What is Accounting Ethics?
- Ethics and the Code of the Conduct. Ethics and ethical behavior refer more to general principles such as honesty, integrity, and morals.
- Rules and Guidance. One of the key rules set out by professional accounting bodies in North America is the idea of independence.
- Threats to Independence. ...
- Other Important Rules. ...
- Related Resources. ...
Full Answer
What are ethics and why is it an important part of accounting?
Accounting ethics are important because a business relies on the reported financial status to make its business decisions. A business must have accurate reports and know that the business has sufficient funds to continue to operate and be able to pay rent and other bills, pay employees, and to continue producing products and/or offering services.
Why ethics are fundamental to good accounting?
Ethical codes are the fundamental principles that accounting professionals choose to abide by to enhance their profession, maintain public trust, and demonstrate honesty and fairness. People who join organizations and secure the credentials to present themselves to the public as CPAs or IIAs strive to protect the reputation of the profession.
What does accounting ethics mean?
What is Accounting Ethics? Accounting ethics refers to following specific rules and guidelines set by governing bodies that every person associated with accounting should follow to prevent misuse of the financial information or their management position.
Are ethics important to the accounting profession?
Ethics Systems in Accounting: Comparing Deontology and Utilitarianism Ethics are crucial to the accounting profession and the business world, so choosing an ethics system to base your moral decisions on is extremely important. Accountants and all business professionals will be confronted with moral dilemmas on a daily basis.
What is cash earnings per share?
Cash earnings per share (Cash EPS) is different from traditional earnings per share (EPS), which takes the company’s net income and divides it by the number of shares outstanding. management. Ethics is also absolutely required in the course of an audit. Without meeting the requirements of auditing and accounting ethics, ...
What is a self interest threat?
Self-Interest Threat: If the auditor has a direct financial interest through shares or a large fee outstanding from the client
What is a familiarity threat?
Familiarity Threat: If the auditor has a long relationship with the client or they are close friends/relatives
Why is accounting ethics important?
Accounting ethics is an important topic because, as accountants, we are the key personnel who access the financial information. Three Financial Statements The three financial statements are the income statement, the balance sheet, and the statement of cash flows. These three core statements are.
What is independent in appearance?
Independence in fact refers to any factual information such as whether you, as an auditor, own any shares or other investments in the client firm. These facts are usually easy to determine. Independence in appearance, however, is more subjective.
What is the duty of an auditor?
Duty to report a breach of rules – This rule is commonly referred to as the whistleblower rule.
What is the code of ethics?
Ethics and the Code of the Conduct. Ethics and ethical behavior refer more to general principles such as honesty, integrity, and morals. The code of professional conduct, however, is a specific set of rules set by the governing bodies of certified public accountants. Although the rules set out by different bodies around the world are unique, ...
What is ethics in accounting?
Ethics in accounting is a matter of both guidelines and principles. Specific standards are set by governing bodies and trade organizations who craft the rules of accounting, but personal values and professional ethics must guide accountants.
Why are ethics important in accounting?
Because ethics in accounting is such an important aspect of the field, many universities and training programs have begun offering and even requiring courses that provide training in accounting ethics and explore ethical questions. This development was spurred in part by high-profile cases such as the collapse of Enron, which was notorious for questionable accounting practices. The availability of classes in accounting ethics serves in part to address perceptions that professional accounting practices can be shady, and also to discourage people who are entering the field from engaging in any ethically questionable activity.
Why is auditing important?
Auditing is one of the most important tasks that accountants perform. It involves verifying information to assess the truth and accuracy of accounting information, whether for internal purposes or external evaluations for tax and lending institutions. To act ethically during an audit, an accountant should evaluate numbers with the primary objective of getting to the truth. There should be no conflicts of interest, such as owning stock in the business and standing to gain if the numbers portray operations in an advantageous light.
Why are accounting ethics classes important?
The availability of classes in accounting ethics serves in part to address perceptions that professional accounting practices can be shady, and also to discourage people who are entering the field from engaging in any ethically questionable activity.
How to act ethically during an audit?
To act ethically during an audit, an accountant should evaluate numbers with the primary objective of getting to the truth. There should be no conflicts of interest, such as owning stock in the business and standing to gain if the numbers portray operations in an advantageous light.
What is the International Ethics Standards Board for Accountants?
The International Ethics Standards Board for Accountants, itself an independent agency, has created a code outlining the principles at play in ethical accounting. These principles cover many facets of ethical behavior for accountants, although unique situations may call for judgment calls that aren't explicitly reflected in these principles.
What is integrity in psychology?
Integrity: Integrity isn't a set of rules or a course of action, but rather a state of mind oriented towards honesty, straightforwardness and a commitment to acting following principle rather than for the sake of personal gain.
