Moral Ethics v.
Tax Ethics:
The Case of Transfer Pricing Among
Multinational Corporations
ABSTRACT. In recent years there has been an increased
awareness with regards to ethics in business. More specifi-
cally, the abundance of well-publicized examples of cheat-
ing, greed, and hypocrisy has created some alarm about the
general state of personal ethics (Josephson, 1988). Recent
examples include the Oliver North, Ivan Boesky, and Jimmy
Swaggart cases. The tax practitioner probably has little direct
concern for matters of misconduct and ethical improprieties
as mentioned above. Adherence to a code of conduct appears
to circumvent the ethical conflict typically found in the
business environment. The tax practitioner's ultimate goal is
tax minimization for clients. This goal has the blessings of
the courts and the writers of tax law.
The present day dynamic global economic system
includes organizations which have extensive international
activity. In an effort to enhance the performance of these
organizations, there is typically decentralization of opera-
tions. When decentralization exists it is necessary to evaluate
the decentralized units. Profit centers are commonly used
for this purpose. With profit centers comes the need for
transfer pricing between profit centers. The transfer price
should be determined in some objective fashion. However,
tax minimization often is the driving force in the transfer
price decision.
This paper examines the compatibility of tax minimiza-
tion goals, following a code of professional conduct, with
mioral ethics, using the ttansfer pricing problem in a
multinational environment A case that presents a common
scenario for international firms is used as a vehicle to discuss
the underlying tax and ethical ramifications.
No two men between Wall Street and Tijuana have been
Don R. Hansen is Professor of Accounting at Oklahoma State
University, Stillwater, OK, USA.
RicJt L. Crosser is Associate Professor of Taxation and Coordinator integrity in all of a CPA's practice, including tax
of Graduate Programs at Weher State University, Ogden, UT, practice. Rule 102 of the Code states:
USA.
Doug Laufer is Associate Professor and Willard Eccles Accounting
Research Fellow at Weher State University, Ogden, UT, USA.
foumal of Business Ethics 11:679686,1992.
1992 Kluwer Academic Publishers. Printed in the Netherlands.
Don R. Hansen
Rick L. Crosser
Doug Laufer
accused of more &aud, corruption and flagrant swindling
than Meese and Boesky yet they are heroes to a whole
generation: The Cruel and Loveless '80s, the Generation
of Swine. (H. S. Thompson, 1988).
In recent years there has been an increased awareness
with regards to ethics in business. More specifically,
the abundance of well-pubhcized examples of cheat-
ing, greed, and hypocrisy has created some alarm
about the general state of personal ethics (fosephson,
1988). Recent examples include the Olive North,
Ivan Boesky, and Jimmy Swaggart cases.
The tax practitioner probably has little direct con-
cern for matters of misconduct and ethical impro-
prieties as mentioned above. Adherence to a code of
conduct appears to circumvent the ethical conflict
typically found in the business environment. The tax
practitioner's ultimate goal is tax minimization for
clients. This goal has the blessings of the courts and
the writers of tax law. The now classic words of
Judge Learned Hand in the case. Commissioner v.
Newman, 159 F.2d 848 (CA-2, 1947), reflects the
goals and values of the individual practitioner
Over and over again the courts have said that there is
nothing sinister in so arranging one's affairs as to keep
taxes as low as possible. Everybody does so rich or poor,
and all do right, for nobody owes any public duty to pay
more than the law demands: taxes are enforced extrac-
tions, not voluntary contributions. To demand more in
the name of morals is mere cant.
For CPAs the AICPA's Code of Professional Con-
duct requires attitudes and habits of truthfulness and
In the performance of any professional service, a member
shall maintain objectivity and integrity, shall be free of
680 Don R. Hansen, Rick L. Crosser and Doug Laufer
conflicts of interest, and shall not knowingly misrepre-
sent facts or subordinate his or her judgment to others.
Also, the AICP's Statements on Responsibihties in
Tax Practice sets forth the standards a CPA should
follow in recommending tax retum positions. For
example, Statement Number 1.02a reflects that a
CPA must have a good faith behef that the position
to be taken has a realistic possibihty of beii^
sustained administratively or judicially on its merits.
