Ethics Acounting and Finance - Essay Example

Article: Analysis/Research Paper on Ethics, Accounting and Finance Introduction Is ethics a requirement for the attainment of purpose or purposes of accounting and finance? Before we could try to respond to this challenging question, we need to define our terms. In many companies, the two functions are treated as one. There are organizations where accounting division is under finance department and sometimes the two are just combined. What really is accounting? Is it the same as finance? Accounting as they say is the language of business while finance is geared toward activities the purpose of which is the maximization of the value of the company to the stockholders. Finance will use accounting to attain its objectives, since accounting is its language, finance must know where it is in a line at a certain point in time. Accounting therefore measures the objective of finance in concrete terms. Since finance wants the stockholders to have more wealth in relation of their present wealth, accounting tells, “You are still at this point or at that point.” In addition, Finance uses people in order to attain its objectives. It needs decision makers to do that. Accounting then provides the materials for these decisions makers. Needs serve by accounting and finance In concrete terms accounting measures profit and resources, telling how much is the assets, liabilities and capital of a business organization, which are a combination of the interest of the owners and creditors. An income statement tells the results of operation of a business for a given period say a month, or a year, while a balance sheet show the financial condition of a business organization as of a given time say year 1995 or 2000. From their definitions, we can easily discern that there is a difference between the two. A finance manager who heads a department where accounting is a division would exert an influence to have accounting division help finance department in the attainment of the objective of the latter that is the maximization of stockholders wealth. What do you think is the result? Finance will have a biased report because, the Finance manager will just say to the accounting head, “you must practice creative accounting for us to look good to our stockholders.” The head of the accounting office will respond in submission to the head of the finance department, his boss. In an organization ideals, are ideals but human nature would rear its ugly head if one function could abuse another functional area. The conflict between the functions and their resolutions How to solve the inherent conflict between the two functions. It is to separate the two functions. Accounting is better combined with a management information system because they both serve the same purpose that is to provide accurate and reliable information for decision-making and in addition, there must be ethics as to practice of the two functional areas. Professional code of ethics is found in almost all professions. Why do they need to adopt such code? Is it just for convenience that we have such code of ethics or are ethics indispensable in the functioning of the different professions? The next paragraphs will try to explore the relevance of ethics in the practice of accounting and finance. Accounting is governed by different standards than finance. We have the certified public accountants or CPA’s in almost all nations. Finance people need not be CPA’s and in fact, many finance people have background in other course like engineering and economics. Normally however, CPA’s or even non-CPA’s who have accounting background are prone to become finance people because may be of their facility for numbers or figures. What happens as stated earlier is that accountants would loose their identities as accountants if they engage in creative accounting. They become manipulators of numbers in order to please their finance bosses. If said accountant happens to be finance man at the same, there is big problem, because the same person holding the same positions would be exercising a power that lacks the benefit of check and balance. Finance people then, could make it appear that the business is earning when in fact it is not. This could in turn mislead investors as to their decisions. That is why there is really a need for accountants to look at their functions as separate from finance. However, how do ethics try to come in the picture to help resolve the problem on the possible abuse of power? Accountants as we said do not lack standards to do their work. CPA’s have their international accounting standards or the generally accepted accounting principles. Integral part of the principles particularly in public accounting practice is the practice independence. The code of ethics of the accounting profession required auditors to practice independence from their client that in the event that there is threat to independence, engagement for auditing must be declined. However, the present challenges of the times are the rendering of non-assurance services from auditors in additions to their auditing services. A thin borderline is sensitive here because the auditors have become business advisors. In the desire of the accounting firms to further their engagement, the auditing function, which was supposed to exhibit independence, has resulted in a very compromising situation. Example of ethical violations A very good example of absence of ethics in accounting is the case of Xerox Corporation. The corporate officers were accused of manupulating its accounting information to jack up its revenues for the period. What happened was that the investors are misled into believing that the corporation is really earning when if act its not. In the words of the SEC, the scheme that Xerox adopted in order to show itself worth investing had boomerang to the corporation because in the remaining period, it has no more income to earn because it has recognize all revenues earlier. Conclusion Ethics has a way of proving itself correct. We have proven a case where ethics has a reason of staying on its own. Its purpose is sustained by its results. It is here that the accountant will have to realize their role in fulfilling the information needs of users. Accountants of companies may not have the power to assert their independence because there are employees, the independent auditors must realize that they are the only hope that public could run into. This is the reason, why a very high degree of independence of auditors is needed to accomplish the very purpose of the Public Practice of the Accounting profession. For those who are practicing finance, they must realize that they are not just employees of the employer where they are working but they are part of a bigger community with bigger responsibility to society. They are expected not connive with the preparers of the financial information, the accountants, and are expected to choose becoming a finance person or an accountant. If they are finance people, they must realize that stockholders’ gain could be other stakeholders’ loss. This means that finance people might have satisfied their stockholders because of higher return. However, if those high returns are underserved because of underpaid the employees, then such ingenuity cannot sacrifice justice. If they have pleased inventors but they have not paid the property taxes, they did not serve their inherent purposes but rather obeyed the importuning of their superiors, and then finance did not follow its ethics. Hence, on the broader perspective, an ethical finance would consider all stakeholders. It must see to it that employees are paid correctly, taxes are paid religiously, creditors are satisfied since loan amortization updated. By doing what is fair and just under many circumstances, it has attained its designed purpose of maximizing wealth to stockholders in an honest and ethical way. Bibliography 1. Van Horne, James C., Financial Management and Policy, Ninth Edition, Prentice-Hall International Editions, New Jersey, USA,1992 2. SEC vs. Xerox Corporation Read More