Accounting Ethics

What Is Accounting Ethics?

Accounting ethics is a branch of professional ethics that focuses on accounting. Whether in public or private practice, accountants are obliged to follow ethical guidelines that guarantee that accountants perform ethically and consistently. 

In some areas, to be certified as an accountant, one must agree to follow an ethical code, and those who do not follow the ethical code may have their certification revoked. 

Most professional accounting organizations require members to adhere to and uphold ethical standards, and any who fail to do so will be dismissed from the organization.

Many ethical issues about accounting remain the same, even if today's financial world would be unimaginable to a 15th-century accountant. 

Understanding Accounting Ethics

Accounting ethics are the collective standards and rules that accountants must abide by in order to stop fraud and preserve the public's trust in their profession. 

Accounting ethics are nothing new. Even the "Father of Accounting," Luca Pacioli, incorporated ethics in his first book in 1494, and it is still a crucial part of today's official accountancy education.

These ethical standards have been developed and expanded over time by businesses, governments, and professional bodies. 

One of the essential aspects of accounting ethics is that unethical activity on the part of an accountant can harm not just a customer but also society. Investors in a firm, taxpayers who may be caught up in government bailouts or regulatory actions relevant to the company, and employees all suffer if an accountant colludes in misrepresenting financial statements, for example.

Accountants are expected to use due diligence in their job, ensuring that the records they work with are correct and presented properly. They must also avoid conflicts of interest that might jeopardize their employment, refrain from criminal activity, and report suspected illegal activity on the part of clients. 

Accountants are also required to treat their clients respectfully by correctly charging them, ultimately revealing information, safeguarding their financial papers, etc.

Several global financial crises have demonstrated that accounting ethics alone are insufficient to prevent accountants from acting unethically. 

Accountants and auditors have access to private financial data and have a responsibility to give firm directors and shareholders truthful and accurate records. When generating these financial statements, accounting ethics ensures they make the proper decisions, especially when it comes to whatever the company deems to be "bad news."

The American Institute of Certified Public Accountants (AICPA)

The American Institute of Certified Public Accountants (AICPA) is a professional organization dedicated to developing ethical standards in accounting. 

The AICPA requires professional accountants to operate responsibly when providing accounting services and evaluating sensitive financial information. In all accounting tasks, accountants should constantly use sound moral judgment.

Accountants are obligated to provide professional services to customers while also providing the general public with a true and accurate appraisal of a company's financial health.

1. The Importance of Integrity

Integrity is an essential component of the accounting profession. 

To maintain their integrity, accountants must be honest, upfront, and forthright with their client's financial information. In addition, accountants should avoid exploiting sensitive information for personal benefit or advantage. 

While there may be errors or differences of opinion on the applicability of accounting rules, professional accountants should avoid intentionally deceiving and manipulating financial data.

Public accounting firms or private enterprises frequently develop a code of ethics or behavior for accountants. These ethics and behavior guidelines ensure that all accountants follow the same norms. 

Accountants should assess their conduct to verify if they follow widely recognized principles without formal regulations or standards.

2. Objectivity and Independence

In the accounting profession, objectivity and independence are fundamental ethical qualities. Accountants must avoid conflicts of interest and other problematic business links when providing accounting services. 

An accountant's ability to honestly evaluate a company's financial facts may be hampered if they fail to stay neutral and unbiased. For auditors, objectivity and independence are also key ethical standards.

The number of services that public accounting companies or individual certified public accountants (CPAs) can provide customers is usually limited to the accounting sector. 

Individuals who perform general accounting responsibilities and then audit this information, for example, are effectively doing a review of their work. In this case, an accountant may be able to conceal a company's poor financial data.

3. Due Care and Competence

The ethical virtue of due care requires accountants to follow all technical and ethical accounting requirements. 

Professional accountants are frequently called upon to examine generally accepted accounting standards (GAAP) and apply this framework to a company's financial data. 

Due care necessitates skill, dedication, and a thorough comprehension of financial data on the part of accountants.

