1.

Ethics in the Accounting Profession

ETHICS IN ACCOUNTING

At least as far back as ancient Greece, when the Hippocratic oath

was instituted for medical practitioners, a hallmark of a profession
has been its claim to integrity. When the public thinks of the
accounting profession, they usually think of certified public
accountants (CPAs) who work in big national or regional firms that
audit the financial statements of publicly listed companies. But many
CPAs work in smaller partnerships, auditing or organizing the books
and records of private companies and not-for-profit and
governmental organizations. CPAs may also perform other services,
most notably tax services. Some work as financial officers and
management accountants in corporations, large and small, as well
as governmental and not-for-profit institutions. In addition, many
accountants who do not have a CPA designation perform services
similar to some of the services—but not audits—performed by
CPAs.

ROLE OF ETHICS IN THE WORK OF PUBLIC

ACCOUNTANTS
As noted, only CPAs can audit the financial statements of publicly
owned companies that have to report to the federal government's
Securities and Exchange Commission (SEC). CPAs who audit the
financial statements of an organization have a clear ethical
responsibility to all those who use audited financial statements. But
public accountants are in a peculiarly difficult position compared
with those in the legal and medical professions, because the parties
that rely on their work extend beyond the client (often a corporation)
who pays them, to the business and financial community, including
stockholders, investors, creditors, suppliers, customers, employees,
and government regulators. These parties rely on the objectivity and
Page 1 of 52
integrity of CPAs to make sure that the financial statements fairly
present in accordance with generally accepted accounting
principles.

In the early days of the public accounting profession in the United

States, many accountants came to the United States to audit new
and growing enterprises on behalf of British investors. These
auditors clearly knew to whom they owed their loyalties. They also
brought with them strict principles that, when many of these auditors
founded U.S.-based audit firms, influenced the formation of the
accounting profession in the United States. Almost from the
beginning, however, professional ethical standards were not left to
the individual CPAs to determine.

To protect the public, states instituted educational standards and

examinations, as well as admission standards for CPAs and the
rescindment of professional licenses for breaches of professional
standards. The American Association of Public Accountants formed
an ethics committee in 1906 to develop ethics standards for its
members. Its modern successor body, the American Institute of
Certified Public Accountants (AICPA), is an organization of all state
societies of CPAs. Its Professional Ethics Executive Committee
(established in 1971) promulgates a code of professional conduct
and investigates, threatens, and punishes AICPA members for
infringements of the code.

Consequently, for much of the twentieth century the accounting and

auditing profession was largely self-regulating, with a professional
code of conduct and a mechanism for investigating and punishing
those whose conduct fell below professional standards. A separate
investigation might also be conducted by the state licensing
organization (e.g., the Department of Education in New York State).

Page 2 of 52
The federal legislation that ensued after the 1929 stock market
crash (the Securities Act of 1933 and the Securities Exchange Act
of 1934) set up a federal agency, the SEC, with broad powers of
regulating public securities markets. All public companies are
required by these acts to register with the SEC and to file annual
audited financial statements. The SEC largely delegated accounting
standard setting to the private sector but retained enforcement
action. It may regulate the most powerful members of the profession
who audit the financial statements filed with the SEC directly, by
enforcement actions including bans on auditing or working for public
companies; it can also ban trading in the securities of public
companies. For the most part though, throughout the twentieth
century, the audit profession continued to be self-regulating at the
federal level, by agreement and cooperation between the SEC and
the AICPA.

ETHICAL CONCERNS BEGINNING IN THE 1990S

During the 1990s the growth of management consulting by audit
firms caused many observers to question whether those firms were
sufficiently independent to conduct their audits of public companies
in the interest of the investing public. Anecdotal evidence of an
increasing willingness by auditors to agree with corporate
management's dubious accounting treatments, strained the
relationship between the profession and the SEC. Its chairman,
Arthur Levitt, was so concerned about the growing threat to the
integrity of financial reporting and hence to the operation of capital
markets that he instituted a new regulatory body in 1997, the
Independence Standards Board (ISB). The ISB attempted to shore
up audit firms' independence from corporate management by
instituting stricter regulation of professional conduct. Unfortunately,
the board received little more than lip service from leading CPA
firms and was abolished in 2001.

Page 3 of 52
The corporate scandals of 2001–2002 resulted in major federal
legislation and regulation not seen since the 1933 and 1934
securities acts, principally the Sarbanes-Oxley Act (SOX) of 2002.
SOX transferred the regulation of accountants auditing the financial
statements of public corporations from the AICPA to the Public
Companies Accounting Oversight Board (PCAOB), a new private
sector, not-for-profit body. The PCAOB is funded from fees paid by
registrants. SOX requires accounting firms, including international
firms and foreign firms that play a substantial role in the preparation
of audit reports of U.S. public companies, to register with the
PCAOB. As of November 2005 more than 1,500 firms were
registered.

Section 103 of SOX directed the PCAOB to establish auditing and

related attestation, quality control, ethics, and independence
standards and rules for registered public accounting firms. To meet
this requirement for ethical standards under rule 3500T, the board
adopted the AICPA's Code of Professional Conduct Rule 102, and
passed interpretations and rulings (as Section 191) as of April 16,
2003, as interim ethics standards, unless superseded or amended
by the board. The board also adopted (under rule 3600T) the AICPA
code of Professional Conduct Rule 101 as its interim Independence
Standard, along with Standards 1, 2, and 3 and their interpretations
issued by the ISB. It is the responsibility of users to determine if a
particular rule has been amended or superseded.

AICPA CODE OF ETHICS

The AICPA Code of Ethics covers general principles as well as
more explicit rules of conduct. It is based on six principles, which
are translated into a set of specific rules that AICPA members must
observe. The code is supported by interpretations and rulings that
apply in specific circumstances. The overriding objective of the six
principles is to commit members to honorable behavior, even at the
sacrifice of personal advantage. The preamble states that by
Page 4 of 52
accepting membership in the institute "a CPA assumes an
obligation of self-discipline above and beyond the requirements of
laws and regulations."

The six principles to which the CPA must adhere are:

1. Commitment —to the public interest and honoring public trust
2. Integrity —sensitivity to professional and moral judgments
3. Objectivity —requires the CPA to be unbiased and impartial in assessing facts,
making estimates and arriving at judgments
4. Independence —unbiased, impartial, and free of conflicts of interest (independence
in fact and appearance) when providing auditing or other attestation serves. CPAs
may not audit a company if they (or spouse or dependents) own stock in that
company and/or have financial or employment relationships with the client (apart
from financial interest in timely receipt of audit fees).
5. Confidentiality —information known to accounting professionals may not be
disclosed to outsiders except when professional work papers are subpoenaed by a
court. (Accountants do not have attorney-client privilege.)
6. Professional competence —exercising due care, including observing professional
technical and ethical standards. Accounting professionals should undertake only
tasks that they can complete with professional competence, and they must carry out
their responsibilities with sufficient care and diligence, usually referred to as due
care.

As the AICPA Code of Ethics has been adopted as the interim

standard by the PCAOB, it governs behavior of all AICPA members,
in all types of practice—auditing public companies, private
companies, not-for-profit and governmental institutions, as well as
attestation and tax practices. Accountants who are not members of
the AICPA but who belong to other professional bodies are
governed by similar codes of ethics. Those who are not members of
any professional body are still subject to professional codes
promulgated by state governments, for example, the New York
State code.

In so far as the PCAOB amends their rules of ethics, however, there

may be an increasing gulf between the demands made on
registered firms by that board, and the requirements of the AICPA
for CPA firms not involved in audit of public companies. For

Page 5 of 52
example, on November 23, 2005, the board proposed a change in
rule 3502 from "Responsibility not to Cause Violations" (of tax
shelter laws) to "Responsibility not to Knowingly or Recklessly
Contribute to Violations." Unless the AICPA adopts the same higher
standard, CPAs auditing public firms will in the future have to
conform to higher ethical standards than those who do not.

ETHICS ENFORCEMENT
Enforcement varies with the type of accountant (CPA or non-CPA)
and the type of practice (audit of publicly listed companies or not).
For non-CPAs, state governments and professional societies may
be responsible for ethics enforcement, but the penalty imposed by
professional societies is limited to expulsion. CPAs face higher
penalties.

Section 105 of SOX makes the PCAOB responsible for the

enforcement of the professional standards for accountants auditing
the financial statements of corporations issuing securities in public
markets. The PCAOB adopted rules, approved by the SEC in May
2004, that allow it to investigate:

Any acts or practices, or omissions to act, by registered public

accounting firms and persons associated with such firms, or both,
that may violate any provision of the Act, the rules of the Board, the
provisions of the securities laws relating to the preparation and
issuance of audit reports and the obligations and liabilities of
accountants with respect thereto, including the rules of the
Commission issued under the Act, or professional standards [italics
added]

Registered firms must cooperate with PCAOB investigations, the

results of which are private and not released to the public. If a
potential breach of professional standards is found, though, the
PCAOB may hold public hearings and may impose sanctions—

Page 6 of 52
including revoking a firm's registration, barring a person from
participating in audits of public companies, and invoking fines and
imposition of remedial measures, such as training, quality-control
procedures, and appointment of independent monitors.

Following SOX the AICPA membership voted to permit the AICPA

to sanction members without investigation, if the SEC, Internal
Revenue Service, PCAOB, or a state board sanctioned the
member. In addition, the institute will allow more public disclosure
and transparency on disciplinary matters.

CPAs who do not audit the financial statements of publicly listed

companies do not fall under the jurisdiction of the SEC and the
PCAOB. Ethical standards for these CPAs are enforced by the state
societies of CPAs (if they are members) and by individual state
enforcement mechanisms of codes of ethics. For example, in New
York State, the Office of the Professions of the Department of State
Education investigates and prosecutes professional misconduct.
Penalties include censure, reprimand, fines of up to $10,000 for
each violation, suspension of license and, in severe cases,
revocation of license. The state board deals with about thirty cases
of all types of professional misconduct by CPAs per year, about
nine of which involve breaches of professional duties. State
societies of CPAs also have enforcement mechanisms for their
codes of ethics, and violations can lead to public expulsion.

ETHICS FOR ACCOUNTANTS NOT IN PUBLIC

PRACTICE
Not all accountants work as public auditors. Those who work for
corporations as financial managers, management accountants, and
internal auditors may be CPAs, but a significant number are not.
Over time, these accountants and internal auditors have founded
their own professional societies without state or federal legislation.
These societies also promulgate professional standards ensuring all

Page 7 of 52
members are appropriately qualified to do the work required of them
and that all members adhere to a code of conduct or ethics
somewhat similar to those of the AICPA. Examples include the
Institute of Management Accountants' Standards of Ethical
Conduct, which apply to practitioners of management accounting
and financial management in corporations and not-for-profit
institutions, and the Institute of Internal Auditors' (IIA) Code of
Ethics, which applies to all IIA members and to certified internal
auditors.
https://www.encyclopedia.com/finance/finance-and-accounting-
magazines/ethics-accounting

a. Ethical Responsibility in Accounting

ETHICAL RESPONSIBILITY AND THE PROFESSIONAL
ACCOUNTANT
Introduction
Way back in 1494, Fra Luca Pacioli, the Italian Franciscan friar who published the first description of
the double-entry system, also wrote about accounting ethics claiming that they were based on
business and human ethics and the study of moral values and judgments.

Unfortunately, in recent years we have seen a number of financial scandals being uncovered around
the world. Many public figures, perceived as role models, were embroiled in financial wrongdoing.
Moreover, the world continues to witness a decline in moral values mainly instigated by greed. The
biblical story of Sodom and Gomorrah comes to mind, where not even ten righteous people could be
found to save these two cities, though perhaps that would be taking the matter to the extreme.
Unfortunately, however, all these failures start to instil doubts about the effectiveness and reliability
of financial reporting and the underlying financial standards.

The positive thing is that as a result of the above wrongdoings, the question of ethics and good
corporate governance started to be given more importance, and the role of the accountant as the
main example and guardian of good financial ethics is becoming more significant.

The fundamental principles of ethics for accountants can be found in all the handbooks of the major
accountancy bodies and are basically the following:

 Integrity
 Objectivity
 Confidentiality
 Professional behaviour
 Competence and due care

Page 8 of 52
In the following paragraphs we will look at each principle and dwell upon certain practical issues that
many accountants face during their daily working life:

Integrity
Accountants are expected to be persons of strong principles and high moral values for whom
honesty and integrity always come first. Indeed an accountant whose integrity is put in doubt can
consider himself a write-off in our profession since it is a sine qua non characteristic.

In their daily routine accountants should lead by example and practice what they preach so that their
staff and colleagues may follow in their footsteps. This level of integrity needs to be applied
consistently, fairly, and equitably irrespective of the race, sex, nationality, religion or any affiliation of
the person concerned. Judgements should not be affected by undue pressures from influential
people nor by bribes or favours.

The most important feature of integrity is that the accountant can always walk with his head held
high and that he does not feel afraid or intimidated in passing judgement or expressing opinions.
Moreover he should not be scared to stand up and be counted whenever necessary even when
nobody else finds the courage to speak up.

Objectivity
This principle can be put to test by subjective and strong opinions expressed by people occupying
high positions. On their part, accountants need to reach their own conclusions free of any bias, even
at the cost of going against the currents of public opinion.

