Understanding the Nature of Ethics in the Landscape of Accounting - Essay Example

? Understanding the Nature of Ethics in the Landscape of Accounting of the of the Summary In the last decade, the interest in ethics education in accounting has been increased. However, significant gaps remain, such as the fact that, rules, principles and virtues are often taught separately. Only a few authors address the role of personality of the accounting presentation of relevant and accurate financial reports, and the importance of practical reasoning in accounting. It should be understood however, that these sets of rules are minimum guidelines or criteria guidance, because the concrete actions of the public accountant or auditor in particular situations, lies in the general principles of codes themselves and the principles of ethical science enrolled in the within man.  A distinctive feature of the audit profession is the recognition and acceptance of the duties to act in the public interest. Therefore, the responsibility of the auditor is not limited exclusively meeting the needs of individual client or employer. Acting in the public interest, the auditor is obliged to respect and obey the rules of professional ethics of auditors. This Code of Ethics for Auditors is a code of professional ethics auditor, i.e. established and widely used in the conduct of the audit rules of conduct of the auditor and audit firm is not required by law. As it is not possible to determine the rules of professional ethics for all situations and circumstances that can confront the auditor in the conduct of audit activities, the Code contains only the basic rules. Abstract There are two basic directions in ethics, ethics of the mind that justifies an action by reference to intention and ethics of the consequence that justifies an action by reference to results. The foundation of civilized society is based on the ethical values and without these values; the civilized society can fall rapidly. The main purpose of ethics in business is directing men and women to obey code and conducts that encourages the people to have confidence in the products or services offered to them. In the field of accounting, it is the responsibility of the professional accounting organization to provide comprehensive guidelines to the organizations so they can perform their operations by considering ethical values. The purpose of this paper is to explain unethical accounting practices Table of Contents Summary 1 Abstract 2 Discussion 4 1. What is Ethics? 5 2. Accounting ethics 6 3. Ethics & professional practice 6 4. Professional accountancy bodies 7 5. Reason for Developing Ethical Standards 8 5.1. Standards of Reporting 8 5.2. To Ensure Integrity 8 5.3. To Ensure Objectivity 9 5.4. To Maintain the Confidentiality 9 5.5. To Improve the Productivity 9 5.6. To Ensure Professional Competence & Due Diligence 9 5.7. Maintaining Professional Behavior 10 6. Why Public Interest and Public trust are Important? 10 7. Why ethics are important in the field of accounting? 10 7.1. Fraud 11 7.2. Accuracy 11 7.3. Macro Economic Issues 12 Conclusion 12 References 12 Understanding the Nature of Ethics in the Landscape of Accounting Introduction Ethics related to business operation is currently treated as burning question due to thrilling scandals that have caused economical turmoil’s in several countries. These astounding business scandals raise many questions about the integrity and morality of accountants and businessman. It is critical argued by many economists that accountants are the main reason behind the deterioration of the ethical standards of a business. Following the collapse of WorldCom and Enron in year 2002, International Federation of Accountant (IFAC) published a report with title “Rebuilding public confidence in financial reporting – an international perspective”. Findings of the report concluded that financial disorders of corporations were the upshots of problems related to improper management of ethical standards. The report identified that to increase confidence of public in financial reporting one should enhance ethical standards, the adequacy of corporate finance, reporting methods, quality of audit and corporate governance. Discussion The professional accountancy bodies and accounting professionals have some responsibilities in the establishment of ethical standards, but their inefficiencies have lead to collapse of corporations and exposed our business environment to corporate scandals. Ethical conduct of accounting professionals is becoming a newsworthy subject. This essay will focus on the following aspect: development of ethical codes by professional accountancy bodies in order to protect the public interest, ensuring public trust and upholding the reputation of the accountancy profession (ICAEW 2013). Ethics in the broad sense, deals with human behavior in relation to what is morally good and evil, right and wrong. This is the application of values ??to decision making. These values ??include honesty, fairness, responsibility, respect and compassion. The focus on the code of ethics in business organization adhere the highest standards of ethical conduct. This is important