Accounting Ethics and Impact on Business Performance - Term Paper Example

?Running Head: Accounting Ethics and Impact on Business Performance Accounting Ethics and Impact on Business Performance There has been a growing concern about the survival of companies especially during the recent economic and financial crisis. Many companies have collapsed and others may be at the verge of collapse due to failures in accounting as professionals in this field have neglected the importance of ethics in governing the day to day activities of their companies. This paper seeks to explain the relevance and need to embrace these ethical practices and their impact on the general business performance. Introduction Accounting ethics are moral values that govern the profession of accounting. They can also be described as judgments that apply in course of undertaking accounting tasks (Saleemi, 2002). These ethics have become accepted globally by government agencies and companies and help instill some degree of discipline both at organization level as well as employee level. Embracing these ethics cannot be ignored at this time of global economic crisis caused by malicious employees who collude with others and form cartels that have ripped off organizations and government resources leading to complete collapse or closure of once profit-making companies and organizations. Driven by the need to earn profits, an organization should also strive to ensure that shareholders’ interests are met. These interests vary among individual shareholders and as such accounting ethics in an organization are paramount in meeting these. It is with regard of its importance in controlling and monitoring the accounting profession that this paper concurs with adherence to accounting ethics. Accounting Ethics Lead to Better Management and Profitability There are shareholders whose interest is in the capital gains from the company. Pandey (2003) states that if the motive behind investing in a company is driven on capital gains, then the shareholders are likely to have a keen interest in the dividend policy of the organization. Accounting ethics in this case would strive to ensure proper reporting of the accounting statement. Alternately, there are another group of stakeholders or investors who are mostly concerned with a company’s management style and hence would demand that accountants have the necessary skills to help them undertake their task in the most professional way. All government bodies and companies have set ethical measures for the practice of this profession. These include competence, confidentiality, integrity, objectivity, timeliness, full disclosure, materiality and many others which are to look in the discussion. At the height of growing concerns of whether or not ethics play a role in companies’ management, the duty to ensure that all works well rests with the management. Everything progresses or fails due to the management and as such it is paramount to ensure that all ethical practices begin with them (Carbone, 2012). Business is not all about making profits but also how the company is perceived in the general business environment (Belkaoui, 1992). Most of the organizations are driven by the desire to retain their clients. This begins right from the way such clients are handled and their needs met. There are cases of companies that have embarked on this journey of adherence to accounting ethics and as such have reaped a lot of benefits over the years. Some of these are Safaricom Ltd, Sammer Group of Companies, Equity Bank, Kenolkobil, British American Tobacco, Oldmutual Investment Services, Kestrel Investment Services, and British American Insurance (Garrison, 2009). Safaricom has been applauded for observing high standards of integrity in customer relations. This extends from the way they respond to client complaints to the preparation of their accounting statements (Ferugson, 2007). The company has been the most profitable company in Eastern Africa for the past seven years maintaining the lead even in economic recessions as experienced since 2011(Kieso, 2009). Their systems in accounting have also been described as shareholder friendly in the recent past. This results from the simplicity in their reports as all stakeholders’ needs are met in regards to analysis of the statements. The company holds the fair value method of recording assets’ worth in the statement of financial position. This leaves out the worry whether or not the company’s assets worth matches the market value. It is the simple practice of ethics, that many companies ignore, which has led to its success (Joseph, 2003). Also, the company has an image of being clean, right from the strategic management level down to the subordinate staff and their clients (Pandey, 2003). Ogola (2003) in his book, Business Law 1, states that accounting ethics is a moral issue as it thrives on the foundations of utmost good faith and concern for each other’s interests. Another dimension of accounting ethics can be viewed on the depreciation method a company adopts for its fixed assets. It is prudent to use a method that does not mislead shareholders on the true worth of the companies’ assets (Wang’ombe, 2006). Ethics have helped instill discipline in reporting of depreciation on the companies statements without which shareholders could be misled by accountants in reporting of the same. Usually a company that adopts the straight line basis tends to reflect high figures as compared to the reducing balance method (Saleemi, 2002). From the ethical point of view, it would be better to reflect a negative figure and finally have