Why Are Accounting Ethics Important?

Accountancy Resources

Why Are Accounting Ethics Important?

Uncategorised Author: Admin


The discussion of accounting¬†ethics has declined in recent years as the Enron and WorldCom debacles have receded from memory. Furthermore, the perceived excesses and criticism of the Wall Street crowd during the financial crisis has further pushed something as unglamorous as accounting ethics out of the public eye. Recent events have, if anything, reinforced the need for the practitioners of accounting to act in an ethical manner and fairly portray the financial performance of the entities they work for. In today’s world, the complexity and sheer scale of many corporate transactions have made the need for a transparent and fair assessment of the obligations (liabilities) and value (assets) of these transactions.

Further importance is laid on the application of ethical accounting behaviour by the fact that, even if they don’t know it, the vast majority of people are impacted every day by the decisions of accountants they never meet. These people contribute to pensions, work for companies, actively invest, or are in some other way a stakeholder in a company somewhere. In a broad definition like that pretty much every individual is in some way impacted by the decisions and actions an accountant makes. This is not said to glorify the importance of the profession but more to underline the importance of these individuals applying high ethical standards to their work. This will become even more important in the United States as the US moves further away from the US Generally Accepted Accounting Principles (US GAAP) and aligns with International Financial Reporting Standards (IFRS). These accounting guidelines frame the way in which transactions and balances are assessed and reported. Under US GAAP rules are far clearer and guidance very direct, while under IFRS the application of professional judgement is emphasized to a higher degree.

Unethical behaviour: What’s the Motivation?

There can be many reasons why accountants can act in unethical manners. Typically most reasons somehow tie back to a financial one as the payout, through stock price or something as direct as steal cash, can be substantial. Many of the accounting scandals of the past, i.e. WorldCom and Enron, saw individuals gain vast sums of money through the application of unethical accounting practices. Additionally, many companies under pressure to deliver results (or avoid a loss) can apply poor accounting ethics to their decision making. In a sense, this is financial also, but more in a capacity to avoid the company being penalized by the market or individuals losing their jobs.

Who regulates Accounting Ethics?

With such a small group of individuals being required to operate ethically, who makes sure this is being done? Most national accounting bodies form their own ethics committees that are responsible for establishing ethical guidelines and enforcing those guidelines. In America, the American Institute of Certified Public Accountants has an ethics committee that sets these standards at a national level, in participation with the state level institutes. Enforcement is also performed by these bodies and can see accountants suspended or stripped of their accounting designation for unethical behaviour. For many accountants that, aside from personal values, is the main disincentive to committing an unethical act as the loss of their designation means the loss of their jobs and ability to work. Enforcement is also performed by various legal bodies as well as the SEC, which has punished accountants and accounting firms for various unethical behaviours. Many are critical of this arrangement as it leaves the management and guidance of ethical accounting in the hands of the accountants themselves. That said this is countered by the argument that those involved in the profession have a vested interest in maintaining the professions public image and reputation. So while accounting ethics may sound boring and abstract it is something that has an impact the lives of most people. While no one is going to provide accolades for the daily ethical decisions made, we all see the impact of when unethical decisions are made and can see how the lives and savings of people can be impacted.