Accounting Ethics - Term Paper Example

Accounting ethics Introduction Accounting ethics is mainly a part of applied ethics. It is a study of morality and judgments in which way accounting is applied. Accounting is the backbone of any organization. It is very important for the management as well as stakeholders of every organization to know real accounting facts about their organizations. The concept of accounting ethics was first introduced by Luca Pacioli. Accounting ethics is a very important ethical practice for preventing corporate collapses. Accounting ethics has significant importance for different stakeholders related with any organization. It is being noticed that different corporate collapses and recent accounting malpractices has increased the importance of accounting ethics. There is no doubt that role of ethics in accounting has increased a lot. International managers are giving highest priority to accounting ethics. This is very much dependent on individual sense related with values and morality. Modern day business world is facing cutthroat competitions. Each and every company is trying to outperform other companies. Accounting ethics plays a very important role in this scenario. Accounting ethics is very much important for the transparent image of organizations. It also has great impact on brand image of a company. The gravity of the concept is so significant that different universities are teaching accounting ethics to related people. Accountants and auditors are mainly responsible for maintaining accounting ethics in different organizations. Impacts of accounting ethics for any organization are deep rooted and are very long term. Accounting ethics is a most talked about topic in modern business organizations. Managers around the world are spending huge time and money for managing accounting ethics in their organizations. Managements of different organizations make their important forecasting and investments on the basis of accounting. So, accounting ethics is a very critical matter for them. Lots of money and future of different companies are very much dependent on accounting ethics. It is a very urgent factor for business control. This study is a step by step approach. This paper will include a problem statement related with accounting ethics and that problem statement will be discussed elaborately. It will discuss about the history of the issue. Different recommendations will be given to overcome the issue. At the end of the topic suitable conclusion will be drawn. Problem statement Modern business world is facing serious problems from different ethical issues in accounting segment. Any kind of ethical problem related with accounting ethics can be very serious issue for organizations. Here in this study the problem statement is impacts of different financial fraudulent reporting. It is a very sensitive problem for all size business organizations. Each and every business organization maintains some accounting systems into their business activities (Zabihollah and Richard, 2011). If any fraudulent activity has been indulge into those systems, and then total accounting system will give false statement. It is very much detrimental for both organization and stakeholders. It is being noticed that due to some personal or narrow benefits accountants or auditors often include fraudulent activities in to their accounting process. It is a huge ethical problem from the side of accountants or auditors. Fraudulent financial reporting has negative impacts on organization’s financial health. Organizations manage accounting for understanding their financial performances (Charles, 2008). On the basis of that they fix their future courses of actions. But manipulated accounting prevents them to take proper strategic decisions. It is quite obvious that different strategies will be failure if financial reports are manipulated. It has very serious impact on the future of an organization. Every organization generates some employments. So, fraudulent financial reporting does can be very much harmful for employees also. Manipulated financial reporting can reduce efficiency and productivity of an organization. Management could not control performances of their employees properly. Every business organization sets some budgets for their different activities. All those budgets are designed on the basis of different financial reports (Ken and Diane, 2009). But, if financial reports are fraud then it is very natural that total budget allocations will be useless. If budget allocation is faulty then it is impossible to go ahead with any new project. Fraudulent financial reporting can cause for lots of legal problems. It is often being noticed that different organizations for their narrow benefits often disobey different legalities in their financial reporting. Companies try to hide originality to pay less tax to Government. They very often prepared manipulated financial statements like income statements and balance sheets. It is a great ethical problem. It has very negative impact on organizations (John and Catherine, 2005). A proper check from the side of Government organizations can cause serious problems for those unethical organizations. Fraudulent financial reporting does tarnish the brand image of an organization. For an example, Satyam Computers was an India based IT organization. The organization was performing very well both in nationally and internationally. But due to some manipulated financial reporting the company collapsed. Company’s brand image was grounded. Both, the external auditor from PWC and founder & CEO of the organization were punished. Futures of huge employee base were uncertain. It shows that manipulated financial reporting have limitless negative impacts in each and every level of an organization. It is a serious headache for managers around the world. Share holders invest their hard earned money in to different organizations. But fraudulent financial reporting pushes all those investments towards great uncertainties. History of the issues Ethics are very important issue in case of maintain accounts in a professional way. History says that this kind of accounting practices provide moral value and prevent anyone to do any kind of injustice. Every professional accountant should have the ethical knowledge otherwise