Therefore, the tax practitioner can take a position,
which exploits the intent of the law, if some "reason-
able support" can be gleaned from primary tax
authority, and still be within the legal ethics pro-
vided by the Code of Conduct.
A major confhct arises because written codes of
responsibility and ethics only estabhsh Unes of con-
sensus impropriety. Theoretically, ethics requires
more of a person than technical comphance with
rules (Falk, 1986). An ethical person may choose to
openly break a law beheved to be unjust. The char-
acteristic of lawfulness may be subordinated to other
conscience-driven values. For example, civil disobe-
dience has a long history of societal acceptance. On
the other hand, covert lawbreaking is not civil dis-
obedience. Not being discovered is a primary aspect
of this type of lawlessness. Would society consider
the Iran-Contra affair an act of civil disobedience?
The present day dynamic global economic system
includes organizations which have extensive inter-
national activity. In an effort to enhance the per-
formance of these organizations, there is typically
decentralization of operations. There are numerous
incentives for decentralization. An example is the
enhancement of efficiency by the placement of deci-
sion making at the level where the relevant informa-
tion is required, stored, and processed.
When decentralization exists it is necessary to
evaluate the decentralized units. Profit centers are
commonly used for this purpose. With profit centers
comes the need for transfer pricing between profit
centers. The transfer price should be determined in
some objective fashion. However, tax minimization
often is the driving force in the transfer price
decision (Wheeler, 1988). There is evidence that
multinational corporations take advantage of the
detailed, subjective regulations which govern Inter-
nal Revenue Code Section 482, with regard to inter-
company transfer priding.
This paper examines the compatibility of tax
minimization goals, following a code of professional
conduct, with moral ethics, using the transfer pricii^
problem in a multinational environment A case that
presents a common scenario for international firms
is used as a vehicle to discuss the underlying tax and
ethical ramifications (Hansen, 1990).
The case brings to light several of the ethical
conflicts that arise in the course of today's business.
The most significant conflict is the question of
whether moral ethics and its concem with societal
well-being is at a higher level of righteousness than
the situational ethics issue as exemplified by the tax
minimization scheme. Questions that are addressed
include the
1. Is the transfer pricing tax minimization
scheme in harmony with the ethical behavior
that should be displayed by top corporate
executives?
2. Did the tax minimization scheme fall within
the guidelines for professional conduct of tax
practitioners?
3. Do the tax rules that guide intemational
transfer pricing reflect a well-being?
The case
Paterson Company is a U.S. based company that
manufactures and sells electronic components on a
worldwide basis. Virtually all of the manufacturing
takes place in the United States. The company has
marketing divisions located throughout Europe. One
of these divisions is located in France. Debbie
Kishimoto is manager of this division (she had been
hired away from a competitor and is in her third
year of employment with Paterson). Debbie was
recently informed of a price increase of one of the
major product hnes and had requested a meeting
widi Jeff Philhps, the company's marketing vice
president The meeting took place in London. Fol-
lowing is a summary of the conversation that took
place during the meeting.
"Jeff, I simply don't understand why the price of
our main product has increased from $5.00 to $5.50
per unit We negotiated an agreement earlier in the
year with our manufacturing division in Philadel-
phia for a price of $5.00 for the entire year. I called
 Moral Ethics v. Tax Ethics
the manager of that division and he indicated that
the original price was still acceptable he said that
the increase was a directive from headquarters.
That's why I requested a meeting with you. I need
some explanations. When I was hired I was told that
pricing dedsions were made at the divisional level
that divisions were given a lot of decision-making
latitude. This directive not only interferes with this
decentralized philosophy but it will adversely affect
my division's profits. Given current market condi-
tions, there is no way that we can pass on the cost
increase. Profits for my division will drop at least
$600000 if this price is maintained. I think a
midyear increase of this magnitude is unfair to my
division."
"Debbie, under normal operating conditions,
headquarters vnll not interfere with divisional deci-
sions. As a company, however, we are having some
problems. What you just told me is exactly why the
price of your product has been increased. We want
the profits of all of our European marketing divi-
sions to drop."
