Accounting Choice and the Ethical Considerations - Essay Example

Accounting Choice: Ethical Considerations Abstract The paper elucidates various aspects of accounting choice and the ethical considerations necessary for making the profession a success. As far as basics are concerned, the ethical consideration is supposed to honesty by which the person is able to conduct the business. Although helping clients to save taxes can be exemplary but not defying the rules laid by the states should also be considered. It also brings to fore the need for providing improved and flexible systems for accounting process to meet the demands of the public also to properly allocate the resources provided by the government. The paper also tries to understand the conflicts faced by the social structure for ensuring ethical consideration in the accounting system across the world. Defining ethics Ethics is being defined as those standards or rules that focus on the relationship between people, which would benefit all the parties involved while fulfilling the needs and desires of all concerned. In terms of defining ethical behavior, one needs to conduct all the relationships between various parties in an honest, friendly and faithful manner. Further, a person is required to honor his word and spirit fully and abide by all the agreements once they are being made. Also, in case of providing any critical comment, it is required to confine it in a temperate and reasoned manner and through a balanced discussion approach (Elias 2006). Ethics is a part of philosophy which comprises of a good life and right conduct. It is also wider in a significant manner when compared to the common belief about wrong and right. Philosophers believe that an important aspect of ethics is to have a good life or a life that is worth living or satisfying, which is being seen as more relevant than moral conduct (Elias 2006; Greenfield 2008). For upholding and implementing the code of ethics for becoming focused business organizations, and adhering to increased standards for being ethical especially in the accounting profession. In this situation, financial decisions of organization can directly be based on judgments and information as given by accountants. In the past, it has been a concern by the domestic and international concern on the business ethical standards and social as well as corporate responsibility that has become very significant. It has emerged by the emergence of private and government organizations for which the objectives were to be defined and could enforce really high ethical standards along with the willingness of businesses of the institute of ethical codes as well as value statements (Choi and Wong 2007; Belski et al. 2008). The highlight is now being provided to professionals in the field of accounting. In fact, business organisations such as Institute of Management Accountants (IMA) and the American Institute of Certified Public Accountants (AICPA) have created ethics codes for their members to follow. With regards to the Code of Professional Conduct of AICPA, these include themes such as objectivity, principles of professional conduct, integrity, independence and general accounting standards principles. Moreover, three of the most important variables being recognised by accounting professionals for being ethically responsible are independence, integrity and objectivity. Independence focuses on the financial relationship that an accountant share with a client, while curbing some factors in the relationships that might lead to creating biasness or presenting a conflict of interest in the financial reporting presented by the accountant. With regards to integrity, an accountant is required to be honest while communicating or reporting with the clients. Objectivity on the other hand focuses on being independent and highlights the responsibility of the accountant for being free of any conflicts of interest while transacting with the clients (Hope et al. 2008; Schminke et al. 2007). Ethical Considerations in Accounting Choice Socially Unacceptable Decisions in Accounting Choice The accountant is not only encouraged to focus on helping shareholder maximize their wealth, but even have the duty to understand and analyze the various social and moral impacts of their decisions especially in view of how their decisions would influence the stakeholders of the company. Some of the involved parties whose interests are being impacted by the accountant’s statements include the debt holders, shareholders, local community, employees, suppliers and any other concerned party who might get impacted by the decision. It is therefore important to develop a comprehensive ethical practice, which would also take care of the ethical considerations, especially focusing on the social implications (Carlin and Gervais 2009). It has been mostly seen that most accounting managers are mostly concerned with focusing on the financial difficulties of the companies and may try to inflate the income to make their shareholders secure about the future of the company. However, such practices are not legal and the accountant is morally wrong in inflating the figures. Further, in order the vice versa is also true. Often the firm despite earning a lot of profit often shows only a part of it in the public domain. This is mainly due to the fact that the firms might be giving dividend to its shareholders and showing a lot of profit would mean sharing it with the shareholders as well. Therefore, with the help of the accountant, the company may present misrepresented data and hide the actual profits earned by the company. Further, companies are often seen to negotiate with the government, unions, lenders and the management to hide the correct