarianism and Fraud ....................................................................................................... 23
Review Question .......................................................................................................................... 24
Ethical Theory for Fraud Examiners i

ETHICAL THEORY FOR FRAUD EXAMINERS
IX. THE GENERALIZATION PRINCIPLE

Limitations of the Generalization Principle ............................................................................. 26
A Practical Application of Generalization ................................................................................ 27
Review Question .......................................................................................................................... 29
X. SOME CONCLUDING REMARKS

Four-Step Test .............................................................................................................................. 30
Review Question .......................................................................................................................... 31
SOLUTIONS TO REVIEW QUESTIONS

I. Introduction .............................................................................................................................. 32
II. What Is Ethics? ....................................................................................................................... 33
III. Ethical Decisions................................................................................................................... 34
IV. Morality, Ethics, and Legality .............................................................................................. 35
VI. Values and Principles ............................................................................................................ 36
VII. The Imperative Principle .................................................................................................... 37
VIII. The Utilitarian Principle .................................................................................................... 38
IX. The Generalization Principle ............................................................................................... 39
X. Some Concluding Remarks ................................................................................................... 40
FINAL EXAMINATION....................................................................................................... E-1
ii Ethical Theory for Fraud Examiners

Introduction
I. INTRODUCTION
As a fraud examiner, the decisions you make will be extremely important to your client or
company, as well as to the individuals you may be called upon to investigate. Therefore,
Certified Fraud Examiners are held to a very high ethical standard. The material in this
course is designed to aid CFEs by providing an explanation of ethics in general, as well as a
discussion of several specific behavioral and ethical principles applicable to both
organizations and individuals.
Why Study Ethics?

Two types of ethics operate in the professional environment—general ethics (the spirit)
and professional ethics (the rules). In their book The Philosophy of Auditing, Robert K. Mautz
and Hussein A. Sharaf contributed the following thoughts to the association of general
ethics and professional ethics:
The theory of ethics has been a subject of interest to philosophers since the beginnings of
recorded thought. Because philosophers are concerned with the good of all mankind, their
discussions have been concerned with what we might call general ethics rather than the ethics
of small groups, such as the members of a given profession. We cannot look, therefore, to
their philosophical theories for direct solutions to our special problems. Nevertheless, their
work with general ethics is of primary importance to the development of an appropriate
concept in any special field. Ethical behavior in auditing or in any other activity is no more
than a special application of the general notion of ethical conduct devised by philosophers for
people generally. Ethical conduct in auditing draws its justification and basic nature from
the general theory of ethics. Thus, we are well-advised to give some attention to the ideas
and reasoning of some of the great philosophers on this subject.
Understanding the importance of ethical behavior is vital for the fraud examiner, whose
primary function is to aid in the prevention and detection of fraud. In practical terms,
ethics involves making the right decision even when one’s actions are not under scrutiny.
Fraud examiners must be able to make the correct choices in times of pressure, especially
when there is no one to answer to but themselves.
Ethical Theory for Fraud Examiners 1

Introduction
Review Question
1. What are the two types of ethics that operate in the professional environment?
A. Personal ethics and professional ethics
B. General ethics and situation-specific ethics
C. General ethics and professional ethics
D. Primary ethics and secondary ethics
2 Ethical Theory for Fraud Examiners

What Is Ethics?
II. WHAT IS ETHICS?
Contrary to popular opinion, the field of ethics is not primarily concerned with rules and
moral codes. Ethics as a branch of philosophy has been developing since ancient times as a
way to clarify how people interact with one another, and how they should interact. The Greek
word ethos, from which the term ethics is derived, refers to how other people regard a person’s
character; people have strong ethical standing if they’re well esteemed by others. Similarly,
people generally judge the rightness of their actions by imagining them through the eyes of
their peers. The focus of any ethical system, then, involves seeking the best way for people
to deal with each other.
By this definition, an ethical life is a social life. Certainly, the decisions about how to behave
are made by individuals. But the evaluation of those acts occurs socially. Even our most
private feelings about ourselves are affected by the approval—or disapproval—of others.
A Definition of Ethics
In A Critical Introduction to Ethics, Philip Wheelwright defined ethics as:
That branch of philosophy which is the systematic study of reflective choice, of the standards
of right and wrong by which it is to be guided, and of the goods toward which it may
ultimately be directed.
This definition contains three key elements:

• Ethics involves questions requiring reflective choice (decision problems).
• Ethics involves guides of right and wrong (moral principles).
• Ethics is concerned with values (goods) inherent in ethical decisions.
Ethical Problems
What is an ethical problem? A problem situation exists when you must make a choice among
alternative actions and the right choice is not absolutely clear. An ethical problem situation is a
problem situation in which the choice of alternative actions affects the well-being of other
people, whether individually or collectively.

What Is Ethics?
Ethical Behavior
What is ethical behavior? There are two standard philosophical answers to this question: (1)
ethical behavior is that which produces the greatest good, and (2) ethical behavior is that
which conforms to moral rules and moral principles. The most difficult problem situations
arise when two or more rules conflict or when a rule and the criterion of “greatest good”
conflict.