they will be unable to know what is right and what is wrong. Ethics provide disciplinary action to do the accounting work in a proper and accurate way. The accounting skill will also enhance by using the ethical factors. At the same time a good reputation can be built by any accountant for practicing ethical knowledge in the accounting system. Work pressure will also be reduces by such kind of practices because chances of doing wrong entries will be omitted totally if someone will follow the ethical guidelines for keeping accounting records. Now another more important problem can also be solved by this issue. From the very past doing fraud in accounting entries is a very common problem. Ethical factors can build strength within an organization which will helpful to prevent such kind of practices. Luca Pacioli was 1st introduced the accounting ethics in the year 1494 (Chatfield and Vangermeersch, 2014). He was an Italian mathematician and is recognized as the “Father of Accounting” in the worldwide. In his 1st book he 1st wrote about the accounting ethics. The name of that book is ‘Summa de arithmetica, geometria, proportioni, et proportionalita’. From that period ethical standard has been implemented in accounting practices in the government organizations, independent companies and private or professional organizations. These groups have directed their accountants in the organization to follow the ethical rules and regulation for maintain accounting records of the organization. Such kind of practices will maintain the stable professional work environment in any organization. The major duty of an accountant is to maintain the settled guidelines of ethical issues by any organization where they are involved. United States has so many accounting societies which have specific code of conducts, rules and regulations and the accountants who are the member of such societies have to follow this code of conducts in their accounting practices. Examples of such kind of societies are Institute of Internal Auditors, association of Government Accountants, National Association of Accountants etc. An accountant in US can be the member of more than one society. US were taken the 1st step for developing professional accounting system in the year 1887. It created American Association of Public Accountants (AAPA) for the said purpose in that year. In the year 1905 American Association of Public Accountants formulated its first ethical code of conducts related to accounting industry to educate its members (Jeffrey, 2012). In the year 1907 the association conducted its 20th anniversary meeting where the members of this association were discussed mostly about the ethical issues. Ethics was the major topic for discussion at that conference. After the detailed discussion at that conference a result was come out which was a list of professional accounting ethics were implemented in the practice and procedure of the organization’s activities by applying law. But the organization not invited individual members to provide suggestion regarding ethical issues as there was voluntary presence in that specific conference. Later American Association of Public Accountants changed its name and now it is famous as American Institute of Certified Public Accountant (AICPA). American Institute of Certified Public Accountant has implemented five divisions of ethical principles and its members should follow all these principles. These divisions are ‘competence and technical standards’, ‘integrity, independence and objectivity’, ‘responsibilities to colleagues’, ‘responsibilities to clients’ and ‘other responsibilities and practices’. Every division was provided guidelines to the accountants to practice accounts in a professional way. Any kind of failure from applying the ethical code of conducts in practices will remove any accountant from his existing position and his license for doing accounting practices can be cancelled. Before developing any ethical principle American Institute of Certified Public Accountant is analyzed all the situations for applying the mentioned ethics from inside and outside of an organization. If any problem will arise for applying any principle in the practical field then they will revise that ethics which will help to do smooth and uninterrupted accounting activities. Other accounting organization in US such as Illinois Institute of Accountants was also engaged to develop ethical rules and regulation for its members to apply accounting practices (Duska, Duska and Ragatz, 2011). Universities also started to teach ethical accounting practices from the year 1980 in US. They have taken initiatives such as case studies, guest lecture, role playing activities and class room lecture for giving knowledge about the ethical accounting practices. In all the accounting text books a new chapter was included and the name of that chapter was ethics. From the year 1999 ethical classes became important in universities for passing the exam CPA. State University of New York was taken effective steps for implementing ethical study in the accounting profession for the growth prospect and better position of the country’s economic condition. In the year 1988, Stephen E. Loeb proposed 7 goals for studying accounting ethics and reasons to include this topic in the accounting course curriculum. These 7 goals are as follows. Ethics of accounts will develop a sense of responsibility and moral obligation Students can learn the procedure to deal and handle with the uncertain situations when they will enter in their accounting profession This will develop a stage which will change the ethical behavior of persons This will recognize the areas and fields where ethical implementations are necessary for doing correct accounting practices Moral issues will be involved in the accounting education which will enhance the learning procedure This will help to develop certain abilities among students by which they can be able to deal with ethical conflicts or can solve the ethical problems without any difficulties This will help to build a good and healthy relationship between accountant and other related parties in an organization (Ketz, 2006). Different countries maintain their ethical issues in case of accounting practices by following different laws. For example – Sweden is following