Ethics in Accounting and Finance Research Paper

Introduction

At first it is needed to know what ethics is and then what is accounting. “Ethics are the true moral principles that guide the conduct of individuals, regardless of differences among individuals, proper ethical conduct implies a behavior that considers the impact of one’s action on society and others” (Warren, Reeve, and Fess, 2006, p-7).

Again, “accounting is an information system designed to measure, record, and report in monetary terms the flows of resources, into (inflows) and out (outflows) of an organization, the resources controlled by the organization, and the claims against those resources” (Welsch, and Anthony, 1977, p.2). The importance of ethics in accounting is to inspire and guide the investor as well as the public interest in a systematic way. ‘’For years the accounting ethics has been viewed as an unimportant’’ (Ketz, 2005) factor to study. But the view has been changed. It is known that, accounting ethics is used to increase the confidence of shareholder because they put their trust in the company. Accounting or financial report represents the all required data that is needed to the shareholders. Without a strong code of ethics, it would be uncertain for the individuals to rely on the company. Ethics in accounting is more than just an issue as it takeover the boundaries from business practice. The Ethics in accounting is to be said as a very controversial issue now-a-days. There is an important role that played by the accountants and the accounting profession. They play a major role as they maintain and take the responsibility for accurate and reliable preparation. This paper is to find out the in-depth analysis on the accounting ethics and what is the public interest with this issue. Out comes of this paper:

• A good understanding of the necessity and limitations of ethics in accounting.
• Understand the environment of accounting and the conceptual framework which forms the fundamental of accounting.
• The scope and practice of accounting ethics.

Background

The main objective of any organization is to make money. But to do so, they must have to consider the public’s trust. Ethical accounting practice can ensure that public trust. But it is true that the business people may have the intension to do anything to make money. The purpose of ethics in accounting is to ensure control of business people under a code of conduct. “In the accounting field, the AICPA maintains and enforce a code of professional conduct for public accountants”. Besides AICPA the institute of management accountants (IMA) and the institute of internal auditors (IIA) also maintain the code of ethics“ (Smith and Smith, 21 June 2003).

‘’In the period since, 1900, accountancy has attained the stature of profession similar to law, medicine, engineering, and architecture. As with all recognized professions, it is subject to licensing, observes a code of professional ethics, requires a high level of professional competence, is dedicated to service to the public, requires a high level of academic study, and rests on a ‘common body of knowledge’. The accountant, in addition to meeting specified academic requirements, may be licensed by the state to be a certified public accountant, or CPA. This designation was first established in 1896. the primary objective was the attainment of high standards of professional competence. It is granted only upon completion of requirements specified by state statutes. Although the CPA requirements vary somewhat among states, generally they include a college degree with a major accounting, good character, from one to five years specified experience, and successful completion of a three day examination. The CPA examination, scheduled in each state simultaneously on a semiannual basis, is prepared by the American institute of certified public accountants and covers accounting theory, auditing, business law, and accounting practice.’’ (Welsch, and Anthony, 1977, p.11).

The code of ethics in accounting is important from three perspectives:

• Clients
• Professions
• Society

It is the argument in public accounting against its existence and that can be fruitless. Therefore, it is to be said that to obtain the maximum benefit for the company, the client and the society a systematic guidelines and code of ethics need to be implemented. The competition is to be considered as the first and most obvious factor. The competition is a crucial factor for implementing the ethical guidelines. Moreover, there is a strong and effective relationship among the firm size, advertising and the ethical code.

For manufacturing concerns, accounting ethics has become increasingly necessary to have reliable records, both for fixing of sales policy and for comparison of results between individual plants under the same ownership. Exact performance data are essential to furnish a gauge of the relative efficiency of plants or operating units. Statistical devices have been incorporated with the accounting system, to supply analysis, to furnish checks upon activities and to promote improved methods of production or management. With the fluctuations in prices its actual cost have been, but also what the present costs would be, and what the relative costs are between various units in different localities under the same control. There needs to maintain the ethical conduct from the perspective of client.