What Is Ethics?
Review Questions
1. The field of ethics is primarily concerned with rules and moral codes.
A. True
B. False
2. Which of the following is NOT one of the three key elements of Wheelwright’s
definition of ethics?
A. Ethics involves questions requiring reflective choice (decision problems)
B. Ethics involves unconditional standards that apply to all situations (absolute values)
C. Ethics involves guides of right and wrong (moral principles)
D. Ethics is concerned with values (goods) inherent in ethical decisions

Ethical Decisions
III. ETHICAL DECISIONS
Reflective Choice
One of the key elements in ethics is reflective choice. Ethical problems almost always involve
projecting yourself into a future in which you have to live with your decisions. Professional
ethics decisions usually turn on these questions: “What written and unwritten rules govern
my behavior?” and “What are the possible consequences of my choices?” At its core, ethics
is about studying or reflecting on a choice before making it and deciding “Is this the right
course of action or the wrong one?”
Sources of Ethical Guidance

Conscience
We could dispense with any discussion of ethical theories and rules if we were willing to
accept a simple proposition: “Let conscience be your guide.” Such a rule is appealing
because it calls upon an individual’s own judgment, which might be based on wisdom,
insight, adherence to custom, or an authoritative code. However, it might also be based on
caprice, immaturity, ignorance, stubbornness, or misunderstanding.
Customs
In a similar manner, reliance on the opinions of others or on the weight of opinion of a
particular social group is not always enough. Another person or a group of people might
perpetuate a custom or habit that is wrong. (Think about the signboard that proclaimed:
“Wrong is wrong, even if everybody is doing it.”) To adhere blindly to custom or group
habits is to abdicate individual responsibility. Thus, the function of ethical principles and
rules is not to provide a simple and sure answer to all of life’s problems, but to provide some
guides for individual decisions and actions.
Colleagues
Although external influences should not be the sole source of one’s ethical choices,
consulting colleagues can prove beneficial in certain moral dilemmas. This is especially true
for the Certified Fraud Examiner. When faced with an ethical challenge, the best sounding
board is often another professional who has no personal interest in the situation and can
offer honest opinions on how it should be handled. Advice from a respected, unbiased
professional can be an invaluable resource.

Ethical Decisions
Codes of Ethical Conduct

Why does an individual or a group need a code of ethical conduct? While it has been said
that a person should be upright and not be kept upright, a code of conduct serves a useful
purpose as a reference and a benchmark. A code makes explicit some of the criteria for
conduct particular to a profession. In this way, codes of professional ethics are able to
provide some direct solutions that might not be available from general ethics theories.
Like professionals in many other fields, CFEs are required to adhere to an explicit code of
ethical conduct—the Certified Fraud Examiner Code of Professional Ethics.
(http://www.acfe.com/about/cfe-rules.asp?copy=ethics)
Furthermore, an individual is better able to know what the profession expects when a code
of ethical conduct is in place. From the viewpoint of an organized profession, a code is a
public declaration of principled conduct and a means of facilitating enforcement of
standards of conduct. Practical enforcement and profession-wide internal discipline would
be much more difficult if members were not first put on notice of the standards.
An Ethical Decision-Maker’s Role

While one of the main purposes of ethics is to guide the actions of individual decision-
makers, the role of decision-maker does not fully describe a professional person’s entire
obligation. Each person acts not only as an individual, but also as a member of a profession
and as a member of society. Hence, fraud examiners also are spectators (observing the
decisions of colleagues), advisors (counseling with co-workers), instructors (teaching students or
new employees on the job), judges (serving on disciplinary committees), and critics
(commenting on the ethical decisions of others). All of these roles are important in the
practice of professional ethics.
In considering general ethics, your primary goal is to arrive at a set of acceptable methods
for making ethical decisions to fulfill all your roles. Consequently, an understanding of some
of the general principles of ethics can serve as background in understanding the ethical
decisions faced by CFEs, as well as the ethical guidelines provided in the Certified Fraud
Examiner Code of Professional Ethics.

Ethical Decisions
Review Question
1. Which of the following is a source of ethical guidance?

A. Customs
B. Colleagues
C. Codes of conduct
D. All of the above

Morality, Ethics, and Legality
IV. MORALITY, ETHICS, AND LEGALITY
Is it all right to lie to catch a crook? Consider the following story about a fraud examination.
Abel, a fraud examiner, was hired by Megacorp, Inc., to discover the method stockroom
employees were using to steal electronic parts from the inventory. Abel was given a cover
identity known only to the president of Megacorp. His application was processed through
the personnel department in the normal manner, and he was hired as a stockroom clerk.
On the job, Abel preserved his false identity, infiltrated the group responsible for the thefts,
and produced sufficient evidence to have three people arrested and indicted.
While this story involves only one type of fraud (embezzlement) and one investigation
method (undercover work), it can serve as a simple example of the moral, ethical, and legal
issues facing fraud examiners. These issues involve principles of moral philosophy, rules of
ethics, legal considerations, values, and—above all—the problem of distinguishing right
from wrong. One executive, upon taking office, told the board of directors that his would be
an ethical administration, saying: “It is very simple. All it takes is knowing the difference
between right and wrong.” But knowing that difference is often the hardest part.
The High Road

Most public and many private discussions of ethics quickly become philosophical, reaching
toward lofty principles and broad generalizations about desirable behavior. People easily cite
well-known guides and believe the ideas in them should never be violated. Such discussions
often take place in a vacuum, apart from real-world situations. People generally exhort
themselves and others to observe the highest principles of moral behavior.
Such considerations—the high road—are necessary if we desire to lift the discussion above
the nitty-gritty facts of everyday problems. However, the idealistic nature of this level of
discussion is often not sufficient to help people cope with a problem immediately at hand.
The high road is the realm of moral philosophy where philosophical principles guide the
process of thinking about problems and distinguishing right from wrong. Such principles are
necessary in the process of everyday life. Even though an individual might not know them in
all the twists and turns familiar to philosophers, their fundamental precepts are well