Accountants should not rush in reaching their conclusions and they need to reflect carefully and
evaluate both sides of the coin. People can be looking at things from a totally different perspective
and still bring up seemingly valid arguments. This is in fact seen in many politicians who sing the
praises of one side and demonise the other. Actually, counter-arguments to biased positions need to
be built up with patience and be carefully articulated so that the accountant can put himself in a
strong position to win the argument without giving rise to unnecessary aggravation. This would
enhance his reputation of being fair, strong, but yet objective.

It is a well-known fact that whereas entrepreneurs tend to be generally over optimistic in justifying
their ambitions and projects, accountants tend to be over cautious in the knowledge that an error in
being overly optimistic can cost dearly. At the end of the day accountants need to call a spade a
spade and yet demonstrate that there is no hidden agenda against anyone or anything. The ultimate
respect for the accountant is gained through the adoption of a balanced and fair approach.

Confidentiality
One of the most sensitive areas where an accountant has to show the highest degree of ethical
behaviour and discretion is with insider information. This matter acquires a higher significance in the
case of public companies. The accountant has to be the main guardian of sensitive financial
information and he therefore needs to prepare, circulate and explain the appropriate guidelines so
that whoever is exposed to such information fully understands the relative importance and
implications.

Another sensitive issue is that relating to remuneration packages where leakages of information can
disrupt a harmonious organisation and give rise to jealousies, piques and resignations.

Price negotiations with suppliers and contractors submitting tenders for projects can induce these
parties to offer various kinds of bribes and sweeteners and the accountant needs to be very vigilant
for any sign of such illicit behaviour. Other areas where confidentiality is crucial are trade secrets,

Page 9 of 52
intellectual property, distribution lists and employee details, all of which are also vulnerable to these
kinds of situations.

Professional behaviour
Many a time the accountant is assumed to be the dull and nerdish type. While an accountant should
always use good manners and etiquette he should also strive to be an interesting person with a
pleasant and outgoing personality that belies this stigma. Such a disposition would help him
integrate much easier with other members of the organisation and not be labelled the traditional ‘wet
blanket’ or ‘Mr No’.

Certain situations make it hard for the accountant to retain a professional behaviour. Living a life
filled with deadlines compounded by an ever-changing regulatory environment, the accountant’s
resilience is tested to the limits. It is however important that in such situations he remains calm and
composed since otherwise he could transmit the wrong signals down the line.

Professional behaviour is also expected from an accountant in meeting prescribed deadlines,

providing advice, compiling reports, and extending his co-operation whenever necessary. An
accountant can win the crowd by delivering whatever he promises on time while at the same time
consistently exceeding expectations. This is a characteristic found in many accountants and it is
important that it is nurtured on an ongoing basis.

The accountant should never try to be a prima donna. On the contrary, he needs to remain humble
yet persuasive and assertive. These latter characteristics are not easy to develop especially since
most accountants do not receive the appropriate training. Natural aptitudes and experience can help
but accountants should be trained to express their views and conclusions in a confident, articulate
and convincing manner, particularly when dealing with directors who are normally much more
experienced in this area.

Competence and due care

This is an area in which most employers and clients expect the accountant to be always on top of
the situation, knowing everything about his profession including the myriad new technical
pronouncements, regulations and compliance obligations being dished out on a regular basis. Since
the vast majority of people are averse to financial information, reports, and obligations including tax,
many a time they leave it up to the accountant to handle such situations for them.

In view of this level of trust placed in them it is important for the accountant to always stay abreast of
developments in the accountancy world so that he can alert his clients about the consequential
challenges or opportunities that are bound to arise.

In a world that is continuously changing and in which an incident in any part of the world can change
the ball game in an instant, it is very important that business entities stay abreast of such
developments and their potential impact so that they can react to them quickly.

The same applies to feasibility studies for new products, projects etc., for which substantial amounts
of funds are allocated. These funds can go up in smoke unless the appropriate studies are
undertaken in a realistic manner backed up by alternative scenarios to test their sensitivity.

As stated above, many people, including business directors do not relish the idea of reading and
even less studying financial reports. The accountant should therefore ensure that he presents his
reports in a way that they are easy to follow and understand. Much of this depends on the clarity of
the ideas, the way they are expressed and the attractiveness of the wrapper in which they are
presented.

Page 10 of 52
Good corporate governance involves adherence to the various legal and statutory provisions and
many organisations look upon the accountant to act as the conscience and the champion of
compliance that allows directors to sleep well at night without worrying that that one fine day they
might find themselves in trouble with the law.

Other considerations
 Upholding ethical behaviour can come at a cost. Sticking out one’s neck and going against
the current has its risks.
 For most non-financial people it is somewhat difficult to appreciate the accountant’s work.
The main reasons are the very limited knowledge of this area and the fact that most of the
accountant’s work is of an intangible nature and lacks visibility.
 One of the redeeming factors of being an accountant is that most people do tend to look up
to us for advice and inspiration. Sometimes this only happens when and if things start going
wrong but such situations serve as eye openers for the future.
 Accountants need to be shining examples of fairness and correctness and pillars of strength
in difficult situations. Through ethical behaviour accountants build trust and long-term
relationships with the community.
 A responsibility that each of us carries is that our personal professional success or failure
can condition the perception of the general public vis-à-vis the whole profession.

Epitomising Ethics in Accounting

“When people need a doctor, a lawyer, or a certified public accountant, they seek someone whom
they can trust to do a good job – not for himself, but for them.

They have to trust him, since they cannot appraise the quality of his ‘product’. To trust him they must
believe that he is competent, and that his primary motive is to help them”

https://theaccountant.org.mt/ethical-responsibility-and-the-professional-accountant/

b. Accounting Principles & General Financial Ethical

Standards

Accounting Principles and General Financial Ethical

Standards
Like all other professionals, accountants are expected to abide by the principles and
ethical standards set in their profession. You cannot just perform accounting services
Singapore if you are known to be dishonest or incompetent. Even simple projects
like bookkeeping services should be following the proper regulations. In order to build
reputation, businesses, however small, should assure that their books and financial
statements are always compliant with relevant laws or standards.

Page 11 of 52
US Generally Accepted Accounting Principles

One set of accounting principles which gained worldwide recognition is the US GAAP or
the US Generally Accepted Accounting Principles, promulgated by the US Federal
Accounting Standards Board (FASB). GAAP presents how accountants should
conduct their deliverables and how they should present their reports. Two of the main
focuses of standardization are the comparability and transparency of accounting
reports.

Competence

Accounting services should always be accurate, that’s why it is imperative for

accountants to be always competent. Competence does not only mean that the
professional is a graduate of an accounting course but rather, he/she should be actively
engaged in Continuing Professional Education (CPE) programs. CPEs will enhance the
accountant’s competence by supplying him/her updates relevant to his work.

Objectivity

One of the key principles nations want to instill to their accounting professionals is
objectivity. Accounting services in Singapore are monitored closely by the government
to ensure all dealings are done with full honesty and integrity. Accounting firms in
Singapore are very careful not be involved in any dishonesty scandal as it will tarnish
their reputation, consequently losing their customers.

Adherence to objectivity also means avoidance from conflicts of interest. Accountants or

firms should avoid performing bookkeeping or other accounting services to companies
in which they have vested interests. Even if by fact, an individual or accounting
firm performed objectively, doubts will still be casted upon the real intention of the
engaged professional.

Confidentiality

When performing services, accountants are exposed to a great deal of sensitive

business information. The data we’re discussing here are not just the financials; rather it
includes all other non-financial ones. It could be the client’s tax IDs, investors’ personal
details or upcoming expansion plans. Confidentiality suggests that professionals should
avoid divulging their client’s data, unless being required by a proper court of law.

An accounting engagement is a fiduciary contract, which means that the accountant

should always act for the client’s benefit. Information gathered should never be used to
gain unethical or illegal advantage.

http://altaccounting.sg/accounting-services-singapore/accounting-principles-and-general-financial-
ethical-standards/

Page 12 of 52
 c. Accounting Systems Ethics

INTRODUCTION

Accounting is the process of collecting, aggregating, validating, and reporting information

about business performance. Until the last century, accountants focused almost exclusively
on financial information generated from double-entry bookkeeping.
Since then, their purview has expanded to many other financial and nonfinancial measures.
Subfields are typically defined by the audience an accountant reports to: outside investors
(financial accounting), employees (managerial accounting), tax authorities (tax accounting),
citizens (governmental accounting), or regulatory agencies (regulatory accounting).
The central practical issues in accounting arise from the difficulty of devising systems that
report performance measures accurately, understandably, and cheaply. The
central ethical issues in accounting arise because many parties involved in the reporting
process can distort measures to their own benefit, at the expense of the reporting audience.
What can firms or regulators do to minimize such distortions?

IDEAS TO APPLY (Based on research covered below)

 Be on the look out for measure management. Is your organization engaging in it? If so, how,
why, and what are will the long-term impacts be for your organization and other stakeholders?
 Apply best practices. Ensure that your companies accounting systems has 1) an effective
system of internal controls to make it hard for a single person to distort any step in the
reporting process; 2) an independent party to audit reports and attest to their validity; and 3)
people who represent a diverse set of interests to oversee the entire reporting process.
 Carefully weigh consequences of encouraging “underpromising and overdelivering.” As
discussed below, ‘sandbagging’ behavior is common in many large organizations, however as a
practice it generally prioritizes short-term goals over long-term objectives.

AREAS OF RESEARCH
 How does the very act of measuring performance distort performance? People engage
in measure management when they focus on improving measures of their performance, rather
than improving the true performance those measures are intended to represent (Bloomfield,
2013). People can “manage” measures by distorting either the reporting process itself or the
operational decisions that generated the raw data to be processed. For example, a principal
who wants to improve her school’s performance on standardized tests can change students’
answers, or she can direct teachers to stop teaching topics that aren’t being tested (see,
e.g., Freakonomics). Depending on the specific context and behavior, measure management can

Page 13 of 52
 be illegal, simply unethical, or completely ethical. Interference with the reporting process
is typically viewed more negatively than distortion of operations, even though the latter often
creates more direct harms. For example, changing test answers is often illegal, even though it
does not alter how much students actually learn. “Teaching to the test” is typically considered
ethical, even when it robs students of a good education in untested subjects.
 What are the special problems with earnings reports? A great deal of accounting research
focuses on the detection and determinants of earnings management, in which firms manipulate
the earnings numbers reported to outside investors. Earnings management need not violate
civil or criminal law to be damaging to investors and the economy. Documenting earnings
management is difficult, because “true earnings” is a slippery concept, but researchers continue
to improve their detection methods using detailed performance data (see Dechow et al., 2012).
Recent research has analyzed voice stress and word choice to detect when executives are
discussing managed earnings numbers in conference calls (Mayew and Venkatachalam, 2012).
Earnings management appears to be influenced by managerial incentives; it is most severe
immediately before firms issue new equity (Teoh, Welch, and Wong, 1998), and when Chief
Financial Officers are given equity incentives.
 How do managers obfuscate performance when releasing information to the
public? Financial markets respond more completely to information that is more widely known
(The “Incomplete Revelation Hypothesis,” Bloomfield (2002), and to information that is more
salient and easy to process (Hirshleifer and Teoh, 2003)). Managers frequently make
operational and reporting decisions that boost reported earnings. This inflated “good news” is
often featured prominently in the financial press, while the corresponding bad news is released
in ways that relegate it to little-read footnotes. Furthermore, firms disclose pro forma earnings
(non-standard earnings measures) in press releases, and these numbers are almost always
higher than standard earnings based on GAAP (Generally Accepted Accounting Principles). Li
(2006) shows that managers also strategically obfuscate bad news by writing longer and less
readable annual reports when financial performance is poor or temporarily bolstered by
transient factors.
 Do managers exploit inside knowledge of the firm for personal gain? Early studies
indicate that insiders sell (or delay purchases) before significant price decreases and buy (or
delay sales) before significant price increases (Jaffe 1974, Seyhun 1986). Subsequent studies
link insider trading to various information releases, including dividend initiation
announcements, repurchases of stock, equity offerings, bankruptcy filings, and 10-Q/10-K
filings. Research also connects insider trading with opportunistic disclosure behavior. Penman
(1982) provides initial evidence that managers benefit from timing their trades around their
forecasts of annual earnings. Cheng and Lo (2006) provide evidence that managers
opportunistically delay purchases until after they issue bad news warnings, while Cheng, Luo
and Yue (2013) find that managers strategically choose the precision of their forecasts in an
effort to increase their trading returns.
 How might managers’ opportunistic behavior harm investors? Negative news earnings
warnings reduce firms’ litigation risk (Field, Lowry and Shu 2005). Yet managers often remain
silent when facing impending earnings disappointment (Skinner 1994). Billings and Cedergren
(2014) find that insider selling helps to explain this silence. In so doing, they find that strategic

Page 14 of 52
 silence combined with opportunistic selling by managers increases the litigation consequences
borne by the firm and investors. Collectively, these findings highlight the tension between
manager-level trading incentives and firm-level disclosure incentives.
 What are the pros and cons of granting managers judgment and discretion in
reporting? Many reporting systems require the reporter to make difficult judgments, or to
choose among alternatives. For example, financial reporting standards issued by the Financial
Accounting Standards Board and International Accounting Standards Board require managers
to estimate the proportion of accounts receivable that won’t be collected, and to estimate
whether an unfavorable judgment on a lawsuit is probable or only a remote possibility.
Reporting standards also allow managers the discretion to choose between different methods
of depreciating buildings and equipment, and whether to report financial assets based their
current fair value or their original cost (suitably modified for changing circumstances).
Extensive research shows that judgments such as these are frequently distorted by incentives,
often unconsciously. Managers use their discretion to improve reported performance. (See our
pages on Conflicts of Interest and on Contextual Influences.) However, allowing judgment and
discretion can also allow managers to communicate more information than they could under
one-size-fits-all reporting rules (Dye and Verrecchia, 2005).
 How can the reliability of reports be increased? Accountants have devised many practices
to make reports more reliable. The most important are: 1) to have an effective system of
internal controls that make it hard for a single person to distort any step in the reporting
process; 2) to have an independent party audit the reports and attest to their validity; and 3) to
have people who represent a diverse set of interests oversee the entire reporting process.
These practices typically improve reporting reliability and reduce fraud (Association of
Certified Fraud Examiners, 2012), but failures are frequent and often staggeringly costly, as in
the case of Enron, WorldCom, and Lehman Brothers.
 How does personal accountability impact audit quality and earnings management? Laws
that require a partner to sign off on audits, with their own name, rather than merely the firm's
name, improve audit quality and reduce earnings management. (Carcello & Li, 2013; and see
this related story and summary in the New York Times.)

