Ethics in Accountancy, Essay Example

Ethics and principles deal with the expected behavior and accountability of the accounting profession. Ethics in accounting is of great importance to both accounting professionals and their clients. In addition to the high academic qualifications accountants must also have a high degree of professional integrity.  Certified Public Accountants (CPAs) and other accounting professionals are aware that people who rely on their services, especially those who use financial statements to make decisions expect high reliability, competentence and objectiveness from them.  The society highly expects professionals to adhere to the society’s general ethical standards for People to be confident with the quality of the services offered by professionals. Due to the high expectations, professions have adopted codes of professional conduct or codes of ethics which call for their members to adhere to a certain level of self-discipline which goes beyond the law and regulations requirements. The professional organizations in the field of ethics are not exempted in adopting these ethical codes. Each accountant’s major professional association has a code of ethics which are upheld by employees in the field of accounting.

This is an emphasis on the overriding fact that most of the decisions made by accountants and other related professional occupations are judgment calls that can go either way and which call for high degree of integrity and prudence upon the people making these decisions. There are many stakeholders both general and connected who rely on the information from accountants to make crucial decisions concerning the business entities that these accountants serve (BPP 2009). The shareholders need accurate accounting information to enable them discern whether the money they have invested is being put into good use by the management. The creditors also need to know whether the organization is able to meet its financial obligations. The suppliers as well as the customers need to know whether the organization is a going concern or it is faced by insolvency issues. Finally the regulatory authorities use the information to determine how much tax they are to levy on the organization. This wide dependency on account information therefore calls for regulation of the accounting profession to avoid the accountants duping the users of the information at their hands

There are three organizations which provide accountants with a code of ethics. These are the Institute of Internal Auditors (IA), the American Institute of Certified Public Accountants (AICPA) and the Institute of Management Accountants (IMA).each group plays a different role in the process of accounting but adhere to the same ethical code. They provide the CPAs with a set of positive guidelines and statements. The rules of conduct give specifications of what a professional accountant should or should not do and therefore accountants agree to principles which guide their profession by enrolling with one of these professional organizations. The three groups have a goal of defining the professional accountant’s responsibilities and standards to which he or she is held. The standards comprise the ability to maintain confidentiality, objectivity and  integrity  as well as professional competence. The national professional association for CPAs, The Code of Professional Conduct of the American Institute of CPAs (AICPA) sets forth rules of conduct and ethical principles for its members. The rules of conduct are more explicit as to specific actions that should or should not be taken .The principles are stated positively and give general guidelines that CPAs or any professionals should strive to adhere to.  Code of Ethics of the Institute of Internal Auditors (IIA) applies to Certified Internal Auditors (CIA’s) and its members while the Standards of Ethical conduct of The Institute of Management Accountants (IMA) apply to financial management and practitioners of management accounting (AICPA Code of Professional Conduct 1988).

Many, CPAs but not all are in public practice because they work in firms that offer   auditing, accounting among other services to public in general. The AICPA Code applies to CPAs professional conduct regardless of the organization they work for with exception of those in public practice who have some special provisions. Management accountant’s financial managers and internal auditors in most cases offer their services to their employer organizations but as professionals they too must consider their obligations to the public.

The three codes of ethics and the related professional standards place similar responsibilities on the accounting professionals. All three demand professional confidentiality competence, objectivity and integrity. The IMA, IIA and AICPA codes of ethics require that accounting professionals should not disclose confidential information to outsiders with the exception of the work papers of the professionals which are subject to subpoena by court. The ethics also requires that the accounting professionals should only perform task s that they can do to completion with professional competence and maximum care and diligence.

Another important ethical standard required for accounting professionals is independence; this means that one is and is also by others to be impartial, unbiased and objective .this applies to all accounting professionals and especially the CPAs in public practice. The AICPA’s has set detailed and technical rules concerning independence for CPAs doing audits. For example, due to lack of independence a CPA may not audit a company if he or she or dependents or the spouse has certain employment or other financial relationships with the client and or owns stock in that company (AICPA Code of Professional Conduct 1988).

Ethics Enforcement

The accounting profession is self-regulated to a large extend. Self regulation is achieved via various professional associations not the government. The IIA, IMA and AICPA utilize internal means to enforce ethical. In addition, the CPAs professional organizations in every state (state societies of CPAs), have ways of enforcing their ethical codes, which similar to the AICPA Code. The state government plays the role of issuing a CPA license to practice which is usually done through an organization called the state board of accountancy. The state laws governing the practice of accountancy encompass vital parts code of ethics of the AICPA and hence the Code is legally enforced. The penalty for violating the ethical standards is a strong disciplinary measure involving the person’s expulsion publicly from the professional organization. State and federal laws make ethical violations to have more adverse consequences for CPAs.Ethical violations for example can result in the state revoking a CPA’s license to practice on a permanent or temporary basis. A licensed CPA has likelihood of belonging to the state society of CPAs and AICPA and therefore ethics violation investigations may be done jointly by the state society, the state board of accountancy and AICPA.

