Accounting,corporate governance and ethics - Essay Example

Accounting, Corporate Governance and Ethics 12 May Introduction The accounting profession has evolved over the years and today is mostly viewed as making big contributions to inspiring investor confidence in various enterprises. The tedious accounting profession is a sensitive undertaking especially when it comes to certifying to accuracy and timeliness of financial information; its distinguishing mark is to accept full responsibility to act in the best public interest (APESB 3). Because of this sensitivity, the accounting profession had adopted a professional code of ethics for all members. People however believe a lot of reformist agenda had been thwarted by the vested interests of pro-corporate public policy makers (Conrad 313). The chief ethical difficulty that faces most accountants today is what constitutes a full and timely disclosure (Duska & Duska 7). The accounting profession has seen a lot of corporate scandals which had spoiled its sterling professional image in which countless individuals lost their lifetime savings. It has been as a reaction to these scandals that laws were passed to strengthen the standards of the profession to avoid repeating the same mistakes and as additional safeguards for investors. Regulators, lawmakers, accounting professionals and policy makers had scrambled to draft these new rules and regulations to impose higher standards in the profession but ultimately, it is the individual’s conscience that will preclude any scandals or lapses from happening again. Management boards and executive committees likewise have spent considerable time into the deliberations of formulating their own set of corporate standards and code of ethics to prevent accounting scandals from occurring in their firms or in any part of their organization. An aim of this paper is to explore the accounting profession as it is today compared to previous years. Discussion Accounting is one of those professions in which utmost trust is reposed on those who practice it as a profession (as source of income and livelihood). It is no different from client- lawyer engagement or a patient-doctor relationship in which confidentiality is paramount. As a profession, accounting is charged with the task of making sense out of numbers and it is for this capability for which the various users of financial information rely on for their judgment. It is therefore very crucial that the information contained in financial statements can be relied upon for their timeliness, integrity, usefulness, relevance and accuracy. Stricter government regulations regarding corporate financial reporting has removed some of the more immediate temptations and threats to the integrity of financial statements. However, self-regulation of the industry is also vital in this regard and to educate members of the profession regarding their sacred duty to make the financial figures credible to the public. The most significant reform to ever come about the recent corporate accounting scandals that involved Enron and others is the Sarbanes-Oxley Act of July 30, 2002. It is a very significant piece of legislation in one respect: it now requires corporate executive officers to also sign off on the financial documents prepared by third-party auditors. What this piece of law means for the accounting profession and the executive boards of publicly-listed companies is both entities must now certify as to the accuracy of the data as contained in the audited financial statements. Previously, management boards and executive committees of affected companies can wash their hands off any audited financial documents if there are discrepancies contained in them but the Sarbanes-Oxley Law (or SOX for short) had changed that cavalier attitude. For the first time ever, not only are the auditing firms to be liable for failures to detect any accounting anomalies as they go about their task of auditing, the management people of the audited entity are also equally liable. The new law had rightly put some pressure on company management to ensure all the accounting and financial data they present to the general public at large is accurate to the last detail. Accounting is obviously not an exact science in the sense that facts and figures can be presented and interpreted in a number of ways, depending on the honest opinion of auditors. There is obviously a lot of leeway and discretion when it comes to accounting and auditing. This is why the reforms that were adopted and implemented after all the accounting scandals broke out were intended to regain the investing public’s trust in financial documents. This is accomplished through a number of ways, such as improvements in corporate governance and the adoption of revised principles in accounting’s code of ethics for professionals. Corporate Ethics – this is the set of corporate principles and practices that are adopted by a company all throughout its culture. It is contained in the code of ethics that will serve as a guide to all its employees. A company may adopt its own set of code of ethics but generally, it contains the values held dear by the company and all employees are expected to follow it. In a nutshell, the code of ethics is the bible that will set the tone of the company’s dealings with all its stakeholders (employees, suppliers, general public, investors, etc.) and it contains all the values that will define the