accounting law, UK is following Company law and Germany is following tax law. There are 3 levels of ethics which can be shown in case of accounting study. The 1st one is macro level. In this level students can get information about the Sarbanes – Oxley Act which was implemented in the year 2002. In this act corporate governance and ethical issues was highlighted which was helpful to prevent fraud cases. Business activities can be controlled and directed in a right way by applying this act. The reasons of bankruptcy, procedure of equity funding can be understand by the micro level study. SEC has prescribed accounting principles that can be used in uniform way. The American Institute of Certified Public Accountant formed a commission which was involved in auditor’s responsibility. The 2nd level is known as level of the firm. Here it is described that how the ethical decisions of an accountant will impact on the structure, culture, system and activities of any organization. Ethical decisions in accounts also help in shaping behavior, attitude and belief system of employees and outsiders towards the organization. Shareholders will be assured that the company is not involved any kind of corruption at least from the monetary perspective. The 3rd level is micro level where ethical behavior, ethical sensitivity, ethical motivation and ethical reasoning are included. By using ethical sensitivity an accountant will indentify the issues where ethics are absent but required very much to do the accounting practice in a right way. By using ethical reasoning accountant will think about any problem which has risen from the accounting transactions or practices and try to find solution to solve the problem by using ethical principles. Ethical motivation will help to build the desire among the accountants for practicing the act in ethical way. Every accountant should carry the ethical behavior throughout his work. For the absence of ethics so many accounting scandals can be found in history. From the year 1980 plenty numbers of financial scandals were reported by media and as a result many companies and accounting firms were closed, fraud charges were implemented and government received many requests regarding protection of bankruptcy. The scandals were majorly related to the bribery, creative accounting, misleading financial analysis etc. Many companies were highlighted for fraud cases in their accounting practices such as Nugan Hand Bank, AIG, WorldCom, PharMor etc. The famous multi - national company Enron was focused for violation of accounting ethics. They did not prepare true and fair view of their financial statements for several years. From the past experiences it can be said that there are end number of usefulness of practicing ethical principles in accounting procedure (Green, 2014). Recommendations This is known that there are several problems which are related in the accounting ethics. But corrective steps are also there through which the problems can be resolved or can avoid while an accountant will do the accounting practices. The major problem which can be seen widely in accounting practices is impacts of different financial fraudulent reporting. Omission of financial records is one of the reasons to raise such problem. If any accountant will leave out or omit any financial figure from balance sheet or income statement or cash flow statement or any other financial statement then a wrong picture about the financial condition of the company will be given to the share holders, investors, suppliers and public from the end of the company’s management group. To overcome this problem management should take effective steps. Company will not depend on one accountant for any financial transaction or accounting entry. There should be more than one accountant and every entry will be verified by more than one person. Fraud cases can be happen in case entering financial entries. For example it can be said that one accountant in ABC Ltd. has taken $ 10, 000 from the cash balance of company and entered a self created entry in the income statement. Suppose he showed the amount in the heading of miscellaneous expenditure. Now the management of the company has to be verified by more than one accountant that what the actual headings or purposes are of miscellaneous expenditure in which the amount $ 10, 000 has been spent from the end of the company. The corporate officer who is the member of the management group or any executive can do this verification after getting permission from the management of the company. Management can also fixed the purpose where the miscellaneous expenditure is required and without such purpose no money can be spent by the company under the heading of miscellaneous expenditure. This ethical principle should be followed strictly by the accountant at the time of accounting practices. Again if more than one accountant will be involved to verify any accounting entry then such kind of scopes will be removed permanently. Management can ask all the vouchers which are related to miscellaneous expenditure from the accountant to check and sum up the actual figure of the expenditure amount. For such purpose all the vouchers which are related to expenditures and incomes of business activities should be maintained by the accounts department on the basis of strict rules formed by the management. Company also can appoint an external auditor to investigate all the financial transactions in a proper and effective way. If time constraint will be a matter of issue for doing verification by the external auditor then management can involve the internal audit depart of the company for the said purpose. But for this particular case there should be one or more than one financial expertise in the internal audit department of the company. In many small companies maintain the internal audit department with experts of related fields is not possible. So in that case certain ethical guideline should be provided by the company to the accountant and has to monitor that the accountant will follow and maintain all those guidelines in the accounting practices or not. If not then management will take immediate corrective steps to replace that accountant or comply him to follow those guidelines (Hoque, 2006). Management can also develop the following ethical