"Wait a minute. What do you mean that you
want the profits to drop? That doesn't make any
sense. Aren't we in the business to make money?"
"Debbie, what you lack is the corporate perspec-
tive. We are in die business to make money and
that's precisely why we want European profits to
decrease. Let me explain. Our divisions in the United
States are not doii^ well this year. Projections show
significant losses. At the same time, projections of
European operations show good profitability. By
increasing the cost of key products that are trans-
ferred to Europe to your division, for example
we increase the revenues and profits in the United
States. By decreasing your profits we avoid paying
taxes in France; with losses on other U.S. operations
to offset the corresponding increase in domestic
profits, we avoid paying taxes in the United States as
well. The net effect is a much needed increase in our
cash infiow. Besides, you know how difficult it is in
some of these European countries to transfer out
capital. This is a clean way of doing it."
"I'm not so sure that it's clean. It doesn't seem
right to me. I can't imagine the tax laws permitting
this type of scheme. There is another problem as
well. You know that the company's bonus plans are
tied to a division's profitability. This plan could cost
all of the European managers a lot of money."
681
"Debbie, you have no reason to worry about the
effect on your bonus or on our evaluation of your
performance, for that matter. Corporate manage-
ment has already taken steps to insure no loss of
compensation. The plan is to compute what income
would have been if the old price had prevailed and
base bonuses on that figure. I plan on meeting with
the other divisional managers and explaining the
situation to them as well."
"The bonus adjustment seems fair, although I
wonder if the reasons for the drop in profits will be
remembered in a couple of years when I'm being
considered for promotion. Anyway, I still have some
strong concerns about the propriety of all this. How
does this scheme relate to the tax laws?"
"We will be in technical compUance with the tax
laws. In the United States, Section 482 of the Intemal
Revenue Code governs this type of transaction. The
key to this law as well as most European laws, is
evidence of an arms-length price. Since you're a
distributor, we can use the resale price method to
determine such a price. Essentially, the arms-length
price for the transferred good is backed into by
starting with the price at which you sell the product
and then adjusting that price for the markup and
other legitimate differences such as tariffs and trans-
portation."
"If I were a French tax auditor, I would wonder
why the markup dropped from last year to this year.
I also wonder if we are being good citizens and are
meeting the fiscal responsibilities imposed on us by
each country in which we operate."
"Well, a French tax auditor might wonder about
the drop in markup. The markup, however, is still
within reason, and we can make a good argument
for increased costs. In fact, we have already instructed
the managers of our manufacturing divisions to find
as many costs as they can be legitimately reassigned
to the European product lines that are affected by
this increase. So far they have been very successful. I
think our records will support the increase that you
are receiving. Debbie, you really do not need to be
concemed with the tax authorities. Our tax depart-
ment assures me that this has been carefully re-
searched and planned it's unlikely that a tax audit
will create any difficulties. It'll all be legal and above
board. We've done this several times in the past,
with total success. We have some good people in
that department."
682 Don R. Hansen, Rick L. Crosser and Doug Laufer
Discussion
The case brings to light several of the ethical con-
flicts that arise in the course of today's business. The
most significant conflict is the question of whether
moral ethics and its concern with societal well-being
is at a higher level of righteousness than the situa-
tional ethics issue as exemplified by the tax mini-
mization scheme. This conflict will be examined in
detail.
First, the provisions of Internal Revenue Code
482, its related Treasury regulations, and legislative
intent will be described. Then the tax minimization
scheme utilizing international transfer pricing will
be discussed. The focus will be on the applicability
of the guidelines for professional conduct of tax
practitioners. Finally, the tax minimization scheme
will be discussed in light of its harmony with ethical
behavior of corporate executives.
Transfer pricing and LR.C. 482
In the above case, JefF briefly explained to Debbie
that the proposed transfer pricing scheme will be in
comphance with U.S. tax law. JefF said that by using
the resale price method to determine an arms-length
price the key compliance ingredient will be met. The
resale price method is but one of four methods of
which the IRS approves as a determinant of a proper
intercompany transfer price (Reg. 1.4822(e)).
