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Accountancy - Accounting Ethics
Ever since the Business Accounting profession began, there has been a need
for Accountancy Ethics. Accountancy is one of the few professions
that is still self-regulating in Australia and UK.
This self-regulation means that the profession is governed by its own standards
and not the government. One of the major standard setting bodies is the
Accounting
Standards Board
(ASB).
Accounting Standards Board set out a number of standards and codes for accountants
to follow and the first Code for the Accountancy profession was developed over one
hundred years ago.
Important Note
Because the material covered here is considered an introduction to the topic of
Accountancy and Accounting, there are many complexities that may not
be presented. You should always consult with a business accounting professional
for assistance with your own specific circumstances.
The Auditing Practices Board also sets out a number of guidelines on ethics which should be followed by auditors due to the nature of their work. Self regulation may not be possible if accountants were not seen to have a high standard of professionalism or morals. Therefore, due to both the nature of the work of accountants and their reputation as a professional service it is essential for them to have this high level of ethics.
Accountancy Ethics Introduction
The nature of the work carried out by auditors requires a high level of
accounting
ethics
. Auditors have to ensure a “true and fair” view is being portrayed
by the financial accounts of the company they are auditing. Shareholders, potential
shareholders and users of the financial statements rely heavily on the yearly financial
statements of a company as they can use this information to make an informed decision
about investment.
They therefore rely on the opinion of the auditor that the accounts represent a
true and fair view of the company. As, they would not want to invest in a company
showing problem signs. Auditors could face a great deal of temptation in this line
of work. Auditors may have an issue with the accounts they are auditing but could
be receiving financial incentives to ignore these issues. These problems usually
come to light eventually and could ruin not only the company but also the auditors
for not discovering/revealing this misstatement.
A scandal like this occurred with the company Enron. Enron was a multinational company
but their financial statements did not show a true or fair view of reality. Their
auditors, Andersen, signed off the accounts despite the misstatements in the financial
statements. When the truth came to light it was not only Enron that suffered but
also Andersen. The public had put their faith in their opinion and after this scandal
felt like it could no longer be trusted.
This is not the sole time that a scandal like this has occurred and therefore it
is reasonable for the public to expect an accounting firm to have a high level of
ethics. Scandals within the Accountancy sector have threatened the reputation
of accountants and seen firms such as Andersen fall under the pressure. In these
types of cases, ethics clearly did not play an effective role and this could be
seen by the public. Therefore, to reassure the public that accountants can be relied
on and trusted it is essential that these ethics are adhered to, preventing any
scandals that could have a negative effect on the accounting industries reputation.
Accounting ethics are also essential to maintain the reputation which accountants
have managed to create for themselves. One of the implications of professional status
is that it is necessary that accounting ethics play a key role. Accountants
are still self regulating and a reason for this is their professional reputation.
Over decades accountants have attempted to achieve professional status, some would
say with great success. With professional status, a great deal of responsibility
usually follows.
It is clear therefore that Accountancy requires a higher level of ethical
standards than say for example a shop assistant or a bartender. Where a doctor will
have to take a persons' live in their hands an accountant is responsible for financial
reporting and the public are relying on their opinion and knowledge. Therefore although
there are advantages to gaining this kind of status, there can also come negative
implications. In the remainder of this study, we will have a further look at the
nature of accounting ethics required, whether it is possible to teach
accounting
ethics
to individuals and the possible future for accounting ethics
within the Accounting sector.
Accounting Ethics
Professional Accounting Ethics can be described as "moral principles and
standards of conduct guiding CPA's in performing their functions" (www.answers.com/topic/professional-ethics?cat=biz-fin).
Although they may be important in a number of jobs, for the accounting profession,
it is fair to say that they are vital. Unfortunately, a lack of ethical behavior
can affect the reputation of an individual firm and the profession as a whole. Of
course, this begs the question, how are ethics set and who sets them?
Ever since the accounting profession began, there has been a need for
accounting
ethics
. Ethical standards have evolved through time, and we are now at the
stage where accountants must follow a 'Code of Ethics'. Many would think that this
would be one unified Code for all accountants to follow and execute during their
career. Strangely, this is not the case. Accountants must follow the code of ethics
set out by the professional body of which they are a member.
