Ethics in Financial Accounting

A profession like financial accounting makes a distinguished mark by holding a high sense of responsibility to the public. Ethics in accounting is quintessential as there are a lot of important informed judgments and decisions made by the users of accounting information. Fraudulent accounting when comes to light not only will ruin a business, but also ruin the auditors of the company for not revealing the misstatements. A strong code of ethics and adherence to those ethics will lead to investor confidence thereby leading to certainty and security for their investments.

Luca Pacioli the ‘Father of Accounting’ wrote on accounting ethics in his first book Summa de arithmetica, geometria, proportioni et proportionalita, published as early as 1494. Theodore Roosevelt said it best: “To educate a person in mind and not in morals is to educate a menace to society.” Knowledge of ethics can help accountants and auditors to avoid ethical dilemmas, allowing them to make the right choice, which may not be good for the company but will definitely benefit the public who relies on the accountant or auditor’s reporting.

Enforcement of Ethics

Ethical principles and rules of conduct have been issued by American Institute of Certified Professional Accountants (AICPA) for the Certified Professional Accountants, Institute of Internal Auditors (IIA) for the Certified Internal Auditors and the Institute of Management Accountants (IMA) for the practitioners of management respectively. These rules of code enforce the accountants and auditors to maintain highest degree of ethical standards and fulfill their obligations to their profession, public and the organizations they serve. Some of the main areas these codes highlight on are integrity to be honest with their dealings, objectivity with impartiality and freedom from conflict of interest, independence by the auditors in appearance and fact, competence by having knowledge and skills to perform the work, acceptance of an obligation and confidentiality to non disclosure of information to outsiders.

Government Responsibility

Most often when ethics is fading in society it becomes unavoidable for the government to play an important part in handling the situation. As a result of this, regulatory bodies like Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB) have been created which ensure that financial accounting is honest and reliable. Financial abuses made by companies like Worldcom, Enron, and Adelphia Communications by blinding the public, affecting the economy of the United States and emptying the retirement savings of thousands of people, have led to passage of Sarbanes Oxy Act in 2002. These frauds stemmed out by hiding the debts of the organizations and inflating their earnings by practicing unethical accounting practices.

Certified Professional Accountants, who are in public practice, serve firms that provide accounting, auditing and other services to general public. These CPA’s are subject to federal securities laws and regulations, including Securities Exchange Act of 1934. Also the state government issues CPA’s license to practice through an organization known as State Board of Accountancy. Since the state laws include the important parts of the AICPA code, the code acquires legal enforceability.

Impact on Society

How much does the society get influenced by the actions of the accountants and auditors in a firm?  Society is vulnerable to a great deal when there is financial misconduct in ethical terms in an entity. Investors, suppliers, customers etc who are major stakeholders of an entity are also an integral part of the society in which the businesses run. In certain cases depending on the degree to which the financial data is manipulated in a business, the negative impacts of this action can reach the entire nation as a whole. It must be also noted that most often when the conduct of certain accountants or auditors is not ethically appropriate, the specific people involved in these actions alone should be blamed and not all the people in the profession. It is also possible that the accounting figures are manipulated by the financial accountants or the auditors due to the constraints laid by the CEOs who would want to see the figures in a certain way to make their businesses look good. In these cases the unethical actions are not primarily carried out by the accountants but are instead driven from the top management.

Ethical standards in accounting can be created and revised from time to time. They can be enforced by law and code of conduct. To abide by it and to act with a right motive that is superior to one’s own interest, is in the hands of individuals who are in the accounting profession.