International Ethical Standards - Research Paper Example

International Ethical Standards Affiliation: There are multiple complex ethical concerns that the corporate world must deal with across the globe. It is important that the workforce within the industry pay attention to ethical standards and provide high-quality financial reports. Professional ethics are a core concern in the accounting industry; for this reason, there is a system that is in place carrying rules and regulations. The corporate world within the globe has come up with multiple regulating bodies that play the roles of setting up the governing rules and implementing them. The people within the industry must follow the ethics and regulations at all times. Business practices differ from one state to another based on the company culture in the respective countries. The appreciation of a county’s entrepreneurial culture and hierarchy allows smooth running of commercial activities devoid of unethical circumstances. There are multiple challenges associated with ethics in global business; however, there are various roles that standards plays in the same setting. This paper seeks to examine the need and the importance of establishing a global set of ethical standards, the history and growth of international ethical standards, as well as the challenges that governing bodies face. Introduction The accounting field is a constantly growing and changing industry. Accounting was regarded an area with high ethical standards until recently. The business world has recently experienced high profile failures through unethical behavior. Conducting business internationally may cause numerous ethical concerns. Some of the ethical issues are corruption, diverse cultures and customs, human rights, and different working environments. The economy of today is becoming globally smaller; for this reason, corporate institutions across the globe are becoming co-dependent on one another on local and international viewpoint. For instance, labor, information technology, raw materials, and finance. The American Institute of Certified Public Accountants draws the behaviors within the United States during the International Federation of Accountants (IFAC), outlines international ethical standards and practices. The principle of one ethics system requires the understanding of the ideologies and operations of both standards bodies as well as similarities amid them. The American Institutes of Certified Public Accountants (AICPA), The AICPA is an American based professional organization for certified accountants. The key objective is this institution is to provide sufficient resources, set professional and ethical standards to certified public accounting personnel, set standards for auditors that audit corporate institutions, state and local governments and also enforce the professional standards through effecting disciplinary action against the certified public accountants. The AICPA is trying to create public confidence alongside proper practice of ethical behavior with regards to the accounting profession and the certified public accountants. The certified public accounting personnel play a vital role in the society through the services that they offer the governmental bodies, private corporations and individuals (Wild, Shaw, &Chiappetta, 2009). In order to cement the public confidence in respect to the accounting profession and the certified public accountants, the industry should administer itself and behave in an ethical manner, respect and adhere to the rules set by the legislative bodies and act within their scope of duty and maintain objectivity and independence (Wild, Shaw, &Chiappetta, 2009). Individuals who act in a manner that contravenes the principles set by the legislative bodies will cause a colossal harm to the accounting profession and further enactment of strict legislation thus leading to increased public mistrust. Ethical standards are crucial to the economy because may people rely intensely on financial figures (Wild, Shaw, &Chiappetta, 2009). The intention of the moral standards is to provide a framework of rules that ensure public certified accountants and public bodies disclose financial reports accurately and in an ethically rational manner. According to the AICPA, the accountants must display high integrity standards as well as handle the accounting information in a confidential manner (Wild, Shaw, &Chiappetta, 2009). The International Federation of Accountants (IFAC) The principle objective of the International Federation of Accountants is to uphold a global business standard and corporate ethical behavior so that investors and creditors will appreciate the financial information across the globe. The principle and scope of IFAC spread to accountants across the world to follow a particular set of rules that guide them in providing the clients with steadfast, comparable and comprehensible, commercial information. The basic structure if the International Federation of Accountants relies more on the principle and the conceptual commercial reporting. The idea of concept means that disclosure of information should be done in a reliable and relevant way, therefore, demanding the accountants, corporates and federal institutions ‘to keenly examine the details of the balance sheet and information that contribute to the financial reports. The above bodies should use their competitive analysis to apply the policies set by International Federation of Accountants. The importance of a global set Ethical and Regulation in Accounting It is knowledgeable that credibility is a significant feature for an accounting personnel. In a commercial economy, the manufacture of wealth and the economy significantly rely on the confidence of the public and the investor. Principles and transparency play a vital role in ensuring that individuals in the accounting and commercial industries consistently and professionally undertake their activities. Accountants execute multiple tasks and contribute to