Increased Regulation Will Not Necessarily Lead to Higher Ethical Standards - Essay Example

?INCREASED REGULATION WILL NOT NECESSARILY LEAD TO HIGHER ETHICAL STANDARDS Ethics is defined as the moral values that define right or wrong. It has been said that the ethical standards are to be increased however it has been said by different people that regulations can be increased to increase the ethical standards. George Bush in the year 2002 has said that ‘At this moment, America’s highest economic need is higher ethical standards- standards enforced by strict laws’. It is generally perceived that increasing regulations result in increasing the ethical standards as when regulations will be more strict towards increasing the ethical standards, then businesses will need to follow the regulations and in turn they will be more ethical in their approach as well. According to Milton Friedman, “There is one and only one responsibility of business- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game”. Therefore, it clearly says that increased regulations will result in higher ethical standards. However, on the other hand, Albert Camus says that ‘Integrity has no need of rules’ which reflects that it is up to the organization to become more ethical then the regulations. The relationship between regulation and ethical standards is not as easy as it looks. Increasing regulations may or may not lead to increase in ethical standards. If it would have been the case then companies to maintain the conduct of its employees ethically sound would have been competing on number of regulations than their effectiveness. This essay will explore and analyse the view that increased regulation does not lead to increase in the ethical standards. On developing the general argument, this essay will also attempt to develop support from variation in accounting and auditing treatments with level of compliance to financial regulation and ethical standard. In the end, it would suggest ways to increase ethical standard of firms and especially accounting and auditing professionals. Hence, this easy is aimed to support the view that increased regulation does not necessarily increase the ethical standards. In order to better explore this topic, it is important to first understand the concepts behind ethics and then analyse the impact of regulations on ethics with the help of different examples from corporate world. Concerns regarding the ethical conduct of business have gained increased attention since recent past, when corporate scandals, mainly Enron scandal, were unveiled and it resulted in huge fines, reputational loss and even jail sentences (BBC News, 2002). It proved to be the earthquake in trust of stakeholders on the validity of information presented by firms and increased distrust about the accounting practices worldwide (Enderle, 2004). The question was posed to entire mechanism that remained incapable of indentifying the deceiving accounting practices were given least or no punishments (Enderle, 2004). In the mentioned case, it was desirable to correct the existing regulation with focus to eliminate the flaws. This exercise presumably was expected to have more constructive results. The role of auditors in particular became a question mark after this scandal. Moreover on adoption of the corrective measures, the impact of current financial crises was also expected to have been mitigated to some extent (Argandona, 2012).Contrary to this and without taking lessons from Enron case, increased regulations were imposed on businesses. Increased regulation provided more options to business professionals than ever to use various shades to protect businesses - in both fair and unfair ways. As a result, the newer shock in form of economic downturn took high intensity wave and pushed the entire economy to the verge of survival. Ethics appear to be a relative term being adjusted in relation with the domain in which it is being discussed. Here comes the biggest dilemma of ethics. Since there is no separation of boundaries, it gets easier to develop positive relationship of any regulation to ethical consideration. Important to mention, this does not mean that none of the regulations are intended to integrate the ethical conduct within the firm. But on the other extreme, it is also a proven fact that regulations alone cannot integrate ethical conduct within employees. Hammersley (2009) developed a study which clearly stated that the increased regulations do not increase the ethical standards and the persistence of increased regulations can result in more worsened situations. Businesses are aimed to increase the benefit and more specifically increasing financial benefit. To ensure that financial benefit is not attained from unfair means, regulations are imposed. Financial regulation being one component of entire set of regulations uses various tactics to maintain businesses performing within allowed spectrum. However, these regulations, if followed in their true sense, shall add to ethical standards but none are solely representative of ethical soundness of business. Given below are three examples from the financial regulations that support the view that increase in businesses regulations does not necessarily increase the ethical standards: Lease mechanism that is currently being used reports financial lease on balance sheet where a lease contract that falls under the operating lease category is not accounted for in balance