Accounting refers to the activities of recording, summarizing, maintaining and publishing financial statements for public, etc. These activities play a vital role not only for internal users of the information but also for the external users who might raise issues and concerns to the work being carried out. It is essential for the investors to get the correct picture of the business before taking the risk of investing in the venture. The ethical practice also enhances the performances and procedures of the organization.
Ethics relate to segregating what is good or bad for the consideration of the moral duties and obligations bestowed by one's status or position. Being ethical means doing the right thing. Accounting ethics is a part of business ethics, which analyzes the adoption of moral values and judgments in the accounting practices. It is crucial to have ethical standards in accounting whistleblowers safeguard people from fraudulent organizations and misrepresentation of accounting information, which can lead people to face heavy losses.
The information generated from the financial statements will determine the success and failure of a company due to its impact on the stakeholders. Ethical accountants are impartial and loyal yet must not be affected by the pressure from the management. They must be able to showcase the positive and negative affect caused due to adjustment of the financial figures. They can help in building a better culture in an organization. The information on expenses, income, cash, debts, etc. should showcase the true picture of the organization. The accountants must ensure complete, accurate and reliable information made available to the general people.
Accounting ethics came into focus after giant corporate collapses leading to loss of jobs. It is quintessential to have ethical standards for the works done by accountants and auditors. The financial documents or statements formulated by accountants to the public every year plays a vital role in decision making about their investment for potential shareholders and other stakeholders. Such statements showcase the true financial position of the company. It also enables the financial bodies to avoid ethical dilemmas and make the right choices ("Nature of Accounting and the Chief Ethical Difficulty: True Disclosure"). Although, being ethical might raise cost and lose opportunities yet it will help to enhance the goodwill and fairness of the company. The accountants need to be careful regarding ethical practices for the interest of the general people along with remaining employed in their existing jobs.
Accounting ethics vary from country to country. Mostly domestic laws guide the practices and regulations while some activities are coordinated under the internationally accepted practices. There are several practices carried by companies to showcase a sound financial position. The published accounts are usually amended legally to show a better picture.
However, some cases of fraudulence have breached the basic norms and regulations through misleading information, bankruptcy, and bribery. Some companies involved in such scandals were AIG, Phar-Mor, etc. The biggest scandal of unethical practices was of Enron in 2001, which lost more than $60 billion and affected more than 5600 people who were employed directly and indirectly in the company. Enron had been publishing inflated accounts to enhance the value of their assets. Even, the auditor had validated the inaccurate financial statements for money. The blame was also put towards the auditor for not highlighting the correct information to the company. The auditors also blamed Enron for their fraud business plan to boast their market value and hide their real debt. After noticing the unethical practices of the company, the company was dissolved along with a loss of $25 billion ("Nature of Accounting and the Chief Ethical Difficulty: True Disclosure").
After the major scandal of Enron, there were numerous regulations and reforms developed to enhance the level of awareness towards the result of indulging in unethical behavior. To improve the accountability of accounts towards adopting the ethical behavior, ethics has been incorporated in the accounting field of study as well as new laws directly impacting such practices has been formulated.
The official standards of accounting practices and ethics did not exist until 1929. The accounts of the company such as profits or losses were not needed to be disclosed to anyone outside of the organization. The accountants focused on serving the corporation in which they were employed. After the crash of market during the Great Depression, the regulation and standard of practices were developed.
The problem in ethics also arises when there is conflict of interest between the company and their financial statements. The role of accountants is to supply information to several entities that need to know about the financial position of the organization. Moreover, the accounting firms also need to provide detail account of the profit and loss of the company to the general public and shareholders (Jeffrey). The disclosure might also be disadvantageous to the corporation yet fulfilling their responsibility is crucial.
The major scandals of large corporate were followed by the development of Sarbanes-Oxley Act in 2002. This act was included in the law for the protection of the public from illegal and unethical behavior in maintaining the accounts of a firm. The act emphasizes on maintaining internal control system along with auditing internal accounts regularly. There are several sanctions incorporated under the act such as fine and imprisonment. This act strictly monitors any deviation in behavior and immediately conducts required actions. The act also limits the amount of fee received by firms from one client, which can lead them to behave ethically. It also safeguards the whistleblowers for providing information about any wrong practices. Furthermore, it obliges the management in public companies to sign the company's accounting information to mark the accuracy of the statements ("Ethical Behavior in Accounting: Ethical Theory").
The accounting codes of conduct have also been published to enhance the integrity and standards of the accounting practices. It underlines the responsibility and obligation of accountants towards the public. There are several issues covered in the code of conduct which can resolve ethical dilemmas.
Additionally, the recent development in maintaining ethics in accounting was made through "Dodd-Frank Wall Street Reform and Consumer Protection Act." It has focused on several changes such as consumer protection, transparency, advance warning, executive compensation, corporate governance, etc. It imposes further regulations on the company's accounts, protection of investors, and protection of whistleblowers. It has identified the importance of whistle blowers to identify fraudulent activities. It will enable to protect the investors, as well as a sanction the unethical personnel more quickly.
Thus, the relationship between ethics and accounting is crucial in today's globalized world. People and companies make the investments from different parts of the world in an organization, which further demands, a fair account of company's financial information. The acts and laws also support to implement fair practices, but there are other barriers to following the ethical approaches.
In several situations, the companies do not provide adequate support and encouragement to the accounting firms to be ethical and effective. The management might also adopt its own version of ethics for managing their organization, but it can lead to confusion in the workplace. Additionally, the conflict of interest can exist between accounting firm and organization in order to maintain good relation with the company along with the need to disclose fraud practices of an organization leading to extra expenses of the company. They need to maintain appropriate strategies to retain their job and to maintain integrity towards the public. Even in the case of Enron, the auditor knew about the activities yet hid the information for extra commission. This led to the cancellation of his license.
The other reason for not involving in ethical behaviors could be the incurrence of heavy cost. It is a costly initiative to maintain ethical practices in an organization. The ethical code of conduct consumes not only excessive time and details but also consumes extra cost for internal and external auditing. The ethical regulations also need to be updated as new acts are formulated with time. The new acts also lead to change in workforce practices incurring a higher cost to learn and implement them. The internal auditor also constantly monitors financial accounts of the company to highlight in the case of any deviation to the standards.
Thus, it is both beneficial as well as expensive for a firm. But being ethical is not a choice. There are severe consequences attached to unethical activities. So, even though there might be a drastic increase in cash flow in the short run that lures companies to do such behavior, they will lose everything gained in the short run over the long run consequences that must be faced. Similar to Enron, the consequence follows not only the wrong doers but also the ones who hide the right information.
Works Cited
"Ethical Behavior in Accounting: Ethical Theory." Accounting Ethics (2011): 51-67. Web. <10.1002/9781444395907.ch3>.
Jeffrey, C. Research on professional responsibility and ethics in accounting: Volume 15. Bingley, UK: Emerald, 2011. Print.
"The Nature of Accounting and the Chief Ethical Difficulty: True Disclosure." Accounting Ethics (2011): 9-30. Web. <10.1002/9781444395907.ch1>.
