An Inquiry in the Ethical Challenges in the Accounting Profession - Research Paper Example

?An Enquiry in the Ethical Challenges in the Accounting Profession of This paper critically examines the issue of disregard for ethics in the accounting profession. The paper assesses the critical role of ethics in accounting and goes further to identify the causes of ethical problems in the field of accounting. It finally makes recommendations on how accountants can be made more responsive to ethical standards and methods. Keywords: Accounting, Ethics, Sarbanes-Oxley, Stakeholders Table of Content Executive Summary………………………………………..4 Introduction………………………………………………...4 Ethics in Accounting……………………………………….4 The Scope of Ethics in Accounting………………………...5 Issues with Accounting & Ethics…………………………...6 How these Challenges are Affecting the Profession………..7 Recommendations ………………………………………….8 Executive Summary Like most professions, accountants are expected to work within morally acceptable systems in their decision-making and operations. Ethics is so crucial in accounting because accounting is involved with the control, distribution and documentation of financial transactions. Accountants therefore need to be regulated by very serious ethical standards which are monitored by professional accounting bodies. In practice though, accountants fail to meet the ethical standards and frameworks stipulated for them. This has led to so many corporate scandals like the Enron and Arthur-Anderson scandal. There are four main causes for this, identified in the paper. They include: inherent lack of ethical awareness amongst accounting students and practicing accountants. External causes for unethical behavior amongst accountants include shareholder pressures as well as the existence of loopholes in accounting standards. This paper recommends that ethics in accounting should be an integral part in the training of accountants. Accounting professionals should also be given refresher training and proper regulation to ensure that they are ethical in their behavior. Additionally, accounting standards should be institutionalized in statutes to make it less susceptible to manipulation. Finally, there should be a good effort to eliminate grey areas found in ethical standards to keep accountants focused on honoring ethical standards whilst they work. Introduction Ethics is an important part of the accounting profession. It is therefore necessary for people who study accounting to have a firm grasp of the ethical framework of accounting to become good accountants in practice. However, over the past decades, there have been a blatant disregard for ethics in the field of accounting and this is always connected either directly or indirectly to the blatant disregard for accounting ethics (McPhail & Walters, 2009). The Enron & Arthur-Anderson collapse can be attributed to the complete disregard for ethics on the part of accountants and managers. This paper identifies the causes of massive disregard for ethics in the accounting profession and its effects to the various stakeholders. It goes further to make recommendations about how best accountants can be made more responsive to ethics in their routine activities. Ethics in Accounting Ferrell et al (2009) defined ethics as a way of incorporating moral judgment and rules of conduct into a given profession. This therefore means that ethics is linked to the use of moral standards to ensure that the decisions and activities of a professional are acceptable by the wider society. In order to define and institutionalize ethics, professions have come up with their own codes to ensure that these ethics are standardized and people are kept in check in their routine professional activities. The accounting field is no exception to the general rule. Accountants need some rules that “determine the attitudes and procedures of the accountant in relation to the client and to the general public” p147 (Calhoun et al, 1999). Accountants therefore need to have a framework within which they can operate ethically. The issue of ethics in the accounting profession cuts across three areas: they are stakeholder issues, corporate social responsibility and corporate governance (Ferrell et al, 2009). This effectively means that accountants need to ensure that all the parties the affect in their operations are treated according to the right moral standards expected of them. Secondly, accountants are expected to give back to the society. And also, accountants have to co-operate with the people who run organizations, like directors and managers to enable the organization to operate ethically to all stakeholders. To honor and enforce ethics in the Accounting Profession, most nations now require accountants to join professional bodies. Most professional bodies are linked to the International Federation of Accountants (IFAC). IFAC has made efforts to harmonize the operations of the various national accounting bodies around the globe by setting standards that are applicable in all jurisdictions. In America, the American Institute of Certified Public Accountants (AICPA) is responsible for regulating the profession. They are increasingly sharing similar standards with IFAC. The following standards apply to both institutions: 1. Integrity: Accountants are required to be honest in their dealings. 2. Objectivity: Accountants are supposed to be neutral in their operations. 3. Professional Competency: Accountants should only take up jobs they are qualified and experienced enough to do. 4. Due Care: Accountants need to take the necessary steps in executing projects 5. Confidentiality: Accountants must not disclose information about their clients to third parties unless they are authorized to do so or there is a legal obligation to do so. 6. Professional behavior: Accountants need to put up professional behavior and ethical conducts in their activities. 