sheet. Recently, the IASB (international Accounting Standard Board) and IFRS (International Financial Reporting Standards) suggested updating lease reporting mechanism. It has proposed to include operational lease assets on the balance sheet as well as financial lease. Reasoning behind this proposal was to address concerns related to non-declaration of operational lease assets. One of the basic concerns against non-declaration of transaction on balance sheet refers it to providing incomplete information to the shareholder, investors or any other person who concludes the health of the firm from the information provided in financial statement. The practice is declared to be un-ethical, though not clearly stated (Ernst & Young, 2010). Moreover, this practice not only raises questions about the role of accountants but doubts have been raised about the responsibilities of auditors as they are the external body that checks and verifies what have been presented plus the importance of standards of accountancy and auditing. Without going in detail of the possible results regarding the acceptance or rejection of this proposal, it is taken into consideration being increase in financial regulation. This regulation in financial reporting raises the question if the declaration of such assets would increase the ethical standard meeting in the firms. The probable response is assertive as this regulation will add the amount of information available through financial statements. It will also be a step to increase transparency in the businesses. Litmus tests for this regulation to add to the ethical standard discussion conducted on international forums provide considerable evidence. Most discussions suggest businesses to prepare to manage their lease specific and lease dependent operations accordingly and adapt in ways that has least impact overall. In addition, the discussion also suggested businesses to undertake negotiations with authorities and regulators (Ernst & Young, 2010). This suggestion, though in itself does not hold any negative intention, refers to ways with which business professionals, mainly accountants and CFO’s, come up with their expertise, get advantage and manage to escape to a considerable extent and because of this reason, despite having auditors playing their part, the organization would be able to show financial statements that show fair value of the organization. In such cases there arises conflict of interests and professional expertise are given priorities over ethical standards. Important to mention is the fact CFO’s, accountants and auditors are hired for their professional expertise to state financial position of the company as good as possible. Moreover, auditors are the external body that highlights any changes in the financial statements so that they could reflect true and fair value of the organization. But with such practices, there are doubts whether people and other bodies like IFRS want to represent true and fair value of the organizations through financial statements. Another example that asserts the view under study is from current economic down turn. Recent wave of double-dip recession also poses severe question to the effectiveness of these increased regulation in increasing ethical consideration. Lax monetary policy from the Federal Reserve Bank (US’s central bank) fuelled the housing bubble in multitude (Bhattacharya and Yu, 2008). Resultant over valuation of assets along with other factors led economy run down into crises and thus, auditors should have highlighted such risks that banks and other financial institutions were facing at that particular time. On later stages when real estate boom slowed and finally burst the effects were devastating on economy. Consumer defaults translating into negative balances on banks’ balance sheets posing all questions the efficiency of extensive regulations developed to prepare balance sheets and how these balance sheets have been checked and verified. When increased regulation could not anticipate point where asset is turning into bubble then it raises questions on the efficiency of measures. Measures that cannot ascertain the health of asset in real shall also not be expected provide guideline for ethical standards. Sound professionals that manage banks’ liability as well as auditors that are the external body that govern and check overall system and in particular these financial statements are also liable to be question. These professionals used regulation for their own benefit to express firms growing with accelerated pace under their management. Despite increased regulation in banks due to its nature of business, ethical standards remained less effective.Hence, after the case of Enron where the auditors were directly involved in the fraud even with increased regulation the ethical standards remained same or even declined. As in former case it was only one organisation that was affected while in latter case the entire economies collapsed. All of the above-mentioned examples presented separate perspectives; first, stated ways of preparation focused to meet the challenges of proposed regulation with negotiations with regulators. The other example reflects the decline of ethical standards that led the entire world in recession; despite increased regulations after the corporate frauds being unveiled. An important factor related to all three examples and also in case of Enron; the element of human involvement is