Introduction
Every Professional accountant has the responsibility of taking into account the interests of the public while also maintaining the reputation of the accounting profession. It is important that self-interest does not prevail over one’s duties as a professional accountant. Acting in the public encompasses having regard to the genuine interests of the clients, government, financial intermediaries, staffs, investors, as well as the business and financial community and all others who rely highly on the impartiality, fairness and truthfulness of the accounting profession for supporting their propriety and methodical functioning of commerce. The purpose of this essay is to illustrate the importance of applying the code of ethics in the accounting system through commitment to the fundamental principles and the code’s sections, and how the absence of it could lead to an international crisis and to present some high profile cases that had affect the wide ramifications (situation), and lead to the 2008 depression.
Fundamental Principles of Accounting
Primarily, ethical conduct results in lesser cost of friction with the social environment. For companies, the cost of social friction emerges when behaviour though legal is viewed as unethical and results in the firm getting boycotted from other companies in the society. The society offers every professional organization and all of its members with the lawful right to shape them, to regulate the entrance into the accounting profession, and to articulate values of behaviour regulating its members. As an exchange for this right, members of the accounting profession are supposed to function in the interest of the society and all of its members. Regional and Federal laws, and the Code of Ethical Principles and Rules of the ethical conduct ratify and validate this arrangement. In order to accomplish this responsibility, accounting professionals must have a wide range of vital characteristics, and also the skill to make proficient technical and moral decrees that serve in the interest of the society.
There are a few important guiding principles that are rudimentary to the profession of accounting. A few of them are:
Integrity
Integrity is one of the most vital and rudimentary elements of the profession of accounting. This necessitates accountants to be extremely truthful, honest and outspoken with respect to the client’s financial information. Accountants should limit themselves in view of the personal benefit they might gain by (mis)using the client’s confidential accounting information. While inaccuracies or discrepancies in viewpoint concerning the applicability of the various accounting laws are unavoidable, professional accountants are required to avoid the deliberate opportunity to mislead and influence the financial information.
Objectivity and Independence
Objectivity and independence are two other crucial ethical principles that are to be adhered to by professional accountants in their profession. Accountants are required to stay away from any and all conflicts of interest and other debatable business associations when performing their duties as professional accountants. Lack of objectivity and independence while performing the duties as a professional accountant may impede an accountant’s ability to offer a candid and truthful judgment about the financial information of a client, be it an individual or an organization. Objectivity and independence also are important ethical principles for even auditors.
General application framework of the codes
According to the research conducted for this paper, it has been ascertained that ethical decision making has been interpreted by a wide range of varied paradigms, including the characteristics of the person who is making the ethical decision as well as the situational and circumstantial factors that are associated with the structural environment in which the decision is being made.
Sufficiency and Appropriateness of Audit – This aspect focuses on the adequacy and pertinence of audit evidence available in the engagement files. The evidence thus available on engagement files need to be such that it supports the opinion of the audit report by clearly illustrating the several measures and inferences of the auditor with respect to the key audit judgment or areas of risk. The areas that were identified to be improved include, instances when relying upon audits done by other auditors or experts in the field, validation of key balances, sorting the balances pertaining to material loan, contemplation of fraud risk, and the disclosure of the financial statement.
Level of professional skepticism – This aspect relates to the engagement files in particular. It has been identified that the level of professional skepticism needs to improve in specific areas of audit judgment. Such key audit judgment includes calculations related to impairment, fair value measurement of the company’s assets among others.
Insufficient evidence – Evidence pertaining to the files of engagement with specific relevance to the nature of entity, the duration of engagement and reviews of quality control etc., can be improved a lot, according to the ASIC.
Cases showing the negative effects of an ignoring code of ethics in accounting
Lehman Brothers is a clear case of an organization that has ignored the code of ethics in its accounting operations. Everybody in the world is aware of the catastrophic downfall of this organization which had resulted in the 2008 financial crisis while also sending shock waves to various global economies.
The collapse of Lehman Brothers was not a consequence of just one lapse in the ethical judgment or non-conformity to the ethical code of conduct that was committed by just a single employee who was misguided. This is because, it would have been almost unmanageable for a lonely incident to get the Wall Street giant on its knees, specifically after it efficaciously survived a number of past prosecutions. Rather, the downfall of Lehman Brothers was the collective impact of several of blunders committed by numerous individuals and entities. These perpetrations can be characterized under three different acts, as under:
- Falsehoods and fabrications by the company’s CEO Richard Fuld;
- disguise authorized by the company’s CFO Erin Callan; and
- The negligence on behalf of the company’s auditors Ernst & Young.
When the housing bubble started intensifying in the year 2007, Richard Fuld, Lehman’s CEO was rooted in an extremely aggressive and leveraged model of business operations, quite different form many of the other players on the Wall Street during those days. Rather different from the competitors, a few of whom had the prudence to recognize the forthcoming collapse and assess likely outcomes of the mortgage defaults, Fuld did not changeround and reconsider his strategy. Rather, he continued investing in mortgage-backed securities, unceasingly aggregating the asset portfolio of the company to one of excessively high risk, taking into account the given market conditions. To be precise, Fuld was extremely obstinate, but at the strike of the clock to realize his mistake, he did not accept responsibility or admit misconduct.
Conclusion
The account of the downfall of Lehman Brothers’ is highly disastrous, and not just as its demise intended the end of a Wall Street corporation. The actual tragedy is in the unethical behavior of the company’s directors and external auditors. Conscious decisions were made by all of them with an intention to betray and negatively influence, and the outcomes turned out to be too dire to safeguard the existence of the historic investment bank. The perpetual lesson that needs to be learnt from the case of Lehman Brothers is that irrespective of how dire the situations may look, adherence to the code of ethics is not to be compromised at any point of time and that transparency and responsibility are of paramount importance in the accounting profession.
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