The Importance of Ethics in Accounting

Introduction In this paper we will look at the importance of Ethics in the accounting profession and present ways to restore confidence in an industry that has been marred with recent incidents of unethical behavior. Accounting is one of the most important business functions a company does and accurate accounting statements form the basis for the financial image of the company. These statements are used by executives to make sound decisions, inform investors of developments within the company, and most of all keep the company profitable. (Armstrong 1993) Furthermore, due to the wide dissemination of this information and the myriad of uses, ethical behavior is extremely important to accountants when dealing with this financial information. Accountants are often privy to sensitive information regarding the company and this provides the potential for misuse. Because of this, there must be a level of trust between accountants and not only their employer, but also the general public that may be relying on the integrity of the information they provide. (Hoffman 1996) Certified Public Accountants and other accounting professionals must not only be well qualified, but must also possess a great deal of professional integrity. A professional's reputation is one of his or her most important possessions. They know that people who use their services, especially managers and investors using financial statements, expect them to be highly proficient, accurate, and objective. (Love 2008) These statements are also vital to investors because they provide important information that could be the determining factor in the decision to invest in a company. Because of all this, there are professional ethics standards that guide the accounting profession and accountants are expected to adhere to these standards. (Armstrong 1993)

Society needs be confidant that the quality of the complex services provided by professionals is accurate and consistent. Because of these high expectations, professions have adopted ethical standards, known as codes of professional conduct. (Love 2008) These ethical codes require their members to maintain a level of integrity that goes beyond the requirements of laws and regulations. In the same way it is important that the field of accounting itself is not seen as an unethical one. The Ethics Codes Integrity requires accountants to be honest, candid, and forthcoming with financial information and they must not use this information for personal gain or advantage. (Berton 1984) While differences in opinion over the accounting regulations do exist, professional accountants must not manipulate financial information to intentionally deceive others. Public accounting firms or other companies often develop a code of conduct for their accountants. (Carey 1980) These rules ensure all accountants act in a consistent manner, but in the absence of specific rules or standards, accountants should be continuously looking at their actions to ensure they follow accepted practices. By joining professional organizations, accounting professionals agree to uphold the strict ethical standards of their profession. Each of the major professional associations for accountants has a code of ethics. (Cheffers 2007) The Code of Professional Conduct of the American Institute of CPAs dictates the ethical principles and rules of conduct for its members. The principles are positively stated and provide general guidelines that CPAs should follow. (Cottel 1990) These rules are much more explicit as to specific actions that should or should not be taken. The Institute of Management Accountants Standards of Ethical Conduct applies to practitioners of management accounting and financial management, and

the Institute of Internal Auditors Code of Ethics applies to its members and to Certified Internal Auditors. (Duska 2003) The AICPA requires professional accountants to act responsibly when engaged in accounting services and reviewing sensitive financial information and always exercise sound judgment in all accounting activities. Accountants have the responsibility to provide clients with professional services while presenting an accurate appraisal of the companys financial situation. They must not create conflicts of interest or other questionable business relationships when conducting accounting services. Objectivity and independence are important to the accounting profession and failure to remain objective and independent may hamper an accountants ability to create an unbiased opinion about a companys financial information. (Cottel 1990) Maintaining objectivity calls for avoiding both actual and apparent conflicts of interest. Being independent means that one not only is unbiased, impartial, and objective, but also is perceived to be that way by others. Furthermore, accountants should not perform more than one service for a client or they may find themselves in a compromising situation. An individual who handles general accounting functions and then audits this information is essentially reviewing his or her own work. (Cheffers 2007) This situation may allow an accountant to hide a companys negative financial information. In addition, in executing their duties accountants are required to exercise due care. This requires accountants to observe all technical and ethical accounting standards while applying generally accepted accounting principles the companys specific financial situation. Finally, accounting professionals should only undertake tasks that they can complete with professional competence, and they must carry out their responsibilities with sufficient care and due diligence. (Duska 2003)