OPEN QUESTIONS

 When Should Measure Management Be Discouraged? Consider a firm that rewards

managers for achieving budgeted income targets. Most firms discourage managers from
underestimating expenses to push income up to the target. But what about a manager who
overestimates expenses because performance is strong this quarter, in order to ensure that
hitting the target next period? What if a manager boosted earnings by reducing discretionary
R&D and marketing expenses? Such operational measure management is often explicitly
encouraged, even though it achieves short-term goals by sacrificing long-term success. What
about managers who provide pessimistic budget forecasts so they can more easily hit their
targets? Such ‘sandbagging’ behavior is widespread in large organizations and often viewed as
evidence of wise and effective management (underpromise and overdeliver) rather than
punishable misrepresentation.

Page 15 of 52
 Principles or Rules? Reporting standards can be stated in the form of general principles or
detailed rules. For example, assume a division leases a factory building for many years. When
should the division capitalize the lease (i.e., report as if it owns the building and has a liability
for future payments, rather than simply expensing the lease payment each year)? The reporting
authority (whether the FASB or division headquarters) could state a principle like “capitalize if
you are using the asset for substantially all of its useful life.” Alternatively, they could state a set
of specific rules, such as “capitalize the asset if the lease term is 75% or more its useful life.”
Both approaches are problematic, but in different ways; the principle allows the manager to
avoid capitalization by making a favorable judgment that is costly to monitor, while the rule
allows them to do so by writing a lease contract for 74.99% of useful life, pushing up to but not
over the edge of the bright line (Nelson, 2003).
 When Is High-Stakes Reporting Worthwhile? High-stakes reporting is ubiquitous. In some
schools, teachers are fired when their students score poorly on standardized tests. Investors
dump stocks that report unexpectedly low earnings. Managers receive large bonuses for hitting
financial targets—and are fired for failing to do so. Workers are promoted or fired based on
any number of nonfinancial performance reports. While high stakes can motivate high
performance, they also motivate measure management, as powerfully stated by Donald T.
Campbell, in a phrase that has become known as Campbell’s Law: “The more any quantitative
social indicator (or even some qualitative indicator) is used for social decision-making, the
more subject it will be to corruption pressures and the more apt it will be to distort and corrupt
the social processes it is intended to monitor.” Context and details typically determine whether
the motivational benefits of high-stakes reporting outweigh the costs of the inevitable
distortions.
 When Do Controls Backfire? Reporting controls can limit measure management through
brute force, but they can also create counterproductive norms about reporting ethics. People
often reciprocate trust with honesty; controls that intrude on their privacy or restrict their
discretion breach that trust and encourage them to game the system with whatever limited
tools they retain (Tayler and Bloomfield, 2011).
 How Does Culture Matter? Some companies and countries consistently show reliable
reporting habits, while others are plagued with distortion. To what extent are these tendencies
driven by cultural forces, religion, and ‘tone from the top’? Research has found some
preliminary evidence, but no firm conclusions. How do moral attitudes affect accounting
practices such as earnings management, nondisclosure, or misleading disclosure? How do
moral attitudes affect regulation and standard setting? Does a moral norm for prudence attract
firms and regulators to conservative accounting practices? Does the desire to find scapegoats
after financial and economic crises shape reporting regulation?

http://www.ethicalsystems.org/content/accounting

Page 16 of 52
Accounting systems ethics involve a company’s financial reporting activities. Companies that publicly
trade stock, solicit investors or creditors use their financial reports as the means to communicate
important financial data. The U.S. Securities and Exchange Commission along with the Financial
Accounting Standards Board created the “Generally Accepted Accounting Principles” that define the
ethical practices and principles of accounting that businesses use.

Nature of the Work

Accountants, auditors and accounting clerks must maintain a high ethical standard when dealing with
financial data. The majority of financial data within a company outside its financial reports is highly
confidential and usually only available to a select few. This requires accountants, auditors and clerks to
understand the nature of the confidentiality and employ ethical standards when discussing transactions
outside the department.

Accurate Information

Other ethical issues within accounting include validating that data entered into the accounting system is
accurate. Because humans can make mistakes, this means that all financial transactions must have easily
verifiable hard copy backup documentation. Errors that occur must be corrected within the accounting
system. This also means that transactions made to adjust or correct errors provide a complete audit
trail. Providing a complete audit trail involves completing all the transaction steps without taking
shortcuts. An auditor must be able to follow the transaction from beginning to end with backup
documentation supporting the transaction.

GAAP

Accounting departments usually adopt the principles under FASB-created generally accepted accounting
principles, whether a company is publicly held or not. Even if financial reports are not required to
provide because the company is privately held, ensuring that financial reports are accurate is still part of
using an ethical accounting system. This applies even when a company’s financial reports are made
available to creditors to obtain loans.

Internal Controls

One of the ways in which an accounting department protects its accounting system ethics and internal
users is to separate functions within the department. For instance, the person who generates checks
during the accounts payable function does not have the authority to approve or sign the checks. This
may include working across functions as well. The accounting payroll clerk’s duties are separate from
the accounts payable clerk and neither can access the other’s information.

Page 17 of 52
http://smallbusiness.chron.com/accounting-systems-ethics-24413.html

d. What Are the Causes of Ethical Lapses in

Accounting?

Corporate scandals cause the public to question why some people run their businesses honestly and
others turn into criminals. Despite the blatant appearance of some scandals, the causes of unethical
accounting practices are complex and interlocking. Some people may attempt to rob their customers
blind with no qualms, while others are drawn into illegal practices gradually through ignorance or good
intentions.
Greed

At the root of a complex matter is a very simple fact: Some people enjoy having lots of money and will
break the law to get it. Accounting, whether it is on an individual basis or within the context of a
multinational corporation, offers the opportunity to "cook the books" and take a little or a lot more for
yourself without actually pointing a gun or breaking into someone's house. The white-collar nature of
accounting crimes make them very tempting because nobody seems to be getting hurt. The presence of
large amounts of money activates the greed centers in some people's brains.

Opportunity

The saying that "opportunity makes the thief" is applicable to crooked accountants. People who would
never seek out a crime to commit under normal conditions may succumb to temptation when an
opportunity is offered. Accounting sometimes involves dealing with very large amounts of money, some
of which can be easily hidden, siphoned off or removed with little chance of detection. When presented
with this level of temptation, some people succumb, particularly if they perceive themselves to be in a
situation of financial need.

Disconnection

Perceptions of reality are determined by daily surroundings. When working within the confines of a
large company, a person can become wrapped up within the corporate culture of that company and lose
sight of how the rest of the world is functioning. A sense of hubris and entitlement can develop in the
presence of $100 lunches and $1 million houses. When part of this culture involves accounting

Page 18 of 52
irregularities for the benefit of the business or the individual, this can come to seem normal to someone
who loses touch with how things work outside the company.

Ignorance

While ignorance is no excuse for committing unethical or illegal actions, it may play a role in accounting
crimes. Everyone knows that you can't walk into a bank with a gun and steal the money without
breaking the law, but accounting regulations aren't nearly this simple. Tax law, regulations about insider
trading and similar arcane rule books are easily misunderstood, and inexperienced accountants or
businesspeople may engage in unethical behavior without even being aware of it. Of course, when
someone is caught and charged, he may make this claim of ignorance when it isn't actually true.

http://smallbusiness.chron.com/causes-ethical-lapses-accounting-24559.html

The Effects of Poor Ethics in Accounting

Accounting rules and regulations exist to ensure that financial statements are useful to their end users in
their financial decision-making. For financial statements to be useful, the information presented therein
must be accurate, faithful to the financial circumstances and be produced in time to help the decision-
making process. Poor ethics in accounting result not only in increased incidences of criminal activities,
but also hurt the business through harming its reputation and rendering their financial statements
untrustworthy and thus useless.
Criminal Activities

Poor ethics amongst a business' accountants means that those persons are more willing to break the
rules to benefit either themselves or their business illegally. For example, an unethical accountant
granted too much control and too little oversight from superiors can embezzle from the business and
conceal the evidence. In contrast and comparison, an unethical accountant working at the behest of the
business can manipulate the data to commit a number of crimes including fraud and tax evasion.

Personal Consequences

Once caught and tried, accountants so unethical as to commit crimes related to their profession are
punished. Depending on the specific circumstances of the case, this can result in prison time, financial
costs and other legal punishments to the accountants found guilty. Not only is this devastating for said
accountant, it is also devastating on both friends and family, particularly the family.

Business Reputation

Page 19 of 52
Poor ethics can also inflict damages on the business' reputation and trustworthiness of its stakeholders,
such as customers and business partners. The absence of trust ensures that the business finds it difficult
to conduct business with others. This damage to a business' reputation is particularly devastating to
accounting firms who rely heavily on that reputation to remain in business. Arthur Andersen LLP
effectively perished as a business because of its poor conduct in the Enron scandal.

Usefulness of Financial Statements

Each time that an unethical accountant deliberately breaks the rules and regulations to manipulate the
information presented on the financial statements to illegal advantage, those financial statements
become less and less useful. Since financial statements must remain accurate and truthful to help end
users in making their financial decisions, financial statements tainted deter the decision-making process.
Erroneous figures cast all other figures into doubt and end users simply become unable to trust the
information presented.

http://smallbusiness.chron.com/effects-poor-ethics-accounting-37750.html

Ethical Dilemmas in Accounting

Individuals in the accounting profession have a considerable responsibility to the general public.
Accountants provide information about companies that allow the public to make investment decisions
for retirement, a child’s education and major purchases such as a home. For the public to rely on the
information provided, there must be a level of confidence in the knowledge and behavior of accountants.
Ethical behavior is necessary in the accounting profession to prevent fraudulent activities and to gain
public trust.
Facts

In an article entitled "Business Accounting Ethics," Katherine Smith and L. Murphy Smith explain that
the main reason for ethical guidelines is not to provide an exact solution to every problem, but to aid in
the decision-making process. An established set of guidelines provides an accounting professional with a
compass to direct him toward ethical behavior. Specific responsibilities of the accounting profession are
expressed in the various codes of ethics established by the major organizations such as the American
Institute of CPAs. The AICPA Code of Professional Conduct outlines an accountant’s responsibilities
towards the public interest and emphasizes integrity, objectivity and due care.

Significance

The effects of ethical behavior in accounting are far reaching in the economy. Every business entity has
an accounting professional provide information at some point in the organization’s life cycle. Many

Page 20 of 52
accounting professionals are tempted to alter financial results and often rationalize the behavior by
calling it creative or aggressive accounting. Aggressive accounting is the process of employing
questionable accounting methods to boost results. An accountant may record revenues and expenses in
an incorrect manner or omit expenses altogether. Repeated incidences of aggressive accounting are a
result of the lack of ethical behavior.

Example

A common example of an ethical dilemma involves management instructing a subordinate employee to

record a transaction in an incorrect manner. For instance, a company with a Dec. 31 year-end calendar
year, signs contracts with consumers to perform services. The contracts are usually signed Dec. 1 and
are a year in length. Accounting principles require the company to record the revenue for the contract
for one month only, the month of December. The remainder of the revenue is recognized on next year’s
financial statements. However, management instructs an employee to record the entire amount of the
contract in December to boost revenues for the current year end. Management receives a bonus for the
boosted revenue and the subordinate receives recognition in an upcoming performance review.

Solutions

Unfortunately, ethical dilemmas, such as the example provided, are common. To help curb the desire to
practice aggressive accounting and ignore ethical behavior, a number of organizations require
accounting professionals to complete continuing professional education courses on ethics. In addition, a
number of companies establish whistleblower hotlines to encourage employees to demonstrate honesty
and integrity in the workplace.

Considerations

Many accounting professionals do not encourage ethics courses and argue that ethical behavior is not
taught, but it is inherent in an individual’s personality. In addition, Faculty Director J. Edward Ketz notes
that accounting professors do not like to research or study ethics because of its unscientific approach.
The results are difficult to examine and it is hard to gauge the level of success from teaching ethics
courses.

http://smallbusiness.chron.com/ethical-dilemmas-accounting-3740.html

Page 21 of 52
 2. Professionalism and Work Ethics

Abstract- All CPAs should play a proactive role in developing standards of professional
ethical behavior for themselves and their companies, and places where CPAs can look for
guidance are professional organizations. The revised version of the American Institute of Certified
Public Accountants Professional Code of Ethics has been extended to include CPAs employed in
private industry, while the National Association of Accountants' Standards of Ethical Conduct for
Management Accountants emphasizes the obligation of its members to maintain high standards
of ethical conduct. The American Accounting Association and The National Commission on
Fraudulent Financial Reporting also have issued recommendations that standards for ethical
conduct be included in the curricula of schools of business and accounting.