virtually every aspect of the commercial sector. In this respect, there is a great necessity for reliable ethical and regulatory standards in the accounting profession. Every occupation has explicit skills, knowledge, and principles that the particular business requires. The type of guideline that a particular field requires is highly reliant on the kind of policies that needs implementation in that particular business. According to the International Federation of Accountants, Where an occupation such as the accounting provides an imperative public service, then it is significant, it functions and operates in the interest of the public. Sustainability for the accounting business highly relies on offering quality services and the moral behavior of those working within this arena. Regulation helps to safeguard high quality and reliable reporting in the accounting occupation. There are multiple aims that control can be necessary to sustain proper and quality accounting services. Observing ethical, procedural, and professional principles as well as representing the desires of non-contracting consumers of accounting services such as investors and creditors are the reasons why accounting personnel must ensure compliance. The first aim that regulation is necessary is: Regulation may address the knowledge disparity amid the supplier and client of professional services through offering a level of security to the customer that the accountant has the essential qualifications and is should to meet the proper professional standards in his or her occupation. Through this system, the purchaser has confidence that they are receiving services of the correct quality. Secondly in regards to the importance regulation is ensuring that any benefits and expenses that third parties may incur go into account. In regards to this, the client and the accountants are not the only ones who may feel the effects of the quality of services. For example investors who use a company’s commercial statements to make assessments on the correct place to invest. If loose, an unscrupulous accounting firm can directly provide misleading information regarding a business that the investor may then use to make decisions. If these reports are not correct and standard, then the investor may incur severe consequences. Consequently, it can go out of control and lead to glitches for the entire economy as well as the society as a whole. Regulation There are still numerous discussions regarding the perfect law; however, changes have occurred due to various inadequacies in previous principles. It is significant to note that financial rules and principles are continually altering to safeguard the quality of accounting control better. In fact, the United States Securities and Exchange Commission (SEC) always propose new regulations and even inspire the public to submit observations on the anticipated rules during the observation period. Anytime law is being proposed or implemented great care should be taken to ensure that the operation of the market and understanding of its characteristics. Failure to do so will possibly cause the regulation from doing what it was intended to do. Additionally, for the regulations to be worthwhile the benefits to the economy and society should be greater than the costs of the regulation. Importance of Transparency Transparency is an important mechanism to ensure adherence to ethical behavior; however, it also does things such as enhance consumer confidence. Transparency by the legislative agencies enables the public to understand and know exactly how the accounting profession is being regulated. It has unquestionably added to the credibility of the regulation and gives the public a way to judge the importance of the law and the full extent of its influence over the market. After the public is aware of how the industry is being regulated, not only do they gain trust, but they, on the other hand, obtain a better appreciation of how accounting professionals should be behaving. When unbiased and transparent information exists, investors can make informed decisions based upon a company’s actual financial performance. When clear and concise information is available for decision makers about a company surprises are much less likely. It significantly reduces the risks of investors and the market. As you can see the transparency is an important part in maintaining ethical behavior in financial reporting, and we will discuss what regulatory agencies are doing to ensure greater transparency a little later. The scope of regulation Every industry has rules that are designed to help prevent industry specific problems. The accounting industry is no different, and there is a tremendous amount of the rules throughout all aspects of the industry. The goal of these regulations is always to provide a firm foundation for all stakeholders. Regulation is also typically standardized to ensure that high standards exist in all areas. There seems to be endless regulation in the accounting profession, yet most all of the rules set out to ensure that people within the accounting industry remain ethical and follow the law. Contributions by the United States and Global Organizations The number of regulatory agencies in the accounting industry is astounding; listing all of them is nearly impossible. Regulatory agencies exist at all different levels, including international, national, state, and local. Below we will identify and briefly discuss the main functions of some of the most prestigious and well know agencies. In today’s global economy, there is increasingly more global companies, investors, and lenders. It has raised the demand for accounting reports to be more comparable. Regulations between other agencies and International Accounting Standards Board are becoming much closer to being the same, meaning that many companies can use one set of financial statements while still meeting the requirements of multiple agencies. An important thing to realize is that International