Accounting Ethics “Accountants and the accountancy profession exist as a means of public service; the distinction which separates a profession from a mere means of livelihood is that the profession is accountable to standards of the public interest, and beyond the compensation paid by clients. ” —Robert H. Montgomery, describing ethics in accounting [1] Accounting ethics is essentially part of applied ethics. Accountancy is based on the study of moral value and judgements, which is an sample of occupational ethic.

Luca Pacioli, who is the first person, were introduced accounting ethics,which is expended by government groups, professional organization and also independent companies. Higher education institutions teach ethic in accounting courses It is also taught accountants and auditors training by company. Accounting profession consider about ethical standards by reason of recent corporate collapses and varied range of accounting services. [2] Ignoring reputation of the accounting professions caused these collapses. 3] Governments and several accounting organizations have developed regulations and solutions for improved ethics in the accounting professions in order to resist criticism and dishonest accounting. Importance of ethics Accounting and auditors must have high level of ethics in their work. Companies yearly financial statements are of high importance to shareholders and prospective shareholders and other financial statement users. This helps them make informed decisions on financial investment. 4] Accountants opinions and auditors verification should present a true and fair view of the company that is important for the shareholders and prospective shareholders and other financial statement users. [5]Ethical dilemmas can be overcome with knowledge of ethics by accountants and auditors. It will benefit the public,who trust on the accountants and auditor’s reporting, to make right choice, however it may not benefit the company. [6] Countries often have their own accounting laws. For example, Germany uses tax law, Sweden; accounting law, UK; company law countries can have organizations that regulate accounting.

For instance, Sweden;BFN(Accounting Standards Board), Spain; ICAC (Instituto de Comtabilidad y Auditoria de Cuentas) and the United States the FASB (Financial Accounting Standards Board). [7] History Luca Pacalio is called the “father of accounting”. His first book, which is Summa de arithmetica, geometria, proportioni, et proportionalita, was about accounting ethic, published in 1948. [8] Since 1948, ethical standards has been developed by governments groups ,professional organization and companies.

Accountant is led by these various group with several ethics’s code in order to achieve their responsibilities in a professional work environment. Ethics code that formulated by professional body is must followed by accountants. In United States, accounting societies such as Association of Government Accountants, Institute of International Auditors and the National Association of Accountants have ethic codes. Most accountants are getting memberships for at least one of these societies. [9] In The USA accounting businesses, were the first important step in 1987.

In addition, The American Association of Public Accountants (AAPA) was established that same year, and, by 1905, they set up AAPA’s ethical rules to teach its members. [11] In October 1907, during its twentieth anniversary, for all of their members, ethic was the core subject of the meeting. End of the meeting, they came out with a list of ethics rules that is included to the organization’s bylaws. Due to fact that the organization memberships was voluntary, they could not ask to conform to the recommended attitudes. 10] A number of other establishments, like the Illinois Institute of Accountants, continuously claimed the significance of ethics for accounting. [12] They’ve renamed AAPA a number of times since its establishment. (Today, it’s simply known as The American Institute of Certified Public Accountants. – AICPA. ) There are 5 departments developed within the AICPA, and they have a series of ethical principles, that every member must obey, which are: “independence, integrity, and objectivity”; “competence and technical standards”; “responsibilities to clients”; “responsibilities to colleagues”; as well as “other responsibilities and practices”. 13] There are certain rules about each and every departments, that every Certified Public Accountant has to go through, to be able to act with professionalism. Failure to do so, it is likely that one can be disbarred from their profession. The AICPA is a trailblazer to build and design new guidelines, principals and rules. They also have change everyone’s perspective towards the business of accounting. [13] Teaching Ethics In the 1980s, business ethics were thought in universities. Since then a variety of course’s are given on this subject of increased importance . 14] Ethic teaching to accountants can require lectures, case studies, guest lectures, as well as other necessities. [9] According to the latest research, ethics is mentioned by almost all accounting textbooks. [15] The avocation of accounting developed and established at the State University of New York at Binghamton, while they were also the first establishment which focused on the ethic studies. [16] Since 1999, ethic classes prior to the CPA exam is required by some US States[15] Seven Goals of Accounting Ethics Education : Relate accounting education to moral issues.