The AICPA Code of Professional Conduct was once considered applicable in large measure to CPAs in
public practice. With the new Code, this situation has changed. In addition, in many business
organizations and corporations, greater stress is being placed on their own codes which are considered
good business practice and are applicable to all officers and employees. The authors discuss these
recent developments and present typical situations in which application of ethics faces CPAs in industry.

In the business community, the resolution of ethical conflicts does not easily lend itself to objective
quantitative analysis. Managers frequently leave ethical discussions open to a number of interpretations,
and subordinates are left to sort out the issues and forever wonder if they have done the right thing.
There is little guidance in the form of specific rules or case studies as to how a particular ethical problem
should be addressed. It is as if ethics in general terms must be left to philosophers and theologians.

A high ethical standard is presumed of the CPA in public practice. But what of the ethics of the CPA
employed as a professional in the private sector? This is especially relevant now because the AICPA
Code of Professional Conduct has recently been extended to include all CPAs, not just those in public
accounting. There are initiatives emanating from both the public and private sectors that address the
concerns raised by companies, employees, and society at large about ethical standards. These serve as
a backdrop to reinforce the CPA's obligation to be armed with a consciously developed set of high ethical
standards. In addition, examples of ethical dilemmas that confront the CPA in industry can be used to
raise the consciousness of professional accountants involved in decision making.

Ethical Analysis: A Professional Responsibility

Missing in most discussions of ethics is the fact that, by definition, ethics is the part of philosophy that
deals with the practical application of those actions over which we have control. Webster's Dictionary
defines ethics as "...the principles of conduct governing an individual or a profession: the discipline
dealing with what is good or bad or right and wrong, or with moral duty and obligation; a particular theory
or system of moral values....," At the same time, in defining a professional, Webster's characterizes that
person as one "...conforming to the technical or ethical standards of a profession or an occupation."
Professionals are expected to maintain "high standards of achievement and conduct." Therefore, ethics is
very much an appropriate philosophical mode of analysis and is integral to the definition of a profession.

While ethical decisions may appear to be strictly subjective, they are made in the context of personal as
well as professional lives. Individual ethical conduct must be carried out in conjunction with other
individuals as well as within the context of the organization. The individual dealing with a personal ethical
response to a given situation does so within an organizational structure which itself has defined certain
responses as ethical or unethical. When significant differences exist between the ethical beliefs of the
individual and that of the organization, conflicts arise. The same is true when differences exist between
the company and the societal context in which the company operates.

Page 22 of 52
Whether a company chooses to address the importance of ethics in decision making in a formal manner
(e.g., through the promulgation of a code of ethics) or otherwise, it is inevitable that the decision made is
evaluated by all stakeholders and not just the stockholders. The stakeholders are all individuals or groups
involved with the company, both internally and externally, who are affected by its decisions. The financial
press is full of examples that indicate the impact that unethical decisions can have on a company and its
relationship to the stakeholders who are part of the corporate culture. The responses to charges of
unethical behavior are all too familiar: "I (we) lost sight of what was important in the long-term view of
things." "With hindsight, we should have told them to get the hell out of here." "There was such a push for
strong quarterly earnings."

These responses point to two critical factors that must be addressed by a company serious about
incorporating ethics into its decision making process: the short-term versus the long-term view of what is
good business, and the need to evaluate the ethical implications of a decision as part of the decision
making process, rather than as a reaction to a third party's criticism of the decision. Accordingly, to
ensure its imporatnce, ethical analysis must be institutionalized as an integral input into all phases of the
decision making process.

Ethical Initiatives Affecting the CPA

If one accepts the tenet that a code of conduct directing ethical behavior is a critical part of the definition
of a profession, then it is important that a mechanism exist for incorporating ethics into the decision
making framework. While professional organizations and numerous companies have put emphasis on
this process for years, there has been a renewed call on many fronts during the past decade. In part, this
is a result of violations of ethical behavior in every aspect of society and, from a purely pragmatic point of
view, actions to avoid excessive regulation and costly litigation. Three major initiatives affecting the CPA
are emanating from professional accounting organizations, educational institutions, and the business
community at large.

Professional Initiatives

The initiative coming from professional accounting organizations includes the AICPA's new Code of
Professional Conduct. A major change in the new Code is the development of both principles and rules
for ethical behavior. The six principles, in contrast to the spirit of the old Code, adopt a proactive and
positive approach to ethics. Although the rules are an update of previous "dos and don'ts," the new
principles attempt to develop an attitude and atmosphere in the profession which makes ethical
considerations a cornerstone of every action a CPA undertakes. The thrust of the principles is that CPAs
have an obligation beyond just complying with the law. Instead, the professionalism of accountants must
be manifested by behavior consistent with a responsibility to serving the public trust.

The Code has been extended to apply to all CPAs, including those employed in the private sector. By
including all CPAs, the Code ensures that the title "CPA" universally carries high standards of
professionalism and ethics. Accordingly, all CPAs now have a stated obligation to act professionally and
in the public interest. For example, CPAs in private industry will adhere to the principle of competence by
fulfilling a comprehensive set of continuing professional education requirements. Moreover, CPAs in
industry are required to be as objective in applying GAAP when preparing financial statements as CPAs
in public practice performing audits.

The National Association of Accountants (NAA), the world's largest organization of management
accountants, has also been actively involved in promoting ethical behavior among accountants in the
private sector. The NAA's Standards of Ethical Conduct for Management Accountants has emphasized
the obligation of management accountants "...to organizations they serve, their profession, the public, and
themselves to maintain the highest standards of ethical conduct.1 Since accountants produce and
monitor financial reports both for internal and external use, it is imperative that their integrity be beyond
reproach.

Despite these initiatives promulgated by the professional accounting organizations, Stephen Zeff in an
article entitled "Does the CPA Belong to a Profession?" has raised two issues that may adversely affect

Page 23 of 52
the CPA's professional status. The first issue he discusses is that diversified services draw firms into
competition with other disciplines that have few or no professional/competitive restraints. He suggests
that this may erode the professional judgment of the accountant. The CPAs in private practice face these
same issues of competition and diversification that impinge on their ability to maintain an appropriate
professional response to ethical questions.

Zeff also argues that ethical and judgmental problems may arise because of the increase in a rule-
dominated practice. The problem of a rule-dominated practice is that it may lull us into a false sense of
what is right and wrong by viewing decision making through a legal/illegal lens. Here the concern
becomes one of form over substance with ethical decision making being replaced by legal decision
making.2

Educators Must Set the Tone

It is not only in the professional accounting organizations that the ethics question is being addressed.
Educators are concerned with how ethics should be incorporated into the accounting curriculum. The
American Accounting Association (AAA) in its report, Future Accounting Education; Preparing for the
Expanding Profession, has noted that a professional accounting education goes beyond providing skills
and knowledge. In addition, it must "...instill the ethical standards and the commitment of a professional.
The general effort to develop in students a concern for individual needs and for the overall advancement
of society must be given more emphasis.3 The report notes that accountants need to be creative,
sensitive, and aware of the needs of society. While the circumstances within which we exercise
professional judgment may change, the common thread running throughout these changing
circumstances should be those characteristics that define the accountant as a professional.

The National Commission on Fraudulent Financial Reporting (Treadway Commission) has also
recommended that students be exposed to ethical questions and that more emphasis be placed on the
ethical dimension of financial reporting in the business and accounting curricula. As recent insider trading
cases have revealed, ethical decisions are not only the concern of upper level managers, but also may be
faced by individuals early in their professional careers.

Companies Join In

A third initiative has been generated by companies themselves with a renewed interest in codes of ethics
developed by companies. The Corporate Ethics Project of the Business Roundtable, which includes the
CEOs of 200 major corporations, recently looked at 100 companies and how they have dealt with the
issue of corporate ethics. The project pointed to the "crucial role of top management" and the necessity of
providing constant leadership in tending to and renewing the values of the organization. This was also
strongly recommended by the Treadway Commission which emphasized the importance of the tone set
by top management and its influence on the corporate environment. Two other major findings of the
Business Roundtable project were a deep conviction that a good reputation for fair and honest business
is a prime corporate asset and that corporate obligations extend to a variety of constituencies or
stakeholders. Recognizing that the human conscience is fragile, the Ethics Project emphasized the role
that ethics plays in the company must be pervasive, extending to hiring, training, oversight, recognition
and reward, review for adherence, and channels for reporting problems. They noted the growing
conviction that "...strong corporate culture and ethics are a vital strategic key to survival and profitability in
a highly competitive era.4

Ethics: Good Business Sense?

There is evidence from surveys of practitioners that accountants in the private sector might be under
pressure to ensure that financial results meet expectations, both internal and external to the company.
This raises a practical question about whether ethical behavior is at odds with the notion of maximizing
reported profitability. The question must be addressed from both a short-term and long-term perspective.
The response made by Johnson & Johnson to the Tylenol crisis had very negative short-term implications
for profits but, in the long-term, represented not only an ethically sound decision but one which was
praised as making good business sense as well. There is growing concern in the financial press over the

Page 24 of 52
emphasis on short-term earnings results at the expense of performance over the long-term. Companies
themselves are criticizing this short-term view and are beginning to develop methods for evaluating
performance from a long-term perspective.

Earnings Corrupts?

In considering many of the ethical decisions facing the manager, a key factor influencing ethical/unethical
behavior is often the concern over a decision's impact on earnings. The Treadway Commission has noted
the negative impact that this myopic notion of profitability can have on top management. Rather than
viewing attempts to reduce fraudulent financial reporting as defensive, the Commission emphasizes
sound financial reporting as making good business sense by positively affecting the corporate reputation.
A corporation must meet not only the condition of viability, but also that of legitimacy for its continued
existence. Legitimacy means the way in which the enterprise goes about its economic role in accordance
with generally accepted rules, principles, and standards, whether or not they are required by law or
statute.5 The role that ethics plays in decision making goes beyond the legal dimension and must
concern itself with whether or not the decision meets the value orientation of the company as well as the
environment in which it operates.

This belief in corporate social responsibility does not deny the importance of profits and financial viability
to the company. Rather, it sees ethical decision making as an integral part of sound business decision
making and as having a positive effect on its long-term financial success. Support for this exists in the
popular financial press. In a Fortune article ranking America's most admired corporations, one of the eight
criteria used for evaluation was a sense of responsibility to community and environment.6 The well-known
management analyst Peter Drucker goes further, encouraging a company to turn a social problem into an
economic opportunity and benefit rather than viewing it as a cost to be absorbed.7

Employees Are Affected

There may also be internal costs to a company failing to deal with the impact that unethical behavior may
have on employees. When employees are faced with significant conflicts arising from differences
between personal and corporate ethical value systems, they may be faced with a choice of living with this
conflict or choosing to work elsewhere. Both of these choices can result in real costs to the employer. It
has been suggested that when the employee chooses to stay with the company, these conflicts may have
adverse effects on productivity through reduced quality of work performance, absenteeism, strained
relationships, and low morale. Those who choose to resign also represent a cost since they are most
likely to be individuals whose work performance may be superior and are therefore in the best position to
be able to find work elsewhere.8 In either case, there is most likely an impact on the profitability of the
company for failing to provide the employee with a positive outlet and response mechanism for these
areas of conflict.

In addition, there may be future costs for the company if employees choose to detach themselves from
the perceived "corporate unethical decision." This separation of personal ethics from the corporate ethics
might result in a future action being taken by the employee with a lack of consideration of its ethical
implication for the company. This "losing touch" with their personal value system is often cited by those
found to be involved in illegal or unethical behavior. The institutional value system replaced their personal
value system on the job and eventually impaired their ability to function in an ethical manner.

A Proactive Organizational Response

As discussed, the Treadway Commission has noted that the "tone at the top" is the most critical factor
affecting ethical behavior in corporations. It is imperative that the CPA in industry advocate and promote
this proactive approach recommended by the Commission. This approach should be reflected in the
organizational climate rather than the reactive mode often noted in the financial press.

Debate Will Continue

Page 25 of 52
While the debate over what constitutes ethical behavior has, and will, wage on for years, the importance
of addressing this issue within a company has been well established. Whether an organization chooses to
respond to this concern strictly from a self-centered point of view, to reduce the threat of increased
regulation or future litigation, or chooses to raise the issue to a higher, more altruistic goal, it appears that
there are benefits to be gained both from an economic perspective and through the creation of a more
healthy work environment. A common thread running through Peter's and Waterman's book, In Search of
Excellence, is that companies who have achieved excellence have made a conscious attempt to pay
attention to the needs of their employees and customers.9

Every Day Guidance

Just as companies adopt models for decision making in their approach to responsibility accounting or
capital budgeting, it is imperative that they also provide a framework within which to evaluate the ethical
implications of their decisions. This extends beyond the adoption of a corporate "code of ethics" to the
implementation of a working model that can serve to provide guidance to employees in their every day
handling of complex and ambiguous situations. Failure to adopt this working model can result in the
creation of a "moral vacuum" that allows each of the employees to decide for themselves what will, or will
not, constitute ethical behavior. While some have dismissed the entire process on the basis that ethics
cannot be taught, others have decided that, at a minimum, it is critical to raise the ethical consciousness
of those who work within the company.