understood in our concept of “common sense.” We will explore three of these basic
principles of moral philosophy later in this course.
Moral Philosophy
Moral philosophy exists at a global level, permeating all facets of the problems of
distinguishing right from wrong. The field deals with human judgments based on standards
that identify good and evil. These words mean more than just right and wrong, but they convey
essentially the same idea. There are two aspects of moral philosophy that are important for
fraud examiners to consider. The first is the human judgment process, which deals with ways
of performing analyses of (i.e., thinking about) problems. The second is the standards or
values—such as honesty, faithfulness, and unselfishness—that people can use to make moral
principles useful.
Ethics can be distinguished from moral philosophy by its roots in society. People are usually
more comfortable talking about ethics than moral philosophy because ethics seems practical
while moral philosophy seems theoretical and impractical. Ethics generally refers to a
specific setting—a society, culture, nation, profession, or small group. In this context, ethics
refers to behavior that conforms to some societal norms or to a written code of ethics, such
as the Certified Fraud Examiner Code of Professional Ethics.
Legality
When faced with an ethics-related problem, it is appropriate to begin the analysis of a
possible action by asking: “Is it legal?” Such analysis is at the most practical level. Ethics is
somewhat less global and is connected to the setting. The law deals very specifically with
actions that are permitted and actions that are prohibited. With all due respect to the law, it
is the lowest reference level for moral decisions. It happens, though not frequently, that a
law might permit an action that is prohibited by a profession’s code of ethics. Going one
step further, a profession’s code of ethics might permit actions that a moral philosopher
would abhor. Likewise, laws and codes of ethics might prohibit actions that present no
problem in moral philosophy.

In other words, the relationship between the law and ethics is not always black and white.
Laws, rules, and regulations function as standards by which to judge whether an action is
acceptable or illegal; however, from an ethical perspective, the legality of a certain behavior
does not necessarily make that behavior right. For instance, if you have promised an
individual that you will honor a contract, you are ethically bound to do so, regardless of your
legal responsibility. In this case, keeping your word is the right thing to do, no matter what
the law says.
The Complete Picture

All three areas—morality, ethics, and legality—are important for everyday decisions. It might
not be enough to know that a contemplated action is legal or that it is permitted or
prohibited by a group’s written code of ethics. And, while helpful, it might also not be
enough to know that reasoning based on moral philosophy seems to identify that action as
right or wrong. The important things to know are the distinctions between morality, ethics,
and legality (i.e., between the philosophy, the rules, and the law). Only with this knowledge
can a fraud examiner know where he stands when deciding upon and justifying a course of
action.
Note: This course observes one important limitation. It confines its consideration of ethics
for fraud examiners to matters of moral philosophy, rules of ethics, and general values. It
does not deal with detailed matters of the law or with questions about the legality or illegality
of actions a fraud examiner might take. This is not to say that the law is unimportant; it is
just beyond the scope of this course.

Review Question
1. ____________ is the realm of moral philosophy where philosophical principles guide

the process of thinking about problems and distinguishing right from wrong.
A. The path of least resistance
B. The moral pedestal
C. The high road
D. None of the above

Means and Ends
V. MEANS AND ENDS
Everyone knows some saying like: “The ends justify the means,” or “Fight fire with fire.”
Fraud examiners can be particularly influenced by this idea because they need to deal with
people who do not exercise moral reasoning, follow ethical rules, or keep within the law.
These sayings have the purpose of justifying actions that could otherwise be considered
immoral, unethical, or illegal.
When a moral rule appears to be inflexible, people can always think of situations in which
they want to justify breaking the rule. For example, some people would easily conclude that
it is all right to lie to catch a crook. After all, if the moral rules were followed by everyone,
then there would be no crooks; thus, the fraudster’s dishonesty made it necessary for the
fraud examiner to lie in return. The ends (catching crooks and upholding justice) justify the
means (lying).
The problem with means-ends analyses is that they are often superficial, ending with the
needed justification but failing to consider other aspects and consequences of the actions.
The justification of the undercover role of the fraud examiner must be carefully considered.
In the previous example, the president of Megacorp must think about the moral, ethical, and
legal climate of the company once it becomes known that an undercover agent was
employed. (How many more are around? What happened to trust?)

Values and Principles
VI. VALUES AND PRINCIPLES
There is a great difference between values and principles in moral thinking. Values are the
criteria for “good” and “evil.” Principles, on the other hand, are the means of analysis—the
ways of thinking about moral problems. To a certain extent, people can exercise moral
thinking using a principled approach. In the end, however, values necessarily enter into the
process.
Values
Many people assert that ethics cannot be taught. In large part, they mean that values cannot
be taught. Values are personal and social criteria that are learned and internalized through a
wide variety of influences—family, social status, peer groups, national origin, and the like. At
any given time and place, some values are more widely held than others are. Additionally,
some values are more strongly held by people who are older, wealthier, poorer, more
religious, or more experienced.
Discussions about values often lead to moral relativism, commonly translated as “When in
Rome, do as the Romans do.” Moral relativism denies the existence of absolute values that
have not changed over time and among cultures. For example, slavery was accepted as part
of the social order in the Greek and Roman empires with little dissent. A moral relativist
might say that slavery in ancient Greece was ethical because it was accepted, while a moral
absolutist would say that slavery should never be considered morally right at any time in any
place.
Thinking about values brings up the question of whether there are any natural values or
whether all values are fabricated by convention, i.e., by local general acceptance. Protagoras,
one of Socrates’ contemporaries, held thus: “Man is the measure of all things.” This saying
means that there is no natural morality, justice, or law; nothing in these realms is objectively
true or false. Yet, people have continually sought some bedrock of absolute truth.
Protagoras’ epigram is said to be “widely scorned.” Fraud examiners are no exception to the
search for constant values that will help solve ethical problems.