Ethics in accounting

In today’s economy every person or institution must account to someone for wealth owned or income earned. Economic activity generally involves the use and consumption of things having monetary value-both goods and services. Accountability is ordinarily expressed monetary term. Accounting activities involves full description of custodianship of property and its disposition in the course of exchange of goods and services. Thus accounting stands for measuring and reporting the results of economic activities. In all these activities, ethics has a greater impact and it plays a supplementary role also. For business, accounting services are of immense value, and the accounting records are the language of business. Not all firms maintain the same strategy in their recording or colleting data. So, the question is what would be the acceptable method to all and what policy would be deducted. In business there is an indispensable need of a systematic record of dealings in money or money’s worth. Nobody can remember every event that takes place in the course of business, however sharp his memory may be. So we have to pursue a systematic method of recording all those business events relating to financial affairs. Ethics has become one of the most effective that can be implemented. In addition, accounting can not implemented properly without implementing proper ethics.

Arguments for and against ethics in accounting

As it mentioned earlier, ethical norms and codes need to be maintained in the area of accounting. It is a controversial issue whether the ethics should be considered as part of accounting or not. People, who work in the accounting area, agree to maintain the high ethical standards. Whatever, it is needed to state that the discipline in accounting has not been strongly associated with ethics. The accounting ethics has not developed compared to the other discipline; for example the business ethics or marketing ethics. Most of the accountants have not had a strong ethical formation.

The ethics in accounting now-a-days, more than ever before is considered as an important issue. What ethics need to maintain, how to maintain, what are right and what are wrong has become a vital part for the management concern. Whether the motive is towards the accumulation of wealth and the growth of capital or the expansion of production and trade or operation and control of business organizations or the development of government, the need for maintaining ethics in accounting is always there. Accounting ethics is such a response to the demands of economic organizations. So, there is no doubt that the ethics in accounting is an instrument of administration and commerce.

There is one side, who argues that accounting is independent discipline and there is no need of implementing ethical issues. The logic behind their argument is that accounting is independent variable. But this logic has been treated as an weak logic.

Need and importance of ethics in accounting

“The importance of ethics must be communicated to all accountants worldwide” (Catasta, n.d., p.3). Maintaining ethics is the nerve centre of modern accounting. The modern accountants depend on facts rather than hunches and his accounting facts are organized for him by maintaining the ethics. Accounting has been appropriately described as the language of business. Without some knowledge of ethics, real understanding of accounting and of the intricate operations of the complex business unit of today is difficult to obtain. Without ethical knowledge the large scale operations of modern business, mass production, integration of related functions, wide spread systems of the distribution of goods could not be maintained. Modern business can survive only through reliance upon maintaining the ethical norm in accounting.

The need of accounting ethics for a systematic has resulted in the development of accounting. Another major purpose of ethics in accounting is to accumulate statistical and financial data which will be useful to the owners or management of a business in the guidance of the business and the determination of its policies.

It is needed to share higher level of integrity and ethics in the conduct of accounting. If it is not maintained, then there is no doubt that the ultimate sufferer would be the company. It is found that inefficient management and lower profitability were common phenomenon with those industrial units, who do not maintain proper and effective accounting ethics.

