Exploring Accounting Ethics
Transcript of Exploring Accounting Ethics
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Introduction
In this paper we will look at the importance of Ethics in the accounting profession and
present ways to restore confidence in an industry that has been marred with recent incidents of
unethical behavior. Accounting is one of the most important business functions a company
does and accurate accounting statements form the basis for the financial image of the
company. These statements are used by executives to make sound decisions, inform investors
of developments within the company, and most of all keep the company profitable.
(Armstrong 1993) Furthermore, due to the wide dissemination of this information and the
myriad of uses, ethical behavior is extremely important to accountants when dealing with this
financial information. Accountants are often privy to sensitive information regarding the
company and this provides the potential for misuse. Because of this, there must be a level of
trust between accountants and not only their employer, but also the general public that may be
relying on the integrity of the information they provide. (Hoffman 1996)
Certified Public Accountants and other accounting professionals must not only be well
qualified, but must also possess a great deal of professional integrity. A professional's
reputation is one of his or her most important possessions. They know that people who use
their services, especially managers and investors using financial statements, expect them to be
highly proficient, accurate, and objective. (Love 2008) These statements are also vital to
investors because they provide important information that could be the determining factor in
the decision to invest in a company. Because of all this, there are professional ethics
standards that guide the accounting profession and accountants are expected to adhere to these
standards. (Armstrong 1993)
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Society needs be confidant that the quality of the complex services provided by
professionals is accurate and consistent. Because of these high expectations, professions have
adopted ethical standards, known as codes of professional conduct. (Love 2008) These ethical
codes require their members to maintain a level of integrity that goes beyond the requirements
of laws and regulations. In the same way it is important that the field of accounting itself is
not seen as an unethical one.
The Ethics Codes
Integrity requires accountants to be honest, candid, and forthcoming with financial
information and they must not use this information for personal gain or advantage. (Berton
1984) While differences in opinion over the accounting regulations do exist, professional
accountants must not manipulate financial information to intentionally deceive others. Public
accounting firms or other companies often develop a code of conduct for their accountants.
(Carey 1980) These rules ensure all accountants act in a consistent manner, but in the absence
of specific rules or standards, accountants should be continuously looking at their actions to
ensure they follow accepted practices.
By joining professional organizations, accounting professionals agree to uphold the
strict ethical standards of their profession. Each of the major professional associations for
accountants has a code of ethics. (Cheffers 2007) The Code of Professional Conduct of the
American Institute of CPAs dictates the ethical principles and rules of conduct for its
members. The principles are positively stated and provide general guidelines that CPAs
should follow. (Cottel 1990) These rules are much more explicit as to specific actions that
should or should not be taken. The Institute of Management Accountants Standards of Ethical
Conduct applies to practitioners of management accounting and financial management, and
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the Institute of Internal Auditors Code of Ethics applies to its members and to Certified
Internal Auditors. (Duska 2003)
The AICPA requires professional accountants to act responsibly when engaged in
accounting services and reviewing sensitive financial information and always exercise sound
judgment in all accounting activities. Accountants have the responsibility to provide clients
with professional services while presenting an accurate appraisal of the companys financial
situation. They must not create conflicts of interest or other questionable business
relationships when conducting accounting services. Objectivity and independence are
important to the accounting profession and failure to remain objective and independent may
hamper an accountants ability to create an unbiased opinion about a companys financial
information. (Cottel 1990) Maintaining objectivity calls for avoiding both actual and apparent
conflicts of interest. Being independent means that one not only is unbiased, impartial, and
objective, but also is perceived to be that way by others. Furthermore, accountants should not
perform more than one service for a client or they may find themselves in a compromising
situation. An individual who handles general accounting functions and then audits this
information is essentially reviewing his or her own work. (Cheffers 2007) This situation may
allow an accountant to hide a companys negative financial information. In addition, in
executing their duties accountants are required to exercise due care. This requires accountants
to observe all technical and ethical accounting standards while applying generally accepted
accounting principles the companys specific financial situation. Finally, accounting
professionals should only undertake tasks that they can complete with professional
competence, and they must carry out their responsibilities with sufficient care and due
diligence. (Duska 2003)
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For the most part, the accounting profession is self-regulated through various
professional associations rather than being regulated by the government. (Cottell 1990) The
AICPA, the IMA, and the IIA have internal means to enforce the codes of ethics. Violations
of ethical standards can lead to being publicly expelled from the professional organization.