A person's education and experience often determine competence. As a result, appropriate care may need senior accountants to supervise and direct other accountants with less expertise.

Why are Accounting Ethics important?

Here are five reasons you should keep things legal in accounting and adhere to these ethics.

1. Dealing with sensitive information

• You will deal with sensitive information daily as a business owner. Someone must manage your business bank account information, transaction totals, and other financial data regarding your business books.

• You could be in charge of handling sensitive employee data in addition to keeping track of your company's finances (e.g., SSNs and bank information).

• You must maintain confidentiality and security when managing your firm's books and dealing with sensitive corporate or employee information.

• Don't email any sensitive data, make sure your WiFi is secure, have firewalls and other security safeguards in place, and be alert to phishing schemes to keep your accounting information safe. Also, avoid disclosing sensitive information.

• When dealing with sensitive employee and business information, keep your cool. When handling private accounting information, use best practices to ensure you're as ethical as possible.

2. The responsibility for errors

• Who will be held accountable if someone is discovered doing something unethical in accounting? It will be on the person who made this error.

• It's on the person if he makes accounting blunders or acts unethically because he's not an accountant.

• If someone doesn't follow it and stays current with accounting standards, anyone is sure to make a mistake at some time.

• Everyone makes errors, of course. It's one thing to commit a mistake by accident, but it's another to get complacent and fail to adhere to accounting norms and standards.

• Keep up with the newest accounting news, apply someone's best judgment, and don't overestimate his abilities to prevent future penalties.

• If someone finds themselves committing the same mistakes repeatedly while ignoring accounting ethics, it may be time to seek expert assistance (e.g., an accountant).

3. Seen as a professional

• Even though you're not an accountant, you're treated as one when running a business and keeping track of your finances.

• Following specific accounting regulations and legislation, such as the Financial Accounting Standards Board's GAAP (generally accepted accounting principles), is part of being ethical in accounting. 

• However, remember that not all organizations are legally obligated to use GAAP.

• So, if you want to be perceived as a professional, you must be one. Like any other accounting expert, follow accounting standards to prevent penalties or undesirable effects.

• If you have any issues or are unsure how to record a transaction in your books, don't hesitate to get advice from a professional to verify you're following accounting regulations.

4. Legal trouble due to risk

• You will likely face legal problems if you don't follow accounting regulations. It may begin with a few questionable accounting procedures here and there, but it may quickly escalate into serious issues.

• You're asking for trouble if you don't follow accounting ethics. Familiarize yourself with ethics and accountancy to avoid any future legal issues. 

• Also, be aware of what unethical accounting practices might jeopardize your small firm.

5. Responsibility of the business

• As you can see, there are various reasons why these ethics are so important. The most crucial reason is that your company relies on you to be ethical.

• Your business depends on your honesty in your day-to-day operations, just as your customers and workers do.

Accounting ethics examples

The FBK Company Limited is a well-known steel manufacturer that produces steel and by-products. Steel and its by-products are manufactured and exported to other nations. 

The company's accountant is responsible for keeping track of the company's stock and making pricing adjustments as needed.

After observing the demand and supply of steel products that year, one of the company's accountants leaked the news of the stock's price drop to a group of people, who eventually formed a group and bought a large number of shares in the company.

The accountant was caught after an investigation. This is a complete violation of accounting and the accountant's professional ethics, which he is obligated to observe.

An accountant was in charge of reimbursing all employees in a company. Now, the accountant carefully conducts the settlement for only his favorite employee, which is a biased act.

The other employees' compensation is due multiple times until the senior officer raises a complaint, the accountant's motive is revealed, and he is reprimanded.

As a result, this is a classic example of such ethics. If the accountant had followed these ethics of clearly separating the reimbursement dues of the employees based on either first-come, first-served or the time within which this should be resolved, he would not have found himself in such a precarious position.

Therefore, adhering to accounting ethics is a crucial necessity for any accountant.