positive results as compared to reporting positive figures and have negative returns on investment for the shareholders (Satav, 2006). However each method has its advantages in certain situations like during taxation. Another very important dimension of ethics is confidentiality. It is in accordance with accounting ethics to ensure full disclosure of accounting information. However, this has its limits. Accountants are obliged to ensure that company secrets are not revealed to other parties like competitors. This can be explained with the case of CMC Motors Group, where important accounting information was leaked out by its accountants with serious implications to the company including its de-listing from the Nairobi Securities Exchange, Kenya (Belkaoui, 1992). This case can be viewed as failure of the accountants to uphold ethics. Another instance can be in the case of investments firms. It is important for a firm to ensure that clients’ investment issues are not disclosed to other parties. This helps build clients’ confidence in the firm. A case in point is CFC Investment Firm where client portfolio is regarded a top secret by the company and not disclosed to any other parties (Belkaoui, 1992). Clients sign a Clients Privacy Pledge form as part of this ethical measure. This has in turn enhanced the equity of the firm amidst its competitors making it one of the largest investment firms. This has also helped create positive publicity and perception in the general public (Belkaoui, 1992). Equity Bank is accredited for upholding accounting ethics in regards to competence of the accountants. It is the largest bank in Kenya and in a position to serve its clients to satisfaction. This in turn has worked in favor of the company as its business has grown tremendously over the past ten years. This is also evident from its Annual Accounting Report 2011 where the bank showed profits to the tune of 8 billion Kenya Shillings, which is the highest for the Kenyan markets (Strathmore, 2003). Barclays Bank is yet another multinational that is vetted for competence in its accounting statements (Steve, 2009). This has been accomplished mostly by automation of their accounting systems. It has in turn led to increase in its market capitalization over the years as it share price keeps appreciating. This step also enabled potential shareholders invest in the company as shares were affordable. Share split in accounting practice has the effect of lowering the market price per share but does not affect the overall market capitalization of the firm. It’s a practice which also enhances positive public image as investors can identify with the firm as opposed to having expensive shares that only the rich can afford (Satav, 2006). Scholars in the field have also extensively discussed timeliness as another important aspect of accounting ethics (Satav, 2006). They argue that preparation and publishing of accounting statements should be timely, that is, investors should be in a position to rely on the statements at a time of making investment decisions. This calls for a company to ensure that structures necessary for preparation of these accounts are well maintained. The economic recession experienced in the US in 2008, was purely due to the violation of accounting ethics (Barcelo, 2009). This saw companies like Enron, Adelphia Communications, Dynergy, and World Com collapse on grounds of non-compliance to accounting ethics and management issues. Accountants failed to uphold the full disclosure requirement in preparation of accounting statements and misled shareholders on the performance the company (Barcelo, 2009). This led to the collapse of the firms as clients lost confidence in them, making it difficult to operate. Scholars have argued that accounting ethics help create a positive public perception and hence should be upheld as a way of marketing a firm over its competitors (Pandey, 2003; Pearson, 1995). Ethical practices have been advanced to also cover investors’ compensation in the event that material misstatements are made in the financial statements. This caters for investors who lose their money as a result of accountants’ failure to include an item that is perceived to be material. The measure of materiality however varies from one firm to another. (Steve, 2009) describes material misstatement as that which is likely to influence decision-making either due to its proportion of value in the overall accounts or relative effect on shareholders’ equity. The need to instill accounting ethics has led to the establishment of regulatory bodies that have helped promote accounting education through introduction of a number of courses which have been made mandatory for accountants to pursue. Some of these bodies include CPA (Certified Public Accountants) and ACCA (Association of Chartered Certified Accounts). Completion of their courses and compliance to their regulations has greatly promoted standards of reporting in accounting (CICA Handbook of Accounting, n.d). These bodies have also enhanced business as they ensure that practices in companies are tailor made to meet clients’ needs (Kilaka, 2009). For instance, in the regulations, roles of various positions in accounting are defined to avoid conflict of interest between accountants and their employees. Objectivity is also another an accounting ethical standard that ensures that accounting statements are prepared with other peoples interest in mind. This prevents accountants from serving their own interests while preparing the accounts (Garrison, 2009). This has enhanced businesses as the various parties interested in the company