data so and reduce their earning figures with the help of an accountant (Arnaud 2010). One of the recent cases of forging balance sheet to present false data has been that of Satyam Computers Services Limited, a India-based IT consulting firm. On January 7, 2009, Ramalingam Raju, founder of the company, confessed that the company had falsified its account to the regulatory authority, Securities and Exchange Board of India (SEBI). It was found that the balance sheet had inflated figures for bank balances and cash of around US$ 1.04 billion, non-existent accrued interest of US$ 77.46 million and false liability figures of US$ 253.38 million. This was indeed a classic case of ‘cooking the book’, where the shareholders were duped to believe that the company was in good health based on the data presented in the balance sheet and continued to invest their money into the company (Ferrell et al. 2009). However, such a practice can be detrimental for the company. In case the shareholders get aware of such unfair practices, they would boycott the company and may lodge complaint against it. Further, the regulators may delist such a company from the stock exchanges, which would further create a negative perception about the company and together with shareholders, the company would also loose their suppliers, customers and even employees. Thus, accountants are required to understand the social implications of their decisions as well and should not indulge in taking decisions that might be detrimental for the image of the company and impact its reputation in the market. The accountant has the job to also uphold the position of the company by taking into consideration the interest of not just the shareholders but also that of other stakeholders attached to the company such as the employees, suppliers and the clients (Carlin and Gervais 2009). Illegal Decisions in Accounting Choice The globalization has given vent to mixing of socioeconomic and cultures systems. It has been believed that companies cannot assume that the systems which are considered proper in the home market cannot be acceptable in the other market. Technology has been able to fuel globalization trend and has been able to make the businesses more transparent. The rising competition in the market place have also resulted in increased pressure for the organization, thus they are forced to cut corners. They always look at new ways for gaining competitive edge. The importance for increased analyst support and net income with EPS has dramatically increased the incentives for the organization for manipulates the earnings for predicting the forecasts. Also, the rising public expectations of the ethical corporate behavior as well the ability for using the legal system for being compensated for illegal or unethical corporate actions had increased risk of organizational and personal liability (Armstrong et al. 2010). The expectations of carrying a high standard of ethical behavior has been on rise and companies can face economic and legal penalties for pursuing illegal and unethical activities. Also, some companies are able to make ethical leadership in the market as a part of the corporate strategy. They also believe that ethical behavior is a part of conducting good business (Shawver and Sennetti 2009). Embezzlement, fraud and misappropriation can occur in any kind of business. In this kind of illegal accounting practices, accountants can manipulate the accounts of the business. Sales skimming are another method. By not recording the sales revenue for deflating the taxable income for the business and the owner. By recording the personal expenses of the business, and making the expenses deducted from the income tax. The kickbacks and payoffs are also one of the way by which purchasing managers can be tempted to accept under-the-table payoffs from suppliers and vendors. For instance if the business is paying bribe and does not record the amount, the account can put it under expenses. This is rather, what the disguises these by recording under legitimate expense account which can be repairs or maintenance expense or even legal expense. Money laundering is one of the fields that have been investigated in the recent past very thoroughly (Marques and Pereira 2009). Money laundering can be taking illegal money from various sources such as hawala and infusing it into the business for making it legitimate or giving false identity. This kind of money cannot be recorded and revenue from drugs can be easily infused by the accounts in the business. Incase the employee embezzles the money from these kind of businesses, there needs to be a cover the tracks by making false entries or not making any entries at all. These kinds of activities may be hard to track by the enforcement agencies and thus, intricate scrutiny makes it a probability for making progress and identifying some of the cash that has been infused. In such a scenario, accountants may be required to be vigilant and in cases truthful to provide details about fraud to the agencies investigating (Marques and Pereira 2009). The fall of one of the leading auditing and consulting firms of its time, Arthur Andersen, is an example of how illegal decisions in accounting choices may result in the downfall of an entire firm. The entire corporate culture of the firm deteriorated due to the unethical practices of the management of the company, which played a major role in supporting the accounting fraud at one of its major clients, Enron (Ferrell et al. 2009). Unethical Decisions in Accounting Choice Financial Decision-making is one of the most important exercise in the business at the present day. Ethics in financial decision- making and accounting is considered to be a process in which