Conflicts of Interest and Disclosure

"The accountant's responsibility is to provide valuable information about an organization's economic affairs to various entities who have a lawful right to know about those economic concerns," according to "Accounting Ethics." 

When there are competing interests, this function is difficult to fulfill correctly. 

Suppose a business engages an accounting firm to perform a profit and loss audit. In that case, it must offer accurate information to shareholders and the general public, even if it is potentially detrimental to its client.

The Sarbanes-Oxley Act was enacted in the United States in 2002

Following a series of high-profile business scandals, the Sarbanes-Oxley Act was passed in 2002. 

Senators Paul Sarbanes of Maryland and Michael G Oxley of Ohio drafted this bill, which safeguards the public from unethical accounting practices. 

Companies must implement internal control systems and evaluate them yearly under new disclosure rules. Companies must also include complete disclosure of off-balance sheet items in their periodic reports. 

The act's section 802 spells out the consequences for unethical accountants, including fines and imprisonment. 

How can poor accounting ethics affect a company's management?

Insufficient ethics in accounting impacts not only raises the incidence of illegal actions but also harms the corporation by damaging its reputation and causing its financial statements to be inaccurate and, therefore, ineffective.

1. Criminal Actions

• Poor ethics can mean that the accountants in the company have a greater chance of illegally breaking the rules for their self-interest. 

• An unethical accountant can manipulate information and commit fraud and tax evasion crimes.

2. Personal Consequences

• Unethical accountants can get caught and sued due to committing criminalities connected to their occupation, depending on the specific circumstances of the issue. 

• When an accountant gets caught, it is not just devastating for the accountant himself, and it is also devastating for his family and friends.

3. Business Reputation

• Accounting fraud can damage the corporation's reputation and trustworthiness to the stakeholders like business partners and customers. 

• In addition, the lack of trust confirms that the company finds it challenging to conduct business with others.

• Also, this damage to a corporation's reputation is devastating to accounting companies that depend heavily on that reputation to stay in business. 

• Arthur Andersen LLP passed as a firm because of its poor conduct in the Enron dishonor.

4. The Usefulness of Financial Statements

• Unethical accountants intentionally violate the regulations and rules to manipulate the information shown on the financial statements for an illegal benefit, which causes these financial statements to become less valuable.  

• Since financial statements must stay precise and honest to help investors make their financial decisions, it can deter the decision-making process of investors when they are impaired.

• Incorrect busts cast all other figures into doubt, and end-users become incapable of trusting the information shown.

Pros and cons of accounting ethics

The pros of Accounting Ethics are:

• It keeps a clear idea of the accounting norms, which is very helpful for accountants in the organization.
• If the individual does not adhere to it, they will be subject to the punishment imposed by the regulating bodies. It instills an incentive to do the right thing.
• Businesses that pay close attention to it consistently outperform their competitors. 
• It helps to develop the correct image in the eyes of consumers and other parties, assisting in the organization's long-term growth.
• It improves the professional environment since everyone has the mentality of upholding high ethical standards. Respect is also given to those who follow the rules of ethics on the job.
• There is a reduction in legal risk. Thus, the responsible parties take care of nearly everything in advance, making them accountable for legal proceedings.

The Cons of Accounting ethics are:

• Because adequate training should be provided to everyone involved in accounting to offer information on the many regulations and norms, such training is costly.
• It takes a lot of work and time since the individual needs to know everything about the rules he has to follow and update the information regularly for any changes.
• When a person tries to follow it, there is a reasonable risk that the company's management will not support them. Management will seek out and collaborate with someone who adheres to the company's norms and procedures.
• It can be challenging for accountants to grasp at first and subsequently put into practice.
• Also, it cannot be easy to enforce on a corporation.
• To make it work for an organization, it will take the experience of a competent person.
• For specific organizations that are not structured in their accounting activities, the process of applying it can be complex and time-consuming.

Researched and authored by Fatemah Kamali | LinkedIn

Free Resources

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