Ethical and Unethical Practices in Accounting - Coursework Example

Ethical and unethical practices; dependence on, or exclusivity from, cultural values and international standard of accounting Table of Contents Ethical and unethical practices; dependence on, or exclusivity from, cultural values and international standard of accounting 1 Table of Contents 1 Introduction 2 Concept of ethical and unethical accounting practices 2 International standard of accounting 7 Conclusion 8 References 9 Introduction The study of judgments and moral values when applied to accountancy take the form of accounting ethics. In other words it is the professional ethics as applied to the field of accounting. The concept of accounting ethics has taken firm roots in today's corporate culture even though the concept is centuries old. Fra Luca Bartolomeo de Pacioli (1445–1517), an Italian mathematician, popularly known as Leonardo da Vinci collaborator, first gave the concept of accounting ethics, which is now taught to accounting students at all levels and even trained accountants at the corporate level. The accounting ethics has recently come under sharp focus because there have been numerous corporate collapses in the recent times, parts of which have sometimes been attributed to depleting standards of the accountants or accounting profession. This has not only resulted in the reputation of accounting practice take a downside plunge, but also led to a serious introspection to know what is ethical and what is unethical in accounting practice. In order to annul this and make the accounting practices as the most reliable and reputed ones, different government groups, individual companies and professional organisation have taken up the task of either formulating new or amending the old regulations pertaining to the ethical side of the profession. Concept of ethical and unethical accounting practices A number of people have said that ethical accounting is an oxymoron. But Keen (n.d.) has argued that it is not and adds that it is not only desirable but also possible. When a commitment is made by an accounting firm to accounting practices, it can be termed as ethical accounting. To presume that ethical accounting is the job of only trained accountants would not be justified. Keen goes on to add that an accounting firm which is serious about involvement of ethics in it practice must have an ethicist working with them. The ethicist would preferably be one who has a doctorate to his credit either in philosophy or a scientific discipline. Ethics is an evaluation human action and revolves around moral virtues and their nature. It is primarily a philosophical domain, which is normally exclusive of cultural, religious and legal approaches, but is centered on rationality of an action. The outlook is secular. Having an ethical approach to accounting should be a rule than an exception. Generally since it is held than accounting firms do not either cross ethical lines or break laws, the onus come directly on the accountant to hold ethical practices in high esteem and prevent the same from falling. It cannot be denied that adhering to honest and ethical accounting practices is a tightrope walk for the involved professionals since at times they are under pressure to release inflated projections. But that does not also give cover in the sense that an accounting practice can take its eyes away from the ethics involved. Accounting practice needs to reflect on some basic considerations which determine the ethics of an action, an individual or an organisation. These considerations include divine command theories, selfishness, conscience, respect, utilitarianism, right, virtue and justice. It is generally held that ethical behaviour in a practice – accounting or otherwise – is shaped by which principles are underlying a specific culture or religion. These cultural principles give codes that are sort of automated and carried on by generations of a culture to the future ones on how to behave. Recently ethics in accounting practices have been driven to some extent by concern raised about ethical issues by general public. It has been having tremendous impact on businesses either run or showcase their practice. Organisations are now very vocal about their ethical statements which give general public a peep into how concerned the organisation is about ethical issues. There is a code of ethics which professional accounting bodies make public and follow. Such codes have undergone a sea-change over the years. While earlier codes were related more to the internal functioning of a professional accounting body, the codes that are in use now reflect more on how the body does or would act in conjunction with public expectations. There is an inextricable link between the code of ethics of a professional body and the notion of professionalism. Parker (1987) is of the opinion that there has been a proportionate development in ethical rules for accountants as professional accounting bodies have developed. The development has been a continuous process. For example, in Australia, a Joint Code of Professional Conduct was developed by ICAA and CPA in the late 20th century. The code outlined certain ethical requirements that were supposed to be followed in accounting practices. Over the time when accounting attained international recognition and formed the cornerstone of organisations, IFAC or International Federation of Accountants came into being. The internationalisation warranted that no accounting practice, wherever it takes place, should have a lenient code of ethics and the ones which are being followed should be stringent. Details of ethical codes of accounting are interesting but the centrality of all concerns is either based on or is governed by certain theoretical considerations. That means even the terms that might seem insignificant need careful definitions to be understood and used in the right earnest. For example, the terms profession and public interest. Ethics on part of the later determines the public perception on the profession. Ever since the globalisation, accounting practices need to be backed by ethical values as much as that of any other practice which has public dealing or impact. In accounting practice, personal qualities, skills and knowledge are as much relevant as in any other profession. Professionals of accounting practice encounter as many problems and as many dilemmas as do other professionals in terms of conflicts between decisions and rules, established value judgments, and profession-specific problems. The greatest hurdle in following ethics in accounting practice is the striking of tricky balance between fulfillment of the responsibilities and adherence to the ethical values. It is like weighing honesty on one hand and the mountain of responsibility on the other. It is a situation fraught with high degree of dilemma since an organisation on one hand wants to make profits and accounting professional on the other hand has to maintain the ethical integrity. This is where a code of conduct meant to provide direction in accounting practice gains importance. It gives the accounting practitioner knowledge to differentiate between the wrong and the right. The accounting practice can be deemed as following the code of conduct properly when the professionals involved maintain high level of professional integrity and do not bypass law for individual gains; when the behaviour is honest to the extent that it leaves a positive imprint on public, and when the professional is fully aware of the current strictures imposed on and specifying unethical accounting behaviour. Normally honest, trustworthy and