Accounting firms will also have their own code of accounting ethics
to be followed which will also affect the way people carry out their day to day
work. Although the various accounting bodies and firms have different guides to
be followed, they all have essentially the same principals and morals. This leads
on to the debate of whether accountants, and other professions, should have a code
of ethics to follow in the first place.
The fact is, we all have basic morals which have been instilled in us throughout
our upbringing, and these can vary wildly from person to person. It is for this
reason that particular codes have been developed, and their existence is justified
by the fact that without them, investors would be helpless. If auditors were to
behave unethically, companies financial statements would be worthless and investors
would be unable to gauge the potential return on an investment.
This is further strengthened by the recent scandals that have plagued the accounting
profession and tarnished their reputation. Enron and Parmalat are just two in a
long line of recent well documented accounting scandals which have had a destructive
effect for accountants worldwide. This has led to many recent reforms which may
have improved the way in which the profession is regulated. However it has also
started a controversial debate on whether ethics can actually be taught or if it
is simply a frame of mind that cannot be changed or influenced.
Can Accounting Ethics be Taught?
The question of whether accounting ethics can be taught is not a new one
despite the fact that it is only recently been recognized by the accounting profession.
Almost 2500 years ago one of the world's first philosopher's, Socrates, believed
that ethics could indeed be taught and his reasoning was that "ethics consists of
knowing what we ought to do, and such knowledge can be taught" (Andre, C., et al).
It is easy to agree with this view because everyone has experience of being taught
right from wrong at some point in their life, whether by a parent, a teacher or
some other authority figure. However, even if we can agree that ethics can be taught
by parents, for example, it is likely that such teaching will occur at a young age
and is unlikely to concern issues which will face accountants. The question that
therefore needs to be asked is: can ethics be taught to accountants?
Perhaps the most important viewpoint is that of professional accounting bodies as
it is ultimately them who will be providing the training or will be expecting universities
to undertake ethics education to ensure that their students come to them with a
highly ethical set of beliefs already instilled in them. It has been discovered
that professional bodies believe that they have a significant role to play in the
professional ethics development of their members as in one study they stated that
they 'agreed' or 'strongly agreed' with the aforementioned statement (Jackling et
al, 2007).
By considering such evidence one can assume that accounting ethics must be
possible to teach otherwise professional bodies would not waste time and money trying
to improve the ethics of their students. Furthermore, the bodies which were questioned
acknowledged that ethics is capable of being taught in areas other than the workplace.
(Jackling et al, 2007) This would appear to illustrate that not only can ethics
be taught, it can be taught in more than one way. Surely this is an important point
to note especially as it supports prior research that social and behavioural skills
linked to ethics education can be learned in educational programmes (Armstrong 1993;
Thorne 1999; Earley and Kelly 2004).
Carrying on from the above, the fact that professional bodies such as ICAS have
introduced courses on ethics would suggest that ethics can be taught. By introducing
a formal course on ethics which will be assessed ICAS are stating their intentions:
they want their students to be professional and ethical and the method of achieving
this will be through education. Therefore the answer to the question must be yes,
ethics can be taught to accountants.
Almost every academic article on the subject of teaching accounting ethics
references the work of Kohlberg and so it is necessary to give some consideration
to his views. Kohlberg's research identified three different levels of moral development:
pre-conventional, conventional and post-conventional and in order to fully understand
the point made by Kohlberg it is necessary to explain the differences between the
aforementioned stages. The pre-conventional stage can be thought of as the childhood
stage when right and wrong is defined in terms of what authority figures say or
what actions result in rewards or punishments.
Most people then progress to the conventional level where right and wrong is defined
in terms of what society expects or laws require. The final stage is known as post-conventional
and a person who has developed to this point will define right and wrong from a
universal viewpoint. (Andre, C., et al) The most important factor however is not
the stages themselves but rather how people progress through the stages and Kohlberg
states that one of the most crucial factors is education as when subjects took courses
in ethics they were seen to progress through these stages (Kohlberg in Velasquez
et al, 1987).
The above would seem to conclusively prove that accounting ethics can be
taught and, more importantly, can be taught to accountants. However, this is only
one side of the debate as there is a school of thought which states accounting ethics
cannot be taught and this must be considered.
A contrasting view can be obtained by considering the origins of the word 'ethics'.