Consciousness Raising

This process of consciousness raising can be accomplished from a number of perspectives. A corporate
code of ethics is certainly a beginning, but it has been well documented that the code must become a
living document that begins with the "tone at the top." Johnson & Johnson demonstrated that its code was
an action-oriented one. Its "Credo" of corporate values, which is over 40 years old, played a major role in
guiding it through its response to the Tylenol crisis. It is an active document that is constantly reevaluated
and that "...strikes a balance between centralized management control and giving employees enough
autonomy to build mutual trust critical to maintaining a value system." Top management is actively
involved with this process.10

Unless ethical questions are discussed before the situations arise, the response may not be well thought
out but will represent an attempt based on different and possibly conflicting views of what constitutes the
most appropriate response. Companies spend time and money orienting the new employee to the
corporate culture. This orientation should also include a clear understanding of the firm's position on
ethical behavior and its impact on particular practices that the employee may encounter. Whether
explicitly stated or not, the employee will encounter a corporate climate from the first day of training by
observing the way peers and superiors respond to specific situations that arise in the workplace. This
climate can result in the formation of a process for dealing with complex, ambiguous situations, or
individuals can be left to decide for themselves about the best course of action if a "take care of it"
mentality has been observed.

The process must include both planning and control in the same sense that we use the terms in other
managerial models. The planning part of the process includes the development of the code of ethics and
its incorporation into training and professional development programs. It includes making ethical analysis
an "input" into accounting-based decision making. The control aspect consists of regular reviews of the
decision making process, channels for reporting problems, and inclusion of ethical issues as part of the
evaluation and reward structure.

Examples of Ethical Dilemmas Confronting the CPA

Whereas codes of ethics may represent a company's ethical stance at the conceptual level, concrete
examples may do more to raise the ethical consciousness of employees in the decision making process.
Examples can be found in all the major functions performed by CPAs in industry, including the roles of
product costing, decision making, planning, and control.

Page 26 of 52
Product Costing Can Be Manipulated

Product costing is required by GAAP to evaluate inventory and eventually cost of goods sold in the
financial statements. However, the Treadway Commission points out that pressures could arise to
minimize the reported cost of goods sold. This could take the form of accountants being asked to
massage the allocation of overhead or changing the estimates of the economic life of assets. Pressures
could also exist for accountants in industry to delay proper writedowns of the value of inventory. For
example, in the highly competitive and technologically advanced consumer industry, new products are
introduced at a rapid pace. This heightens the probability that demand for existing products and inventory
could flatten or decrease. Management under earnings performance pressure may be tempted to engage
in financial statement management by not writing down inventory. As the saying goes "If you can't report
good performance, you can at least have a good performance report."

With the extension of the Code to include all CPAs, accountants in industry now have the same stated
obligation as auditors to ensure the proper valuation of all assets and to properly cost the inventory.

Decisions Are Being Made

An example of ethical ambiguities in the decision making area occurs when companies are investigating
whether to outsource any part of the production process. In addition to the obligations to stockholders,
does the company have any responsibilities to the workers, suppliers, and the community in which they
are currently located? Moreover, assume a company's production costs would be lower abroad because
the pollution control laws are less stringent and therefore cheaper to comply with. Should the lower costs
justify the possible increased health and safety risks that could occur in the company's new location? To
resolve this issue, the accountant could follow the guidelines of Sir Adrian Cadbury who argues that for
an action to be considered ethical, it must be open to public scrutiny and that the manager would not be
embarrassed if the action were made public.11

With the European Community headed towards substantial economic integration by 1992, many more
accountants will be employed by businesses increasingly attuned to the notion of competing in world
markets. However, one ethical issue that arises is how to reconcile the variations in cultural and ethical
values with the worldwide corporate decision making process. Accounting rules and disclosure
requirements differ significantly among foreign countries and the U.S. Although illegal payments to
procure business are clearly outlawed by the 1977 Foreign Corrupt Practices Act, a gray area can arise
from the issue of what constitutes acceptable expenditures. The CPA in industry could be asked to
approve expenditures for entertainment in one country which might be considered unacceptable in the
context of doing business in the U.S. This is where the accountant could help set policies and guidelines
through a promulgated company code of ethics which would clarify the universality of employees' actions.

Planning Is Also Susceptible

Accountants are involved in the preparation and presentation of budgets. One ethical issue facing
accountants revolves around pressures from individual departments or divisions to use the budgeting
process to maximize their share of allocated corporate resources. If the accountant develops an
unrealistic budget, this could result in needless investment in unnecessary equipment or the production of
excess inventory. Using stakeholder analysis (which analyzes the decision in terms of all affected parties
both internal and external to the company) the accountant could evaluate this effect in terms of possible
future layoffs, lost opportunity cost of a more effective use of corporate resources in other segments of
the business, and possible loss of wealth to the stockholders when actual earnings don't meet
expectations.

Capital budgeting is another area of planning which is ripe with ethical dilemmas. Since many companies
have elaborate mechanisms to evaluate capital budgeting requests, CPAs may confront pressures from
divisional managers to circumvent the formal process. This could take the form of breaking up a large
expenditure into smaller components. The smaller requests, in turn, might not need to comply with as
formal and rigorous guidelines as larger projects do. In both the generation of the projections and the
framing of the amount of the capital budget expenditure, the CPA in industry could refer to the objectivity

Page 27 of 52
principle of the Code. The principle of objectivity suggests that all CPAs must be unbiased in their work
and be firm in expressing their subjective professional judgment.

The last activity we explore is the role of accountants in helping control and motivate employees'
performance. One major accounting technique used to evaluate and subsequently reward performance is
the ubiquitous ROI. To artificially boost ROI a manager could defer discretionary expenditures such as
R&D, maintenance, advertising, and employee development. In addition, the manager could raise ROI by
keeping the asset base low as a result of not investing in new and perhaps needed long-term operating
assets.

These actions constitute an ethical problem for accountants because an accounting tool is being distorted
to promote a favorable evaluation of a manager. Two of the principles of the AICPA's Code of Conduct,
"The Public Interest" and "Due Care," are particularly relevant here. The CPA in industry should strive to
develop multiple criteria that could more effectively evaluate and control the performance of the
company's managers. Therefore, the objective of acting ethically, which translates (in this case) into
improving one's competence and acting in the general public's best interests, will also result in the greater
long-term profitability of the employer.

Conclusion

By its very nature, any discussion of ethics is subjective. There are no easy answers to ethical questions
and situations that confront the professional. This does not mean this topic can be ignored. Ethical
questions have to be answered and the situations have to be addressed. It is critical that accountants
take an active role in helping the company begin the process of consciousness raising and establishing
an appropriate corporate value system. This will offer all employees, including the accountants, an
institutional ethic within which these dilemmas can be resolved. Regardless of whether there are clear
answers, there should be a clear process.

The issue of ethical decision making in business should only increase in importance in the near future. In
our litigious society, companies which do not institutionalize ethics into their corporate culture could find
themselves expending financial resources in the courtroom rather than on revenue-generating assets.
Moreover, CPAs in industry now can turn toward the AICPA's Code of Professional Conduct to resist
pressures they might confront to engage in actions which run counter to their ethical sensibilities.
Accountants should strive to develop measures that will capture a company's long-term successes and
failures and thus help create an atmosphere that will minimize the need for "creative accounting" to
produce mere paper profits. To prevent future government regulation, the accounting profession must
ensure that the behavior of its members is impeccable. As this article has attempted to demonstrate, this
desired ethical behavior can be fostered by both enforcing strict adherence to the Code of Professional
Conduct and by promoting and raising the ethical consciousness of the profession's members.

http://archives.cpajournal.com/old/08416230.htm

a. Importance of being socially responsible and ethical

Ethics also known as moral is determined by the class of philosophy to addresses about morality i.e.
concepts such as good vs. bad, right vs. wrong and matters of justice, love, peace and virtue. The
term is used to indicate how individuals or organization choose to conduct themselves in relation to
universal moral behavior and actions. Ethics involve choosing actions that are right and proper and
just. The individual behaviour can be right or wrong, proper or improper and the managerial or
individual decisions can be fair or unfair.
Ethics are vital in businesses and all aspects of living. The foundation of society is built on Ethics.
Without ethical principles a business/society is bound to be unsuccessful sooner or later. Business

Page 28 of 52
Ethics look at ethical philosophy , moral or ethical problems and deal with issues concerning the
moral and ethical rights, duties and corporate authority between a corporation and its shareholders,
workers, clients, media, government, provider and dealer. Ethics are connected to all discipline of
organization including accounting information, human resource management, sales and marketing,
fabrication, logical belongings information and talent, global business and financial system.
Social responsibility can be defined as the responsibility of the organisation to operate in ways that
provides both its individual benefit like making a profit and also the benefit of its stakeholders- those
people and groups who are affected in one way or another by the behaviour of the organisation. For
example, an industrial chemical plant has a responsibility not only towards its customers, but also
towards the shareholders and the board of directors, and to those people who live in the surrounding
area. This responsibility can be "negative", meaning there is exemption from blame or liability, or it
can be "positive," meaning there is a responsibility to act beneficently. Let's take an another
Example, in corporate company a chief executive make expenditures on reducing pollution beyond
the amount that is in the best interests of the corporation or that is required by law in order to
contribute to the social objective of improving the environment. There are lot many benefits to any
organisation of being social responsible. First and foremost benefit to organization is that to ensure
the customers, suppliers and the local community knows what you are doing. Publicity like this can
be a key part of using CSR to win contracts. People want to buy from businesses they respect.
Through this way your business reputation will be growing day by day and it encourage customers to
stay with you and do business with your company.

Compare and contrast the difference between "ethics"

from a personal perspective to one established viewpoint
of ethics from an organisational perspective.
Personal perspective view of ethics
People's lives are built on moral foundation of personal ethics. They support in conclusion making,
guides people to contribute measures that helps to meet their inner moral principles. Ethics are used
by people in solving problems in everyday life and also help for determining correct versus incorrect.
Ethics are not absolute rules but they are developed during life based on range of factors. Defining
personal ethics are a difficult venture for many people as they think their "inner voice" is all the
ethical guidance they require. Perception plays a great role in what one finds ethical. By organisation
view, ethics plays a vital role that defines the way of representation, way of talking, body language,
attitude etc. The lack of personal ethics gives a negative response in managerial processes. For
example, if a company is launching the product with risk taking, then the manager should be fully
ensured with correct way of personal ethics, as the product may be failed to attract customer if
marketing manager lacks in personal ethics. So, it is clear that personal ethics makes a man to take
a right managerial decision.
A standard way of understanding ethical decision-making is to understand the philosophical basis for
making these decisions. People and organizations need each other.The written and unwritten codes
of principles and morals that administer decisions and actions inside a business are known as
Business Ethics. In the Corporate world, the organization's traditions sets principles for determining
the differentiation involving excellent and dreadful judgment making and manners.

Discuss four benefits and four disadvantages of social

responsibility to an organisation.

Benefits of social responsibility

Page 29 of 52
Providing good value for money
If the management and workers of the organization are well social responsible for internal and
external environment of the organization then it would result in best productivity and obviously the
good image of the organization. The biggest power of the any organization among all resources is
the human resource that's why if human resource is so well behaved with good ethical ways the
value of any organization will be good enough.

Broadening the futuristic concept of business

If the organization is giving best output to the public demand satisfying their needs with latest trends
and technology, it means that the business of the organization is good and as public response is
excellent the organization would have better future aspects. This all happen due to the organizations
social responsibility towards their employees and environment factors. Also workers stay longer if
the business has high-quality status.
For example, MC Donald's is giving best variety of food in hygienically manner, where all the
perception of individual match such as price, food quality, taste etc. Their business is so good that
we can find its outlet anywhere in the world. MC Donald's is popular because they are socially
responsible to the environment and for their work.
·.Good relationships with local authorities help doing business easier.

Disadvantages of social responsibility towards

organisation
Everything has some prons and crons, similar to social responsibility where so many people argued
on the benefits and disadvantages of social responsibility. First the most important is that the
organization is running for profit maximization mostly, the social responsibility shows the
fundamental misconception of the character and nature of a free economy. Business functions are
moreover economic rather than social if come to the practical way and it is judged by economic
criteria alone. This point of view comes to the employees mind most of the time leading to not to
concentrate much in their work which automatically results in bad productivity.
The role of corporation is to make a profit and maximize social welfare through the efficiency of the
employees. In some cases where employees are not much social responsible for the organization
than it would be very difficult for the managers or corporation to do the best out of the work and lead
the group, resulting in bad image of the organization and bad internal environment
There is the concern for the efficient use of national resources, because of social costs; profitability
is not necessarily the best measure of effectiveness which affects the organization goal.
Lack of interest of the employees towards social responsible in their business also not good for the
organization
Competency sometimes makes the stake holders to go beyond the limit forgetting their social
responsibility that harm the nature and organization too. Being socially responsible costs
organisations money, and sometimes the bill is huge. Therefore the organization think to do for profit
maximizing rather than be social responsible.