in the accounting profession, where the business financial solution is directly based on the information and judgments, subject to their accountants. In this paper we will talk about the importance of ethics in accounting and basic principles of ethics in pursuing professional public accountants. It is a fact that there is no magical formula in order to make people act in an ethical manner in the business and according to past researchers, it has been observed that the criminals in the top management of the organizations is more where they have gone through formal training. The educators of management do not seem to concentrate on giving proper training regarding business ethics because they cannot change the overall thinking of the competent and intelligent managers for performing unethical acts. Apart from the ethical qualities of the individuals, it is important that the moral environment of the organizations is conducive as well. In the recent times, the present business and regulatory environment is conducive for the organizations because awareness of the people has significantly increased because of media, internet and social networks for the past decade. This is the reason that most of the organizations believe in performing different Corporate Social Responsibilities (CSR) activities and gives first priority to ethics during operations (Ferrell et.al, 2008). The rules and regulations of different governments have made mandatory for the organizations to perform ethical activities and if they are not able to perform ethical activities, then social media can completely damage their reputation (Fernando, 2009). Therefore, it can be said that today’s environment is more favorable for the businesses and they can operate effectively by performing ethically 1. What is Ethics? Clarity of the concept of ethics is formed by professional, cultural and personal values. There are two perspectives regarding the nature of ethics, some believe it is a subject of individual interest while other believe it’s based on society’s interest. Debate on ethics and ethical standards has been dominated by these two perspectives for a longer period of time, and this debate will remain continuous in future (Allen 1990, p.2). The term Ethics is derived from the combination of two words ethos (Character) and moras (Customs). Jointly these two words explain how individuals interact with each other. Therefore, ethics is about making the selection between right and wrong based on the values an individual carries from inheritance and from accumulated knowledge. 2. Accounting ethics Accounting ethics is primarily a field of applied ethics. This is a study of moral values and judgments as they could apply to accounting. Accounting ethics were first introduced byLuca Pacioli, and then later expanded by government groups, professional organizations, and independent companies. Ethics are taught in accounting courses at Universities and as well as by companies training accountants and auditors. Attention has been drawn towards the ethical standards accepted within the accounting profession due to range of accounting services and recent corporate collapses. The collapses have had a widespread effect of how many accounting professionals practice. It has grown into a popular disregard for the reputation of the modern day accounting professional. To fight the criticism and prevent fraudulent accounting, various accounting organizations and governments have developed regulations and remedies for improved ethics among the accounting profession. 3. Ethics & professional practice It is essential for accounting professionals to follow establish ethics in their working practices because of the sensitivity of their working environment. The nature, duty and responsibility of accountants work put them in closer and special position of faith in relation to their employees, employers, clients and the general public. These all stakeholders are directly relying and dependent on the reporting of accountants for making investment and related decisions. Thus, it is important to keep and maintain the confidence of public and clients by following ethical standards design by a professional accountancy body (IFA 2013, p.10). Ensuring the uppermost ethical standards is the responsibility of a business accountant (someone who is performing accountancy tasks in an organization on salary) and a public accountant (Someone who deliver taxation and assurance services to the general public for free). All types of accountants are in constructive working relationship with their clients and employers. So the fiduciary relationship demand accountants to perform their duties and task according to the ethical values, moral standards, honesty, and integrity describes under the rules and regulations given in ICAEW’s ethical policy. Accountants are required to maintain a certain level of ethical and moral conducts that are expected by the social practices (Ponemon 1990. P. 215). Because of all these reasons accountants professional bodies work together to develop a code of practiced conduct, which describes rules that explain the difference between right and wrong practices to ensure that the accountant’s behavior is following ethical standards and perceived expectations of public. 