Increased Regulation and Higher Ethical Standards - Essay Example

INCREASED REGULATION WILL NOT NECESSARILY LEAD TO HIGHER ETHICAL STANDARDS INTRODUCTION Regulations before implementation are necessarily tested on the yardstick of ethics. Regulations that reflect to have positive implication on the ethical conduct of an organisation receive more votes than those not expected to have any positive impact. Moreover, proposed regulations that are expected to violate any ethical boundary are likely to receive opposition. This does not refer that all the regulation increases the ethical standards plus does it imply that regulations does not have any impact on increasing ethical conduct of the organisation. If it would have been so then companies to maintain the conduct of its employees ethically sound would have been competing on number of regulations than their effectiveness. Hence, this paper is aimed to support the view that increased regulation does not necessarily increase the ethical standards. On developing the general argument, this paper 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. ATTENTION TO ETHICS Concerns regarding the ethical conduct of the business have gained increased attention since recent past. Accurate to state would be to mention the point in time when corporate scandals mainly Enron scandal unveiled and resulted in huge fines, reputational loss and even sentenced to jail (BBC News, 2002). It proved to be the earthquake in trust of stakeholders on the validity of information presented by firms and increased cynicism about the accounting practices worldwide (Enderle, 2004). This shake accounted the top management of the firm for the fraudulent act mainly and the question to be posed to entire mechanism that remained in-capable to indentify 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; if couldn’t be eliminated in full (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 professional than ever to use various shades to protect businesses- in both fair and unfair ways. Resultantly the newer shock in form economic downturn took high intensity wave and wrapped the entire economy on the verge of survival. DILEMMA OF ETHICS For the subjectivity of ethics it would be enough to state that as this argument was being developed research for the definition of ethics with defined boundary could not be found. In fact, it appeared to be 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 only cannot integrate ethical conduct within employees. Hammersley (2009) developed a study which clearly stated that the increased regulations do not increase the ethical standards; persistence can, however, result in more worsened situations. EXAMPLES OF REGULATIONS FOR FINANCIAL STATEMENT AND ETHICS 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 lease contract that fall under the operating lease category is not accounted 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 alike 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 details 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 a 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, refer 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 of 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 interest 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 of 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. METHOD TO INCREASE THE ETHICAL STANDARD 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) suggests that 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) stresses 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. CONCLUSION The paper 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). Algunos vinculos entre la ética corporativa y los estudios de desarrollo. In B. Kliksberg (compilador), Ética y desarrollo.La relación marginada (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