Discuss social responsibility barriers that inhibit an

organisation

Page 30 of 52
Barriers that inhabit an organization
Social responsibility has certain costs. It's not the natural thing to be responsible. Greed and
selfishness work against social responsibility. When greed and selfishness become higher values,
social responsibility goes out the window. One of the problems with our culture is that we worship
wealth. People who have a lot of money are heroes to us and we strive to emulate them. We see
wealth and power as an indicator of merit and virtue. But people who are rich and want to be richer,
and corporate and industrial leaders whose jobs are to put the prosperity of their companies at the
top of their priorities, often trivialize social responsibility, and this sets the tone for the whole culture.
In social responsibility every individual in the organisation is not social responsible towards the work,
it depends upon the people behaviour and motivation level within the organisation. Today every
people think about wealth rather than social responsibility that they possess towards the
organisation. This is the barrier in the organisation.
For e.g.:- in an organisation if certain facility is lacking for the staff then staff will suffer and this
management must be think which in reality they don't. This lacking of facility may affect the work out
going on within the organisation.
Flow of information in the organisation should be well enough to avoid any conflicts between the
staff but it arises due to the problems that every employee are not social responsible. A vendor to
the company first think towards the money he/she will get from doing particular kind of work.

https://www.ukessays.com/essays/business/discuss-the-importance-of-ethics-and-social-
responsibility.php

The importance of social responsibility and ethics is largely subjective. Economist Milton Friedman
wrote, in an article for the New York Times Magazine, that the sole purpose behind social
responsibility in business is to increase profits. Where there is no potential for profit, philanthropy is
comparable to theft from the stakeholders in the corporation. Whole Foods' John Mackey and
Cypress Semiconductor's T.J. Rodgers hold different opinions, but both share similar perspectives to
Friedman's.

The Benefits of Social Responsibility in Business

Social responsibility is not a requisite in the business world. In fact, many argue that it borders on
Marxism or Socialism. An organization like Whole Foods that places social responsibility in their
mission statement argues that being socially responsible is beneficial to everyone: shareholders,
customers and the community. Their philanthropic efforts are a very effective marketing tool,
however. They provide the company with positive exposure, and the nonprofit organizations chosen
to receive their donations are targeted based on membership lists that would potentially bring in a
large number of customers while supporting their worthwhile causes.

Ethics and Social Responsibility

The principal concept of ethics is to focus on the well-being of others; essentially, any action taken
by the corporation should cause no harm. For instance, dumping toxic waste in a body of water that
would then have a detrimental effect on those who swim in or drink the water is considered
unethical. Social responsibility is different from ethics because the company is actively seeking to
positively contribute to the community. Philanthropic efforts that are detrimental to the profitability of
the company are not a prudent option.

Page 31 of 52
 The Importance of Ethics in Business

Although ethical behavior in business is not always as action-driven as being socially responsible, it
is just as important for many reasons. Ethical reasoning is the exercise of intellectual abilities to
choose the best course of action that would best serve everyone's interests. Employees who are
treated ethically are more motivated to provide higher quality work, and customers who are treated
ethically will generally continue to provide the company with their patronage and shareholders will
benefit from this with the company's increased profitability.

Benefits of Running a Socially Responsible, Ethical Business

Altruism has nothing to do with running a company in a socially responsible, ethical manner.
Essentially, social responsibility and ethics serve to increase profitability for the shareholders of the
company by publicizing their philanthropic efforts, increasing productivity through the ethical
treatment of employees, and increasing patronage by treating customers in an ethical manner.

https://bizfluent.com/info-8310319-importance-social-responsibility-ethics.html

b. Professionalism in Accounting

Characteristics of a Professional Accountant

The role of a professional accountant is a vital one, assisting clients with financial matters that
are often highly confidential. Accountants perform a number of tasks within this role, including
book keeping, VAT, PAYE, Provisional Tax, financial statements, business plans and many
other services. While accounting skills and education are the foundation of any accounting
professional, there are a number of additional characteristics that are required of a professional
accountant.

These include the following traits:

 Skills, knowledge and expertise

The most critical traits of any accounting professional is a solid education that provides a broad
range of skills, knowledge and expertise within the various aspects of accounting services.
Training ensures that accountants are fully versed across all accounting skills, so that they are
able to perform tasks that are required of them. Without adequate education and training,
accountants are not able to provide a high level of service excellence to clients, and also run the
very serious risk of making mistakes or other lapses of judgment caused by a lack of
understanding.

 Commitment to strong values

A number of values need to be held by a professional accountant, including integrity,

accountability, reliability, ethics, moral reasoning, honesty, trustworthiness and confidentiality.

Page 32 of 52
 These values play an important role, and help to ensure that accountants follow a strong set of
internal rules that govern the way that they do business on a daily basis.

 Belongs to a recognised accountancy body

Accountants should also belong to a recognised accountancy body that ensures that they are
subject to the disciplinary powers of that body. Some of the bodies within South Africa include
Southern African Accounting Association, Independent Regulatory Board for Auditors, The
Association of Chartered Certified Accountants; Chartered Institute of Management
Accountants, Institute of Certified Bookkeepers, Chartered Secretaries of South Africa, The
South African Institute of Professional Accountants, Institute of Commercial and Financial
Accountants of SA and South African Institute of Tax Practitioners.

 Upholds professional standards

The accountant must also uphold professional standards and approaches within the disciplines of
recording, analysing, measuring, reporting, forecasting and offering advice and support in
financial, management and strategic decisions, thereby adding value for their clients and
stakeholders. Professional conduct plays an essential part of the accountant’s role, and is closely
linked to the commitment of values.

 Commitment to on-going professional development

The final important trait of an accounting professional is the commitment to consistent

professional development. Whether this is continuing to broaden their skills, obtain further
qualifications within the industry, or any other professional achievements, it is crucial that the
professional accountant is committed to improving their skills on a continuous basis.

http://www.patc.co.za/characteristics-of-a-professional-accountant/

The accounting profession is subjected to strict guidelines for professionalism and ethics, often
regulated by federal law. Since accountants deal with the lifeblood of companies and organizations –
their finances – accountants owe a fiduciary duty to act professionally and in the best interests of their
employers or clients. Understanding the basics of professionalism in accounting is vital part of
accounting education.
Accounting Standards

Accounting practices are standardized in a number of ways, including the way in which financial
statements are presented and the ways in which revenue and expenses are recognized. Professionalism
in accounting involves adhering to national and international accounting standards, such as Generally
Accepted Accounting Principles, or GAAP, in the United States and standards set by the International

Page 33 of 52
Accounting Standards Board, or IASB. Sticking to accounting standards creates reliable reports and
financial accounts that can quickly be read and understood by auditors, investors or other accountants.

Due Diligence

Due diligence is the act of thoroughly investigating a specific situation to discover all possible impacts
and variables which might come into play. In accounting, due diligence comes into play heavily in
financial audits; certified public accountants performing financial audits have a responsibility to dig as
deep as possible into the accounting records they are auditing, rather than quickly glossing over the
numbers to arrive at a predetermined outcome. Due diligence also comes into play in tax accounting.
Professionalism in accounting involves performing thorough research to minimize employers' and
clients' tax liabilities without defrauding taxing authorities in any way.

Accounting Ethics

Ethical business practices are an inseparable component of professionalism in accounting. Working with
money and financial reporting creates numerous opportunities for unethical behaviors, including theft
and fraud. Although government agencies continually work to identify and address areas of ethical
concern in accounting, all accountants have a responsibility to act ethically regardless of what dubious
behaviors the law may allow. Ethics in accounting includes full disclosure in financial reporting,
presenting the plain facts of financial data rather than manipulating the numbers to reveal more
desirable outlooks than reality.

Continuing Education

The accounting profession is in a continual state of evolution as new laws, technological advancements
and the advancement of globalization in the world of finance continue to change the rules of the game.
To be a consummate professional in the field of accounting, you must keep abreast of new developments
in the industry to be able to offer top quality, fully informed services to clients and employers.
Continuing education includes things like reading industry news publications, attending industry
seminars and reading new books about accounting and finance topics.

http://smallbusiness.chron.com/professionalism-accounting-10103.html

c. Cost of unprofessionalism in the practice of

Accountancy

Page 34 of 52
Professionalism means having the right kind of attitude and is much discussed in
context with the workplace. So at the onset of the article, let us discuss this broad and
important term - professionalism. What does it actually mean when we hear someone
say 'he or she is a thorough professional'. Professionalism encompasses everything
from the right kind of attitude to being perfect in secondary things like dressing style,
grooming and behavior.

Every organization looks for employees with a proper attitude because they bring in with
them a positive spirit and also are an asset to the organization. On the other hand,
unprofessional employees are more or less a kind of burden on the organization.
Unprofessionalism affects the progress of both, the individual and the organization. The
various effects of it are put together in the coming paragraphs.

The Effects of Unprofessionalism

Unprofessionalism revealingly affects the work of the individual. Consider the example
of an employee who wastes time chit chatting with other workers and creates a
nuisance at the work place. This is a supreme example of unprofessional attitude that is
attributed to many employees of a unit. It affects the work of all the workers as it
disturbs the peace at work. Not following the expected company timings and guidelines
is also a sign of lack of professionalism. Relating to work it can be anything like not
being sincere and committed towards work and the duties assigned. More of
unprofessional signs have been discussed at the end of the article.

In a gist, any organization will not tolerate this attitude in its employees for long and it
will increase the chances of the employee getting fired from work. Being unprofessional
also hampers the mindset of the individuals. Consistently being pulled up for bad
behavior is not good for the confidence of the individual. This behavior thus serves in
the least interest of the growth of the employee and so employees should try to cultivate
discipline and organization in their work life.

It was mentioned in the earlier paragraph that employees who lack organization skills
and the right attitude are a burden to the organization. If a majority of the employees are
not behaving in the desired way, it does harm to the progress and image of their
company. Unprofessional employees contribute less and this indirectly does harm to the
profit earning capacity of the company. There will be goodwill about the organization if
all the employees in it are disciplined and equally contributing. Thus you see, this
behavior is of no use to the organization as well as to the individual.

Signs of Unprofessionalism

Professionalism is something we learn as we move forward in our career. Most

obviously freshmen find it difficult to develop the right attitude. We have discussed
below some of the common signs that are associated with unprofessional behavior.

Page 35 of 52
 Employees not following discipline during the working hours is one of the common signs
of unprofessionalism. This includes spending hours talking on a cell phone or near the
water cooler with colleagues, and gossiping about others in the workplace.
 Not working hard to achieve the set targets is also an example of unprofessional
conduct. This often is an outcome of the first sign.
 Disturbing other workers, indulging in backbiting about others, doing harm to the work of
others, and unnecessarily troubling someone in the office also accounts for lack of a
professional attitude.
 Rude behavior with clients or coworkers, losing one's temper easily and unwillingness to
work in a team also are indicators of lack of professionalism at the workplace.
 Discussing too much about the personal life with colleagues during the working hours is
also not expected from the employees. This can also account for spreading negativity in
the work environment.

No organization would want to cater to unprofessional employees. It is the responsibility

of the employee to understand and do justice to the work expected from him. A
professional employee is valued by any organization and is well rewarded for his work.

https://workspirited.com/effects-of-unprofessionalism

Unprofessionalism in the Workplace

Your workplace is an environment that needs to be molded and maintained by company policies and
employee professionalism. A positive work environment based on professional staff attitudes can help
encourage strong teamwork, be a catalyst to improve productivity and inspire employee retention.
When you learn how to identify the signs of unprofessionalism in the workplace, you can address it with
corporate policies.
Dress and Grooming

Many companies establish guidelines for employee dress and grooming in the employee handbook.
These guidelines are tailored to specific job duties and reflect the image the company wants to portray
as well as important safety measures for employees. For example, sales professionals are asked to wear
formal business attire because of their contact with clients, and manufacturing employees must have
short hair or wear a hair net to prevent getting caught in the machines. When an employee decides to
ignore the dress and grooming policies, that is not only unprofessional to the rest of the staff, it also
presents an unprofessional attitude to clients.

Employee Interaction

Your employees have deadlines, production goals and career development plans they are trying to
achieve. The unprofessional employee consistently disturbs other employees by wandering from desk to

Page 36 of 52
desk looking for someone to talk to, is disruptive in training sessions and tries to talk other employees
into taking extended lunches and breaks. It is unprofessional because this kind of behavior interferes
with the professional development of other staff members and affects company productivity.

Insubordination

Insubordination from an employee is not only unprofessional, it also threatens to disrupt the
productivity of an entire group. There is a difference between an employee that discretely disagrees
with his manager, and an employee that outwardly disrespects management. An employee that takes
disputes with his manager directly to the manager, or to human resources, is taking a professional
approach to the issue. An unprofessional employee disrupts staff meetings when the manager is talking,
refuses to do tasks assigned by the manager, openly argues with the manager over various issues, and
abuses breaks and lunches by leaving early and returning late. Insubordination needs to be addressed
immediately before the manager is seen as unable to control the situation and other employees decide
to engage in unprofessional behavior as well.

Harassment

Harassment and intimidation in the workplace represent unprofessional and potentially dangerous
behavior. Your company needs to have comprehensive policies in place that cover all forms of
harassment, including sexual harassment, bullying and abuse. Employees that bring claims of
harassment to the attention of management should be given immediate assistance and the situation
should be resolved as quickly as possible.

http://smallbusiness.chron.com/unprofessionalism-workplace-11908.html

d. Ways to Promote Professional Development in the

Workplace

Ways to Promote Professional Development in the

Workplace
Professional development plays a key role in the workplace. Employees who engage in
developing their professional skills provide more value to the company. These
employees bring a greater depth of knowledge to the company. They use this
knowledge to improve processes, serve customers and grow within the company.