Legislative history
Internal Revenue Code 482 has its origins in the
Revenue Act of 1918. Its intent was to give the IRS
authority to allocate, or reallocate, income and
deductions between related taxpayers to the extent
necessary to prevent evasion of taxes or to clearly
reflect the income of related taxpayers. The original
single sentence comprising 482 remains unchanged
over its hfe. However, Congress added one more
sentence dealing with transfers of intangibles with
the Tax Reform Act of 1986.
The Regulations promulgated by the U.S. Depart-
ment of Treasury bring the focus of 482 to cases
involving foreign income. Since 1969 taxpayers have
had regulations for guidehnes for their international
transfer pricing activities beginning with the
principle that transactions between related parties
must be evaluated on an arms-length basis (Reg.
1.482-l(b)(l)). That is, transactions need to be
structured similar to the way unrelated taxpayers
structure transactions. Generally, this structure in-
cludes selling at a profit (Reg. 1.482-2(e)(l)(i).
482 applies only where there is common con-
trol; that is, two taxpayers in a transaction are owned
or controlled by the same interests (Reg. 1.482
l(a)(3)). In determining control, the IRS focuses on
the realities of the situation rather than whether
there is formal legal control (Reg. 1.482l(b)(3)).
In the international context, 482 is generally
apphed to allocate income from a foreign subsidiary
to a U.S. parent. The provision is also apphcable to
the converse situation to allocate income from a
foreign parent to a U.S. subsidiary.
Application of 482 to sales transactions
When a U.S. company or division sells goods to a
foreign division or subsidiary, the gain recognized by
the U.S. company for tax purposes will be deter-
mined in accordance with the arms-length price that
an unrelated purchaser would have paid under the
same circumstances. The Regulations detail three
pricing methods to be used in determining the arms-
length price and one general residual method (Reg.
1.4822(e)). In order of preference the methods are
the comparable uncontrolled price method, the
resale price method, the cost plus method, and "any
other appropriate" method.
In a world with perfect information available at
no cost, all four methods would generate the iden-
tical allocating between corporate divisions. A com-
parable transaction involving an arms-lei^th price is
the best method of allocation. If that information is
not available, working backwards from the ultimate
price charged by the foreign division to an unrelated
purchaser may produce an arms-length price for the
sale from the U.S. division to the foreign division.
The intent of 482 is to allow the IRS to reallo-
cate transfer prices between related taxpayers. If the
IRS audits or examines a transaction, the burden is
on the taxpayers to show their transfer pricing
scheme follows one of the methods prescribed by the
Treasury regulations. A method falling outside the
 Moral Ethics V. Tax Ethics
prescribed methods is deemed improper. The trans-
fer price is reallocated by a method prescribed by the
service. In the case described earlier a safe harbor is
apparently found. The multinational firm used the
resale price method to establish its transfer price.
The corporate executives in the case situation
have comphes with the technical side of the rules.
Next, the discussion will focus on the ethical side of
the transfer pricing scheme. Attention will be given
to the guidehnes for professional conduct of tax
practitioners.
Ethical considerations of tax minimization
scheme
In discussing the ethical ramifications of the tax
scheme described in the Paterson Company case,
two viewpoints will be presented. The first view-
point, labeled "tax avoidance," will defend the
actions taken by the company. The second view-
point, labeled "moral ethical," will challenge the
actions taken by the company. By presenting two
strongly opposing viewpoints, a better assessment of
the issues can be made.
The tax avoidance view
Tax practitioners are faced with the challenging task
of applying existing tax law to the factual situation
of a particular entity for purposes of complying with
requirements under the law. The solution(s) which
flow from this process often are not clear and con-
cise. When there is a lack of specific authority, or the
law allows a choice between two or more alterna-
tives, the tax practitioner will select the approach or
altemative which minimizes the tax liabihty of the
entity.