(Duska 03) Because of the importance of a professional accountant's reputation, expulsion can
be a very strong disciplinary action. Nevertheless, ethical violations can also lead to even
more severe consequences for CPAs because of state and federal laws. The each state issues a
CPA a license, usually through the state board of accountancy. Since state laws governing
accounting usually include parts of the AICPA Code, the Code now gains legal enforceability.
(Cheffers 2007)
Ethics Violations
What causes unethical behavior? Society provides managers with wrong incentives,
and gives them the means to hide the deception. Executives can find it easy to inflate
earnings statements because they are an inherently unreliable predictor of future performance.
However, investors look at earnings statements as a signal to bid up or down the stock price.
(Jackling 2007) Furthermore, U.S. investors want stock appreciation and they want it now and
changing the system won't change this short-term focus, nor will it add to the reliability of the
earnings statements. (Stuart 2004)
Recent financial accounting scandals have generated unfavorable publicity for CPAs.
For example, Arthur Andersen underscores the consequences accountants may face under
professional responsibility rules, but the scandals also have implications for the profession as
a whole. In April 2003, the Public Company Accounting Oversight Board (PCAOB), created
by the Sarbanes-Oxley Act of 2002, voted to assume responsibility for establishing auditing
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standards, this ended the role previously played by the Auditing Standards Board of the
AICPA. (Scannell 2008) The PCAOB is also authorized to set rules governing ethics,
independence, and quality control for registered accounting firms. (Scahhell 2008) Publicity
over the role of accountants in ethics scandals often accompanies major corporate collapses
and some say that the recent string of corporate scandals has set a new low for the accounting
profession. It was the accountants who assisted in financial management, prepared financial
statements, and audited those statements. On the other hand, accountants have also played a
major role in good corporate governance and ethical sustainable business practices.
Gouthorpe 1998)
Nevertheless, negative consequences that go far beyond the scope of a single firm or
even the industry can result from poor ethics in accounting practices. The first result is
generally a lag in business. (Jackling 2007) Accounting firms rely heavily reputations, and it's
very easy for publicity about unethical behavior to sway prospective clients away from a
particular firm or to lose investor confidence. Notwithstanding, there can also be severe legal
repercussions for those who are found guilty of violating legal codes and standards.
Case study - ENRON
Enron is a resent and well-known scandal in unethical accounting practices. The
executives at Enron knowingly and intentionally manipulated accounting data for personal
gain at the expense of investors, creditors, and employees. The scope of this fraud is so
extensive that it goes far beyond merely unethical practices. They created offshore entities,
using them as shells corporations for planning and avoidance of taxes, in an attempt to raise
the profitability of the company. This provided leadership the freedom of currency movement
and the anonymity that gave the company the opportunity to hide significant losses over a
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long period of time. These entities made Enron look more profitable than it really was, but
eventually created a downward spiral, in which each quarter, executives performed more and
more distorted financial manipulation to create the illusion of profit while the company was
actually losing money. This drove up their stock price, until it reached a breaking point at
which the executives began to sell off millions of dollars worth of Enron stock. The
executives and others at Enron knew about the offshore accounts that were hiding losses, but
investors knew nothing of what was really going on. The Chief Financial Officer led the team
that created the off-the-books companies, and worked the deals to provide him and others
with hundreds of millions of dollars in returns, at the expense of the company and its
stockholders. As the scandal unraveled, Enron shares dropped from over $90.00 to less than a
dollar. Enron had been considered a blue chip stock, so this was an unprecedented and
devastating event in the financial world. Enron filed for bankruptcy on December 2, 2001.
(Stuart 2004) In addition, the scandal led to the dissolution of Arthur Andersen, a top
accounting firm. The firm was found guilty of obstruction of justice in 2002 for destroying
documents related to the Enron audit and was forced to stop auditing public companies.
Although the Supreme Court threw out the conviction in 2005, the damage to its image has
prevented it from returning to the industry. (Stuart 2004)
Ethics Education
Ethics education is more than studying the code of professional conduct, but rather a
process where individuals learn to consciously make ethical decisions. One of the main goals
of ethics education should be to encourage students to recognize social responsibilities within
their profession and develop abilities needed to deal with ethical conflict and ambiguity.