4. Professional accountancy bodies The accounting practices in a business environment is formulated and guided by some professional accountancy bodies. Following are the world leading professional bodies ICEAW (Institute of Chartered Accountants in England and Wales) AICPA (American institute of Certified Professional Accountants) ACCA (Association of Chartered Certified Accountants) CICA (Canadian Institute of Chartered Accountant) CGA (Certified General Accountants) ICAS (institute of Chartered Accountants of Scotland) ICAI (Institute of Chartered Accountants Ireland) CGA (Certified General Accountants) 5. Reason for Developing Ethical Standards All professional accountancy bodies develop their ethical standards, and there are several reasons which cause professional accountancy bodies to develop ethical codes and assess their effectiveness in protecting the public interest, ensuring public trust and upholding the reputation of the accountancy profession. Following are some prominent reasons which require them to design an ethical policy 5.1. Standards of Reporting Ethical standards are designed by professional bodies for accountants to follow them while reporting the financial positions of their clients. It helps in setting ethical standards for financial reporting so that an investor can understand about the financial position of an organization and make a decision based on its overall performance (AICPA 2011, p.12). 5.2. To Ensure Integrity Ethical standards are designed to ensure that the work done by an accountant is reliable, and one can take its investment decisions based on the data provided in the annual reports. For example consider a situation in which an accountant has misrepresent the data of his client and has temporary increased business income, now an investor who is taking investment decisions based on this reporting will sooner or later loose his or her money completely which creates a trade deficit and will results a poor image regarding the reporting standards of accounting body (AAT 2011, p.15). 5.3. To Ensure Objectivity The ethical standard of objectivity compels a compulsion on accountants and accounting firms to provide their business judgments without being influenced or pressurize by anyone. Their decision should be clean from any undue influence, biases and conflict of interest. 5.4. To Maintain the Confidentiality The ethical standards are also designed to maintain the level of confidentiality in reporting of business related information. An accountant is not supposed to disclose any information related to business and its operation without the permission of its clients. 5.5. To Improve the Productivity Ethical standards also guide accountants and clients to follow designed SOPs which minimizes the cost and allocated time to present the information in a corrective and more informative way. This can enhance the overall productivity of an organization. 5.6. To Ensure Professional Competence & Due Diligence Professional accountancy body’s sets ethical standards in order to ensure that clients are receiving competent services and skilled knowledge at all levels of operations and it also require accountants to follow stated standards while delivering professional services to clients. 5.7. Maintaining Professional Behavior The standard of professional behavior oblige accountants to follow relevant laws and regulation in the implementation of accounting practices and it also requires to avoid any misconduct or wrongdoing which may bring shame for the profession. 6. Why Public Interest and Public trust are Important? The income of an accountant depends upon the growth of a business and confidence of the general public in the accounting standards. So it is essential for an accountant and governing body to keep the public in confidence regarding the authenticity and reliability of the reporting standards (Lawrence, A., Weber, j. 2007, p.19). The decisions which an individual’s take regarding investment and other financial transactions are solely based on the information which an accountant provides regarding the portfolio in its annual statements of its financial disclosure. Excellent understanding of accounting knowledge helps accountants in overcoming or minimizing the ethical dilemmas and it also provide them assistance in making the right choice which may not benefit the client but benefit the general public who relies on the financial reports of auditors or accountants. 7. Why ethics are important in the field of accounting? Ethical standards are important for the development of any business, but most importantly they shape the behavior of an accountant and all accounting practices. This importance of ethics is because of the reason of the nature of the business area (W. Michael Hoffman 1996, p.40). The accounting side of any business deals with the usage of hard data and figures which means there is less room for any unethical reporting activity. CPA’s CPA’s (certified professional accountants) is the individuals who work for large firms to render tax and auditing services. It is essential that a CPA should report all information and data accordingly and correctly. CPA’s must take courses in ethics to ensure the ethical standings of the reporting of a CPA. The American institute of certified professional accountant (AICPA) requires members to follow a specific code of ethics. 