Introduction, Meaning of Ethical Behaviour in Accounts

Accounting ethics is primarily a field of applied ethics and is part of business ethics and human ethics, the study of moral values and judgments as they apply to accountancy. It is an example of professional ethics. Accounting was introduced by Luca Pacioli, and later expanded by government groups, professional organizations, and independent companies. Ethics are taught in accounting courses at higher education institutions as well as by companies training accountants and auditors.

Due to the wide range of accounting services and recent corporate collapses, attention has been drawn to ethical standards accepted within the accounting profession. These collapses have resulted in a widespread disregard for the reputation of the accounting profession. To combat the criticism and prevent fraudulent accounting, various accounting organizations and governments have developed regulations and remedies for improved ethics among the accounting profession.

Ethical behaviors can be identified in both individual relationships and work relationships. The concept can also be applied to corporations as entities. It evaluates the moral implications of actions being taken on each of the previously mentioned contexts. An ethical behavior is essential for a society to function properly. Individuals that behave unethically will normally loss other people’s confidence and their unethical behavior should be also punished by the law.

The nature of the work carried out by accountants and auditors requires a high level of ethics. Shareholders, potential shareholders, and other users of the financial statements rely heavily on the yearly financial statements of a company as they can use this information to make an informed of the decision about investment. They rely on the opinion of the accountants who prepared the statements, as well as the auditors that verified it, to present a true and fair view of the company. Knowledge of ethics can help accountants and auditors to overcome ethical dilemmas, allowing for the right choice that, although it may not benefit the company, will benefit the public who relies on the accountant/auditor’s reporting.

Most countries have differing focuses on enforcing accounting laws. In Germany, accounting legislation is governed by “tax law”; in Sweden, by “accounting law”; and in the United Kingdom, by the “Company law”. In addition, countries have their own organizations which regulate accounting. For example, Sweden has the Bokföringsnämden (BFN – Accounting Standards Board), Spain the Instituto de Comtabilidad y Auditoria de Cuentas (ICAC), and the United States the Financial Accounting Standards Board (FASB).

Principles and rules

“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

The International Financial Reporting Standards (IFRS) are standards and interpretations developed by the International Accounting Standards Board, which are principle-based. IFRS are used by over 115 countries or areas including the European Union, Australia, and Hong Kong. The United States Generally Accepted Accounting Principles (GAAP), the standard framework of guidelines for financial accounting, is largely rule-based. Critics have stated that the rules-based GAAP is partly responsible for the number of scandals that the United States has suffered. The principles-based approach to monitoring requires more professional judgment than the rules-based approach.

There are many stakeholders in many countries such as The United States who report several concerns in the usage of rules-based accounting. According to recent studies, many believe that the principles-based approach in financial reporting would not only improve but would also support an auditor upon dealing with client’s pressure. As a result, financial reports could be viewed with fairness and transparency. When the U.S. switched to International accounting standards, they are composed that this would bring change. However, as a new chairperson of the SEC takes over the system, the transition brings a stronger review about the pros and cons of rules- based accounting. While the move towards international standards progresses, there are small amount of research that examines the effect of principle- based standards in an auditor’s decision- making process. According to 114 auditing experts, most are willing to allow clients to manage their net income based on rules- based standards. These results offer insight to the SEC, IASB and FASB in weighing the arguments in the debate of principles- vs. rules based- accounting.

Advantages of Accounting Ethics

If the person does not follow it, then the person will be liable for the punishment as decided by the governing bodies. This creates fear in the mind of the person and leads to follow up appropriately.

As the different rules and guidelines are set by the governing bodies that govern the action of the person associated with the accounting profession, this prevents the misuse of the information available of the client with the accountant, auditor, or any other accounting person.

The businesses which pay proper attention to accounting ethics always do better when compared with the other businesses as it creates the right image in the eyes of the customers and the other parties and thereby helps in increasing the business in the long run.

There is decreased legal liability. This is so because almost all the things are taken care of well in advance by the concerned persons so that they are liable for any legal actions.

It creates a better Professional Environment as everyone has the proper mindset of maintaining a high level of ethical standards. Also, respect is given to that person who follows the ethics accurately in the place where they are working.

Disadvantages of Accounting Ethics

As the person is required to know every aspect that he has to follow and also to update the information regularly for any changes if taken place, it requires lots of efforts and time of the person.

As the proper training should be given to everyone associated with accounting for providing the information on the different rules and guidelines to be followed for accounting ethics, such training involves a considerable cost.

When a person tries to follow the accounting ethics, there are high chances that it will not get the support from the management of the company. Management will try to find and work with the person who follows the rules and guidelines which provide the benefit to the company.

Important:

As the different rules and guidelines are set by the governing bodies that govern the action of the person associated with the accounting profession, this prevents the misuse of the information available of the client with the accountant, auditor, or any other accounting person.

There are various rules and guidelines which are required to be followed by everyone who is associated with accounting. Some of these rules include the rule of non-acceptability of the contingent fees like setting the audit fees based on the net profits of the clients, Confidentiality where the auditors have to keep all the information of its clients confidential and are not allowed to disclose it to any outsider, duty concerning the reporting of the breach of the rules by anyone, etc.