Ethical guidelines of an accountant - Essay Example

Ethical Guidelines for an Accountant 07 May Introduction Todays business environment has become exceedingly complex. The globalization of most industries means new standards of financial reporting have to be followed by the firms. In many instances, new standards had indeed been adopted by accounting bodies eager to be of help in contributing to the promotion of the interest of various stakeholders such as varied investors, government regulatory bodies and the employees who also have a stake. Because of their confusing and complex nature, one has to be a detective of sorts to be able to sort out all the information contained in financial statements (Brigham & Houston 113). Analysis of these statements require a certain degree of skill to be able to make fair comparisons between firms operating in various countries. Admittedly, there had been several efforts to standardize all the accounting rules and practices beginning in 1973 and took more concrete form by 1998 with a creation of the International Accounting Standards Board (IASB). My paper deals with the ethical issues confronting most chartered accountants today. It is because the profession of accounting is often a murky environment with various rules and regulations subject to different interpretations. In other words, most of the rules were formed from mere opinions of authoritative bodies. As such, opinions can be subjected to challenges. Despite all the efforts at standardization, there is still a long way to go before all accountants follow the same rules and procedures. Chartered accountants can be subjected to all various pressures for them to fudge the numbers if necessary. This puts them in awkward positions of conflicts of interest. Often, it comes down to a choice between upholding the integrity of their profession and the dictates of management or whoever wants window dressing to be done. In many cases, it all boils down to the code of ethics and personal values of the accountant. Discussion Accountants have a big moral obligation to make financial statements accurate and be truly reflective of the financial condition of their firms. This is because people depend on the reliability of financial statements to make decisions, such as investing in the firms or using them to make mergers and acquisitions. Ordinary investors rely on them too as they purchase shares of stocks in a certain company, hoping to make money from dividends and appreciation of their stock shares. This is why accounting is regarded as a profession worthy of having its own set of code of ethics for all practitioners. These are standards by which all accountants are expected to abide by and comply to the best of their ability. If financial statements can not be relied upon, the whole world of business will be thrown into complete chaos. A profession like accountancy is considered as such whenever its practitioners group themselves together and hold out their services to the public as something of good value. This means their offer of service is something that meets certain standards as codified in their code of ethics. This is their social contract with the investing public and all other stakeholders who use and rely on financial statements to make decisions. Without this assurance, people will be extremely reluctant to invest in a business organization since they will not know what is truly happening inside it. The code of ethics supplements whatever laws and regulations exist today with regards to accounting and especially auditing practices. The most sticky issue regarding most professions is conflict of interest. This is why a code of ethics contains provisions in which ethical and moral issues are addressed squarely. In professions like the medical and health care professions, both American Medical Association (or AMA for doctors) and American Nurses Association (or ANA for the nurses) have strict provisions regarding controversial subjects like abortion, euthanasia, organ transplants, brain death and assisted suicide. The accounting profession also has similar provisions on ethics. Accountants deal primarily with numbers and as everybody knows, numbers are easy to fudge. They also deal with people, primarily the bosses to whom they report and the people who use them such as shareholders, regulators and the investing public in general. Along the way, it is easy to succumb to some temptations that can make fudging the numbers quite easy. In particular, the Code of Ethics of Chartered Accountants (http://ocaq.qc.ca 1) had gone by several revisions to further strengthen its provisions regarding the obligations of accountants to the general public, their clients and to their profession. An example of this possible conflict of interest arises when accountants know something about the company not available to the general public. If they want to do so, they can profit from this information which is known as insider trading. There are many laws against this practice, in particular the US Securities and Exchange Commissions The Insider Trading Sanctions Act of 1984 which penalizes severely anyone who trades in securities while in possession of critical or material information that is not available to the general investing public. Insider trading can greatly harm investors as it erodes their confidence and thereby cause havoc on capital markets (Macey 7). There are many ethical issues that can confront an accountant besides insider trading. Whether as practitioners or as regulators themselves, accountants need to be more aware of a moral and ethical obligation to discharge their duties with a clear conscience. Some problems arise out of simple mistakes or oversights which are not deliberate. However, most of the big problems associated with accounting today concerns what is called creative accounting. This is defined as the process where accountants use their knowledge of accounting rules to fudge or manipulate the figures in preparing financial statements (Gowthorpe & Blake 24). With this definition, it is obvious creative accounting techniques lie between what is barely legal and the generally accepted principles of accounting or what is known as GAAP. This means it is more serious and represents a deliberate attempt to mislead the users of financial statements. Accounting experts admit that creative accounting practices are quite prevalent. What is more alarming is that most accountants know this practice is deceitful and yet they still do it in many instances. Western accounting practices are especially prone to this malpractice as it gives a lot of freedom, discretion and leeway in how accounting rules are to be interpreted. It is therefore not very surprising why this is quite prevalent and there are four general reasons why this is so: accounting rules allow a firm to choose between different accounting methods, some books of accounts require a degree of estimation, judgment and prediction (which mean there can sometimes be no precise figures available), variety of artificial transactions allowed and finally, genuine transactions which have a material effect due to timing differences (ibid.). Sometimes, it is only the accountants conscience that separates a firm from having a realistic financial