company to its various publics. Ethics comes from the word ethos in Greek which means character; that means the company places a high premium on the important values in life like honesty, integrity, honor and fairness. Before any accounting standards are to be discussed, it is important to recognize first the importance of a corporate culture that is based on the right set of code of ethics. This set of ethical values may seem insignificant to some people but for company employees, it sets the tone of the company’s direction as exemplified by the company leadership. This means it is not allowed or tolerated to commit fraud or other mischief at this company and the message is communicated to all concerned about these business values (Ciulla 67). An enhanced culture of excellence required by a code of ethics is the true mark of the seriousness a company puts into its corporate responsibilities. It is now part of the wider and more pervasive mentality of corporate governance that tries to enhance the relationships with all stakeholders and to act in a socially-responsible way by giving back to the community. A media backlash against the fairly recent corporate scandals had put public pressure on those corporations to police their own ranks first and on the wider issue of business ethics. There is now a big premium on corporate social responsibility unlike before. Corporate Governance – this is the whole set or the totality of a company’s customs, practices, processes, laws and traditions which altogether affects the way a corporation is to be governed, directed, administered and controlled. These set of guiding principles govern a whole set of stakeholders, both internal (employees, suppliers and executives) to all external stakeholders as well like the creditors, customers and communities in which it operates in. It is vital that company executives believe in and adhere to good practices in governance as it will determine the overall character of employee conduct when they deal with internal and external stakeholders of the company. Good corporate governance practices as they relate to accounting and auditing has deeper implications because it states to the whole world that the company is serious about the accuracy of its financial statements to inspire trust. The moral responsibility of the managers of a for-profit business enterprise is to get the firm to produce profits but not at any cost. Mr. Matshushita of Panasonic himself had put it that a firm is entitled to profits so it will not be a burden to the community but there are limits to what honorable profits can be derived from a business undertaking. It is also what a Nobel prize winner in economics (Milton Friedman) had acknowledged as an ultimate social responsibility to produce profits for the good of the larger society (Sison 4) and this can only be accomplished if there is good corporate governance in place in a firm. Corporate governance policies in place and additional public pressure has put less incentives to commit accounting frauds and other means to “cook the books” to enhance a listed company’s stock fortunes at the market. Accounting today has been greatly improved with the adoption of many professional and ethical standards but these are not guarantees no anomalies will again occur but the chances are now more remote of such happening as there is also increased public vigilance (from investors and government regulators). There are still many accounting issues unresolved at the moment because of differing perspectives such as historical-cost accounting (HCA) or using the version which is fair-value accounting (FVA) (Penman 33) because the methodology affects the decisions of accounting users. Code of Ethics – this is perhaps one of the most important set of principles to be of any use in the prevention of accounting frauds and other financial anomalies. However, this is largely dependent on the individual accountant and auditor who ideally should have a clear conscience to resist the temptations inherent in accounting malpractices. The rewards for use of “aggressive techniques” in accounting can be quite fabulous. Any group of professionals almost always adopts a code of ethics for its members and accounting is no different. The will to follow this code is just voluntary but members who violate it can be expelled and licenses revoked by the accreditation boards. In this regard, accountants and auditors must exercise a good judgment at all times with regards to objectivity and not unwittingly become a player or participant in the commission of corporate financial frauds (Cottell & Perlin 6). However, the accounting profession is not united on the treatment of some important issues facing it such as how to deal with stock buybacks which are often used by corporate managers to “artificially” inflate the value of their company’s stock in the market. Buybacks have a great influence on how investors perceive a certain company in terms of its chances or viability as an on-going concern and more importantly, the prospects for future profits. The accounting profession is constantly trying to update its ethical standards to cope with the changing times by issuing important policy pronouncements through International Accounting Standards Board (IASB). The IASB had come up recently with the guidelines to integrate global capital markets through one common language for financial reporting. The IASB had