How did Enron executives pull off all these lies on their own?
How could Enron executives pull off all these lies on their own? They didn't. They had a little help from an accounting firm by the name of Arthur Andersen. The Andersen firm provided accounting services to Enron. From posting transactions to creating financial statements, they were responsible for it all. Since that is the case, then it's obvious that Andersen executives made a conscious decision to hide the true extent of debt that Enron held. They also made the decision to provide the Enron executives with bogus financial statements that supported the boasts made by such people as Jeffrey Skilling. Why would they do such a thing? The answer is simple. The more money that investors put into Enron, the more money that went into the pockets of both Enron and Arthur Andersen executives.
What was Enron worth in 2000?
At a meeting of stock market analysts and potential investors, Jeffrey Skilling stated that the broadband network side of the Enron business was worth over $29 billion dollars. The financial statements that Enron made available to the public supported Mr. Skilling's comments on the value of the company. People went crazy over this news, and within months, the amount of Enron stock purchased by investors had increased 50%. It's sad to say, but it was all a lie. The leaders of Enron didn't want the public to know the truth. They hid debts and losses by shifting dollar amounts to offshore accounts. They purposefully made it look as if the company was rolling in money by misstating revenue. They lied to their employees, their stockholders, and any potential investors. Was that ethical? Certainly not!
How did Enron start?
Enron was created from a merger between two companies: Houston Natural Gas (a gas company) and InterNorth (a gas pipeline company). In the beginning, Enron was on shaky ground financially. In an attempt to make the company a success, then-CEO Kenneth Lay recruited a young and shrewd business consultant.
Why is ethics important in accounting?
For that reason alone, ethics are important in accounting. Unethical practices can and do lead to criminal charges, organizational demise, and the loss of trust of potential investors. Lesson Summary. Ethics are the moral obligations of being able to tell right from wrong.
What was the SEC investigation of Enron?
It wasn't long before the Securities and Exchange Commission (SEC), alerted by the almost unbelievable statements being made by Enron executives, began an investigation into the financial practices of the company. Upon learning of the SEC investigation, two Arthur Andersen executives instructed other employees to shred all information related to the true financial status of Enron.
What does ethics mean?
How do you define ethics? The Merriam-Webster dictionary defines ethics as the discipline dealing with what is good and bad and with moral duty and obligation (Merriam Webster, 2013). Basically, ethics means doing what is right.
What does Bob tell Lilli about the financial statements?
Bob tells Lilli that he needs to impress a potential investor, so he wants her to 'fluff up' the financial statements. Lilli is shocked. She can't believe that Bob would ask her to do something like that.
How to keep your accounting information secure?
To keep your accounting information secure, don’t email any sensitive data, make sure your WiFi is secure, have firewalls and other security precautions in place , and be aware of phishing scams. And, don’t go around sharing sensitive information. Use your head when you deal with sensitive employee and business information.
What happens if you don't follow accounting rules?
If you don’t follow accounting ethics, you’re asking yourself for trouble.
What happens if you adopt unethical accounting practices?
If you adopt unethical accounting practices, it will likely come back to bite you later. Not to mention, if you get too comfortable following unethical accounting practices, your business could suffer the consequences (discussed next).
How to avoid consequences down the road?
To avoid consequences down the road, keep up with the latest accounting news, use your best judgment, and don’t overestimate your skills. If you find yourself making mistakes time and time again and brushing off accounting ethics, it may be time to seek help from a professional (e.g., accountant). 3.
Why is ethics important in business?
Ethics are important in many aspects of business, especially when it comes to your company’s accounting books. Even though you might not be an accountant, you’re expected to exhibit the same qualities as them when you handle your books.
What are the ethical requirements for accounting?
Accountants are expected to act ethically when they handle clients’ books. They must: 1 Demonstrate integrity 2 Keep things confidential 3 Stay up-to-date with the latest accounting news 4 Act professionally
What happens if you don't keep up with accounting?
If you don’t keep up with accounting ethics and stay up-to-date with accounting rules, you’re bound to make a blunder at some point or another. Sure, everyone makes mistakes. However, it’s one thing to make an error accidentally, and another to get lazy and fail to keep up with accounting regulations and standards.
How ethical is accounting?
Being ethical in accounting means that you keep the business's financial information correct to the best of your ability, that you don't falsify records and you don't move funds around to make the company look more sound than it is. Keeping accurate financial records is crucial in any company, especially those that report the information to stockholders. Shuffling funds among accounts can make a company look healthier than it is by hiding problems; this can mislead investors. Or it can be done to make the company look weaker than it actually is in order to lower the tax burden. Some movement of funds between accounts is completely legal. But if it's done to give the appearance that the company is doing better or worse than it is, it is considered ethical.