Accounting Standards Board is an independent, not for profit organization that works to protect the public interest by ensuring performance and ethics in financial reporting. There are other two main groups that establish traditionally and accepted accounting principles in the United States. One of these groups is the Financial Accounting Standards Board (FASB). Much like the International Accounting Standards Board, FASB is an independent organization that has been the appointed body for the private sector in the U.S. for instituting standards. The second main group in the U.S. known as the SEC formally recognizes these standards. The goal of the FASB is to institute and enhance ethics of commercial accounting reporting that promote financial reporting by private entities that offer decision-useful reports to investors and creditors. The Financial Accounts Standards Board has a structured procedure for overseeing and creating new standards, which constantly adapt to and improve current conditions in financial reporting. As stated above the Securities and Exchange Commissions is the other primary entity responsible for setting standards in the United States. The Securities and Exchange Commissions (SEC) is the government group that establishes reporting requirements for public companies (Wild, Shaw, &Chiappetta, 2009). It is different from the Financial Accounting Standards Boards that only sets standards for the private sector, although they share many of the same regulations. The SEC works hard to create and enforce rules that protect everyone from the individual first-time investor the billion-dollar company. The aim of the U.S SEC on is to safeguard investors, sustain fair, organized, and efficient markets, and expedite capital formation. The organization can bring both civil actions as well as administrative measures against those who violate the rules and regulations. The SEC has proven to be a valuable enforcer of the law, as well as a significant deterrent to unethical behavior. The Global Accounting Reform Over time, there has been numerous reform acts designed to ensure that companies and individuals do the right things. Throughout history, we have had the Securities Act of 1933 immediately followed by the Securities Exchange Act of 1934, which was that law that created the Securities and Exchange Commission. More recent reform acts include the Corporate Law Economic Reform Program Act (CLERP 9) and the Sarbanes-Oxley Act (SOX). It created many changes in financial reporting, auditors independence, disclosure, and enhanced penalty provisions. As part of Commercial Law Economic Reform Program 9 (CLERP 9) reforms, specific whistleblowing provisions were introduced into the Corporations Act 2001 in 2004, with the insertion of Part 9.4AAA entitled Protection for Whistleblowers (Pascoe, Welsh, 2002). Whistleblowing protection can be an important factor in discovering and promoting ethical behavior. There is substantial evidence that shows that whistleblowing programs in businesses can significantly increase ethical standards within a corporation in America without a doubt the biggest reform measure in recent history came as a result as Sarbanes-Oxley. Sarbanes-Oxley was declared in 2002 to reinstate integrity and public assurance to the commercial markets after key accounting indignities were revealed at some key firms including Enron, Adelphia, WorldCom, Tyco International, and Peregrine Systems. Sarbanes-Oxley created new standards for public accounting firms, the boards of publicly traded corporations and their management teams. The act is in honor of Paul Sarbanes of the United States Senate and Michael Oxley of the House of Representatives of the U.S. The SOX act consists of eleven different sections that outline corporate board responsibilities, criminal penalties, and everything in between. One of the major differences between Sarbanes-Oxley and other actions that have come up over the years is the fact that Sarbanes-Oxley includes specific rules that aim to ensure ethical behavior. Ethics is an essential when reporting sensitive financial information. (Duska, Duska, &Ragatz, (2011) says Sarbanes-Oxley contains a variety of provisions regarding business ethics. The sections that are mainly of concern with are sections 406 and 203 because they both create a firm foundation for ethical behavior. Section 406 is called Code of Ethics for senior financial officers, this part of the Act requires publicly traded companies to create a code of profession for their financial officers that include methods for enforcement. The additional section, that we are concerned with, is section 203. The section mandates that outside auditors be rotated after a certain period to eliminate any conflicts of interest. Each of the sections describes above work together to create higher ethical standards within companies. Section 406 of Sarbanes-Oxley does a lot to ensure decent conduct in firms than any other. One purpose that makes ethics difficult to administer is because few people agree on what ethical is, as entities and corporations all have their opinions. Consistent with the idea of exclusively, the Securities and Exchange Commission did not set forth a model code of ethics. Instead, the Securities and Exchange Commission came up with some general guidelines that should be followed and that each company’s code of ethics should address. A few of the recommendations include accuracy and retention of business records, payments and gifts to third parties, conflicts of interest, tax violations, and many others. In an entirely random analysis of 39 different company’s codes of ethics, it was found that most businesses have, in fact, created a code of ethics that is in compliance. The common accord is that most firms are adopting a code of ethics as well as enforcing these regulations; this will undoubtedly lead to more ethical companies. Section 203 similarly works to enhance ethics and abolish conflicts of interest. Principally, section 