Recognize issues in accounting that have ethical implications Develop “ a sense of moral obligation ” or responsibility. Develop the abilities needed to deal with ethical conflicts or dilemmas Learn to deal with the uncertainties of the accounting profession. “Set the stage for” a change in ethical behaviour. Appreciate and understand the history and composition of all aspects of accounting ethics and their relationship to the general field of ethics. -Stephen E. Loeb [9] Seven goals of accounting ethics that must be featured in accounting ethics, (which are introduced by Stephan E.

Loeb, and adapted from a list by Daniel Callahan in 1988). [9] According to him, accounting ethics could be conceived as a part of accounting curriculum or can be fitted in an individual class in order to achieve these goals. All of the accounting studies show that accounting instructors have to be knowledgeable about these subject matters. In addition, training may be needed by these subjects. There are some problems of a single course and where to incorporate this course to students education schedule, or, if the material satisfying enough, it can be taught for a single semester.

Moreover, within most universities, the education is being conducted for four full years, (which consists of eight semesters) of study on the subject. [9] Teaching ethics in university has been argument. (if we should teach it or not) Ethic was found important to the vacation by defender, and accounts should be taught to into the filed. [17] Furthermore, it helps to the strength of the students to avoid making any unethical decisions. [14] They criticized that studying ethic would not involve any goal or being an individually is ethical. 17][18]however, against all disputes regarding the issue, accounting firms and vocational organizations uses the accounting ethic instruction in universities and / or in conferences. [19] The Accounting Education Change Commission (AECC) is also known by students “know and understand the ethics of the profession and be able to make value-based judgements”. [20] According to Phillip G. Cottel accountants essential skills are: ”must have a strong sense of values, the ability to reflect on a situation to determine the ethical implications, and a commitment to the well-being of others”. 21] Ethical idea is catacorized in four essential steps by Irish Stuarat which are: noticing ethichal dilemma before it happen , recognizing the problems which would be cause an dilemma, assaying the issues and choosing the best solition. [22] Accounting ScandalsAccounting ethics is deemed as hard to check by accountants and auditors, because they must take into consideration the public interest while they were inspecting finacial record they guarantied that they remained within the company[9][23] They should think thoroughly how to employe accounting standards successfully even if they face bankruptcy or major losses.

According to the accounting scandals, when a client asked accounting “what does two plus two equal? ” likely the accounting would answer “what would you like it to be? “. [23]This and other critiques regarding the issues on accounting ethics have led development and the improvements of the standarts regarding the professionalism. ”Every company in the country is finding its profits. Every set of published accountants is based on books which have been gently cooked or completely roasted. The figures which are fed twice a year to the investing public have all been changed in order ti protect the guilty.

It is the biggest con trick since the Trojan horse. … ‘in fact this deception is all in perfectly good taste. It is totally legitimate. It is creative accounting. ”—Ian Griffiths in 1986, describing creative accounting[1] Since the 1980s many accounting scandals have happened, which have been a focus of the news. Fraud charging, bankruptcy protection requesting, accounting and company closing are resulting of accounting scandals. Cheating by using wrong numbers, giving a false financial analysis and bribing others are result of those scandals.

Many companies, including Nugan Hand Bank, Phar-Mor, Word Com and AIG, were faced with problems of fraud. Enron, an international company, disobeyed accounting ethics which created one of the most infamous accounting scandals. The company gave misleading financial analyses for many of years. Arthur Anderson, who is auditor of Enrol,is one of the ”Big Five” accounting company. However the statements were incorrectness, Arthuur confirmed them. confirmed financial statements despite of the The fraud cost Enron to collapse.

Arthur is forbidden to do business, and shareholders of the company lost $25 billion dollars. Only a group of arthur employees participated in the scandal, but 85,000 people lost their jobs from bankruptcy of the company. Causes Many problems occur with fraudulent accounts. These problems often take time to discover and they can ruin the company and the auditors if they can not find these fraudulent accounts / documents easily. Many studies point out that accountant’s attitude can be affected negatively and their ethical values can be compromised in this type of setting.