It is derived from the Greek word 'ethikos' which means "arising from habit". (Mantor,
2007) Ethics can therefore be thought of as a habitual way of behaving and as such
one would need to be proactive in order to establish habitual behaviour. This would
suggest that ethics cannot be taught as telling people what is 'right' does not
build habitual behaviour; it merely becomes another rule and as can be witnessed
from growing crime figures, some people will always choose to break such rules.
There is also further support for the concept that accounting ethics cannot
be taught within accounting from Mantor's assertion that you "cannot teach ethics
anymore than you can teach common sense". (2007) This illustrates the concept that
ethics are a personality trait which you may be born with or are likely to be taught
at a young age and so by the time accounting students come to learn about ethics
it will be too late to change their values and beliefs.
By considering the views of students and accountants themselves it is possible to
argue that despite various attempts to teach ethics, such attempts are falling on
deaf ears. One student states that he is "strong headed in my beliefs and concepts
(in the accounting ethics education) will not change the way I think" (Dellaportas,
S., 2006).
If students themselves are saying that they cannot be taught accounting ethics
then surely bodies should heed such warnings and stop wasting time, energy and ultimately
money on something which is of no benefit to many students as accounting ethics
education will clearly not convert "a 'deviant' to a 'virtuous human being'". (Hanson,
1987) Teaching ethics to accountants is therefore possibly a wasted exercise as
those who will benefit are likely to be those people who already hold a strong set
of morals and values whereas the people most in need of help are unlikely to take
heed of any information provided.
In conclusion, there is some debate as to whether accounting ethics can be
taught but I believe that it is possible to teach ethics. One is not born with the
capability to distinguish right from wrong and so at the very least accounting ethics
are learned during childhood. However, this view can be taken further and by looking
at ethics as a set of rules we can see that it would most certainly be possible
to teach ethics to students at professional accounting bodies in the same
manner that they are taught various accounting standards.
Rules v Principles
When considering accounting ethics it is important to consider the rules
and principles that govern the profession. At present there are different rules
and principles which govern the profession in different countries.
For example, the International Financial Reporting Standards (IFRS) are used
by over 100 countries including the European Union, Australia and Hong Kong. However,
other countries have still not adopted these practices which do not make the international
standards viable in the world domain. In particular, the "super power" of the US
has not yet conformed and still uses the US Generally Accepted Accounting Principles
(GAAP) which makes comparing principles and rules difficult.
These different rules and principles have an effect on the accounting ethics
of accountants. The question of should the accountancy industry be based on volumes
of specific, detailed provisions (rules) or whether the guidelines should be more
general, allowing accountants more latitude in evaluating a client's situation (Somerville,
2003).
US Generally Accepted Accounting Principles (GAAP)
The US Generally Accepted Accounting Principles are largely rule based which
many think is partly responsible for the number of scandals that the US has suffered.
It is thought that when there is a set of rules in place, companies and individuals
seek to find ways around them (McIntyre, 2006).
This is relevant in the topic of ethics as accountants may feel the need to bend
these rules to meet their client's needs. They can still work within the rules that
are set but be acting unethically as was seen in the Enron case where they were
'allowed' to cover their debt (C.R.Baker et al). This is certainly not ethical however,
it was legal at the time.
In relation to this, other short comings of rule-based standards are: there are
numerous bright line tests; numerous exceptions and voluminously detailed implementation
guidelines (Bennett et al, 2006). This again could lead to unethical behaviour from
the accountant due to finding exceptions which may not be correct in principle however,
conform to the rules or ways around the guidelines.
International Financial Reporting Standards (IFRS)
The International Financial Reporting Standards are principles based standards and interpretations. The principles based approach to monitoring requires more professional judgment than the rules based approach (Bennett et al). A principles based approach should be based on:
-
Relevance
-
Reliability
-
Comparability
-
Understandability
- Materiality
This is a good basis for the accountant to begin to report however, one basis that
is not mentioned is ethical. This is important as the client may act in the above
manners in relation to the best interests for his client however, it may not be
'ethical' in reporting to stakeholders as these broad concepts can again be bent
to suit the accountants needs.
However, as these principles are broad in comparison to the narrow-rules-based approach
there is a wider scope for accountants to conform to. In general, a set of principles
can be seen as a set of ethics, rules, guidance and law in which an individual obeys.
Therefore, word principle alone infers that accountants should be morally obliged
to follow these.
Auditor Independence
Auditor independence is relevant when looking for a specific example of an
accountant's ethical responsibility. They need to provide a professional audit and
a tentative and informal responsibility to other people making use of the statements.