Principles
A principle, as the term is used in this course, is a method to analyze moral and ethical
problems and to reach a decision. The following sections provide abbreviated explanations
of three famous ethical principles—the imperative principle, the utilitarian principle, and the
generalization principle. These principles are concerned with moral decisions made by
following rules, considering consequences, and generalizing rules and consequences,
respectively. As a method, each of them can be explained up to a point without reference to
values. Ultimately, however, values need to be taken into account.
These three principles have withstood time, scrutiny, criticism, scholarly commentary, and
other forces that sink many lesser philosophical thoughts into obscurity. You will find that
they also contain many elements generally considered common sense, and elements to which
your reaction might be: “Yes, I already understood that.” So much the better when logic,
philosophy, and common sense are in accord.

Review Question
1. ___________ are the criteria for “good” and “evil.”

A. Values
B. Principles
C. Ethics
D. Codes of professional conduct

The Imperative Principle
VII. THE IMPERATIVE PRINCIPLE
The imperative principle directs a decision-maker to act according to the requirements of an

ethical rule. Strict versions of imperative ethics maintain that a decision should be made
without trying to predict whether the action would create the greatest balance of good over
evil. Ethics in the imperative sense is a function of moral rules and principles and does not
involve calculation of consequences. If a rule such as you shall not kill is in place, everyone
must follow it without exception or question.
The philosopher Immanuel Kant (1724–1804) was the foremost advocate of the imperative
school. Kant was unwilling to rely solely upon inclinations and values for decisions. He
strongly preferred rules without exceptions. He maintained that reason and the strict duty to
be consistent governed the formulation of his first law of conduct, called the categorical
imperative: “Act only according to that maxim by which you can at the same time will that it
should become a universal law.” In other words, act only how you believe everyone should
act all the time. This law of conduct results in unconditional obligations, such as “lying is always
wrong.”
Suppose you believed it proper to lie in the course of a fraud investigation in order to induce
employees to reveal information they would not otherwise disclose. The Kantian test of the
morality of such a lie is: Can this maxim (lying is all right) be a moral rule that should be
followed without exception by all people all the time? The specific actor involved (the fraud
examiner) and the specific circumstances (say, undercover investigation) are not especially
relevant to test the universal morality of lying.
For all people to follow a rule, all people must know of it. When everyone knows that the
rule is that it is acceptable to lie when doing so is perceived to be necessary, everyone faced
by a questioner must be wary and distrustful. Even the fraud examiner must be wary and
distrustful of the client who hired him, because it is conceivable that the client might have
lied about the assignment in order to induce the examiner to follow a particular line of
inquiry.
Since the nature of a universal rule is universal knowledge of it, any manner of lying is bound
to fail the test of the categorical imperative because no one should believe that people
should always lie all the time. Further, if lying were considered moral and ethical, and
everyone lied all the time, nobody could be fooled by a particular lie. Thus, lying is wrong

because, when made universal, the maxim (lying is all right) fails by its own contradiction.
The liar cannot fool anyone.
Kant was content to rest his case on the duty to be consistent, but as practical people, we
can insert some consideration of values into this discussion. Effective communication is
valued by most people, but if lying were universally accepted as a maxim, all common
communication would become impossible. Indeed, people who operate among liars find that
the effects of double-cross and triple-cross, agents and double agents, vastly complicate the
task of knowing the truth. Hence, we can come full circle from Kant’s philosophy of the
categorical imperative (a method of analysis) to the necessity of truth (a time-tested value).
The general objection to the imperative principle is the belief that so-called universal rules
always turn out to have exceptions. The general response to this objection is that if the rule
is stated properly to include the exceptional cases, then the principle is still valid. The
problem with this response, however, is that human experience is complicated, and
extremely complex universal rules would have to be constructed to try to cover all possible
cases.
One value of the Kantian categorical imperative with its emphasis on universal,
unconditional obligations is that it lets you know what to do when you are faced with an
ethical decision problem. When only one rule derived from the categorical imperative is
applicable, you might have no trouble following it. When two rules or two duties are in
conflict, though, a serious problem can exist.
Assume, for the sake of illustration, another universal maxim is “Live up to all your
professional duties.” In certain situations, these two rules (“Lying is wrong” and “Live up to
all your professional duties”) might be in conflict. Such conflicts of rules and duties create
difficult problems because adherence to one of the rules means breaking the other. Someone
who is rule-bound would find himself in a dilemma in such a situation. This kind of dilemma
is what prompts people to look for ways to weigh the consequences of actions. One way is
described by the principle of utilitarianism discussed in the next section.
Most professional codes of ethics have characteristics of the imperative type. Professionals
are expected to always act in a manner in conformity with their self- imposed rules.
However, critics frequently question not only the conduct but the rules on which conduct is
based. Thus, a dogmatic imperative approach to ethical decisions might not be sufficient to

maintain professional standards. A means of estimating the consequences of alternative

actions might be useful.

Review Question
1. The categorical imperative states that:

A. The ends justify the means
B. Universal rules always have exceptions
C. People should act only how they believe everyone should act all the time

The Utilitarian Principle
VIII. THE UTILITARIAN PRINCIPLE
John Stuart Mill (1806–1873) is known as the apostle of the principle of utilitarianism, which
was originated earlier by Jeremy Bentham. This principle maintains that the ultimate criterion
of an ethical decision is the balance of good consequences (pleasure and avoidance of pain)
over evil consequences (displeasure and pain) produced by an action. The criterion of
producing the greater good is made an explicit part of the decision process.
In simpler terms, the utilitarian approach seeks the most pleasure for the greatest number of
people. Acts are deemed right or wrong based on how much pleasure they produce. A
decision is bad if it causes harm or pain and good if it results in improvement or pleasure.
Consider these circumstances:
John lost his job, and his unemployment benefits are exhausted. He decided to conspire with
a former co-worker at the plant to steal food from the commissary to feed his hungry family.
A fraud examiner caught the pair.
John’s decision to steal can be said to be based on the calculation that the “good” of feeding
his hungry family outweighs the “evil” of stealing. Now the fraud examiner needs to decide
whether the “evil” of failing to report John because he sympathizes with his condition is
greater or less than the “good” of serving his employer as he promised.
Mill perceived Kant’s categorical imperative as an acknowledgment of the interest of