7. Independence: Accountants should not have self interest, indulge in self-review, advocacy, be too close to the client or put themselves in positions that a client can be too powerful to manipulate or influence their decisions p320 (Swanson & Fisher, 2011) With these standards, accountants are expected to be free from pressures that will lead them to indulge in unethical behavior and work according to expectation. The Scope of Ethics in Accounting Accountants are charged with the monitoring of financial proceedings, documentation and disclosure of these transactions in businesses. Accountants therefore play a crucial role to their clients/employers as well as the general public (Calhoun et al, 1999) Since accountants play a central role in organizations, it is crucial for them to act ethically to ensure that all parties connected to them are treated truthfully and fairly. Ethics in accounting therefore has direct and indirect effects on several stakeholders including: 1. Shareholders: They rely on the figures, advise and decisions given by accountants so they need to be as accurate as possible 2. Directors of Businesses: They delegate their responsibility of managing finances to accountants so they need accountants to be ethical. 3. Managers of Businesses: The advise and decision of accountants affect the flow of income to these managers to run operations in their departments. 4. Employees: The advise of accountants determine the remuneration of employees. 5. Customers: The kind of services and goods produced by a business to final consumers is dependent on how much resources are made available to the various departments of the business. 6. Government Agencies: Accountants’ reports act as yardsticks for governmental decisions and tax planning issues. 7. Professional Bodies & Educational Institutions: These are entities that set standards for accountants and train the next generation of accountants. Their actions of accountants prompt changes in ethics that emanate from these institutions. 8. The Wider Community: Accountants’ decisions on the distribution of wealth in the society plays a major role in determining the extent of corporate social responsibility that a business is willing and able to discharge to the wider society. Issues with Accounting & Ethics Although the issue of ethics in accounting is central to the discipline and have far reaching effects on various units of the larger society, there have been serious issues in the accounting profession that can be traced directly to accountants’ disregard for ethics. This is the account of Enron, given by Axelrod p345 (2004). Enron started as a small Houston based pipeline company, that expanded to become a global oil giant. The directors of Enron reported huge profits year after year although they held their ‘cards close to their chests’. The profits reported at the end of each quarter were encouraging until they posted a shocking loss in the third quarter of 2001 that caused their share value to crush to record lows. It became apparent that there were serious reporting issues in Enron. When the matter was investigated, it became apparent that the directors of Enron, in connivance with its accountants and auditors, Arthur-Anderson had: 1. Been involved in insider dealings. 2. Hidden debts 3. Indulged in off-balance sheet finance and 4. Overstated profits. This clearly showed that the accountants had failed to honor their ethical requirements which include among other things integrity, objectivity, independence, and the lack of due care. Arthur-Anderson finally folded up because they failed to honor accounting ethics. This led to the use of a rules based system in the United States after the enactment of the Sarbanes-Oxley act which made directors and accountants more responsible for their actions and inactions (Fletcher & Plette, 2008). However, with these, there are still challenges with ethics in accounting. Causes of Ethical Challenges in Accounting There are many factors that cause accountants to disregard ethics in their activities. Some of these challenges are inherent in the profession whilst others are caused by external factors and pressures that forces the accountant to disregard ethics. First of all, a study conducted by Eynon etal, (1997) showed that accounting students are trained with very little regards for ethics and moral standards. Most accounting syllabi around the world are structured with little contents relating to ethics and moral judgment. They therefore graduate with little regards for ethics and when they start working as accountants, they have very little concern for ethical standards and systems. Secondly, “Accountants appear to exhibit lower levels of moral reasoning than other groups” p4 (McPhail & Walters, 2009). This therefore suggests that the exclusion of ethics from most syllabi does not end there. Accountants fail to learn more about ethics to upgrade their knowledge of ethics and moral judgments. These two points mark out the inherent moral challenges of the accounting profession. For external causes of ethical weakness in accounting, there are several reasons why accountants are forced to disregard ethics and indulge in amoral or illegal activities. The first source of challenge is what Wood & Welker (2011) describe as share value activism. This refers to a practice that began in the 1970s where “shareholders sought to discipline powerful corporate