statement that truly reflects its financial position and a real financial disaster because it is relatively easy to fudge numbers. Creative accounting is much more insidious as it follows a pattern of skirting the laws and regulations without necessarily breaking the laws. In other words, it is much more difficult to uncover and the effects can be quite disastrous like what happened to some spectacular implosions of big companies as reported in the media. It is very different from the more benign form of window dressing of the yesteryears. A very interesting study was done some years back in which researchers attempted to link an individual accountants rank with his or her moral reasoning abilities. In other words, it tried to find out if there is a correlation between rank levels (manager or partner in firms) to ethical beliefs and principles (Conroy, Emerson & Pons 184). The study found out there was no such link; it made a more interesting finding instead: that moral reasoning has more to do with the age of an accountant than his or her position. The authors concluded that age is the most reliable predictor of ethical attitudes. Its implication is that firms which find a great need to be ethical and exercise more corporate responsibility should hire older accountants. Conclusion Besides insider trading and creative accounting (which is sometimes perfectly legal), another issue which accountants need to confront is that of whistle-blowers. Very often, they will encounter situations in which books of accounts have been altered quite imaginatively which makes it difficult to uncover fraud unless the auditor is very good in forensics auditing. Like in the case of Enron, the California wholesale electricity market and other high profile cases, there were several instances in which people who had inside information tried to alert some officials but they were either ignored or their claims dismissed outright. Accountants are also caught in a bind in this conflict of interest situation where they need to protect potential whistle-blowers from the repercussions of reprisals such as termination from employment. If there were sufficient safeguards in place, incidents like Enron could have been avoided. If we look back at certain events, Enron was like a black box in which everything was shrouded in much secrecy (Markham 76) and it was difficult to make an analysis or sense of anything. Its most preferred method of creative accounting was the use of special-purpose entities (SPE). There are sometimes compelling reasons why even top management and directors will engage in selective financial misrepresentations such as trying to increase earnings to earn a bigger bonus (because it is tied to financial performance of the firm), cooking the books so as to avoid a loan agreement default or to satisfy stock analysts predictions of good earnings. It is even beneficial to shareholders in a shorter term because it avoids stock price volatility. As a result of Enron, financial scandals and massive accounting frauds, there was agreement of a stronger regulatory environment which was why the U.S. Congress passed in 2002 the famous Sarbanes-Oxley Act which codified certain corporate behaviors such as protecting a potential whistle-blower from being fired or penalized (Brigham & Houston 15). However, in the final analysis, it is the accountant with good ethical standards who can make all the difference. Works Cited Brigham, Eugene F. and Joel F. Houston. Fundamentals of Financial Management. Florence, KY, USA: Cengage Learning, 2007. Print. This book discussed why investors today need to be financial detective to be able to unravel all the mystery and complexity in most financial statements, especially those found in the accompany footnotes. Sometimes it is difficult to compare similar companies operating in the same industry sector but in other countries because there are significant variations in accounting practices. This is one of the main reasons why global accounting standards need to be adopted by all. Comptables Agréés du Québec (OCAQ). Code of Ethics of CAs. 2010. Web. 06 May 2010. . This is a very useful reference site for existing and future chartered accountants in the area of Québec and in general, for anyone in Canada who wants to become an accountant. It had been updated several times, mainly in the years 2003 and in 2005 primarily to address new issues viewed to be important and which need a further strengthening such as the accountants primary responsibility and issues pertaining to conflicts of interest and finally, the issue of confidentiality. Conroy, Stephen J., Tisha L. N. Emerson and Frank Pons. “Ethical Attitudes of Accounting Practitioners: Are Rank and Ethical Attitudes Related?” Journal of Business Ethics 91.2 (Jan 2010): 183-194. Print. Also available at: . The authors must have been surprised themselves of their findings because the general perception is that those of higher rank had the authority to command their low ranking employees to commit creative accounting when the exigency requires. On the contrary, the more reliable predictor is the age of the practitioner and it is not really surprising when one considers that as one grows older, a person becomes more aware of his mortality and gives more emphasis to values than anything else such as material possessions like wealth or ethereal things like a having a good reputation as a good businessman by manipulating the books. Gowthorpe, Catherine and John Blake. Ethical Issues in Accounting. New York, NY: Routledge, 1998. Print. The book took an in-depth analysis and discussion of the various ethical issues facing the accounting profession today. In particular, it took the view of ethics from a regulatory viewpoint. However, the discussions are still very enlightening on most of the sensitive topics concerning the accounting profession in general. Macey, Jonathan R. Insider Trading: Economics, Politics and Policy. Washington, DC, USA: American Enterprise Institute Press, 1991. Print. When investors lose confidence in the capital market due to insider trading scandals, its net effect would be to reduce the amount of capital formation. This in turn will have an adverse impact on companies trying to raise capital for expansion of manufacturing capacity, entering new markets or funding for acquisitions. It would have a dampening effect on the overall economy because capital is now restricted. Companies which cannot raise capital through initial public offering will have to resort to either external borrowings (banks) or rely mainly on their organic growth (profits and retained earnings). Markham, Jerry W. A Financial History of Modern U.S. Corporate Scandals: From Enron to Reform. New York, NY, USA: M. E. Sharpe, 2006. Print. It was clear from the accounting frauds that were committed especially during those asset bubble years that the accounting professions code of ethics was a victim itself because it became a useless document. It required strong governmental action to impose discipline in the profession because the temptations to fudge the numbers are often so great. Additionally, pressure is almost always exerted on the accountant to improve the books using all the means available often to the point of breaking the law. Read More