The auditor needs to provide his audit with external assurance, show a true and
fair view, comment on the compliance with the accounting standards and report using
reasonable skill and care whilst remaining independent from his client (Dunn, 1996).
This is important as the audit needs to be free from bias – it can become very easy
to get attached to a client and meet their needs. However, the reports are to benefit
those out with the company – the stakeholders.
Therefore, accounting ethics play a large part in this as an accountant is
often faced with the dilemma that if they do not please the company that they are
auditing they may have no further business. However, they may not report based on
the accounting standards, rules and principles if their sole aim is to please
the client. The company need to ensure that the employees are not put in a position
that there independence is at risk. Currently an ethical standard set out by the
Accounting Practices Board suggests that Accounting Firms should think
about "removing ('rotating') the audit partners and the other senior members of
the engagement team after a pre-determined number of years".
This is already being implemented by a number of accounting firms in the UK and
would ensure a high level of independence. This would ensure a high level as if
an auditor is aware this is not a permanent position then he would know that the
next auditor would discover what he had been doing. Further a rotation means that
the auditor will not become too comfortable with their client if they are not with
them for too long. Independence is an essential element of ethics and regulations
should be implemented to ensure that employees are able to retain independence before
ethics even has to come into play.
The Future
Since the major accounting scandals, new regulations have been introduced
to combat the dangers of unethical behaviour. However, this causes a problem in
itself, "the primary criticism directed against rules-makers such as the
Financial
Accounting Standards Board
(FASB) has been a 'standards overload'". This
has developed due to the tedious number of standards used to regulate the profession,
which can be ambiguous and vague at times, but unfortunately this pattern shows
no signs of waning.
Post 2002, the most effective change has been the Sarbanes Oxley Act, brought into
power in America, in order to
"raise significantly the standards of corporate transparency
and accountability"
.
One significant difference is the level of work which can be carried out
by accounting firms. The Act has put a limit on the fee which a firm can receive
from one client as a percentage of their total fees. This ensures that companies
are not wholly reliant on one firm for its income, in the hope that they do not
need to act unethically to keep a steady income. Although currently there is nothing
similar to Sarbanes Oxley in the UK, lessons can undeniably be learned from the
high profile breaches of ethical trust experienced in the US.
In terms of the future with regards to accounting ethics, the controls will
only get tighter. Since 2002, professional bodies have improved their ethical codes
and guidelines. Some cynics may claim that these tighter controls are simply a front
to reassure the outside world that the profession is making an attempt to change.
However, even by simply looking at the ethical guidelines of the different professional
bodies, it is clear that there has been a genuine attempt to improve the way that
accountants think and act. Whether these can be taught or not is a matter of opinion,
but for the accounting bodies it seems to be an effective way to ensure compliance.
The question is, how much further can they go?
It is difficult to see how much more the regulators can do to instill ethical principles
in accountants. From teaching to following certain rules, there is very little room
for further education in this matter. Essentially, it all comes down to the individual.
People react differently in certain situations, and so there may be very little
the accounting profession can do to change that frame of mind. Of course, any further
breaches of ethical trust and there will, quite rightly, be a public outcry. Ironically,
it is down to the accounting profession to regulate itself which may result in yet
more legislation and rules to be followed.
Conclusion
Accounting ethics play a very clear role in the day to day lives of accountants.
This is mainly due to the nature of accounting and the need to maintain a professional
status. A common debate is whether it is down to the firm or the employee to ensure
these ethical standards are met.
If accounting ethics cannot be taught, then all the firm can do is trust
the employees and ensure they have guidelines in place to prevent any blame falling
on the firm. There is the counter argument that ethics can be taught, and therefore
the firm is responsible for ensuring ethical guidelines are followed at all times.
Ethical regulations are definitely on the increase. Following the previously mentioned
scandals, ethical behaviour is imperative to the accounting profession to
preserve its status and reputation, and an increase in regulation is the only way
to do that.
Business Tips
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-
Don't underestimate the capital you need to start up the business.
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Understand and keep control of your finances - income earned is not the same as
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Important Note
Because the material covered here and other pages is considered an introduction
to the topic of Accountancy and Accounting, there are many complexities not presented.
You should always consult with a business accounting professional for assistance
with your own specific circumstances.