Ethics in Accounting Case

ETHICS IN ACCOUNTING

Latasha Baker

ACCT 302 Intermediate Accounting II

Professor Andrew Jackson

December 5, 2013

Abstract

The purpose of this paper is to discuss the ethical practices that a professional should follow in the field of business, and especially in accounting.  This paper will focus on my thoughts and views regarding accounting ethics.

Introduction

What is ethics?  The word ethics comes from the Greek meaning ‘Ethikos’ normal way of being, or character, in terms of way of life developed by man.  Ethics is the science of human behavior, which searches how we all act contrary to our fellow men and the way in which we function in our daily activities.  It is said that ethics is a science, for it is a rational discipline as part of human acts and carries up to its values.  Ethics is a term that relates to a code or moral system that gives conditions for assessing right and wrong.  (Spiceland, Sepe, & Nelson, 2013)  Whether certified public accountants work in the public or private sector, they are required to follow the ethical standards which are aimed to make sure that they perform in a way which is ethical and reliable.  While the intention of every corporation is to make revenues, ethics should contribute to the best interest of society by warranting fair practices.

The Purpose of Ethics in Accounting

The initial documented discussions of accounting ethics began in the 1400s, and numerous of the ethical issues which relate to accounting continue to be the same.  One vital concern with accounting ethics is that poor ethical conduct on the part of an accountant does not just in theory hurt a client, it can also hurt society.  If, for instance, a certified public accountant conspires in altering financial statements, this harms shareholders in a firm, taxpayers who may be restrained in government bailouts or governing efforts pertaining to the corporation, and the employees at the business.  (What is Accounting Ethics?, 2013)

Since 1887, The American Institute of Certified Public Accountants” (AICPA), and its forerunners have been the voice of the accounting line of work.  The AICPA honors itself on its helping the CPA profession and the public concern to which it is deeply dedicated.  They have a board called the Professional Ethics Executive Committee which is a senior technical committee of the AICPA charged with the duty of understanding and implementing the AICPA Code of Professional Conduct.  The Professional Ethics Executive Committee (PEEC) is responsible for publicizing new ethics clarifications and judgments, and for observing those standards and generating corrections as required.  One intention of the AICPA is to endorse and uphold high professional principles of practice by its representatives.  In continuation of this purpose, the bylaws and codes of conduct of the AICPA and the state societies set forth the standards that a member is supposed to observe as a condition of prolonged membership.  These statutes also portray how a member who may have strayed from the Code of Professional Conduct will be investigated, tried and, if found guilty, penalized. (Joint Ethics Enforcement Program (Jeep) Manual of Procedures, 2006)

Ethics in accounting became a focal point during the American financial scandals of the early twenty-first century.  The financial errors and failed audits of major companies, including Enron and WorldCom, raised serious questions about the role of ethics in accounting.  Although Enron was blamed for a massive number of dishonest dealings that included hiding debts in order to keep them from being revealed on the company’s accounts, WorldCom’s accounting practices were so fraudulent that the corporation was led into the biggest bankruptcy in history.  The subsequent bankruptcy of WorldCom, in which swiftly exceeded Enron as the largest bankruptcy in history, led to a domino effect of accounting scandals that continue to smudge American business practices.  Unethical accounting practices and scandals like the Enron and WorldCom scandals is what steered the U.S. government to get involved and contributed to the government’s formation of the Sarbanes – Oxley Act of 2002.  The Sarbanes – Oxley Act was formed by the government with the intention to bring to an end unethical behavior by executing strict auditing rules in accounting.

Due to the fact that companies and individuals depend on accurate information from certified public accountants when making financial decisions, public statements and other business actions, it is vital that they be knowledgeable, impartial and precise.  Accountants are expected to apply due diligence in their work, verifying that the records they work with are correct and honestly performed.  They are also required to avoid conflicts of interest which could compromise their work, to shun criminal activity, and to relate alleged illegal activity on the part of clients.  Certified public accountants are also required to act sensibly towards their customers by charging them correctly.

Ethics are important to accounting and financial decision-making for several reasons, but the most important reason for respecting ethics in finances and accounting is the success of a company.  If a firm does not value ethics it will lose profitability because other companies and customers will not want to deal with and support it.

Several key concepts used in accounting and financial decision-making are trust, privacy, collaboration, and a code of ethics.  Trust and confidentiality go hand-in-hand in accounting because trust is important if a company wants faithful customers; confidentiality is likewise a primary aspect of financial dealings because privacy is often a concern for many companies and customers.  Collaboration is another area of financial decision-making that is relevant because ethical practices promote teamwork.  A code of ethics is necessary in accounting and financial decision-making because it offers guidelines and standards for employees on all levels.  Individuals who labor in the field of accounting must not only be experienced but should also have a high degree of professional honesty.  (Shanker, 2013)  An accountant's good name is one of his or her most vital assets.

Fundamental Principles of Accounting Ethics

The AICPA code of professional conduct is made up of five fundamental principles in accounting ethics to include integrity, objectivity, independence and due care.  Even though code of conduct is required for individuals holding professional certification, all accountants should understand and follow these principles regarding their professional stature. (Shanker, 2013)

Integrity is an important fundamental element of the accounting profession.  Integrity compels accountants to be honest, sincere and direct with a client’s financial information.  Bookkeepers must limit themselves from personal gain or advantage using confidential information.  While inaccuracies or differences in opinion regarding the applicability of accounting laws do exist, certified public accountants must avoid the intentional opportunity to mislead and manipulate financial information.  Psalms 41:12 says, “As for me, you uphold me in my integrity, and you set me in your presence forever.” (The Quest Study Bible, New International Version, 1994)