For the most part, the accounting profession is self-regulated through various professional associations rather than being regulated by the government. (Cottell 1990) The AICPA, the IMA, and the IIA have internal means to enforce the codes of ethics. Violations of ethical standards can lead to being publicly expelled from the professional organization. (Duska 03) Because of the importance of a professional accountant's reputation, expulsion can be a very strong disciplinary action. Nevertheless, ethical violations can also lead to even more severe consequences for CPAs because of state and federal laws. The each state issues a CPA a license, usually through the state board of accountancy. Since state laws governing accounting usually include parts of the AICPA Code, the Code now gains legal enforceability. (Cheffers 2007) Ethics Violations What causes unethical behavior? Society provides managers with wrong incentives, and gives them the means to hide the deception. Executives can find it easy to inflate earnings statements because they are an inherently unreliable predictor of future performance. However, investors look at earnings statements as a signal to bid up or down the stock price. (Jackling 2007) Furthermore, U.S. investors want stock appreciation and they want it now and changing the system won't change this short-term focus, nor will it add to the reliability of the earnings statements. (Stuart 2004) Recent financial accounting scandals have generated unfavorable publicity for CPAs. For example, Arthur Andersen underscores the consequences accountants may face under professional responsibility rules, but the scandals also have implications for the profession as a whole. In April 2003, the Public Company Accounting Oversight Board (PCAOB), created by the Sarbanes-Oxley Act of 2002, voted to assume responsibility for establishing auditing

standards, this ended the role previously played by the Auditing Standards Board of the AICPA. (Scannell 2008) The PCAOB is also authorized to set rules governing ethics, independence, and quality control for registered accounting firms. (Scahhell 2008) Publicity over the role of accountants in ethics scandals often accompanies major corporate collapses and some say that the recent string of corporate scandals has set a new low for the accounting profession. It was the accountants who assisted in financial management, prepared financial statements, and audited those statements. On the other hand, accountants have also played a major role in good corporate governance and ethical sustainable business practices. Gouthorpe 1998) Nevertheless, negative consequences that go far beyond the scope of a single firm or even the industry can result from poor ethics in accounting practices. The first result is generally a lag in business. (Jackling 2007) Accounting firms rely heavily reputations, and it's very easy for publicity about unethical behavior to sway prospective clients away from a particular firm or to lose investor confidence. Notwithstanding, there can also be severe legal repercussions for those who are found guilty of violating legal codes and standards. Case study - ENRON Enron is a resent and well-known scandal in unethical accounting practices. The executives at Enron knowingly and intentionally manipulated accounting data for personal gain at the expense of investors, creditors, and employees. The scope of this fraud is so extensive that it goes far beyond merely unethical practices. They created offshore entities, using them as shells corporations for planning and avoidance of taxes, in an attempt to raise the profitability of the company. This provided leadership the freedom of currency movement and the anonymity that gave the company the opportunity to hide significant losses over a

long period of time. These entities made Enron look more profitable than it really was, but eventually created a downward spiral, in which each quarter, executives performed more and more distorted financial manipulation to create the illusion of profit while the company was actually losing money. This drove up their stock price, until it reached a breaking point at which the executives began to sell off millions of dollars worth of Enron stock. The executives and others at Enron knew about the offshore accounts that were hiding losses, but investors knew nothing of what was really going on. The Chief Financial Officer led the team that created the off-the-books companies, and worked the deals to provide him and others with hundreds of millions of dollars in returns, at the expense of the company and its stockholders. As the scandal unraveled, Enron shares dropped from over $90.00 to less than a dollar. Enron had been considered a blue chip stock, so this was an unprecedented and devastating event in the financial world. Enron filed for bankruptcy on December 2, 2001. (Stuart 2004) In addition, the scandal led to the dissolution of Arthur Andersen, a top accounting firm. The firm was found guilty of obstruction of justice in 2002 for destroying documents related to the Enron audit and was forced to stop auditing public companies. Although the Supreme Court threw out the conviction in 2005, the damage to its image has prevented it from returning to the industry. (Stuart 2004) Ethics Education Ethics education is more than studying the code of professional conduct, but rather a process where individuals learn to consciously make ethical decisions. One of the main goals of ethics education should be to encourage students to recognize social responsibilities within their profession and develop abilities needed to deal with ethical conflict and ambiguity. (Bernardi 2006) Exposing students to common ethical dilemmas and methods of resolution