Page 37 of 52
Companies use various methods to promote professional development among their
employees.

Mentoring
One way to promote professional development in the workplace involves matching
experienced employees with new employees through a mentoring program. Mentors
encourage their mentees to develop their skills by taking advantage of educational
reimbursement offered by the company by participating in internal training sessions and
by learning more about other departments within the organization. Mentors share their
own experiences and how they’ve grown from those experiences. Mentors can even
attend workplace development sessions with their mentees and hold followup
discussions with the mentees.

Brown-Bag Sessions
Another method companies use to promote professional development include
sponsoring brown-bag sessions. Brown-bag sessions refer to learning sessions that
occur during lunch hour. Companies often host these sessions and include a variety of
topics, including a mix of personal development and professional development topics.
Sample topics include identity theft, computer training, diversity or goal setting.
Companies usually encourage employees to bring their lunches and eat during their
sessions. Certain companies provide refreshments as an additional enticement for
employees.

Learning Management Systems

Learning management sessions provide convenience and flexibility to encourage
professional development among employees. A learning management system provides
online access for employees to participate in learning new skills. Companies often
subscribe to a set of general courses offered through an educational services company.
In addition, companies create their own courses to train employees on company-
specific topics. Employees access courses from home or in the office at any time.

Recognition
Employees enjoy recognition. Recognizing employees who achieve various levels of
professional development provides an incentive for employees to create professional
development goals and to work toward those goals. These goals include earning higher
education degrees, completing internal training programs or passing a national
certification exam. Employers can provide recognition by awarding these employees a
plaque, by including an announcement in the company newsletter or by acknowledging
the accomplishment through a companywide email.

https://bizfluent.com/info-8553176-ways-promote-professional-development-workplace.html

Page 38 of 52
Ways to Promote Professional Development in the Workplace

Although many managers talk a good game about promoting professional

development in the workplace, not all actually implement the strategies that will
result in increased productivity, improved morale and greater job satisfaction.
The good news is that creating an environment that fosters these goals not only
makes work a happier place to spend time, it also reduces bottom-line costs
while increasing employee loyalty – as long as you walk your talk.

Informal Training
The best way to foster professional development often is right at your own desk.
Professionals from a wide variety of industries, including the Institute of Food
Science and Technology, report that on-the-job training is frequently the most
valuable kind of professional development. Shadowing higher-ups, engaging in
360-degree peer reviews and earning more responsibility by performing
assigned tasks with a high degree of skill all earn greater rewards through
increased trust. As the highly competent already know, increased trust earns
increased responsibilities. And increased responsibilities often result in higher
pay.

Formal Training
Some organizations take on-the-job training to the next level by developing in-
house mentorship programs. These programs formalize the shadow approach to
learning by providing ample one-on-one training sessions between senior staff
and promising younger employees. Asking a trusted adviser the questions you're
most embarrassed to bring up in the staff meeting, or getting the opportunity to
mingle with clients or other top management in a professional but relaxed
environment, often provides a beyond-the-desk perspective that is difficult to
gain while holed up in a solitary cubicle.

Job Rotation
And speaking of getting a beyond-the-desk perspective, when was the last time
you spent a week sorting corporate mail, scheduling client meetings or managing
tech support? If the answer is never, then a job rotation plan might be the sort of
Page 39 of 52
teamwork-building exercise your organization needs. Getting a taste of the
problems and successes other groups face every day enhances communication
through improved understanding. And when team members learn empathy, they
can better support their colleagues.

Beyond the Office

A quality professional development program encourages employees to continue
their learning beyond the confines of the office. Networking at industry trade
group conferences and with like-minded professionals at other organizations,
joining a formal coaching or mentoring program outside of work, earning an
advanced degree or writing articles or a paper enhance the reputations of the
employee as well as the organization. If you're stuck in an organization that
doesn't provide formalized professional development programs, you can always
pursue these opportunities on your own – which might make you the most
valuable employee of all.

https://woman.thenest.com/ways-promote-professional-development-workplace-7357.html

Attracting and keeping engaged and loyal employees is crucial to the success of a business. High staff
turnover disrupts production and impacts the profitability of a company. A great way to retain staff and
nurture employee skills is to consistently and actively promote professional development activities.
Encouraging professional growth shows your team you care about their progress and their future, and it
inspires loyalty in employees.

Support and Model Behavior

Supervisors and workplace leaders serve as role models to employees in a workplace. Take an active
role in your own professional development activities and let staff know you value these opportunities to
further your career. Show interest in the progress of each employee participating in online courses or
special projects, and share their successes at staff or sales meetings. Encourage employee enrollment in
professional associations or organizations by your own participation.

Cross-Training Work Assignments

Page 40 of 52
On-the-job training is a traditional and effective method of encouraging professional development at
work. Once an employee masters the tasks required in her role, offer opportunities to learn skills of
complementary positions. Cross-training engages employees and shows them you value their work
enough to give them other opportunities. Developing employees to perform a variety of roles also makes
good business sense, because it helps avoid hiring temporary staff to cover absences due to vacation or
sick days.

Access to Resources

Offer professional development opportunities to your staff with a variety of resources. Build a DVD or
online video library of training material and tutorials. Arrange on-site workshops or seminars. Host
lunch-and-learns with guest speakers on current issues and new developments in your field. Coordinate
and take part in informal or formal mentoring and peer-coaching relationships between staff members.
Assist interested employees in accessing other resource material to further their professional and career
development.

Coaching and Development

Create a customized development plan with each employee to support professional development during
performance planning. Ask each member of your team to identify at least one skill or area they would
like to work on. Staff members and supervisors can work together to identify suitable opportunities and
a timeline for completion. Schedule regular coaching or mentoring sessions to discuss progress and
allow the employee to ask questions.

http://smallbusiness.chron.com/ways-promote-professional-development-workplace-45524.html

Page 41 of 52
 3. Social Responsibility and Ethical Audit For CPA

a. Importance of Being Socially Responsible and Ethical

a. Importance of being socially responsible and ethical

The importance of social responsibility and ethics is largely subjective. Economist Milton Friedman
wrote, in an article for the New York Times Magazine, that the sole purpose behind social
responsibility in business is to increase profits. Where there is no potential for profit, philanthropy is
comparable to theft from the stakeholders in the corporation. Whole Foods' John Mackey and
Cypress Semiconductor's T.J. Rodgers hold different opinions, but both share similar perspectives to
Friedman's.

The Benefits of Social Responsibility in Business

Social responsibility is not a requisite in the business world. In fact, many argue that it borders on
Marxism or Socialism. An organization like Whole Foods that places social responsibility in their
mission statement argues that being socially responsible is beneficial to everyone: shareholders,
customers and the community. Their philanthropic efforts are a very effective marketing tool,
however. They provide the company with positive exposure, and the nonprofit organizations chosen
to receive their donations are targeted based on membership lists that would potentially bring in a
large number of customers while supporting their worthwhile causes.

Ethics and Social Responsibility

The principal concept of ethics is to focus on the well-being of others; essentially, any action taken
by the corporation should cause no harm. For instance, dumping toxic waste in a body of water that
would then have a detrimental effect on those who swim in or drink the water is considered
unethical. Social responsibility is different from ethics because the company is actively seeking to
positively contribute to the community. Philanthropic efforts that are detrimental to the profitability of
the company are not a prudent option.

The Importance of Ethics in Business

Although ethical behavior in business is not always as action-driven as being socially responsible, it
is just as important for many reasons. Ethical reasoning is the exercise of intellectual abilities to
choose the best course of action that would best serve everyone's interests. Employees who are
treated ethically are more motivated to provide higher quality work, and customers who are treated
ethically will generally continue to provide the company with their patronage and shareholders will
benefit from this with the company's increased profitability.

Benefits of Running a Socially Responsible, Ethical Business

Altruism has nothing to do with running a company in a socially responsible, ethical manner.
Essentially, social responsibility and ethics serve to increase profitability for the shareholders of the
company by publicizing their philanthropic efforts, increasing productivity through the ethical
treatment of employees, and increasing patronage by treating customers in an ethical manner.

https://bizfluent.com/info-8310319-importance-social-responsibility-ethics.html

Page 42 of 52
 b. Ethical responsibility in audit

Ethical Responsibility of the Auditor

The following is an excerpt from The Complete Guide to the CQA (QA
Publishing, LLC) by Steve Baysinger, which is out of print. Complete
coverage of Quality Audit techniques may be found in The Handbook for
Quality Management (2013, McGraw-Hill) by Paul Keller and Thomas Pyzdek

Although all those who perform quality audits may not be members of ASQ, there
are still underlying principles which apply to the ethics of audits. In performing an
audit, the auditor should always strive to be objective in judgment and
pronouncements. Only the facts should enter into the assessment of whether
conformance exists between criteria and established programs. The auditor should
express an opinion on a subject only when it is based on adequate knowledge and
honest conviction. In all cases, the facts should speak for themselves. Opinions,
when given, should be solidly grounded in objective evidence.

The following extract is from the Nuclear Quality Systems Auditor Training
Handbook: (Reprinted with the permission of the American Society for Quality)

The leader of an audit team serves as a supervisor and should always be willing to
recognize good work and offer constructive criticism for improvement in
performance. The lead auditor must demonstrate through actions how the audit
team should act. A leader must demonstrate leadership and set good examples.
The team leader should require the team to comply fully with the rules, regulations
and customs of the organization under audit. This entails compliance with the
working hours, dress, lunch hours and other requirements. Team members should
attempt to blend into the environment in which they are auditing. Any action which
makes the team stand out will reduce its effectiveness in dealing with the audited
organization.

In dealing with any problem between the team and the audited organization, the
team leader must demonstrate fairness to both parties. The leader must deal with
objectivity in obtaining the facts and settle any personality conflicts. If there is
significant doubt remaining as to verification of the facts or the correctness of the
finding, and additional evaluation fails to eliminate the doubt, the item should be
dropped or offered in terms which acknowledge the degree of uncertainty at the
post-audit (exit) conference. This type of action demonstrates the objectivity and
fairness of the audit.

Should personality conflicts occur between members of the audit team, the team
leader has the responsibility to step in immediately and resolve the conflict. The
resolution should take place in private and be resolved to the benefit of the entire
audit team and organization being audited.

Page 43 of 52
It should be the clearly defined policy of any audit team that there be no surprises
involved with the audit at any time. An audit is no place for “cloak and dagger
tactics,” “witch hunting,” or the identification of situations which are sprung at a
critical time. Ethical audits require full disclosure of any finding (or observation)
with responsible members of the audited organization to test its validity prior to
formal exposure at the post-audit (exit) conference or formal audit report.

The team leader must assure that he (or she) and the team members maintain
their integrity. They should not accept gifts or entertainment of a nature or degree
that might possibly prejudice the audit or affect the relationship between the two
organizations (auditee and audit team). If members of the audited organization
offer to take the audit team to lunch, it is the team leader responsibility to clarify
the rules by which the lunch is accepted, such as limiting the time away from the
audited facility.

During the conduct of the audit, auditors often have access to proprietary
information of the audited organization. Auditors have a moral obligation not to
divulge this information to anyone. Divulging proprietary information is a violation
of this moral obligation and is not in the best business or professional interest of
either organization (auditee or audit team). The disclosure betrays a trust and, in
so doing, gains a reputation that is not conducive to building better business
relations for his/her company or for himself (or herself).

Auditors must avoid the temptation, during external (second party) audits, to
discuss other audits with the people they are presently auditing. To do so is akin to
disclosing proprietary information and is in bad taste. Exceptions to this may be
taken during internal (first party) audits if part of the audit objective is to assess
the efficiency of a quality system which is applicable to more than one facility. (For
example, two or more manufacturing plants owned by the same parent company.)

Auditors must avoid making false, unsupported or misleading statements that tend
to injure or discredit the reputation of the audited organization. This requirement is
self-evident and must be adhered to in every respect.

In summary, all auditors must act in an ethical manner which will bring credit upon
themselves, their company and the quality auditing profession.

http://qualityamerica.com/LSS-Knowledge-
Center/qualitymanagement/ethical_responsibility_of_the_auditor.php

The nature of the work carried out by CPAs – including auditing, accounting, and tax services – requires a

high level of ethics: current and potential shareholders, investors, lenders, regulatory agencies, and other

Page 44 of 52
users of an entity’s financial statements rely heavily on those financial statements in order to make

informed decisions about the entity.

From the 1980s to the present there have been numerous accounting scandals that were widely reported

on by the media and resulted in fraud charges, bankruptcy protection requests, and the closure of

companies and accounting firms. The insidious effect of unethical behavior by top management in major

corporations has touched every American in some way, shape, or form. These stories remind us of how

crucial it is that we strive for ethical decision-making and behavior in business overall, and specifically in

the accounting profession.