In the case presented in this paper the corporate
management of Paterson Company selected a trans-
fer price to minimize the taxes of the entity and thus
maximize profits. The role of transfer pricing is goal
congruent profit maximization (Benke and Edwards,
1980). Paterson Company management depended
upon the tax department to determine the optimum
transfer price within the legal alternatives. It is
reasonable to assume that the tax department of
Paterson Company was assisted by CPA/tax practi-
683
tioners of a CPA firm. Accordingly, the revised
transfer price was determined by CPAs accountable
to the AICPA Code of Professional Ethics (AICPA,
1989) and the Statements on Responsibilities in Tax
Practice (AICPA, 1988). Based on the facts given in
this case the revised transfer price was determined by
applying existing rules under the law. It is within the
letter and the spirit of the law. There was no
violation of the AICPA Code of Ethics. Accordingly,
the revised transfer price is the appropriate one to
utilize.
It is important to point out that the transfer
pricing scheme adopted constitutes legal planning
for the minimization of the tax burden (e.g., tax
avoidance). Tax avoidance must be distinguished
from tax evasion. Tax evasion would clearly be
viewed as unethical. It is also illegal. Tax evasion
entails deception and concealment. On the other
hand, the taxpayer practicing tax avoidance is merely
behaving in a way which hopefully will reduce tax
habihty. Such action is part of a sound business plan.
Our purpose of business plarming is tax avoidance.
The taxpayer is fully prepared to make disclosure to
the IRS. The position(s) which are taken to avoid tax
should be based on "a good faith behef that the
position has a realistic possibihty of being sustained.
. . ." (AICPA, 1988, Statement .02a). If the "good
faith" threshold is met then tax minimization is
ethical and appropriate.
The regulations which govern transfer pricing
allow the tax preparer to select among alternatives.
Accordingly, tax avoidance is granted by statute.
Even an extreme morahst could not expect the
taxpayer to opt for the most cosdy election. The
courts have upheld the right of taxpayers to practice
tax avoidance. Tax avoidance is an acceptable motive
in selecting between altemative, albeit choice of
depreciation method or transfer pricing. The quote
of Judge Hand, stated previously in this paper
{Commissioner v. Newman), makes that clear, as does
the statement by Justice Holmes in Superior Oil Co.,
280 U S . 390 (1930):
The only purpose of the (taxpayer) was to escape taxation.
. . . The fact that he desired to evade the law, as it is
called, is immaterial, because the very meaning of a line
in the law is that you may intentionally go as close to it as
you can if you do not pass it.
It is clear that the tax practitioners and other parties
684 Don R. Hansen, Rick L. Crosser and Doug Laufer
involved in setting the transfer price for Paterson
Company were well within the bounds of profes-
sional ethics while practicing tax avoidance. Perhaps
there is some higher ethical calling. Does the transfer
pricing decision involve some moral value which
transcends professional ethics? When the question is
posed, "Should ethical behavior be adhered to?," the
response will most certainly be a resounding, "Yes."
The problem arises when a consensus is sought as to
what constitutes ethical, moral behavior. Can we
have ethical improprieties without some ethical
standards to measure actions against?
Within the context of business ethics the premise
that ethical morality is achieved through profit
maximization receives support. An example of this
position can be found in the widely cited article by
Milton Friedman, "The Sodal Responsibihty of
Business Is to Increase Profits" (1970). Others argue
against the ethical morality of profit maximization.
Darrell Reeck in his book entitled Ethics for the
Professions (1982) concludes that the moral consensus
in this country is based on egoism (i.e.. What is in it
for me?). Egoism represents the destructive force
Thomas Jefferson wamed of in stating "Our rulers
will become corrupt, our people careless" if the
emphasis is "in the sole faculty of making money"
(Bellah, 1986).
If our only goal is profit maximization then it is
unclear what ethical principles must be obeyed. It is
necessary to place higher values on goals other than
maximizing net worth. However, the blame cannot
be placed on business ethics. Business ethics is a
reflection of American societal ethics (Thurow,
1987).
The above discussion reveals the difficulty in
deriving a generally agreed upon standard of moral
behavior. Thus we are left with our laws, rules, codes
of ethics, and social norms with which to adhere.