promulgated an International Financial Reporting Standards (IFRS) that is basis of a uniform set of standards in more than a hundred countries (McPhail & Walters 161). This is the best foot forward to raise ethical standards in accounting to a higher level. There is a lot of discretionary judgment when it comes to reporting certain transaction matters in accounting but the adoption of a single set of reporting standards takes away this discretion which is quite tempting for some accountants. The treatment of accounting issues is now more or less standardized which does not leave much room for individual judgment. However, the accounting profession now also offers modules on ethics and business issues to acquaint their members on ethical dilemmas and how to avoid or resolve these satisfactorily. The IASB had taken the initiative to launch the IFRS for harmonization and convergence; the new countries planning to adopt them include China, India, Korea and Canada. The member countries of the European Union had likewise adopted the IFRS already back in 2005. It is the United States that has not adopted yet the IFRS but is moving towards adoption of the same accounting standards. There is some difference between the US and the European standards but the difference centers more on the degree of self-reporting; European nations prefer more government regulations while the US is more on industry self-regulation. There is a trend towards convergence of all national accounting standards to the international standards especially with the increased globalization in accounting and finance. For example, the International Auditing and Assurance Standards Board places higher emphasis on creation of a worldwide uniformity in the practice of auditing and advisory services (Fischer, Taylor & Cheng 510); it develops guidance on professional ethics in accounting and auditing services. Conclusion The improvements that are much desired in the accounting profession can come only from a combination of good governance, strict implementation of a code of ethics by the firm concerned in its business dealings and finally, strengthening both governance and ethics by a renewed campaign to instill in all practitioners the highest standards of professional ethics. It is a never-ending struggle to impose a sense of ethics because this is a fundamental business concept that affects other people, firms and society as a whole (Weygandt et al. 8). It is the profession of accounting that gives society a sense of standard values through the financial information it prepares and presents to the general public and to investors at large. The globalization of business finance has also led to the adoption of global accounting standards that will make all audited financial statements uniform in their presentation, content and format. Hopefully, the trend towards harmonization and convergence of all the national accounting standards will become a thing of the past as countries discard their own national accounting reporting formats in favor of one set of global accounting. It will make investing a much easier task and hopefully promotes more investment flows to developing countries as they try to comply with the strict reporting requirements of investors. Accounting is a profession where much trust is reposed on its practitioners and those who are present members should teach and orient new members on the importance of ethics. It is very tempting and even easier to manipulate the numbers if one really wants it but these actions will erode the public’s confidence in audited financial statements. Issues like the full disclosure required in financial documents must be adhered to at all times but tiny bits of the necessary information can sometimes be hidden in the fine print and in the footnotes. Issues such as conflicts of interest and other ethical dilemmas must be dealt with satisfactorily either by the accounting bodies tasked to regulate the profession or by individual professionals. Works Cited APESB - APES 110: Code of Ethics for Professional Accountants, Accounting Professional and Ethical Standards Board, 2006. Web. 06 May 2011. . Ciulla, J. B. “The Importance of Leadership in Shaping Business Values.” Corporate Ethics and Corporate Governance. Eds. W. C. Zimmerli, K. Richter and M. Holzinger. Berlin, Germany: Springer Verlag, 2007. 67-78. Print. Conrad, C. “The Illusion of Reform: Corporate Discourse and Agenda Denial in the 2002 'Corporate Meltdown'.” Rhetoric and Public Affairs 7.3 (Fall 2004): 311-338. Print. Cottell, P. G. and Perlin, T. M. Accounting Ethics: A Practical Guide for Professionals. Westport, CT, USA: Quorum Books, 1990. Print. Duska, R. F. and Duska, B. S. Accounting Ethics. Malden, MA, USA: Blackwell Publishing, 2003. Print. Fischer, P. M., Taylor, W. J. and R. H. Cheng. Advanced Accounting. Mason, OH, USA: Cengage Learning, 2008. Print. McPhail, K. and D. Walters. Accounting and Business Ethics. Oxon, UK: Routledge, 2009. Print. Penman, S. H. “Financial Reporting Quality: Is Fair Value a Plus or a Minus?” Accounting and Business Research, (2007): 33-44. Print (The International Accounting Policy Forum). Sison, A. G. Corporate Governance and Ethics: An Aristotelian Perspective. Glos, UK: Edward Elgar Publishing Limited, 2008. Print. Weygandt, J. J., Kieso, D. E., Kimmel, P. D. and A. L. DeFranco. Hospitality Financial Accounting. Hoboken, NJ, USA: John Wiley & Sons, Inc. 2008. Print. Read More