have access to reliable information for making investment decision. This can also be explained in terms of a company financing strategy. In cases where companies are trying to raise more capital by issuing shares to the public, potential investors rely a lot on the accounting ethics upheld by the company (Peason,1995). Adherence to ethics has promoted compliance of International Accounting Standards. (Strathmore, 2003) emphasizes on the impact of such standards as required by governing bodies. A case in point is the IAS 39 that gives a guideline on financial instruments recognition and measurements. This practice has been greatly embraced in the airline industry where financial instruments like Derivatives are greatly used. It requires that these financial instruments be recorded at fair value through profit or loss. Their impact on the organization is severe especially with respect to the company revenue. Such hedging depletes the firms’ revenues and as such their impact has to be disclosed in the accounting statements for other stakeholders to be aware of. Companies like British Airways, Thomas Cook, and Easy Jet have built their public image due to this compliance with IAS 39. Every detail and its impact are disclosed in the financial statements, making it public for all stakeholders to analyze their statements of accounts. Belkaoui (1992) in his book, Morality in Accounting, expresses the need to compliance with accounting standards. He describes that the solid foundation of this compliance is only enhanced by accounting ethics. In his view, it is what we consider ethical and acceptable that determines how we comply to set standards in the accounting profession. This is paramount for creating an environment that is free of corruption and malpractices in the profession. The sufficiency of data is another dimension of accounting ethics. It is an emerging ethical standard and has arisen out of the need to instill control measures in the accounting profession. In the past five years, companies have incurred huge losses as a result of accountants relying on insufficient data in the preparation of statements. It is paramount to consider the relevance of data as it also determines the materiality in accounting (Garrison, 2009). A case is the Wall Street scandal in the US. Experts say that there was lack of sufficiency in data used by accountants as well as investors. Much of the information published in the statements did not match the actual performance of the firms. Companies that upheld the ethical practice of sufficiency of accounting data were able to withstand the global economic crisis that hit the world at that time. A case in point is when Barclays Group in UK was working on purchasing the Bank of America at the height of the Wall Street collapse (Ferugson, 2007). The accountants at Barclays rejected the plan as the information in the account statements of the American Bank failed to provide sufficient data for decision making. Barclays further requested the American government to acts as a guarantor to the deal but the proposal was denied. This led to Barclays Group rejecting the deal. Adherence to set ethics has also helped in the implementation of principles in the accounting profession. This can be explained on the basis of the various accounting principles (Garrison, 2009). For the matching concept, ethics have guided accountants to ensuring that records of expenses and receipts has to be evidenced and matched to comply with this principle. Another is the accrual accounting principle (Pandey, 2003). Ethical practice guides accountants to record expenses when incurred other than when cash is given out and incomes when earned rather than when cash is received. These are clear instances where ethics have guided accountants in complying with the accounting concepts. This compliance has also helped businesses in the going concern aspect of the firm. Attracting investors funding is pegged on the going concern concept. Accounting ethics have also been a contributing factor to the economic welfare of many nations. This takes the form of attracting funding from institutions like the World Bank, International Monetary Fund and the International Finance Corporation. Adherence to these ethics creates confidence in the donors as accountability is a key to success for these capital intensive government projects. The grants, as per the analysts, form the basis of ethical standards that the receiving company has upheld both in the budget preparation and accounting in various government departments over the years (Garrison, 2009). Conclusion With all these benefits and impacts of accounting ethics in business operations, it is paramount to state that the profession cannot progress without them. It is also necessary to point out that adherence to accounting standards and principles cannot be done in isolation from the ethics that govern the profession (Kieso, 2009). There are numerous examples that depict the dire consequences of unethical accounting or lack of maintaining accounting principles that led to the demise of esteemed organizations and collapse of the economic system. There are also numerous examples as discussed in the paper that show how accounting ethics and standards have helped generate a brand image and also steered organization through crisis situations. References Allard, J. (2006, August 1). Ethics at work. CA Magazine. Retrieved from: http://www.camagazine.com/archives/print- edition/2006/aug/features/camagazine8392.aspx Barcelo, Y. (2009, March 1). Survival Guide. CA Magazine. 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