humankind collectively instead of a matter of the intellectual willing of universal maxims. His
major departure from Kant was to make explicit the idea that the desired end product of
actions is the collective benefit. Mill said of Kant: “To give any meaning to Kant’s principle,
the sense put upon it must be that we ought to shape our conduct by a rule which all rational
beings might adopt with benefit to their collective interest.” Sometimes the utilitarian principle is
called the “greatest happiness principle,” but in this context “happiness” is not merely a
frivolous emotion.
In contrast to Kant’s imperative principle, in which rules must be followed without

exception, the utilitarian principle allows the situation to dictate the best course of ethical
action based on the end result. For example, in the case of a soldier who is separated from
his platoon and captured by the enemy, he might be faced with the ethical dilemma of

revealing his comrades’ whereabouts. If he is operating under the rule that lying is wrong,
the imperative principle would require that the soldier tell the truth, regardless of the
consequences to his platoon. The utilitarian principle, however, would enable him to lie to
his captors. In this instance, lying would not be morally or ethically wrong because it would
be done for the greater good—protecting his friends.
The Role of Values in Utilitarianism

Utilitarianism demands consideration of values, although the principle can be expressed in
terms of good and evil without explicit reference to values. Mill recognized that many forces
influence a person’s perception of values, particularly the social milieu in which that person
lives. He also alludes to the verdict of competent people for determining suitable values—
relying on the judgment of qualified people to rule on the identification of “the good.”
Ultimately, responsibility for proper perception falls exactly where it belongs—on the
individual decision-maker. Nevertheless, Mill discoursed on matters of justice from which
certain values can be derived, among them:
• Proper legal rights of people
• Moral rights of people
• Just desserts—people deserve good for good and evil for evil
• Faithfulness
• Impartiality
• Equality
Act Utilitarianism
One form of utilitarianism, known as act utilitarianism, involves focusing on the consequences
of an action rather than on the logical consistency of following a rule. In an act-utilitarianism
analysis, the attention is on the individual act as it is affected by the specific circumstances of
a situation. An act utilitarian’s ethical problem might be framed in this way: “What effect will
my doing this act in this situation have on the general balance of good over evil?” This
theory admits general guides, such as “Honesty is generally the best policy” and “Telling the
truth is probably always for the greatest good.” However, the emphasis is always on the
specific situation, and the decision-maker must determine whether he has sufficient grounds
for thinking that it would be for the greatest general good to lie or steal in a particular case.
The difficulty with act utilitarianism is that it seems to permit too many exceptions to well-
established rules. By focusing attention on individual acts, the long-term effect of setting

examples for other people is ignored. If John can justify stealing to feed his hungry family,
then Jack can justify stealing to feed other hungry people, Joe can steal for some other
“good” cause, and before long everyone can justify stealing on some ground. If an act-
utilitarian decision involves breaking a moral rule, then the decision’s success usually
depends on everyone else’s adherence to the rule. For example, to benefit from tax evasion
for a good reason depends on other people not having an equally good reason for not paying
their taxes.
Rule Utilitarianism
Rule utilitarianism, on the other hand, emphasizes the centrality of rules for ethical behavior
while still maintaining the criterion of the greatest universal good. This kind of utilitarianism
means that decision-makers must first determine the rules that will promote the greatest
general good for the largest number of people, irrespective of one’s own position or
condition. The initial question is not which action has the greatest helpfulness, but which
rule. Thus, the rule utilitarian’s ethical decision problem can be framed as follows: “What
effect will everyone’s doing this kind of act in this kind of situation have on the general
balance of good over evil?” In simpler, more generalized terms, the expression becomes:
“What would happen if everybody did this?” Thus, the principle becomes operative not only
in determining what particular action to take in a specific situation in which rules conflict,
but also in determining what the rules should be in the first place.
Utilitarianism and Fraud

In addition to its ethical ties, the justification inherent in the utilitarian principle—that rules
can be bended for the “greater good”—as well as the desire to seek pleasure and avoid
suffering, has also largely contributed to the perpetuation of fraud.
In fraud theory, it is well known that fraudsters are often under a great deal of stress and
pressure in their professional or personal lives. Some individuals feel they have been
wronged by their employers or cheated by fate, and it is this sense of entitlement that allows
them to rationalize their fraudulent behavior. When faced with an opportunity to steal, they
take it and immediately go on a spending spree. In other words, they essentially pursue their
own pleasure and avoid pain. Whereas most people can control their desire for immediate
gratification and reward, fraudsters use the justification that the end justifies the means to
obtain instant pleasure. They take what they believe they deserve without putting in the hard
work and pain that is usually necessary to achieve it.