7.1. Fraud Fraud refers to the distortion of information. In the field of accounting misrepresentation of financial data refers to fraud (Clikeman Paul M. 2009). This misrepresentation involves showing a specific head as a positive number which in real is not, and doing this is not a typical task for an accountant. Hence, ethical standards are established and modified to prevent the business environment from such type of fraudulent activities. 7.2. Accuracy Ethical standards of accounting help accountants in maintaining the accuracy of the business environment and business reporting standards. It is important to report the accurate and honest information while writing about the financial statistics of an organization. The entire business environment and investors decisions are dependent on this ethical approach. 7.3. Macro Economic Issues Government and business use accounting documents as a guiding force in making decisions related to investment, taxation, marketing etc. Widespread unethical behavior directs to pervasive mistrust in economical and financial system. This will creates a situation in which investors refuse to invest money because of the dishonest financial system. So to avoid all these pessimistic repercussion it is important for an accountant to follow the ethical standards proposed by the accountancy bodies. Conclusion A series of financial crises around the world have shown that the ethics of accounting is not enough to stop unethical accounting behavior. Some accountants and accounting organizations have clearly crossed ethical lines for money, prestige, and for other reasons. This essay focuses on the identification, implementation and evaluation of ethics and ethical standards used in the accounting professions. It also describes the various reasons which require an accountancy professional body to design ethical frameworks for accountants and individuals associated with accounting profession. At present, ethics has become a major area of concern for the accounting professionals due to the corporate scandals that have taken place because of the unethical activities of accountants. These scandals have raised questions regarding the effectiveness of accounting, corporate governance and auditing practices. Hence, all activities of accounting professionals are closely related to the maintenance and sustainability of ethical standards. References Allen, S.J., (1990).The Meaning of Ethics Today: A Critical Structure for Evaluating Modern Ethics. The Elie Wiesel Foundation for Humanity pp.2-8 American Institute of Certified Public Accountants (2011) Code of Professional Conduct and Bylaws: AICPA Professional Standards, volume 2. Pp. 12-34 Anne T. Lawrence, James Weber (2007) Business and Society: Stakeholders, Ethics, Public Policy. Pp. 110-120 Association of Accounting Technician’s (2011) Code of professional ethics. Version 1.0 pp.15 Clikeman Paul M. (2009) Called to Account: Fourteen Financial Frauds that Shaped the American Accounting Profession, pp. 10-84 Institute of Chartered Accountants England and Wales (2013) Rules and guidelines on Ethics. Data retrieved from http://www.icaew.com/en/members/regulations-standards-and-guidance/ethics International Federation of Accountants (2013) Handbook of the Code of Ethics for Professional Accountants. P.10-39 Lawrence A. Ponemon (1990) Ethical judgments in accounting: A cognitive-developmental perspective: Critical Perspectives on Accounting The Association of Accountants and Financial professionals in business: IMA statement of ethical professional practice. Pp. 2-4 W. Michael Hoffman (1996) the Ethics of Accounting and Finance: Trust, Responsibility, and Control. Pp. 40-75 Romar, E. (2006). WorldCom Case Study Update 2006, University of Massachusetts-Boston, retrieved from http://www.scu.edu/ethics/dialogue/candc/cases/worldcom-update.html Boudreau, A. (2008). WorldCom Scandal: Impact of Organizational Behavior on Company Failure, University of Phoenix, p. 6, retrieved from http://alexboudreau.files.wordpress.com/2009/11/worldcom-scandal-ethical-implications-boudreau-2008.pdf Fernado, A. (2009). Business Ethics: An Indian Perspective, Pearson Education India, p. 513, retrieved from http://books.google.com.pk/books?id=Ak_uWkGCEUC&pg=PA366&dq=current+business+and+regulatory+environment+is+more+conducive+to+ethical+behavior&hl=en&sa=X&ei=No8DUeqWGKTJ0AXgy4Ag&ved=0CCoQ6AEwAA#v=onepage&q=current%20business%20and%20regulatory%20environment%20is%20more%20conducive%20to%20ethical%20behavior&f=false Ferrell, O., Fraedrich, J. & Ferrell, L. (2008). Business Ethics: Ethical Decision Making and Cases, Cengage Learning, p. 518, retrieved from http://www.sel.eesc.usp.br/7980174F-D4D2-4CFA-B0A7-0841F70EEE89/FinalDownload/DownloadId-E9E2558D4ECE8B65D543AED25F7F8544/7980174F-D4D2-4CFA-B0A7-0841F70EEE89/informatica/graduacao/material/etica/private/business_ethics_-_ethical_decision_making_and_cases.pdf Read More