Within this framework behavior which complies
with the laws, rules and norms should be viewed as
acceptable. The duty of the tax practitioner is to
assist the client in complying with the law. Going
beyond this requirement should be left to saints
(Urmson, 1958). If the tax practitioner believes the
tax law tolerates immoral or unethical behavior then
the practitioner should seek to inform the tax law,
not clients (Falk, 1986).
The moral ethical view
Compliance with legal norms is not necessarily
ethical. Legal and ethical are not always equivalent.
There is often a distinction made between profes-
sional ethics and moral ethics. In reality, there
should be no distinction. Professional ethics should
be driven by what is fundamentally right or wrong.
Ethical behavior is choosing actions that are "right"
and "proper" and "just." Behavior can be right or
wror^, it can be proper or improper, and decisions
that we make can be fair or unfair.
Although there are competing ethical systems,
where each tries to define what is meant by right or
wrong, there is a common principle underlying all
ethical systems (Tosmer, 1987). This common prin-
ciple, which is the heart of ethical action, is the
willingness to sacrifice one's self-interest for the
well-beir^ of others. This ethical principle does not
preclude the pursuit of profits by an organization. In
planning, controlling, and making decisions, how-
ever, managers should always consider the impact of
their actions on others, both within the organization
and without. Thus, the objective of profit maximiza-
tion should be constrained by the requirement that
profits are achieved through ethical means.
For example, consider a company where manage-
ment has the opportunity of choosir^ between two
legal altematives of producing a product. Assume
they approach an outside CPA and request an
analysis of the economic consequences of each
alternative. During the course of the analysis, the
CPA receives input from some engineering and
scientific experts revealing that one of the altema-
tives may pose a significant, long-term health threat
to the production workers. Although current laws
exist governing worker safety, adoption of the
alternative is in technical compliance with existing
legal guidelines. Furthermore, the alternative is by
far the least costly of the two altematives.
Upon receiving the analysis, along with the
information regarding the health risk, management
selects the least costly altemative, a legal, cost-avoid-
ance choice. But is this choice right? Ethical? The
motive was apparently cost avoidance and no viola-
tion of the law was in question. Yet choosing a
production method that could threaten the health of
the production workers obviously ignored their
well-being. Self-interest prevailed over concern for
the well-being of others.
 Moral Ethics V. Tax Ethics
The obove example has analogous elements to tax
avoidance and carries with it the implication that
the widely-accepted tax-avoidance norm may not
always work well as an ethical norm. To knowingly
do something wrong, even though technically in
compliance with existing law, is simply not ethical.
Perhaps we need to apply some qualifiers to the tax-
avoidance norm.
The Paterson Company case underscores this ob-
servation. The intent of Section 482 of the Internal
Revenue Code and similar guidelines in other coun-
tries, is to ensure that economic entities pay a fair
share of the income earned within each country. The
management of Paterson, however, was not con-
cerned with the payment of a fair tax (the spirit of
the law) but rather was concerned with reducing the
company's overall tax liabihty. This reduction was to
be achieved by transferring profits from European
operations to offset losses in the United States.
JefF Philhps, the marketing vice-president, made
it very clear that under normal operating conditions,
transfer prices were set by divisional managers. Thus,
the expected losses in the United States provided the
incentive for tampering with the normal transfer-
pricing arrangement. This suggests that the profits
being earned in Europe legitimately belong to that
sector and that the taxes owed on those profits legiti-
mately belong to the host governments.
The only purpose of increasing the transfer prices
was to extract European profits and avoid paying the
taxes that normally would be owed and paid. This
creates some suspicion about the ethical content of
the transfer-pricing decision. This suspicion is
strengthened when one considers the fact that "legit-
imate" costs were "reassigned" to support the
planned increase in transfer prices. The action of
reassigning costs provides further evidence that
management is engaging in questionable behavior. Is
the reassignment of "legitimate" cost merely a ploy
to cover up or support a questionable scheme? If not,
why did the accounting professionals within the
organization not discover these "legitimate" costs
earlier? Why did the prospect of losses in the U.S.
trigger their discovery? It appears to be yet another
example of creative accounting with the purpose
of reducing the chances of detection by taxing
authorities.