managers and restore control to the ‘real’ owners of the companies – the profit seeking shareholders.” This group of pristine capitalists is known for putting pressure on managers and by extension accountants to indulge in activities that will bring them more profits with little regards for other stakeholders. This invariably forces accountants to indulge in practices that ensure that they report high profits through ethical or unethical means. Additionally, with the many legislative instruments like Sarbanes-Oxley and social pressures waged by stakeholder oriented groups, accountants often find ‘grey areas’ that that are not clearly covered by statutes. For example, accountants can take part in unethical behavior that are not covered by law and get away with it. These grey areas therefore provide a breeding ground for many amoral acts by accountants. Recommendations From the following causes identified, I will make the following recommendations for the improvement of moral and ethical behavior amongst accountants. First of all, I recommend that ethics should become a fundamental part of the training of accountants. This way, accounting students should be taught about ethics right from the most basic level so that they get a strong awareness of accounting ethics long before the commence practice. Also, students with professional bodies should be made to go through practical ethical training to enable them to get a feel of the ethics and moral justice in practice. Secondly, practicing accountants and members of accounting bodies should be made to go through refresher courses and training sessions so that they get updated about changes in the ethical terrain and understand how they can be dealt with. Additionally, accounting bodies should always regulate and check the ethical performance of members periodically to ensure that they are supervised and kept in the right ethical framework whilst they operate. Also, nations and communities should continue promoting corporate social responsibility, corporate governance and stakeholder issues in the world of business. With this intact, directors and accountants will get the justification to stand before pristine capitalist shareholders and make demands that will make them more ethical in their operations rather than increase profits all the time. Additionally, with the institutionalization of accounting standards and ethical frameworks by accounting bodies in the laws of the nation, ethical standards will less susceptible to manipulation and politicization in organizations. This will enable accountants to operate and act more ethically than they are doing now. Finally, reasonable steps should be taken to ensure that all loopholes in accounting standards and ethical frameworks are blocked. This will eliminate doubts and enable accountants to operate ethically. Conclusion Ethics is an essential aspect of accounting. This is because accountants are charged with the control of funds that do not belong to them. It is therefore necessary for them to work according to very high ethical and moral standards. Due to this, professional accounting bodies have come up with very high ethical standards that promote integrity and independence in the profession. These ethics are framed in such a way that accountants give off accurate and honest information to the stakeholders their activities are connected with. In recent times though, there have been blatant disregard for ethics in the accounting profession. This can be attributed to the fact that accounting students are not introduced to ethics effectively. This is worsened by the fact that accounting professionals also fail to get enough exposure with current and new trends in ethics. Also, accountants often come under pressure by pristine capitalist shareholders and other pressure group within businesses they operate who force them to act in ways that are not ethical. The Enron scandal is a classical example. And although there have been strong rules like the Sarbanes Oxley Act which forces accountants to be more ethical, most accountants still manipulate the ‘grey areas’ to act amorally. For there to be an improvement, there will be the need for educational institutions and accounting professional bodies to make ethics an integral part of the training of their students and members. Financial standards and ethical frameworks should be further institutionalized to avoid manipulations. Works Cited Axelrod, Allen (2004) What Every American Should Know about American History Avon, MA: Adams Media. Print. Braiotta, Louis (2004) The Audit Committee Handbook. New York: John Wiley & Sons. Calhoun, Charles, Oliverio, Mary Ellen, & Wolitzer, Philip (1999) Ethics & The CPA Building Trust & Value Added Services Toronto: John Wiley & Sons. Eynon, G., Hill, N. T., Stevens, K. T. (1997) “Factors that Influence the Moral Reasoning Abilities of Accountants: Implications for Universities & The Profession” Journal of Business Ethics 16: 1297 – 1309. Print Ferrell, O. C, Fraedrich, John, Ferrell, Linda (2005) Business Ethics: Ethical Decision Making & Cases Mason, OH: Cengage. Print Fletcher, Wilna & Plette, Theodore (2008) The Sarbanes- Oxley Act: Implementation, Significance & Impact. New York: Nova Science Publishers. Print McPhail, Ken & Walters Dianne (2009) Accounting & Business Ethics Abingdon, Oxon: Routledge. Print Swanson, Diane, L. & Fisher, Dann, G. (2011) Towards Assessing Business Ethics Education New York: Information Age Publishing Inc. Print. Wood, David & Welker, Marina (2011) “Shareholder Activism & Alienation” Current Antrhopology, April, 2011 pp 557 – 569 University of Chicago Press. Print. Read More