dominant. It is actually human element that develops the boundary for ethical standard to grow along with financial regulation. Enderle (2004) states that; responsibility for such failures lies on broader scale at macro level, meso level and at micro level. Enderle (2004) elaborates that there are still inefficiencies in macro level system, meso level authorities accepts crucial decisions by firms that are not compliant with regulation in its true essence. Hence, the dilemma of negligence for ethical standards shares equal cooperation on each level. Enderle (2002) suggeststhat truthfulness and trust worthy financial reporting requires responsibility undertaken by persons, organisation and system. Thomas, Schermerhorn and Dienhart (2004) state that; ethics cannot be ingrained merely through defining roles, duties and responsibilities. Thomas, Schermerhorn and Dienhart (2004) stress that it is the duty of organisational strategic leadership to develop social environment in organisation that results employees self –regulation of ethical conduct as a part of organisational norm and a matter of routine. Thus, these all researchers claim that it is the duty and responsibility of everyone involved in not only preparing the financial statements of the organization, but also the ones that are verifying and approving it and even if the accountants neglect something, or they deliberately make some errors then it is the responsibilities of the auditors to make sure that the financial statements show true picture of the organization. International Federation of Accountants (2012) provides code of Ethics for professional auditors as follows: Fundamental Principle of profession to act in public interest than individual and organisation. Integrity- Being straightforward and honest in professional relationships. Objectivity- not allowing conflict of interest or undue favours to anyone. Professional competence and Due care and diligence in verifying the financial statements of firms To ensure Confidentiality of information of firm from competitors and not making public information that need not to be mentioned under any regulation Professional behaviour to acclaim the profession with respect and not indulging into any activity that result in disgrace to profession. All these principles if applied in its due sense and diligence then resulting practices can be claimed to be ethical conduct. However, it is again the personal discretion in certain matters and decisions to determine particular decision ethical under the umbrella of regulation making its ethical otherwise. The essay develops supporting argument in favour of view. The view states that increased regulation does not necessarily result in increased ethical standard. For the purpose, initially logical ground has been developed. Paper presents few examples from different perspective that render that increased regulation does not guarantee increased ethical compliant operations. Example provides evidence of ethics violation even after 10 years of similar type while large number of financial regulations has undergone considerable change. In the end, paper provide suggestion regarding ways to increase ethical standard on personal, organisational and even at macro level with more focus on principles defined for personnel providing accounting services to firm. List of References Argandona, A. (2012). Three ethical dimensions of the financial crisis.Working Paper WP-944. Available from http://www.iese.edu/research/pdfs/DI-0944-E.pdf [Accessed 13 November 2012] BBC News. (2002). Enron Scandal at a glance. Available from http://news.bbc.co.uk/2/hi/business/1780075.stm [Accessed 12 November 2012] Bhattacharya, U. and Yu, X. (2008). The causes and consequences of recent financial market bubbles: an introduction. The Review of Financial Studies, vol. 21, pp. 3-10 Enderle, G. (2002). Algunosvinculos entre la eticacorporativa y los estudios de desarrollo.In B. Kliksberg (compilador), Etica y desarrollo.Larelacionmarginada(pp. 345–372).Buenos Aires: El Ateneo. (Spanish translation of Corporate ethics at the beginning of the 21st century. Paper presented at the international meeting “Ethics and Development” on December 7–8, 2000, Inter-American Development Bank, Washington, DC) Enderle, G. (2004). The ethics of financial reporting, the global reporting initiative and the balanced concept of the firm.In G. G. Brenkert (Ed.), Corporate Integrity and accountability, pp. 87-99. Thousand Oaks, CA: Sage Ernst & Young. (2010). What do the proposed lease accounting changes mean for financial institutions? Available from http://www.ey.com/Publication/vwLUAssets/IFRS-Practical-matters-2010-09-EN/$FILE/IFRS-Practical-matters-2010-09-EN.pdf [Accessed 13 November 2012] Hammersley, M. (2009). Against the ethicists: on the evils of ethical regulation. International Journal of Social Research Methodology, vol. 12, no. 3, pp. 211-225 International Ethics Standards Board for Accountants (2012). Handbook of the Code of Ethics for professional Accoutants.New York: IFAC. Available from http://www.ifac.org/sites/default/files/publications/files/2012-IESBA-Handbook.pdf [Accessed 14 November 2012] Thomas, T., Schermerhorn, J. and Dienhart, J. (2004).Strategic leadership of ethical behavior in business.Academy of Management Executive, vol. 18, no. 2, pp. 56-66. Available from http://home.sandiego.edu/~pavett/docs/msgl_503/leader_ethic_behave.pdf [Accessed 14 November 2012] Read More