In fact, this point can be emphasized by asking
whether management would disclose when and why
the reassignment of costs occurred should an audit
685
take place. Yet, is it not ethical to "disclose fully all
relevant information that could be reasonably ex-
pected to influence an intended user's understanding
of the reports, comments, and recommendations
presented?" (Standards of Ethical Conduct for Man-
agement Accountants, 1983).
The tax avoidance argument is based, in part, on
the claim that tax minimization is a sound business
purpose. Support for structuring an entity's transac-
tions solely for the purpose of tax avoidance as
presented. Quotes from court cases served as pillars
for the argument. Lackii^ from the cites was discus-
sion of the landmark case Gregory v. Helvering, 293
U.S. 465 (1935). The Supreme Court, in this case,
explicitly attacked tax avoidance, stating equivocally
that it did not represent a sound business purpose. In
discussii^ the faulty corporate reorganization the
court provided:
The whole undertaking, though conducted according to
the terms of (the statute), was in fact an elaborate and
devious form of conveyance masquerading as a corporate
reorganization, and nothing else. The rule which excludes
from consideration the motive of tax avoidance is not
pertinent to the situation, because the transaction upon
its face hes outside the plain intent of the statute. To hold
otherwise would be to exalt artifice above reality and to
deprive the statutory provision in question of all serious
purpose.
From this opinion it is clear that the highest court of
the land expects something beyond compliance with
only the letter of the law.
Tax avoidance does not provide an exemption
from ethical behavior. Accounting professionals
should be more concerned with what is right than
with technical compliance with the law. In seeking
to earn profits and minimize costs professionals must
be held accountable to some level of collective well
being.
Conclusion
Reconciliation of tax ethics and moral ethics repre-
sents a difficult task. Yet, if there is any hope for
society in the aggregate to prosper, then some effort
must be directed to encourage actions which serve
the "greater good." The general state of personal and
business ethics is the cause For alarm. It is appro-
686 Don R. Hansen, Rick L. Crosser and Doug Laufer
priate to move towards a professional code of ethics
which focuses on serving the collective well-being.
Given the acceptance of the need for a profes-
sional code of ethics, the next major stumbling block
is what should be the foundation of such a code. A
possible option is to draw upon legal theory and
moral philosophy. In particular, the theory of justice
presented by John Rawls may well offer a starting
point for the construction of a Professional Code of
Conduct and Ethics (Rawls, 1971). Rawls equates
justice with faimess and proposes the idea of social
contract to assure faimess.
They (the principles ofjustice) are the principles that free
and rational persons concerned to fiirther their own
interests would accept in an initial position of equality as
defining the fundamental terms of their association.
These principles are to regulate all further agreements;
they specify the kinds of social cooperation that can be
entered into and the forms of govemment that can be
established.
The principles which evolve should reflect those of
an unbiased third party. Ethical standards and con-
duct should be above the self-serving actions taken
by those vwth a vested interest in the outcome of a
particular event. The Code of Ethics needs to be
presented in a way that causes companies (manage-
ment) to be aware of how their apparently singular
actions or transactions have a multidimensional
effect on society. In the Paterson Company case the
transfer pricing decision had many ramifications.
Some of these include the loss of revenues by U.S.
and French tax authorities. Also, the system of
compensation was altered without documented sup-
port. Division managers could not be assured of
what is needed to attain a given level of compensa-
tion. Managers could no longer have a definitive
understanding of their level of control over decision-
making. Therefore, the behavioral imphcations on
the various divisional managers should be consid-
ered. The human issue must be a component of an
ethical code of conduct
A worthy goal is to devise a Professional Code of
Conduct and Ethics which will promote behavior
that, while in the self interest, is viewed as acceptable
and reasonable to the independent observer. With
the passage of the 1980s it is time to start working
towards a system which will move us beyond the
"Generation of Swine."
References
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Oklahoma State University,
Stillwater, Oklahoma,
U.SA.
Weber State University
Ogden, UT, 84408-3803,
USA.