subject: Ethics in Accounting [print this page] Ethics in Accounting Ethics in Accounting
Ethics are the standards of behavior by which a person or a member of a profession's actions are judged as being morally right or wrong. They are part of our everyday lives whether it is on a personal or professional level. Whether you work in the medical or business profession, legal or educational system, your decisions are based on ethics. Therefore, no matter your line of work, every professional's actions are judged as being ethically good or bad. Due to the nature of an accountant's work, which includes being exposed to privileged and sensitive information regarding an entity's financial statements and having to make decisions and informed judgments about those statements, it is especially important that an accountant practice good ethics.
Due to the importance of maintaining high ethical standards in accounting, many accounting organizations have adopted or created their own code of ethics and enforce them. To name a few, there is the American Institute of Certified Public Accountants (AICPA), which is a national association of Certified Public Accountants (CPA's) and the Institute of Management Accounting (IMA). The AICPA adopted the Code of Professional Conduct and the IMA created the Statement of Ethical Professional Practice. Both organizations highlight the importance of integrity, objectivity and independence in their ethical codes. It is important that an accountant have integrity, being honest in all communications as well as keeping all information confidential. For an accountant to reflect objectivity, they must prepare statements free of biases towards other groups. Also, an accountant must show independence and therefore, be free of conflicts of interest. This includes the auditor to avoid auditing an entity in which he/she holds stock and that he/she may not audit for a company where a relative works. Both the AICPA and IMA also emphasize other standards for members to comply, such as being competent, by developing skills in the profession, maintaining confidentiality of information as well as credibility.
While both organizations have the authority to internally enforce disciplinary actions against members in violation of their ethical code, the AICPA publicly posts on their website, the names of members whose memberships have been terminated or suspended. This information may be posted for up to seven years. Also, the state government in which a CPA works has the authority to revoke a CPA's license temporarily or permanently.
A great example of a company exercising unethical accounting principles is Enron. Many people are familiar with the Enron scandal, which caused the energy company to become bankrupt in 2001 due to accounting fraud. The company's financial statements were altered for years to hide discrepancies which enabled the company to mask billions of dollars of debt from the public. This caused Enron to go out of business as well as for shareholders to lose billions of dollars in investments.
As a result of the Enron scandal, and other companies' unethical practices in the past, the Sarbanes-Oxley Act of 2002 was enacted. This Act expanded consequences for companies who alter their financial records, or attempt to deceive shareholders of accurate information on financial statements. The Act also maintains the ethical principles of objectiveness and independence for auditing firms to follow.
Along with the Sarbanes-Oxley Act, the Public Company Accounting Oversight Board (PCAOB) was developed. The PCAOB monitors auditors of public companies and was created to protect the interests of investors. The PCAOB can also set auditing, ethical and other standards for preparing auditor reports. The board can also inspect auditing operations and enforce disciplinary actions for any violations.
Due to the nature of the work involved in accounting, it is understandable the need for ethical codes to have been created and enforced. Past companies fraudulent accounting activities over the years have led to the current Acts and organizations creating and enforcing these important standards and ethical codes, which include integrity, objectivity and independence.