many organizations have trouble working with. Most of the businesses have emphasized the fact about ethics as well as financial decision making process. Per expectation, all the business in the global arena should behave in certain ethical manner. Although, the business around the world, may have varied definition of ethics as they come from various backgrounds (Carroll 2009). Ethics and the pressure of being ethical in making decision have had increased significance as the pressures in the business environment created by stockholders, other parties or creditors also impact the financial performance. Some of the surveys on the investment management firms have found that approximately three-quarters of the respondents were of the opinion that unethical behavior which was personal trading, fraudulent financial reporting or insider trading were of high concern to them. One of the other survey found that nearly 700 human resource professionals were also concerned about the standards of the company with regards to being ethical by nature (Karnes 2009). The unethical behavior and practices in the field of accounting could be misleading financial analysis which can be done for personal gains, misusing the funds, revenue overstated or expenses understated, overstating corporate assets value or even underreporting liabilities, with the cooperation or any affiliates. Some of the unethical practices can be insider trading, bribery, securities fraud, kickbacks or even manipulation of funds (DeGeorge 2010). Those accountants who get involved in the unethical business practices not only tarnish the profession but also implant perceptions in the field about the practice with the professionals falsifying most of the financial statements. Also with the unethical behavior particularly in the accounting profession, the one that can be found in accounting offices, such as business offices, with favoritism, and incases discrimination or sexual harassment, intimidating behavior with the coworkers or lying to the customers as well as the supervisors. Enron opened up the pandora’s box. A company based out of the U.S.A, Houston Texas, Enron Corporation employed closed to 21000 people and was considered to be the world organization in natural gas, electricity, paper and pulp. In the year 2000, the revenue was around $111 billion. The company was charged with Enron charged falsifying their accounts. In the year 2001, when Enron disclosed the revenue of $618 million, Securities and Exchange Commission started enquiries into the accounting practices. With the auditing firm, Arthur Anderson complying with the fraud, one of the Big 4, had no choice but to stop business. While, Enron can be a case study wherein, malicious practices of inflating accounts, making partnership deals, hiding bad debts, money received from unaccounted source, it also stands in history of business on how stringent rules were laid for checking fraud in U.S. With the occurrence of Enron, the world of finance saw the emergence of Sarbanes-Oxley Act of 2002. It was able to lay the foundation for penalizing the guilty officers by sending them behind bars, and coxing fines for reporting falsified financial statements as well as deceiving shareholders. SOX required publicly traded companies for disclosing whether code of ethics was in place for the senior financial officers. SOX was also meant for restoring investor’s confidence as well as repair (DeGeorge 2010). Conclusion Per the experts, accounting is often termed to be a form of art and not science. As it requires significant amount of judgments as well as assumptions with some of the most complex set of circumstances and given the probability, it would tend to arrive at different taxable income or net income figures. The process also requires professionals to gather, classify, summarize as well as reporting information on the financial structure on the entities who are interested such as creditors, stockholders, potential investors or creditors, other stakeholders or governments. Additionally, accounting also requires the systems that can transform and gather the data or information and also involves making decision for the future on the basis of the information available. Accounting has been termed as language of the business as it affects the lives of the people in the sectors and in the society. These professionals are able to perform various functions for the public and private sectors. Accounting ethics has been a field which is very difficult to control as auditors and accountants should consider the public interest as they rely on the information provided by the auditors. Also, they should consider how best these accounting standards could be applied. Also, when faced with situations or crisis, it could cause the company some serious problem and significant loss or even discontinuing business forever. With the number of accounting scandals with the profession, often times, critics have stated that the accountants do not respond to usual questions, which could further diminish the trust for the people investing with the company. Ever since these accounting scandals were brought to light, new reforms and regulations were introduced but it also paves way for higher education for combating the dangers of this unethical behavior. With the program to educate the accountants on the ethics before entering the workforce, which could be by higher education or even training, it might help improving credibility of the professionals. References: Armstrong, C. S., W. R. Guay and J. P. Weber 2010, ‘The role of information and financial reporting in corporate governance and debt contracting,’ Journal of Accounting and Economics. 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