203 requires that corporations alternate external audit associates every five years. The accounting occupation has long known that auditor freedom is essential to realizing the crucial goals of being impartial and eluding conflicts of interest. It appears apparent that having an external, autonomous, auditor assess a firm’s financials is an excellent way to ensure accurate and impartial information transfers on to the public. The difficulty with this is that after a particular time, corporate organizations can develop associations that may hypothetically cause conflicts of interest. The above sentiment is what Section 203 of Sarbanes-Oxley Act targets to inhibit by demanding that corporate bodies change auditors regularly. There are numerous other concerns that Sarbanes-Oxley does to support ethical conduct in addition to sections 406 and 203. For instance, under the Sarbanes-Oxley Act, the United States Department of Labor directly safeguards whistle-blowers who echo violations of the law and decline to engage in any unlawful action illegal (Ferrell, Fraedrich, Ferrell, 2011). Whistleblowing protection may significantly enhance ethical behavior within a firm, as there is likelihood that the people may report unethical conduct. In addition, compliance with Sarbanes-Oxley 404 requires not mere changes in accounting but a change in corporate culture (Ferrell, Fraedrich, Ferrell, 2011). It is undeniable that the Sarbanes-Oxley Act has done an inordinate deal to ensure more ethical conduct throughout the commercial world. Conclusion It is easy to understand that ethical concerns in accounting are vital as misleading financial reports can cause havoc on the markets. Therefore, it is the reason for endless rules and regulations in the accounting profession. A number of high-profile scandals have provoked even greater regulation of the industry. Many debate that a values-based ethics system is a better way to motivate ethical behavior in people; however, in an industry as large as the accounting industry, which has a significant impact on many parts of society a compliance-based system seems like a better way to ensure ethical behavior. As illustrated in regulations created as a result of programs such as CLERP 9 and Sarbanes-Oxley have done a lot to increase ethical behavior throughout the accounting industry. It will be interesting to see how these relatively new regulations work to create accounting professionals that provide high-quality financial statements. It is likely that new ethical dilemmas will arise in the future, and new laws and rules will have to be enforced to ensure the continued moral behavior of people within the industry. Annotated Bibliography I have utilized a couple of sources that proved to be very effective in assisting me complete the research accurately without deviating from the requirements. The following is a short summary of the sources I cited in my research. Duska, R. F., Duska, B. S., &Ragatz, J. (2011). Accounting ethics.Chichester, West Sussex, U.K: Wiley-Blackwell. The source exploits and clearly states the different accounting ethics that are applied in the corporate sector all around the globe. It has explained that there are professional ethics that both the management and junior employees should strive to achieve. Ferrell, O. C., Fraedrich, J., & Ferrell, L. (2011). Business Ethics: Ethical decision-making and cases: 2009 update. Mason, OH: South-Western Cengage Learning. Ferrell and Fraedrich explain all the business ethics using case studies to illustrate the concept. Some of the business ethics illustrated include transparency and accountability so as to promote efficiency in a business/firm. Hoffman, W. M., & National Conference on Business Ethics (10, 1994, Waltham, Mass.). (1996). The ethics of accounting and finance: Trust, responsibility, and control: from the Tenth National Conference on Business Ethics. Westport, Conn. [u.a.: Quorum Books. The source helped me in analyzing business ethics and their application in international economics. Furthermore, it includes accounting ethics in finance and accounting an essential part in meeting the requirements of the study. White, J. W., Practising Law Institute.,& Institute on Securities Regulation. (2002). What every lawyer needs to know about accounting now or else? New York, NY: Practising Law Institute. The source explains all the international financial regulations and how the international laws in accounting are applied. It further focuses on the elaboration of financial regulation standards that every country should strive to achieve. In addition, it is also important to note that the source explains these concepts at a legal point of view. Wild, J. J., Chiappetta, B., & Shaw, K. W. (2009). Financial and managerial accounting: Information for decisions. Boston: McGraw-Hill Irwin. Having understood all financial and business ethics, it was important to apply a source relevant to financial and managerial economics in decision making. The source exploits and explores how accounting helps in decision making in the corporate, business and government sectors worldwide. References Duska, R. F., Duska, B. S., & Ragatz, J. (2011).Accounting ethics.Chichester, West Sussex, U.K: Wiley-Blackwell. Ferrell, O. C., Fraedrich, J., & Ferrell, L. (2011). Business Ethics: Ethical decision-making and cases: 2009 update. Mason, OH: South-Western Cengage Learning. Hoffman, W. M., & National Conference on Business Ethics (10, 1994, Waltham, Mass.). (1996). The ethics of accounting and finance: Trust, responsibility, and control: from the Tenth National Conference on Business Ethics. Westport, Conn. [u.a.: Quorum Books. White, J. W., Practising Law Institute., & Institute on Securities Regulation. (2002). What every lawyer needs to know about accounting now or else? New York, NY: Practising Law Institute. Wild, J. J., Chiappetta, B., & Shaw, K. W. (2009). Financial and managerial accounting: Information for decisions. Boston: McGraw-Hill Irwin. Read More