Public practice CPAs who audit public corporations financial statements are subject to laws and regulations of the federal securities. The Securities and Exchange Commission (SEC), administering these laws, can regulate corporations which sell their stock to the public.  SEC requires that auditing of these corporations’ financial statements be done by a CPA who is independent. The SEC has the capabilities of establishing and enforcing auditing procedures and standards, including the rules of independence for a CPA. However, SEC has greatly delegated the role of setting standards to the private sector and retained enforcement and oversight responsibilities (IIA Code of Ethics 1988). A good example of accounting ethics and their impact on business performance is the enron scandal.

The Enron Scandal

The Enron scandal was a corporate scandal revealed in October 2001 and which involved both Enron Corporation and their auditors Arthur Andersen which was an auditing, accounting and consultancy firm. By the time of its collapse, Arthur Andersen was among the list of the top five biggest audit firms in the world. The price of Enron’s stock had taken a nosedive from a previous high of $90 for each share in 2000 to a rather dismal $0.12 by January 2002. According to Elkid and Mclean in their book Smartest Guys in the Room, the scandal grew gradually from habits values and actions which spiralled out of control after many years went and eventually led to bankruptcy. The fraudulent actions were perpetrated through direct knowledge as well as indirect actions by the management of the corporation. The major factor that destroyed the market confidence in Enron’s share and eventually occasioned their downfall was the misuse of the off balance sheet financing and their efforts to correct the misreporting of the previous periods (Konzelman & Deakin 2003 ).

To meet the market expectations Enron misrepresented its financial statements to the extent that they cast an image of a successful and well off company. This misrepresentation failed to recognize the fact that Enron was highly indebted to the loaning institutions through the structured finance plans. The other factor that led to this financial failure was the rather astronomical paychecks that made their chief executives so highly paid that the executives of the opposition looked pale in comparison. This was also heightened by the fact the companies executives were being granted hefty share options. The decline in investor confidence is what condemned Enrons shares to the sudden decline. The sudden decline in the share prices made the business operation unsustainable which eventually pushed them to file for bankruptcy in December 2001 leading to what has become the most famous business scandal as well as the biggest liquidation case so far. It was noted that Enron’s senior executives motive of keeping the company looking profitable was driven by the fact that they had huge stock options out of which they stood to benefit if the stock price was high (Konzelman & Deakin 2003 ).

Enron’s Auditors Arthur Anderson has been accused of not only being complacent in their review of the financial figures presented by their clients but of being party to the collapse. First Arthur Andersen’s Risk management standards in as far as client engagement is concerned were brought into question. The key question that was being asked of how Arthur Andersen had sought to address the issue of self review. This is where an audit firm subjects its own decisions to a review during audit (BPP Media). This was especially in appreciation of the fact that the auditors used to rake in colossal amounts of money in consultancy fees besides the audit fees. This was seen to have compromised the independence of the auditors especially since the money they made from Enron alone accounted for close to 27% of their total revenue from audit fees. Also of importance to note is the fact that the auditors failed to point out the credit risk that Enron was running due to the financing arrangements as well as that they moved to shred all the evidence they had when the scandal was eventually unearthed led to the downfall of the audit firm. They were accused by Enron’s board of malpractice leading to their eventual closure.

Conclusion

From these past experiences the accounting as well as the audit environment has been seriously regulated. This is in the form of strict risk management standards being imposed upon the practitioners. The international accounting standards board (IASB) as has issued standards that are to be applied in accountancy practice. Similarly the combined code of corporate governance defines clearly the specific responsibilities of the directors as well as the various stakeholders of the corporation. The combined code of corporate governance was revised to give a regulatory framework within which all public corporations are to be governed. The Public Company Accounting Oversight Board (PCAOB) is charged with the responsibility of regulating the auditors of public companies to ensure that the accounts they give are true and fair representation of the companies in question. This has ensured that the investors and the general public as well as the employees are not given erroneous information concerning the financial situation of the companies. The Enron scandal was not only a moment that led to major changes in the corporate governance code but also a eye opener to the investors and other big audit companies on the risks they are exposed to in their normal course of business.

References

AICPA Code of Professional Conduct. (1988). Jersey City, NJ: American Institute of Certified Public Accountants.

BPP Learning Media (2009). Corporate and Business Law.  London: BPP Publications.

Deakin, P.  Simon, H. Suzanne, J. Konzelmann, P. (2003). “Learning from Enron” ESRC Centre for Business Research University of Cambridge (Working Paper No 274) Retrieved on 05 August 2009. From: http://www.cbr.cam.ac.uk/pdf/wp274.pdf..

IMA. (1997). Statements on Management Accounting: Objectives of Management Accounting, Statement No. 1B. New York: Institute of Management Accountants.

IIA Code of Ethics. (1988). Altamonte Springs, FL: Institute of Internal Auditors.