Why is quality control important?
Quality control is used to make sure the product being produced is up to standards. An ethical company would not ship out a product that is not within the industry parameters of safety or quality. But some companies set different standards for the same product depending on whom it is being sold to. This is not illegal and is a normal business practice, but some consider it unethical. An example might be the different standards in tire valves that are sold to car companies and retail locations. The car companies have a higher standard for what they expect in the tire valves they buy. Retail locations often don't impose the same standards on the manufacturer. Having more than one standard for the same product opens the door for a company to be accused of being unethical because it applies different standards to different classes of customers.
What does it mean to be ethical?
Being ethical means conforming to accepted moral standards. Applied to the work environment, it means that an ethical person has a higher standard than just avoiding a certain behavior or practice because it is illegal. What matters it that it might be the wrong thing to do morally.
Why is it important to keep financial records?
Keeping accurate financial records is crucial in any company, especially those that report the information to stockholders. Shuffling funds among accounts can make a company look healthier than it is by hiding problems; this can mislead investors.
Why do retailers have more than one standard?
Having more than one standard for the same product opens the door for a company to be accused of being unethical because it applies different standards to different classes of customers.
Is customer service ethical?
Customer service employees, or those working in retail, are not always completely truthful with customers. This is not always illegal, but it is unethical. One example of this would be a bait-and-switch sale, where a company advertises an item is on sale but does not have that item in stock. The goal is to get the customer in the door and then sell him a more expensive product. Customers must be able to depend on the businesses they patronize. Companies that function without ethical practices risk losing their customers.
Is it legal to move money between accounts?
Or it can be done to make the company look weaker than it actually is in order to lower the tax burden. Some movement of funds between accounts is completely legal. But if it's done to give the appearance that the company is doing better or worse than it is, it is considered ethical.
What Does Ethical Behavior Mean?
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.
How can ethical behavior be evidenced in work relationships?
This behavior is evidenced by certain values and principles maintained within the relationships, such as integrity, transparency, honesty or fairness. These are ethical standards that should be respected between the parties to maintain an ethical environment.
What is a shady sunglasses company?
A company called Shady Sunglasses LLC is a company that manufactures and distributes a brand of sunglasses called Radiant. The company is currently going through a difficult financial situation since the costs of its raw materials increased by more than 20% and their gross margins are declining fast.
What Does Ethical Standards Mean?
These standards are an important part of an organization’s culture. They establish the parameters of behavior that owners and top executives expect from employees and also from suppliers, at least to the extent of their relationship with the organization. A corporate governance system will put a lot of effort into communicating and enforcing these principles. This is mostly done through behavior modeling, which means that top executives should set the example of how lower-level employees should act.
What are some examples of standards?
A few examples of these standards would be responsibility, honesty, transparency or fairness and even though they might be interpreted differently by each person, companies usually describe the founder’s perspective of each value to avoid confusions.
What are the core values of a company?
He hired a consultant to help him along the process and together they defined four core values, which are: transparency, punctuality, excellence and honesty. These principles helped the business to increase the healthiness of the work environment and reduced the number of conflicts experienced with both customers and suppliers.
Who is Robert Johnson?
The company was founded by Robert Johnson, a marketing expert with a vast experience working with Fortune 500 companies. Robert has been struggling with a vague corporate culture that has been established within his company due to the lack of ethical standards.
Ethics and The Code of The Conduct
Rules and Guidance
- One of the key rules set out by professional accounting bodies in North America is the idea of independence. This is the idea that, as an auditor, you must be totally objective and must be without ties to or relationships with the client since that could potentially impair your judgment and impair the overall course of the audit work. There are two forms of independence: 1. Indepe…
Threats to Independence
- There are always threats and situations that can reduce the level of independence. Let’s take a look at some of these threats: 1. Familiarity Threat: If the auditor has a long relationship with the client or they are close friends/relatives 2. Intimidation Threat: If the auditor changes the financial statements, the client threatens to switch auditors 3. Self-Interest Threat: If the auditor has a dir…
Other Important Rules
- Some other rules outlined by professional accounting bodies include the following: 1. Contingent fees are not allowed – For example, audit fees that are based on a percentage of the net income figure or a percentage of a bank loan received 2. Integrity and due care – Audit work must be done thoroughly, diligently, and in a timely manner. 3. Professional competence – Auditors must be c…
Related Resources
- Thank you for reading CFI’s explanation of Accounting Ethics. To keep advancing your career, the additional resources below will be useful: 1. Forensic Audit Guide 2. Audited Financial Statements 3. Big Four Accounting Firms 4. Top Accounting Scandals