should be an integral part of accounting education. This would bring about more awareness of the necessity for appropriate professional behavior and also ensure that accounting students leave with at least some of the knowledge they will need to recognize their professional responsibility. While U.S. accounting standards tend to follow a rules-based approach, International Accounting Standards uses a concepts-based approach. (Bean 2007) Students need to understand the idea of concept-based standards, the responsibility of financial reporting, and the pressures they may encounter. The accounting profession also needs to address questions of continuing education. Ethics training should be part of continuing education requirements and promoting more continuing education in ethics and professional responsibility issues would increase visibility and create a larger distribution of ethical awareness. Ethics continuing education should concentrate on recognizing professional responsibility and on the consequences of not acting within ethics codes. (Bean 2007) In addition to questions of what to teach, there has been debate on how and when to teach ethics and professional responsibility. Of the accounting programs at U.S. schools accredited by the AACSB, only four offer a separate course in professional responsibility. (Bernardi 2006) This represents a widely held view that ethics integrated into existing classes produces better awareness of ethical issues than a separate course. While an integrated approach to ethics training in may work in theory, it assumes that professors have adequate training and class time to address ethics issues. In some cases, faculty, while highly trained on technical subjects, may not have the expertise or background to adequately cover ethical issues. (Bernardi 2006) Additionally, the increasingly complicated and technical nature of accounting leaves professors struggling to cover more material in the same amount of class time. This means that schools using an integrated approach to ethics must incorporate

professional responsibility in all accounting classes and most importantly introductory coursed that are often taken by all business majors. (Bean 2007) Nevertheless, accounting educators also must establish and enforce strict rules against academic dishonesties and need the support of education administrators if they are to distil integrity in to their students that will carry over to their professional careers. This is consistent with the suggestions of the Treadway Commission, which challenged colleges and universities to establish a culture of academic integrity. Studies have established that academically dishonest students in college are more likely to be involved in unethical practices in the workplace. Because of this, a focused effort to establish a culture of academic integrity in accounting programs is needed to reduce academic dishonesty and prevent dishonesty from carrying over to the profession. (Bean 2007) Many studies have concluded that ethics education does have a positive effect upon students; however, despite the evidence that ethics education can be effective, many accounting programs still dont give ethics the time it needs in the classroom. (Bernardi 2006) Considering the current climate, educators can no longer avoid the topic. Programs that include ethics in introductory accounting courses have shown a desire to include ethics from the beginning to the end of the business program. This should stress the importance of the fundamentals, integrity, and responsibility. One recommendation is to implement ethics across the entire curriculum. This approach conveys the message that ethics is a critical aspect of accounting and not just a textbook chapter. Students will grasp the importance of ethics only when educators give it the same priority as other areas of accounting.

Recommendations There are several steps that need to be taken to improve professional ethics throughout accounting. Managers need to take proactive steps during the hiring and training of new CPAs. During the interview bring up a non-straightforward ethical dilemma for the candidate to evaluate during the interview. Once hired, new employees should receive more training in the ethical environment of the firm and the profession and how to handle conflicts that may arise. (Cheffers 2007) This training would help ensure understanding and highlight the importance of professional responsibility within the organization. Large accounting firms should designate a senior employee to be a specialist on issues of ethical responsibility this ethics specialist should be a resource when ethical issues arise. This specialist should be in charge of efforts to maintain competence on professional responsibility issues. This includes searching publications for related articles to distribute to other employees, attending ethics seminars, and developing expertise on ethical issues. In this way, the specialist can help colleagues understand professional responsibility issues that may not be straightforward. A secondary role would be to ensure that if an ethics issue should arise that it is resolved appropriately. An ethics specialist should be knowledgeable about resources to help answer professional responsibility questions and work to maintain an environment that focuses on the importance of ethical professionalism. An appointment of a highly placed firm member to an ethics position helps establish and reinforce an ethical image from the top down and highlight the companys obligation to professional responsibility principles. This position would develop the companys reputation for professionalism and ensure that it develops an

appropriate response to ethical dilemmas that may arise, rather than just meeting technical requirements. Conclusion CPAs have long and rightfully enjoyed a reputation of integrity and competence, however recent scandals have damaged that image and diminished confidence in the accounting profession. CPAs must make a commitment to understanding ethical issues and ensure that they are always in a position to act within the guidelines of professional responsibility. Also, CPAs should not allow themselves to become too dependent on one client or to become so financially overextended that they cannot afford the loss of income that could come from ending a client relationship because of an ethics issue. Finally, to distinguish potential ethics issues, accountants should look at the ethical environment of the company and other companies in the industry and develop consistent and professional responses. This would represent a step forward in restoring confidence in a profession that cannot operate without the publics trust.

Bibliography
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