(Bernardi 2006) Exposing students to common ethical dilemmas and methods of resolution
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should be an integral part of accounting education. This would bring about more awareness
of the necessity for appropriate professional behavior and also ensure that accounting students
leave with at least some of the knowledge they will need to recognize their professional
responsibility. While U.S. accounting standards tend to follow a rules-based approach,
International Accounting Standards uses a concepts-based approach. (Bean 2007) Students
need to understand the idea of concept-based standards, the responsibility of financial
reporting, and the pressures they may encounter. The accounting profession also needs to
address questions of continuing education. Ethics training should be part of continuing
education requirements and promoting more continuing education in ethics and professional
responsibility issues would increase visibility and create a larger distribution of ethical
awareness. Ethics continuing education should concentrate on recognizing professional
responsibility and on the consequences of not acting within ethics codes. (Bean 2007)
In addition to questions of what to teach, there has been debate on how and when to
teach ethics and professional responsibility. Of the accounting programs at U.S. schools
accredited by the AACSB, only four offer a separate course in professional responsibility.
(Bernardi 2006) This represents a widely held view that ethics integrated into existing classes
produces better awareness of ethical issues than a separate course. While an integrated
approach to ethics training in may work in theory, it assumes that professors have adequate
training and class time to address ethics issues. In some cases, faculty, while highly trained
on technical subjects, may not have the expertise or background to adequately cover ethical
issues. (Bernardi 2006) Additionally, the increasingly complicated and technical nature of
accounting leaves professors struggling to cover more material in the same amount of class
time. This means that schools using an integrated approach to ethics must incorporate
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professional responsibility in all accounting classes and most importantly introductory
coursed that are often taken by all business majors. (Bean 2007)
Nevertheless, accounting educators also must establish and enforce strict rules against
academic dishonesties and need the support of education administrators if they are to distil
integrity in to their students that will carry over to their professional careers. This is
consistent with the suggestions of the Treadway Commission, which challenged colleges and
universities to establish a culture of academic integrity. Studies have established that
academically dishonest students in college are more likely to be involved in unethical
practices in the workplace. Because of this, a focused effort to establish a culture of academic
integrity in accounting programs is needed to reduce academic dishonesty and prevent
dishonesty from carrying over to the profession. (Bean 2007) Many studies have concluded
that ethics education does have a positive effect upon students; however, despite the evidence
that ethics education can be effective, many accounting programs still dont give ethics the
time it needs in the classroom. (Bernardi 2006) Considering the current climate, educators can
no longer avoid the topic. Programs that include ethics in introductory accounting courses
have shown a desire to include ethics from the beginning to the end of the business program.
This should stress the importance of the fundamentals, integrity, and responsibility. One
recommendation is to implement ethics across the entire curriculum. This approach conveys
the message that ethics is a critical aspect of accounting and not just a textbook chapter.
Students will grasp the importance of ethics only when educators give it the same priority as
other areas of accounting.
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Recommendations
There are several steps that need to be taken to improve professional ethics throughout
accounting. Managers need to take proactive steps during the hiring and training of new
CPAs. During the interview bring up a non-straightforward ethical dilemma for the candidate
to evaluate during the interview. Once hired, new employees should receive more training in
the ethical environment of the firm and the profession and how to handle conflicts that may
arise. (Cheffers 2007) This training would help ensure understanding and highlight the
importance of professional responsibility within the organization.
Large accounting firms should designate a senior employee to be a specialist on issues
of ethical responsibility this ethics specialist should be a resource when ethical issues arise.
This specialist should be in charge of efforts to maintain competence on professional
responsibility issues. This includes searching publications for related articles to distribute to
other employees, attending ethics seminars, and developing expertise on ethical issues. In this
way, the specialist can help colleagues understand professional responsibility issues that may
not be straightforward. A secondary role would be to ensure that if an ethics issue should
arise that it is resolved appropriately.
An ethics specialist should be knowledgeable about resources to help answer
professional responsibility questions and work to maintain an environment that focuses on the
importance of ethical professionalism. An appointment of a highly placed firm member to an
ethics position helps establish and reinforce an ethical image from the top down and highlight
the companys obligation to professional responsibility principles. This position would
develop the companys reputation for professionalism and ensure that it develops an
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appropriate response to ethical dilemmas that may arise, rather than just meeting technical
requirements.
Conclusion
CPAs have long and rightfully enjoyed a reputation of integrity and competence,
however recent scandals have damaged that image and diminished confidence in the
accounting profession. CPAs must make a commitment to understanding ethical issues and
ensure that they are always in a position to act within the guidelines of professional
responsibility. Also, CPAs should not allow themselves to become too dependent on one
client or to become so financially overextended that they cannot afford the loss of income that
could come from ending a client relationship because of an ethics issue. Finally, to
distinguish potential ethics issues, accountants should look at the ethical environment of the
company and other companies in the industry and develop consistent and professional
responses. This would represent a step forward in restoring confidence in a profession that
cannot operate without the publics trust.
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