Scope of ethics in accounting

• Size: business units have grown to tremendous proportions. Operations are too extensive to be comprehended by an individual without summarized reports. So there is the ethical issue to help the management by giving the information since personal inspection of all operation is physically impossible and verbal reports are inadequate.
• Complexity of business organization: Operations of an enterprise are becoming more complex under modern economic condition, necessitating more nearly complete control through maintaining the ethical issues in accounting.
• Separation of management from ownership: the joint stock form of business organization has tended to bring into existence managers, who are not owners, and owners, who have no direct part in running the business. Management controls the business, but share-holders control the management, and in order to do this effectively these owners must have records and reports which clearly indicate what management has been doing. So, the accountant should follow the ethical steps in this case.
• Competition: in case of keen competition, profit margins tend to become narrower. Under such conditions the information to be obtained from accurate accounting records and can be especially helpful to the business management in its endeavor to reduce cost and avoid selling at price that is economically unsound. At a time when profit margins are narrow, haphazard guessing and wrong forecasting may be disastrous.
• Variety of properties: Besides the increase in the size of the business unit, there has come to be a general diversity in the properties owned by a business. This variety of properties may be due to the increase in the number of items produced by one company, and also to the largeness of territory which may be served by a single enterprise. Investment and maintenance policies relating to property often constitute a major problem in a large concern. Depreciation policy presents an involved problem for a business owning a variety of properties, especially if these properties have various length of useful life.
• Variety of investors: One of the important phenomena of modern accounting is the fact that the investment in an individual enterprise, especially the corporation, may be provided for by a large number of persons. Many investors, having varying contractual relationships with the company, make accurate records necessary to disclose the status of each.
• Taxes and government control: income tax laws require the exact computation of income. Companies act also requires periodic reports and returns to various governmental agencies. The necessity for compliance with these laws has caused businessmen to see the additional need for adequate records.
• Uniform records: the old tendency to use accounting methods planned for the convenience of the individual firm has given way to a trend towards greater uniformity in accounting systems. Statistics are valuable to the businessman in the formation of policies. Accounts, when they are comparable, are an important source of statistical data.

Ethical challenge

There are some common challenges that accounting has to face and it is necessary to take over those challenges. Some may give their opinion against it, but it isn’t a matter to consider. These ethical challenges may limit the scope of accountings and it is strongly recommended to overcome these challenges. Why these challenges are considered importantly. The following example will give the clear picture of it:

Accrual accounting provides some ethical challenges that cash accounting can avoid. For example, suppose that in 1998, Major Co. prepares $3 million advertising campaign to be conducted by Saatchi & Saatchi, a leading advertising agency. If the advertisements are scheduled to run during December, January and February, Major Co. is buying an asset with a life of three months, and the company should record the expense over the three month period. Suppose Major Co. pays for the advertisement on December 1 and the ads start running immediately Major should record one-thirds of the expense ($1million) during the year ended December 31, 1998, and two-thirds ($2million) during 1999.

Suppose 1998 is a great year for Major, net income for the year is better than expected. Major’s top managers believe that 1999 will not be as profitable. In this case, the company has a strong incentive to expense the full $3 million during 1998 in order to report all the expenses in the 1998 income statement. This unethical action will keep $2 million of advertising expense off the income statement and make operating result look (Harrison & Horngren, 2001, p.131).

Conclusions

”The objective of the accounting process is to gather and transform transaction data into useful information that measures and communicates the results of business activity” (Skousen, Langerderfer, and Albrecht , p.77). So to fulfill the objectives and obtain the desire goad it is essential and strongly recommended to maintain the ethical issues in discipline way. If any accountant feel any concern about the prospective violation of maintaining and preparing accurate books and records or any other accounting issues, should immediately report to his or her superior. The following suggestions are to be followed:

• All accounting information and other relevant issues should be included in both the group books and accounts.
• The management must ensure that the data that has been recorded is accurate and reliable.
• The data recorded must be in particular at half-year and for the end year closure.
• Each accountant is responsible for the reports and data he writes and he provides.
• There should be respect to the laws and rules existed in the country.
• Ethics should be central part of any business discipline.
• Ethics content should be applied into other discipline and other content should be applied into the ethics discipline.
• Ethics discipline should be treated equally.

References

Harrison & Horngren (2001). Financial accounting, 3^rd edition. Prentice Hall.

Ketz, J. Edward. (2005). Accouting Ethics, 4-Vols/Set. Web.

Skousen, K. Fred., Langerderfer, Q. Harold., and Albrecht , W. Steve., 3^rd edition, Financial Accounting. Worth Publishers Inc.

Smith, T. Katherine., Smith. L. Murphy, (2003). Business and Accounting Ethics. Web.

Catasta, Christine. (n.d.). FEE Ethics Working Party. PricewaterhouseCoopers.Web.

Warren, S. Carl., Reeve, M. James., and Fess, E. Philip., (2006). Accounting. 19^th edition, South-western College Publishing.

Welsch, A. Glenn., and Anthony, N. Robert (1977). Fundamentals of Financial Accounting. 3^rd edition. Illinois: Richard D. Irwin.