principles for reducing the fraudulent work within the business entity. They can estimate real sales revenue at a prior date so that they can be able to match the estimated figure with the actual figure. If difference between the estimated figure and actual figure will be high then they will find the reason and investigate the situation for which the difference is happened. If there will be any fraudulent practice occurred then that will be highlighted and if the company continuously do such practices then chances of fraudulent practices will be removed permanently from the organization. Management can also take aggressive capitalization policies to minimize the amount of costs. If cost will be reduced then chances fraudulent in the case of expenditure will also be decreased. The four key standards should be maintained by each company for accounting ethics. These are confidentiality, competence, credibility and integrity. Credibility provides guidelines about the true and fair view of all the financial transactions as well as financial statements which has to be maintained by the accountant of any organization. The objectives of the company can be meet by the credibility in the accounting procedure and it also help to reduce the fraud practices in the finance sector of any company. Integrity indicates to avoid any kind of conflict of interests that will appear by the financial transactions or practices. Accountant should not take gift from the related parties of company or must not engage in any kind of activities which will destroy his ethical value in his professional life. Confidentiality indicates accountant should maintain all the accounting information in safe and secured way so that without legal notice no one can disclose the information to 3rd parties. This is also helpful in reducing fraudulent practices because it is very crucial and important parameter in case of financial position of a company. Share holder’s interest will be affected if any confidential information will leak out to market and at the same time company’s reputation will also be hampered. All the accountants of any company should have proper and adequate level of skill and knowledge to perform the company’s accounting practices and their relevant duties in professional and accurate manner. Competence indicates the mentioned guidelines. Hewlett – Packard Company established their accounting ethics guidelines by some principles and these principles are excellence, responsibility, fairness, citizenship, compassion, honesty and respect. Home Depot, Inc. also framed their ground works with the ethical practices and behavior especially in the accounts and finance field. So this can be said that if organization’s financial policies are made with ethics then fraudulent cases can be removed from the business activities. Conclusion Fraudulent reporting is a very serious concern for accounting ethics. It is a very serious offence. It is a barrier for enhancing organization’s performances and productivities. This is a very serious problem as far as company’s brand image is concerned. Involvements of huge stakeholders are making this issue more serious and sensitive. This issue is not at all very new. It has very long history. It is very easy to draw conclusion that all these unethical and manipulated reporting are being done for the sake of narrow individual benefits. Some unethical people ignore mass interests. This paper is also telling that this unethical accounting practice is not suitable for organization’s long term goals. It may cover short term needs but at the end organizations have to face bitter consequences. It also shows that accounting is the main tool for record keeping. In this sector ethics and morality are very important. But manipulated financial reporting is a serious threat for accounting ethics. It pollutes total accounting system. Managers around the world are keeping sleepless nights due to this sensitive issue. Each and every organization is trying to do away with this issue. These kinds of activities are reducing the environment of trust in organizations. Human psychology and values are one of the main reasons behind this problem. Managements of different organizations are strictly implementing different accounting standards into their companies. They are using different modern accounting technologies for overcoming this problem. Roles of auditors and accountants are being scrutinized under magnifying glasses. Magnitude of this issue in terms of accounting ethics is very high. Scope of negligence from the side of management is very low. Organizations are spending lots of time and money for removing this menace form their companies. Different organizations are arranging different trainings and orientation programs for educating their employees. There are lots of recommendations are given in this paper. Nothing is unmixed blessing. So, all those recommendations are have their limitations. It is a human created issue. So, it is very important for human being to remove this issue by themselves. Otherwise it is very difficult to eradicate the whole problem by imposing strict measures only. Human ethics and morality is very important to stop this problem. References Charles, M. S. (2008). Business Ethics in the Accounting Curriculum: A Comparative Study. New York: ProQuest. Chatfield, M. and Vangermeersch, R. (2014). The History of Accounting (RLE Accounting): An International Encylopedia. London: Routledge. Duska, R., Duska, B. and Ragatz, J. (2011). Accounting Ethics. New Jersey: John Wiley & Sons. Green, W. (2014). History and Survey of Accountancy (RLE Accounting). London: Routledge. Hoque, Z. (2006). Methodological Issues in Accounting Research: Theories, Methods and Issues. London: Spiramus Press Ltd. Jeffrey, C. (2012). Research on Professional Responsibility and Ethics in Accounting. England: Emerald Group Publishing. John, B. and Catherine, G. (2005). Ethical Issues in Accounting. London: Routledge. Ken, M. and Diane, W. (2009). Accounting & Business Ethics: An Introduction. London: Routledge. Ketz, J. (2006). Accounting Ethics: Theories of accounting ethics and their dissemination, Volume 2. Oxford: Taylor & Francis. Zabihollah, R. and Richard, R. (2011). Financial Statement Fraud Defined. New Jersey: John Wiley & Sons. Read More