impartial accounting professionals display qualities that conform to this code of conduct (Fatt, 1995). This is because the ultimate objectives of accounting practice include serving the public and also safeguarding its interests. There is an element of universality that binds accounting systems and practices wherever they are practiced. These are more or less the same everywhere, though some minor differences may exist from one country to another. These elements include materiality, conservatism, substance, consistency, full disclosure, objectivity, monetary units, cost concepts, matching principles, going-concern assumption, entity concept and social responsibility. The last one is very important and finds a perfect match with professional ethics. If this weakens, all other elements weaken as it triggers a ripple effect. The ethical part of it pertaining to the accounting practice would be considered a having been fulfilled when accounting professional acts within the purpose, meaning and scope of the responsibility involved. Not only that, it also covers responsibility vested into the accounting organisation, being aware of the stakeholders' rights, being aware of the public expectations, implementation of accounting practices, and means and method used to report the information that is generated. Different nations have different sets of principles and corresponding rules or codes of conduct governing the practice. For example, in the United States of America, the principals include responsibilities, public interest, honesty, public interest, impartiality and independency, professional care, and scope and nature of the service. The corresponding code of conduct is independency in responsibilities, honesty and impartiality in public interest, general standards in honesty, compliance with standards in impartiality and independency, conditional fee for professional care, and in scope of nature of service the codes of conduct that would apply include activities incompatible with professional integrity and honour, prohibition on advertisements, and strictures passed on any given conduct from time to time. Since accounting practices are meant to provide financial information to public and investors, the practice is always under pressure. This is because if the information provided is positive and creates a feel-good factor in both public and investors, the interest of either increases in the organisation on which information i being provides. But if the information creates a negative influence or rides uneasy financial factors, it might jeopardise further investments and decline public interest. In order to show the positive aspect of an organisation when the real picture is otherwise, accounting professionals resort to behaviour which is unethical. Different organisations encounter negative circumstances of varying degrees that lead the accounting practice into unethical practices. This includes exaggerating revenues and misusing funds, providing of information regarding expenses which is erroneous, highlight the corporate asset value in an exaggerating manner, expect personal gains by providing misleading financial analysis, indulge in securities fraud, resort to bribery, do inside trading and resort to manipulation of financial markets. The most recent examples of unethical accounting practices are those of WorldCom and Enron / Andersen, which happened in 2002. Enron concealed debts on account of some shady dealings. They did so because they did not want the debts to reflect in their financial reports. Similarly WordCom indulged in unethical accounting practices of such magnitude that till there has been no other company as this that has led itself into history's largest bankruptcy. International standard of accounting Both cases shook the corporate world and specifically the United States of America since both were American companies. Their American origin led the US government to get involved, introspect and implement new rules and regulations. This led to the inception of what is now popularly known as Sarbanes-Oxley Act 2002. The act is meant to enforce rules on accounting which are strict to the point that an end could be seen in unethical accounting behaviour being achieved. More often than not it has been seen that certain amendments to rules and regulations are made or new laws enacted only when scandals break out. A pre-emptive comprehensive set of rules not usually made or implemented until then. But continued work is in progress on this. This work might lead, albeit slowly, to some level of uniformity in laws related to accounting practices in nations that have varying cultural and social backgrounds. International Accounting Standards (IAS) already exists and deal mostly with financial statements should report different types of transactions. Previously, IAS were issued by Board of IASC or International Accounting Standards Committee, but following certain change in 2001, new set of standards that emerged came to be known as IFRS or International Financial Reporting Standards. IASB or International Accounting Standards Board issued these. Today, many publicly-trading companies require IAS-compliant financial statement to be made. How far this can go in the backdrop of social and cultural differences of different nations is to be seen as study into relevance of society and culture with respect to accounting system has only begun recently. Research into the impact of culture on accounting has begun in late eighties. To define a nation’s accounting subculture, Gray (1988) outlined four accounting value dimensions: uniformity versus conformity, professionalism versus statutory control, secrecy versus transparency, and conservatism versus optimism. Gray's four value identification can be termed as an extension of Hofstede's model which has linked accounting system and values to institutional norms, cultural backdrops and societal values of a nation. Even as Doupnik and Tsakumis (2004) cultural factors influence a country's financial reporting directly, common consensus and codes of conduct which are universally applicable are still possible. This is because ethical actions are valued equally by all cultures of the world. Conclusion Accounting ethics is an old concept which is finding high importance value in the modern-day practice of accounting in business. Despite the opinions from different people that it is an oxymoron, scholars have argued that ethics in accounting are very much part of each other. Businesses following ethical principles are always too keen about have ethic followed in accounting as well since any little bit of flaw impacts the overall image and credibility of the accounting practice and the organisation as well. This is one reason why ethical codes of conduct for accounting practice are amended from time to time so that an international standard, which meets all the desired criteria, are reached. References Doupnik, T. S. & Tsakumis, G. T. (2004). “A Critical Review of the Tests of Gray’s Theory of Cultural Relevance and Suggestions for Future Research”, Journal of Accounting Literature, Vol. 23: 1-30. Fatt, J.P.T. (1995). “Ethics and the accountants”, Journal of Ethics, Vol.14, s.997. Gray, S.J. 1988. Towards a theory of cultural influence on the development of accounting systems internationally. Abacus. Vol. 24: 1-15. Keen, B. (n.d.). “Ethical accounting practices”, Retrieved http://www.ethicsinstitute.ca/uploads/MB_winter_accounting_reprint.pdf. Accessed December 15, 2012. Parker, L (1987), “A Historical Analysis of Ethical Pronouncements and debate in the Australian Accounting Profession”, Abacus, Vol. 23, pp 122 – 40. Read More

