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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.

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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.

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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.

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Accounting Ethics

Professional Accounting Ethics can be described as "moral principles and standards of conduct guiding CPA's in performing their functions" (

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.

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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.

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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.

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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).

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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.

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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.

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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.

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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.

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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.

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Business Tips

Some tips on how to avoid business failure:

  • Don't underestimate the capital you need to start up the business.

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  • Make sure you have good software for your business, software that provides you with a good reporting picture of all aspects of your business operations.

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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.

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