CPAs in particular have significant ethical responsibilities they must meet in the day-to-day performance

of their jobs. The AICPA, state boards of accountancy, state societies of CPAs, state statutes, and other

regulatory agencies (such as the GAO, DOL, etc.) set forth ethical rules and regulations for their members

or for CPAs who practice before them. As a result, all CPAs (not just members of the AICPA) are subject

to such ethical requirements. The AICPA Code of Professional Conduct establishes the fundamental

principles of professional ethics:

1. Responsibilities: Due to the important role they play in society, CPAs have a significant responsibility
for the services they provide. This means working to cultivate the accounting profession, cooperating
with peers in the industry, and maintaining public confidence in their ability to provide professional
services.
2. The Public Interest: The AICPA defines the accounting profession’s public as consisting of clients,
credit grantors, governments, employers, investors, the business and financial community, and others
who rely on the objectivity and integrity of CPAs to maintain the orderly function of commerce. Every
action taken by the CPA should work towards serving the public interest.
3. Integrity: Many times integrity is tested in the absence of clearly defined rules or expectations. The
integrity of a CPA or any business person is measured by doing what is “right”: it requires a CPA to
observe both the form and the spirit of technical and ethical standards. In an effort to practice stringent
integrity, it’s important for a business person to live by the standard: do what is right, do what you think
is right, do not do what you know is wrong.
4. Objectivity and Independence: Because the accounting profession provides the opportunity for
financial gain stemming from client relationships, maintaining objectivity and independence is crucial.
CPAs must be independent in both fact and appearance when providing auditing and other attestation
services. This is achieved by applying the principles of integrity, responsibilities, and serving the public
interest. But beyond this, accounting firms ensure the objectivity and independence of CPAs within their
firms by requiring employees to review client lists for potential conflicts of interest and sign
independence agreements, establishing quality control policies and procedures to deal with potential
conflicts of interest and independence issues, and through a continual assessment of client relationships
and public responsibility.
5. Due Care: CPAs are expected and obligated to practice accounting and provide professional services to
the best of their abilities. This is achieved through continuing education, seeking consultation when
needed, ensuring adequate planning and supervision, performing annual performance evaluations, and
cultivating experience with inter-firm mentoring relationships.

Page 45 of 52
Following the guidance of the law and the AICPA Code of Professional Conduct helps pave the path for

ethical behavior not only in the accounting profession, but throughout the business world. One of the most

effective ways we’ll see ethics permeate the business world is through respected leadership, of which we

can strive to achieve by setting an ethical tone starting at the top.

https://www.delapcpa.com/uncategorized/what-are-the-ethical-
responsibilities-of-the-cpa.htm

c. Ethical issue in financial accounting

Ethical Issues of Financial Reporting

Financial reporting is a straightforward task that comes with a variety of tricky ethical
issues. Breaches in ethics can result in major scandals for companies and lead to loss
of investor and consumer confidence. Understanding some of the more common ethical
issues that can arise in financial reporting can help those in the field avoid potential
landmines that could bring not only their employers, but also their careers, to their
knees.

Cooking the Books

Financial reporters may be asked to “cook the books” when poor documentation has
been kept of expenditures and asset value. This practice involves making up figures
that may or may not be good estimates of actual numbers. While pressure to do this
may come from the very top of a company, the practice is not only unethical, but also
outright fraudulent. Cooking the books also includes manipulation of accounting records
in preparing financial statements, as well as the intentional omission of important asset
of liability information from financial reports. A company might overstate how much it
made in profits to attract investors, for instance, or understate its liabilities to avoid
creating investor panic.

Cute Accounting
This term describes the practice of stretching or bending standards set by the
accountancy profession to the limit. An example of this might include structuring lease
agreements so that any leased assets, along with any liabilities that come with those
leases, can be kept off their books. Some financial experts argue that this is unethical,
because companies that do this are essentially misrepresenting their assets and
liabilities. In “Ethical Issues in Financial Reporting: Is Intentional Structuring of Lease

Page 46 of 52
Contracts to Avoid Capitalization Unethical?” author Thomas J. Frecka states that this
was one factor that led to the Enron scandal. While less egregious than cooking the
books, this practice demonstrates a lack of respect for the principles the accounting
profession abides by.

Conflicts of Interest
A conflict of interest can result when an employee receives an inappropriate personal
benefit as the result of any actions performed in his official role as a financial reporter.
As an example, consider a financial reporter who overstates a company’s income as a
way to ensure a larger bonus for himself. This is a direct conflict of interest because the
financial reporter is reaping a gain from his unethical activities. It also flies in the face of
the accounting profession’s code of ethics, which requires absolute objectivity.

Breach of Confidentiality
Insider trading is an easy example of breach of confidentiality in financial reporting. A
breach of confidentiality refers to any disclosure of confidential or proprietary
information that an employee acquires as the result of her employment as a financial
reporter. When that information is used for personal gain or for the gain of some third
party, the financial reporter has broken her implicit oath of confidentiality to her
employer.

https://bizfluent.com/info-8417975-ethical-issues-financial-reporting.html

Ethics in accounting are concerned with how to make good and moral choices in regard to the
preparation, presentation and disclosure of financial information. During the 1990s and 2000s, a series
of financial reporting scandals brought this issue into the forefront. Knowing some of the issues
presented in accounting ethics can help you ensure that you are considering some of the implications for
the actions that you take with your own business.
Fraudulent Financial Reporting

Most accounting scandals over the last two decades have centered on fraudulent financial reporting.
Fraudulent financial reporting is the misstatement of the financial statements by company management.
Usually, this is carried out with the intent of misleading investors and maintaining the company's share
price. While the effects of misleading financial reporting may boost the company's stock price in the
short-term, there are almost always ill effects in the long run. This short-term focus on company
finances is sometimes known as "myopic management."

Misappropriation of Assets

Page 47 of 52
On an individual employee level, the most common ethical issue in accounting is the misappropriation of
assets. Misappropriation of assets is the use of company assets for any other purpose than company
interests. Otherwise known as stealing or embezzlement, misappropriation of assets can occur at nearly
any level of the company and to nearly any degree. For example, a senior level executive may charge a
family dinner to the company as a business expense. At the same time, a line-level production employee
may take home office supplies for personal use. In both cases, misappropriation of assets has occurred.

Disclosure

As a subtopic of fraudulent financial reporting, disclosure violations are errors of ethical omission. While
intentionally recording transactions in a manner that is not in accordance with generally accepted
accounting principles is considered fraudulent financial reporting, the failure to disclose information to
investors that could change their decisions about investing in the company could be considered
fraudulent financial reporting, as well. Company executives must walk a fine line; it is important for
management to protect the company's proprietary information. However, if this information relates to a
significant event, it may not be ethical to keep this information from the investors.

Penalties

Penalties for violations of accounting ethics laws have increased greatly since the passage of the
Sarbanes-Oxley Act of 2002. This legislation allows for harsh penalties for manipulating financial
records, destroying information, interfering with an investigation and provides legal protection for
whistle-blowers. In addition, chief executives can be held criminally liable for the misreporting of their
company. If accounting ethics wasn't an important consideration before, the higher stakes provided by
the Sarbanes-Oxley Act have definitely upped the ante.

http://smallbusiness.chron.com/ethical-issue-financial-accounting-57889.html

Accountants handle a wide range of privileged and sensitive data in

their daily tasks. And because they work with numbers that can have
repercussions on bonuses and stock prices, they may face ethical
issues in accounting more often than, say, actuaries or budget analysts.

The ethical dilemmas that accountants sometimes face include conflicts of

interest, payroll confidentiality, illegal or fraudulent activities, pressure from
management to inflate earnings, and clients who request manipulation of
financial statements.

Page 48 of 52
When confronted with such dilemmas, an accountant needs to have the
wherewithal to make difficult yet principled decisions. If you find you’re
struggling with ethics issues in accounting or question the ethical implications
of something in your job, here are four steps you can take:

1. Identify potential legal issues

Explore whether the issue is regulated by law or policy. The source for
information could be your employer, your professional association, a
governmental regulatory body such as the U.S. Securities and Exchange
Commission — or all of the above. The American Institute for Certified Public
Accountants (AICPA) has a Code of Professional Conduct, and Financial
Executives International has a Code of Ethics. Both are excellent resources if
you’re uncertain about the ethics of a situation you’re confronting.

Also, a new standard by the International Ethics Standards Board for

Accountants is expected to take effect by the end of the year. It redefines the
roles of auditors, CFOs and other accounting professionals when they witness
or suspect illegal acts at their organizations or within a client’s organization.

2. Take an outsider’s view

Think about, as a student, what you learned about ethics in your accounting
studies. Or consider how you would feel if you were an outsider who read
about the issue online or heard about it from a friend or family member.
Sometimes, separating the issue from your personal and professional feelings
can help you see it in a different light.

3. Identify the parties affected

Think about the people, companies or stakeholders who could be affected by

the issue — or by your decision to take or not take action. Remember that the
failure to do something, such as not reporting fraud, can have just as much of
an effect as if you yourself were the perpetrator.

4. Get professional advice

If you need to report the unethical or illegal behavior of your accounting

colleague or employer, seek legal counsel — either in-house or from an
independent firm — or access your company’s whistleblowing resources.

While a person’s professional ethics are certainly important, organizations

should also have their own code of ethics and make sure all employees are
familiar with it. Not only are more organizations providing ethics training to
their employees, but they're also collecting and reporting ethical information.

Page 49 of 52
If your employer does not have a code of ethics and standards, you and your
team should advocate for one. An effective protocol will not provide a solution
for every scenario, but it will act as a guide for the decision-making process.
When creating a code of ethics from scratch, include guidelines on acceptable
behavior, examples of ethical dilemmas and solutions, implementation and
cost details, and the consequences for misconduct.

It can be tempting to lie low and not make waves when confronted with ethical
issues in accounting. However, you owe it to your career, your profession and
to society to act on violations you may discover instead of being complicit in
fraudulent activities.

https://www.roberthalf.com/blog/salaries-and-skills/ethical-issues-in-
accounting-4-pieces-of-advice

d. Social Responsibility in Accounting & Reporting

Money is a great motivator of human behavior, which is why financial reports must contain truthful and
unbiased information. Accountants must prepare unbiased, truthful and accurate financial reports for
use by people in various sectors of society to form decisions that will guide their actions or behavior.
Upholding principles, standards and laws of accounting is a primary responsibility of an accountant to
companies, stockholders, creditors and the general public.
Creditors

Banks and other lending institutions rely on financial statements such as balance sheets and income
statements to determine the financial position and health of companies that apply for loans.
Truthfulness and accuracy in preparing and interpreting such reports are vital to the proper assessment
of risks. If financial reports submitted to creditors make it appear that loan applicants are less of a credit
risk than they actually are, banks and other lending institutions can experience an increase in defaulted
loans -- a situation that can cause such institutions to collapse or increase interest rates charged to
loans.

Investors

People who invest money in companies are led to do so by the belief that such companies are profitable
and in good financial health. Investors provide the much needed capital to increase business activities
that lead to economic prosperity. If financial reports are manipulated to make companies appear
superficially attractive to investors, many investors may suffer losses and lose trust in the investments
market.

Page 50 of 52
Companies

Businesses rely heavily on financial reports to assess their health. Such reports provide companies with
maps that they use to plot their financial course. Companies employ people, and any company that fails
due to financial mismanagement will lay off workers.

General Public

Accounting reports produced by the government are supposed to be a statement of assurance to the
general public that the people's funds are properly accounted for and in good hands. Government
accountants and auditors bear this responsibility and must make sure that all applicable accounting
laws and principles are applied in preparing such reports. Misrepresentations and fraudulent reports
can erode the people's trust and confidence in the governing body. Such situations can lead to civil
disobedience and lack of support for the government.

http://smallbusiness.chron.com/social-responsibility-accounting-reporting-50438.html

What Is Social Responsibility Accounting?

by Madison Garcia; Updated September 26, 2017
Social responsibility accounting - sometimes referred to as sustainability accounting or
corporate social responsibility accounting - is the concept of integrating nonfinancial
measures into financial reporting. Although social responsibility accounting and
reporting aren't mandatory for U.S. businesses, companies do at times report on social
issues.

Definition of Social Responsibility Accounting

According to the American Institute of CPAs, sustainability accounting involves reporting
a "triple bottom-line" of a company's economic vitality, social responsibility and
environmental responsibility. In the past, business philosophy in the United States has
tasked company managers with driving profits for shareholders. More and more,
individuals and institutions are concerned with how business operations
affects employees, customers, the community and the natural environment. Social
responsibility accounting seeks to quantify and report on this information.

Information Reported Under Social Responsibility

Accounting

Page 51 of 52
Companies that employ social responsibility accounting may report on some or all of the
following issues:

 Statistics regarding employee health and job-related accidents.

 Emission rates, spills and volume of hazardous waste generated.
 Use of scarce resources such as water or lumber.
 Information about ethical initiatives within the company, such as labor
practices, education, philanthropic efforts, human rights and diversity.
 Links between executive pay and sustainability criteria.

Reporting Framework for Social Responsibility Accounting

It's important for accounting information to be comparable, so companies that use social
responsibility accounting need a consistent framework to work under. Companies can
currently use the Global Reporting Initiative Framework, which the AICPA calls the
de facto standard for sustainability reporting. Leading professionals in the fields of
business, accounting and regulation have formed a Climate Disclosures Standards
Board to develop a framework for environmental reporting.

Use of Social Responsibility Accounting

Companies that have stock listed on a U.S. stock exchange are required to report their
financial information, but are not required to report on their social and sustainability
information. Because of this, not many businesses report the information thoroughly.
According to a 2013 study performed by the Investor Responsibility Research
Institute, only 1.4 percent of companies listed in the S&P 500 - seven, to be exact -
issue a full-fledged statement on sustainability reporting. However, all but one of the
S&P 500 makes some sort of disclosure about sustainability, and nearly half link
executive compensation to some sort of sustainability criteria.

https://bizfluent.com/info-7904492-social-responsibility-accounting.html

Page 52 of 52