Review Question
1. Act utilitarianism focuses on the consequences of an action rather than on the logical
consistency of following a rule.
A. True
B. False

The Generalization Principle
IX. THE GENERALIZATION PRINCIPLE
While the philosophical high road can provide helpful views on ethical dilemmas, there is no
final resting place. Our best hope when faced professionally with these puzzles lies in using
the best knowledge we can acquire from philosophical sources and ethical codes, and sorting
the rest out with our fellow workers. This common-sense method was described by the
modern philosopher Marcus G. Singer as “generalization in ethics.”
Singer’s Generalization in Ethics: An Essay in the Logic of Ethics, with the Rudiments of a System of
Moral Philosophy deals with basic problems of moral philosophy and establishes a rational
basis for distinguishing between right and wrong. Consequently, his work lays the
foundation for a rational and normative system of ethics.
Generalization considers the consequences of an act in terms of desirability, projecting those

consequences onto a social plane and deriving a moral imperative, or something people
ought to do, for all future deliberations. Singer termed this logical construction the
generalization argument. For all practical purposes, the generalization argument may be
considered a judicious combination of the imperative and utilitarian principles. Stated
succinctly, the argument is:
If all relevantly similar persons acting under relevantly similar circumstances were to act in
a certain way and the consequences would be undesirable, then no one ought to act in that
way without a reason.
An everyday expression of the argument is the question: “What would happen if everyone
acted in that certain way?” If the answer to the question is that the consequences would be
undesirable, then your conclusion, according to the generalization test, is that the way of
acting is unethical and ought not be done. Turning this form of the argument around, Singer
also admits: “If the consequences of no one’s acting in a certain way would be undesirable,
then everyone ought to act in that way.”
The key ideas in the generalization test are “similar people” and “similar circumstances.”
These features provide the needed flexibility to consider the many variations that arise in real
problem situations. They also demand considerable judgment in determining whether people
and circumstances are genuinely different or are just arbitrarily rationalized as different so

that a preconceived preference can be justified as right. These keys give rise to Singer’s
expression of generalization as a principle:
What is right for one person must be right for any (relevantly) similar person in the
(relevantly) same or similar circumstances.
The concept of self-defense is an example of how such logic can be applied in practice.
Suppose there is a rule that forbids one person from killing another. However, in the process
of someone breaking into your house and attempting to harm you or your family, you end
up killing him in self-defense. This would be justifiable homicide because most people feel
that they have the right to defend themselves and their property. The generalization principle
comes into effect because while there is generally a rule that prevents people from killing one
another, there are certain circumstances in which breaking this rule would be the right thing
to do by everyone's standards.
Thus, the generalization argument can be seen to have elements of both the utilitarian and
the imperative principles. It considers consequences in terms of their desirability, and it
includes an imperative with the generalization of what all similar people should do in similar
circumstances. Nevertheless, the generalization argument can be difficult in some situations
when it simply does not apply.
Limitations of the Generalization Principle

Generalization ethics can be difficult because it’s not always possible to make an iron-clad
generalization. Think about any extreme form of investigation method; for example,
invigilation—the practice of intense scrutiny of an accounting activity for a short period of
time to compare before and after conditions. If invigilation were performed all the time in a
particular company, the method would lose its effectiveness because violators would adapt
to its existence. If invigilation were never performed, it could never be effective. The
generalization method of thinking, in this kind of situation, does not help solve the question
of whether to perform invigilation all the time or none of the time.
However, generalization does have some application in this situation: Since invigilation is
performed for reasonable purposes, any company whose situation fits those purposes should
be invigilated. The generalization hinges on the desirability of the purpose, not on
establishing a rule without proper consideration of the context. Once we define and justify

the contextual significances, we can issue a general rule based on similar circumstances with
similar actors.
Generalization operates by a system of common sense. There are bedrock rules—for

example, never drive a car when you’re dead. But then there are situations with ambiguities.
Maybe you can use deception during an investigation and accomplish a lot of good for
everybody concerned. Does that make it ethical? The generalization method works on a
straightforward principle: If there’s no bedrock rule covering all situations, then something
about the context has to be generalizable. That means that even a special case like
invigilation has a generalizable element in its description.
A Practical Application of Generalization

An employee of the Smith Factory wants to help Dan Holleman, a CFE working with the
factory’s internal controls department. Dan promises the informant that in exchange for the
help, no one will ever know that the employee was in fact a part of the inventory theft. “At
the least,” Dan promises, “I’ll see to it you get no time for your role in the caper.” Mr.
Holleman is lying — in the first place, he has a professional obligation to turn over all
information he uncovers, and secondly, he’s only giving the employee a line in order to find
out more about the fraud. Dan asserts that he’s justified in lying to the worker because the
investigation will serve a greater good, namely stopping the inventory thieves in their tracks.
Generalization ethics require that the consequences of a particular action are such that
everyone ought to act the same. One consequence of Dan’s lie—busting the thieves—is
certainly desirable. But there’s other fallout from this act to consider.
Permitting fraud examiners to make false promises not only impugns the integrity of the
profession, it endangers the aim of the entire enterprise: people who deal with CFEs—
clients and informants alike—need to know they can rely on the examiner’s word. That’s
why the CFE Code of Professional Ethics forbids making false promises to cooperating
witnesses. Trust is an essential element in the fraud examiner’s job description, just as it is
for financial professionals and even the population at large.
According to the generalization method, an act earns ethical clearance if the consequences
dictate that every similar person in a similar situation ought to act the same way. It’s not
desirable for every CFE who works a case to lie to his witnesses. There’s also the loyalty

owed to the client. Withholding relevant information from a report violates generalization
ethics and the CFE Code of Professional Ethics, not to mention good common sense.

