I have often heard people remark that society cannot legislate morality, though usually it's in the context of some hot political issue. Obviously, such individuals are forgetting a lot about the laws of the land. All states have statutes that criminalize behaviors such as murder, kidnapping, theft, perjury, and fraud. So, of course, society can and does legislate morality. All governments have been doing this from the beginning of time, they are doing it now, and I have every confidence that they will continue to do so in the future.

Those who allege that society cannot legislate morality or ethics, however, usually mean something a bit different. Rather than saying that society cannot legislate morality, what they really have in mind is that the federal government or the states or the local entities may enact such bills, but that does not imply that there is a change in anybody's heart or soul to make them act a certain way. For example, saying that a person should not murder another human being does not imply that people won't dislike, distrust, hate, or envy another, perhaps so much so that they would carry out this deed. Likewise, prohibiting a manager from defrauding investors and creditors does not imply that any manager will have the compassion, concern, and empathy to treat investors and creditors in a decent fashion. Managers might just as well carry out some get rich scheme despite whatever legislation is on the books.

This argument misses the point, for laws that prohibit murder, kidnapping, theft, perjury, and fraud are not directed to the heart or the spirit. They are aimed at human behaviors. The idea is to create incentives for actions that society wants to encourage and disincentives for deeds that society desires to deter.

Economic theory posits that rational actors will choose those actions that maximize expected utility. If the community decides that certain exploits are detrimental to the public interest and ratifies a bill stating so and includes disincentives for those who nonetheless perform these deeds, then the society is attempting to change the calculus of the decision-making process. Now the individual would include in his or her scrutiny some probability of discovery and the penalties for such detection and recompute the expected utility. Society's hope is that the rational actor now has the right incentives to do something helpful to it rather than something dysfunctional.

In other words, it is true that you cannot legislate honesty. You can, however, create enough disincentives to make people most uncomfortable and unhappy if they lie. If anything, we need to create more deterrents and increase the probability of discovering falsehoods. Such a world would have much better financial reports than we do today.

J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals, and columnist of The Accounting Cycle for SmartPros.com.