Accounting practice needs to reflect on some basic considerations which determine the ethics of an action, an individual or an organisation. These considerations include divine command theories, selfishness, conscience, respect, utilitarianism, right, virtue and justice. It is generally held that ethical behaviour in a practice – accounting or otherwise – is shaped by which principles are underlying a specific culture or religion. These cultural principles give codes that are sort of automated and carried on by generations of a culture to the future ones on how to behave.

Recently ethics in accounting practices have been driven to some extent by concern raised about ethical issues by general public. It has been having tremendous impact on businesses either run or showcase their practice. Organisations are now very vocal about their ethical statements which give general public a peep into how concerned the organisation is about ethical issues. There is a code of ethics which professional accounting bodies make public and follow. Such codes have undergone a sea-change over the years.

While earlier codes were related more to the internal functioning of a professional accounting body, the codes that are in use now reflect more on how the body does or would act in conjunction with public expectations. There is an inextricable link between the code of ethics of a professional body and the notion of professionalism. Parker (1987) is of the opinion that there has been a proportionate development in ethical rules for accountants as professional accounting bodies have developed. The development has been a continuous process.

For example, in Australia, a Joint Code of Professional Conduct was developed by ICAA and CPA in the late 20th century. The code outlined certain ethical requirements that were supposed to be followed in accounting practices. Over the time when accounting attained international recognition and formed the cornerstone of organisations, IFAC or International Federation of Accountants came into being. The internationalisation warranted that no accounting practice, wherever it takes place, should have a lenient code of ethics and the ones which are being followed should be stringent.

Details of ethical codes of accounting are interesting but the centrality of all concerns is either based on or is governed by certain theoretical considerations. That means even the terms that might seem insignificant need careful definitions to be understood and used in the right earnest. For example, the terms profession and public interest. Ethics on part of the later determines the public perception on the profession. Ever since the globalisation, accounting practices need to be backed by ethical values as much as that of any other practice which has public dealing or impact.

In accounting practice, personal qualities, skills and knowledge are as much relevant as in any other profession. Professionals of accounting practice encounter as many problems and as many dilemmas as do other professionals in terms of conflicts between decisions and rules, established value judgments, and profession-specific problems. The greatest hurdle in following ethics in accounting practice is the striking of tricky balance between fulfillment of the responsibilities and adherence to the ethical values.

It is like weighing honesty on one hand and the mountain of responsibility on the other. It is a situation fraught with high degree of dilemma since an organisation on one hand wants to make profits and accounting professional on the other hand has to maintain the ethical integrity. This is where a code of conduct meant to provide direction in accounting practice gains importance. It gives the accounting practitioner knowledge to differentiate between the wrong and the right. The accounting practice can be deemed as following the code of conduct properly when the professionals involved maintain high level of professional integrity and do not bypass law for individual gains; when the behaviour is honest to the extent that it leaves a positive imprint on public, and when the professional is fully aware of the current strictures imposed on and specifying unethical accounting behaviour.

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