Review Question
1. The generalization argument can be simplified as:

A. What do the rules say?
B. What would happen if everyone acted in that certain way?
C. What would my colleagues do?

Some Concluding Remarks
X. SOME CONCLUDING REMARKS
This review of principles in ethics provides some guidance regarding the ways many
people approach difficult decision problems. The greatest task is to take general principles
of moral philosophy—the imperative, utilitarian, and generalization principles—and apply
them to a real decision. Their application through codes of professional ethics is where the
challenge lies.
Codes of professional ethics and statutory law have two things in common. They are both
based, more or less, on pervasive moral principles and values, and they both represent the
aspects of behavior that a committee or legislature has chosen to put in writing. In both
professional ethics and law, not every relevant guide for behavior has been written.
Therefore, professional people, including fraud examiners, might find themselves on their
own when they have to decide a proper course of conduct in a particular situation.
Four-Step Test
Since there is literally no end to philosophizing, perhaps the best way to conclude this survey
of ethical theory is to strike a practical note. The following four-step test is adapted from a
course taught to financial employees of the federal government. It applies equally to fraud
examiners, financial professionals, and the general public.
These questions are the criteria for ethical decisions:

1. Is the action I am considering legal and consistent with ethical standards for all citizens?
2. Is the action I am considering consistent with the any professional codes of conduct
(including the CFE Code of Professional Ethics) by which I am bound?
3. Is the action I am considering consistent with my own personal standards?
4. How would this action look on the evening news? How would publicity about this act
reflect on my colleagues, on the profession of fraud examination, and on my own
professional and personal reputation?

Some Concluding Remarks
Review Question
1. When faced with an ethical decision, the fraud examiner should ask himself:
A. Is the action I am considering legal and consistent with ethical standards for all
citizens?
B. Is the action I am considering consistent with my own personal standards?
C. How would this action look on the evening news?
D. All of the above

Solutions to Review Questions
SOLUTIONS TO REVIEW QUESTIONS
I. Introduction
1. What are the two types of ethics that operate in the professional environment?
A. Personal ethics and professional ethics
B. General ethics and situation-specific ethics
C. General ethics and professional ethics
D. Primary ethics and secondary ethics
A. Incorrect: Professional ethics—or the rules—is one type of ethics that operates in the professional
environment. However, personal ethics is not one of the types discussed in this course.
B. Incorrect: General ethics—or the spirit—is one type of ethics that operates in the professional
environment. However, situation-specific ethics is not one of the types discussed in this course.
C. Correct: According to the text, two aspects of ethics operate in the professional environment—general
ethics (the spirit) and professional ethics (the rules).
D. Incorrect: Primary and secondary ethics are not the types of ethics that operate in the professional
environment.

II. What Is Ethics?
1. The field of ethics is primarily concerned with rules and moral codes.
A. True
B. False
A. Incorrect: Contrary to popular opinion, the field of ethics is not primarily concerned with rules and
moral codes.
B. Correct: Ethics as a branch of philosophy has been developing since ancient times as a way to clarify
how people interact with one another, and how they should interact. The focus of any ethical system
involves seeking the best way for people to deal with each other, not establishing strict rules and
moral codes.
2. Which of the following is NOT one of the three key elements of Wheelwright’s
definition of ethics?
A. Ethics involves questions requiring reflective choice (decision problems)
B. Ethics involves unconditional standards that apply to all situations (absolute values)
C. Ethics involves guides of right and wrong (moral principles)
D. Ethics is concerned with values (goods) inherent in ethical decisions
A. Incorrect: Questions requiring reflective choice (decision problems) are one of the three key elements of
Wheelwright’s definition of ethics.
B. Correct: Unconditional standards that apply to all situations (absolute values) are not one of the
three key elements of Wheelwright’s definition of ethics.
C. Incorrect: Guides of right and wrong (moral principles) are one of the three key elements of
D. Incorrect: The values (goods) inherent in ethical decisions are one of the three key elements of

III. Ethical Decisions
1. Which of the following is a source of ethical guidance?

A. Customs
B. Colleagues
C. Codes of conduct
D. All of the above
A. Incorrect: Individuals often look to the customs of social groups they trust for guidance when faced
with ethical decisions. However, this is not the best answer to this question.
B. Incorrect: When faced with an ethical decision, a fraud examiner’s colleagues can serve as a valuable
source of ethical guidance. However, there is a better answer to this question.
C. Incorrect: Codes of ethical conduct frequently provide guidance for professionals when faced with
ethical decisions. However, this is not the best answer to this question.
D. Correct: Sources of ethical guidance include the individual’s conscience, customs, colleagues, and codes
of conduct.

IV. Morality, Ethics, and Legality
1. ____________ is the realm of moral philosophy where philosophical principles guide

the process of thinking about problems and distinguishing right from wrong.
A. The path of least resistance
B. The moral pedestal
C. The high road
A. Incorrect: The path of least resistance is not the realm of moral philosophy where principles guide the
process of thinking about problems and distinguishing right from wrong.
B. Incorrect: The moral pedestal is not the realm of moral philosophy where principles guide the process
of thinking about problems and distinguishing right from wrong.
C. Correct: The high road is the realm of moral philosophy where philosophical principles guide the
process of thinking about problems and distinguishing right from wrong.
D. Incorrect: One of the answer choices provided is correct.

VI. Values and Principles
1. ___________ are the criteria for “good” and “evil.”

A. Values
B. Principles
C. Ethics
D. Codes of professional conduct
A. Correct: Values are the criteria for “good” and “evil.” They are personal and social standards that
are learned and internalized through a wide variety of influences—family, social status, peer groups,
national origin, and the like.
B. Incorrect: Principles are methods used to analyze moral and ethical problems and to reach a decision.
C. Incorrect: Ethics generally refers to behavior that conforms to some norms within a specific setting—a
society, culture, nation, profession, or small group.
D. Incorrect: Codes of professional conduct make explicit some of the criteria for behavior particular to a
profession. In this way, codes of professional ethics are able to provide some direct solutions that might
not be available from general ethics theories.

VII. The Imperative Principle
1. The categorical imperative states that:

A. The ends justify the means
B. Universal rules always have exceptions
C. People should act only how they believe everyone should act all the time
A. Incorrect: The imperative principle is based around the applicability of universal rules. The notion of
“the ends justify the means” tends to be used to rationalize breaking such rules.
B. Incorrect: The imperative principle is based around the applicability of universal rules. The general
objection to the imperative principle is the belief that so-called universal rules always turn out to have
exceptions.
C. Correct: Kant’s first law of conduct, the categorical imperative, states: “Act only according to that
maxim by which you can at the same time will that it should become a universal law.” In other
words, act only how you believe everyone should act all the time.