The firm or corporation can also be negatively affected [28][29][2] Advertising to clients by accounting and auditing companies was not acceptable until 1977 due to ethical rules. Spending on advertising jumped in the 80s to 2000s from $4 million to $100 million after the rules changed. [30] Critics reported that, there was a conflict of interest between business perspective and professional perspective by allowing the rules to be changed. Arthur Bowman said “… to offer services that made them more consultants and business advisers than auditors. [30]since accounting companies focused their interest on more profitable services and became more like advisers and consultants. Less time was spent on auditing is believed to increase the problems. [31]ignoring the time ,which is spent on audits, caused the loss of focus to find false and fraudulent accounts. [32] The survey in 2007 done by the Managerial Auditing Journal pointed out nine elements that cause ethical failures for accountants this information was recorded while doing a survey on 66 members of the IFA.

The elements has recorded were :”self interest, failure to maintain objectivity and independence, inappropriate professional judgement, lack of ethical sensitivity, improper leadership and ill-culture, failure to withstand advocacy threats, lack of competence, lack of organizational and peer support, and lack of professional body support. “[2]the essential element ,which is self interest, is imperative that an accountant when facing conflicts of interest and other issues. [2] For instance, getting bribery to overlook issues could cause an auditor to behave unethically.

Principles- vs. Rules-based”When people need a doctor, or 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. “—John L. Carey, describing ethics in accounting”[33] The International Financial Reporting Standards (IFRS) are based on International Accounting Standards Board’s principles. 34] Over 115 countries use IFRS ,featuring the European Union, Australia, and Hong Kong. [35]The United State uses Generally Accepted accounting Principles (GAAP) that is likely based on rules. [34] The number of scandals have been risen up by the semi-responsibility of the GAAP in the US. [32] In order to monitor the principle-based approach, more professional apprehension is required. [36] The principles of IFRS are :”understandability, relevance, materiality, reliability, and comparability”. 37] As a result of that IFRS is not accepted by all over the word, these principles are not applicable international standards for all countries. Especially, the U. S. has not accepted IFRS and yet uses GAAP which causes difficulty to compare rules and principles. According to the Securities and Exchange Commission (sec) ,The US will have uses IFRS by 2014. [34] Responses to scandalsAfter the main scandals,higher education is required to combating the danger of unethical behaviour. 38] it is believed that accountants’ ethical education such as company training or higher education before starting the work life help to established the integrity in accounting vocation. [3] Accounting organizations and companies supply course work in order to develop their assistance with instructors. [39] As a result of the scandals (which are include Corporate Law Economic Reform Program Act 2004 in Australia as well as the Sarbanes-Oxley of 2002), new regulations have been established the United States of America. 2] Limits have been set by Sarbanes-Oxley on accounting work levels. Furthermore, fee limits have been set as a percentage of total fees for clients, this provides some insurance companies are not totally dependant on one firm for its income. This may provide hope that they do not have to act unethically to keep steady income. Whistleblowers are protected by the act and also senior management in public company is required to vouch for the companies accounting records accuracy.

Public Oversight Board was deemed ineffective resulting in five members resignation in 2002. After the SEC proposal, the Public Company Accounting Oversight Board (POB) was created through the Act replacing the POB. [40][41] Rebuilding Public Confidence in Financial Reporting : An international perspective was released in 2003 by the International Federation of Accountants. [42] According to the accounting study, accounting problems caused failures. Improvement was required in the organizations and ethical codes that were more effective were also suggested.

Training and support in the company are also recommended within the report so, ethical dilemmas could be easily overcome by the accountants. [2] Michel Prada , who is Chairman of the French Financial Markets Authority, Interest Oversight Board (PIOB) on 1 March 2005. [43] Oversight of the IFAC standards-setting boards provided by the PIOB:”the international Auditing and Assurance Standards Board (IAASB), the international Accounting Education Standards Board(IAESB) and the International Ethics Standards Board for Accountants(IESBA)”. [44]

References ^ a b Love, Vincent J. (October 1, 2008). “Understanding Accounting Ethics, Second Edition” (Registration required). The CPA Journal. http://proquest. umi. com. libproxy. sdsu. edu/pqdweb? did=1585902031;sid=2;Fmt=3;clientId=17862;RQT=309;VName=PQD. Retrieved May 18, 2009. ^ a b c d e f Jackling, Beverly; Barry J. Cooper, Philomena Leung, and Steven Dellaportas (2007). “Professional Accounting Bodies’ Perceptions of Ethical Issues, Causes of Ethical Failure and Ethics Education” (Registration required). Managerial Auditing