VIII. The Utilitarian Principle
1. Act utilitarianism focuses on the consequences of an action rather than on the logical
consistency of following a rule.
A. True
B. False
A. Correct: In an act-utilitarianism analysis, the attention is on the individual act as it is affected by

the specific circumstances of a situation. An act utilitarian’s ethical problem might be framed in this
way: What effect will my doing this act in this situation have on the general balance of good over
evil?
B. Incorrect: One form of utilitarianism, known as act utilitarianism, involves focusing on the
consequences of an action rather than on the logical consistency of following a rule.

IX. The Generalization Principle
1. The generalization argument can be simplified as:

A. What do the rules say?
B. What would happen if everyone acted in that certain way?
C. What would my colleagues do?
A. Incorrect: The imperative principle is based around the applicability of universal rules. In contrast,
the generalization principle considers the consequences of an act in terms of desirability.
B. Correct: An everyday expression of the generalization argument is the question: “What would
happen if everyone acted in that certain way?” If the answer to the question is that the consequences
would be undesirable, then your conclusion, according to the generalization test, is that the way of
acting is unethical and ought not be done.
C. Incorrect: The generalization principle considers the consequences of an act in terms of desirability. It
does not give weight to the consensus or actions of the decision-maker’s peers.

X. Some Concluding Remarks
1. When faced with an ethical decision, the fraud examiner should ask himself:
A. Is the action I am considering legal and consistent with ethical standards for all
citizens?
B. Is the action I am considering consistent with my own personal standards?
C. How would this action look on the evening news?
D. All of the above
A. Incorrect: One of the questions in the four-step test for ethical decisions is: Is the action I am
considering legal and consistent with ethical standards for all citizens? However, this is not the best
answer to this question.
B. Incorrect: One of the questions in the four-step test for ethical decisions is: Is the action I am
considering consistent with my own personal standards? However, there is a better answer to this
question.
C. Incorrect: As part of the four-step test for ethical decisions, an individual should ask: How would
this action look on the evening news? However, this is not the best answer to this question.
D. Correct: The four-step test for ethical decisions involves asking: 1) Is the action I am considering
legal and consistent with ethical standards for all citizens?; 2) Is the action I am considering
consistent with any professional codes of conduct by which I am bound?; 3) Is the action I’m
considering consistent with my own personal standards?; and 4) How would this action look on the
evening news?

Final Examination
Ethical Theory for Fraud Examiners Final Examination
1. The function of ethical principles and rules is not to provide a simple and sure answer to
all of life’s problems, but to provide some guides for individual decisions and actions.
A. True
B. False
2. The definition of ethics involves:

A. Questions requiring reflective choice (decision problems)
B. Guides of right and wrong (moral principles)
C. Values (goods) inherent in ethical decisions
D. All of the above
3. ___________ is/are the lowest reference level for moral decisions.

A. A professional code of conduct
B. Religious beliefs
C. The law
D. Ethical principles
4. The concept of projecting yourself into a future where you must live with the
consequences of your choices is called:
A. Ethical mirroring
B. Reflective choice
C. Reactive morality
D. Moral relativity
5. CFEs are required to adhere to an explicit code of ethical conduct.

A. True
B. False
6. Which of the following is defined as the methods used to analyze moral and ethical
problems and to reach a decision?
A. Values
B. Codes of conduct
C. Moral compasses
D. Principles
Ethical Theory for Fraud Examiners E-1

Final Examination
7. The __________ principle maintains that the ultimate criterion of an ethical decision is
the balance of good consequences (pleasure and avoidance of pain) over evil
consequences (displeasure and pain) produced by an action.
A. Imperative
B. Utilitarian
C. Generalization
D. Relative
8. The __________ principle directs a decision-maker to act according to the requirements

of universal ethical rules.
A. Imperative
B. Utilitarian
C. Generalization
D. Moralization
9. The __________ principle states that what is right for one person must be right for any
(relevantly) similar person in the (relevantly) same or similar circumstances.
A. Imperative
B. Utilitarian
C. Generalization
D. Universalist
10. Which of the following is NOT one of the questions fraud examiners should ask
themselves as part of the four-step test for ethical decision-making?
A. Is the action I am considering legal?
B. Who will observe the action that I am considering?
C. Is the action I am considering consistent with my own personal standards?
D. How would this action look on the evening news?
E-2 Ethical Theory for Fraud Examiners

ASSOCIATION OF CERTIFIED FRAUD EXAMINERS
SELF-STUDY COURSE EVALUATION

Ethical Theory for Fraud Examiners
Please take a few moments to fill out this important survey to help us better serve you.
Please return the completed survey to ACFE using the enclosed envelope.
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qq Not at all satisfied course were met.”
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2. Why do you say this? 8. How strongly do you agree or disagree with the
following: “The time allocated for this course was
appropriate.”
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3. Would you recommend this course to colleagues?
9. How many hours did it take you to complete this course?
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qq Definitely recommend following: “The course materials (packets,
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4. Please tell us how much this course will help you in
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5. What did you like best about the course (please be Contributed to achievement of learning objectives:
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11. What is the main reason you took this self-study

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II. WHAT IS ETHICS?

III. ETHICAL DECISIONS

IV. MORALITY, ETHICS, AND LEGALITY

V. MEANS AND ENDS ......................................................................................................... 13

VI. VALUES AND PRINCIPLES

VII. THE IMPERATIVE PRINCIPLE

VIII. THE UTILITARIAN PRINCIPLE