It’s Time for Principal Based Accounting Ethics, Research Paper Example

Introduction

The accounting discipline in the United States and the rest of the world are harmonizing its financial reporting standards. The process involves merging accounting standards into international reporting. It also involves conversion from rule-based standards to principle-based standards. The harmonization process is being undertaken by the International Accounting Standards Board (IASB) and is mainly aimed at harmonizing iGAAP and GAAP. The harmonization will help corporations to compare financial performance and use a common reporting standard.

The code of ethics should do more than establishing minimum acceptable standards. The code of ethics should provide guidance to individual accountants and firms in situations where external regulations and explicit norms offer inadequate guidance to ensure high ethical standards are achieved. The code of ethics has not served well the various stakeholders and the accounting profession at large. Managers have come up with skills that find and utilize technical exceptions and loopholes which have made them avoid the rules and alter their financial results (Albert, 2012). This has resulted in a situation where the financial statements adhere to the GAAP principles but lack a fair representation. The consequence of this is the camouflaging of financial reporting until the problems become too big to handle.

Ethical standards should, therefore, do more than establishing minimum acceptable standards in order to ensure the close alignment of reporting standards with financial reporting objectives such as usefulness and relevance. The ethical standards should also be carefully modeled and applied to the conceptual framework that avoids loopholes and minimizes exceptions.

The five cardinal virtues of professional accountants include the following.

Integrity

Integrity is one of the most fundamental concepts in the accounting profession. The concept is composed of two elements: courage and honesty. Accountants disseminate information from sources with which they work. They are, therefore, communicators and should always tell the truth above anything else. Telling the truth not only requires courage in seeking the truth but also courage in telling the truth (Duska, Duska & Ragatz, 2011). Accountants are faced with to exaggerate, discount and modify information in order to please the receiver of information.

Objectivity

Objectivity means the acknowledgement of an external standard used to measure an accountant’s work or communication. Accounting standards are the objective principles. An example is the objective standard for financial reporting which is the fair representation of the financial operations of an organization.

Diligence

Diligence is expressed mostly in accounting by the virtual of seeking the truth. Accountants must, therefore, aware and ready to identify, organize, rank and address red flags that show potential breach and weaknesses, fraud and other issues within accounting. Diligence is specified in the AICPA code and it requires accountants to show due professional care, professional competence, and supervision, planning and collecting relevant and accurate data.

Loyalty

Professional accountants view loyalty as a balance between faithfulness to the society on one hand and the employers on the other hand. Loyalty towards the client involves maintenance of confidentiality of any information about the employer or client. An accountant must, therefore, have full confidence of his/her client or employer in order to enhance communication between them. An accountant also has a duty of loyalty to the society. This is because most of the duties of professional accountants involve tax returns, financial statements or provision of information useful in to creditors, investors, government entities, employers and consumers (Duska, Duska & Ragatz, 2011). This duty is always met as long as the accountant maintains objectivity, diligence and integrity.

Professional behavior

Accountants who maintain objectivity, integrity, loyalty and diligence are usually readily trusted than those who do not exhibit these virtues. Accountants who render services such as reviews and audits should appear to be independent in order to have the credibility to give an opinion. Accountants can comply with the ethical virtues but fail to be trustworthy if he/she engages in activities that compromise his professionalism. Some of these activities include failure to file tax returns and exaggeration of the amount due for services rendered.

We should not have a rule based ethics standards for the following reasons:

Under the rule based ethical standards, the ethical goals are promoted through a disciplinary process focuses on noncompliance with rules. The primary objective in the rule-based standard is avoiding noncompliance. However, the IFAC code, which is principal based needs more than rule enforcement. IFAC requires accountants to be enlightened on habits, circumstances, conditions and other behaviors that would threaten the observation of fundamental principles (Jeffrey, 2010). IFAC also has a conceptual framework designed to encourage not only compliance to the set of rules but also to provide accountants with optimal ethical principles in order to improve their practices and habits.

The AICPA, which is rule based adopted a conceptual framework approach that does not regard ethical principles. The AICPA emphasizes more on one particular rule, rule 101-independence. The members of the body consider threats or risks to independence beyond the restrictions laid down in interpretations. However, this is a rare application of IFAC’s threats-and-safeguards approach. This is because the approach is used as a back-up procedure to support one rule instead of ensuring continuous improvement in ethical principles.

In 2007, the ethics division of AICPA proposed for the interpretation of rule 102 that was about objectivity and integrity. The rule would require the threats-and-safeguard approach to be applied ethical principles as stated in the preamble to the code by all members. In short, the AICPA was trying to override bylaws and make the preamble enforceable. However, the draft bill has not been enacted as it did not pass the draft phase.

The AICPA is the national professional organization of certified public accountants in America (Albert, 2012). The code of conduct of the AICPA acts as an ethical standard used for self-regulation within the organization. The international Federation of Accountants (IFAC) has over 157 accounting bodies from 123 jurisdictions and countries all over the world. IFAC establishes and promotes quality standards in international accounting and enhances cooperation and collaboration among its members.

Both the IFAC and AICPA contain ethical standards. However, the contents of IFAC are more principled based compared to that of AICPA. An example is AICPA code that prohibits intentional misrepresentation. However, it is not clear the extent of actions are willful and to which actions constitutes misrepresentation (Jeffrey, 2010). On the other hand, the IFAC code emphasizes on the character of accountants. Honesty goes hand in hand with straightforwardness. Accountants are not allowed to associate with returns, reports and communications that have been presented recklessly or omits information in a misleading manner.

The AICPA and the IFAC code of ethics provide different mechanisms to conflict of interest. The ICPA code states that professional accountants shall be free from conflict of interest when delivering services. This definition is limited and circumscribed that it does not cater for the complexity of commerce. On the other hand, the IFAC code does not prohibit conflict of interest but requires accountants not to allow undue influence, personal bias and conflict of interest to affect their professional judgments.

The difference between the AICPA and the IFAC codes is that IFAC emphasizes more on behaviors and patterns that are required by professional accountants. Virtues such as integrity and honesty are addressed in greater detail and emphasizes these ethical standards should be adhered to by professional accountants.

Conclusion

The IFAC code of ethics is more principle based than the AICPA code of conduct. It is used as a model for the establishment of a principle based code of ethics for accountants in the U.S. An effective code of conduct requires careful crafting and articulation of the qualities or virtues that are associated with accounting firm or individual professional accountant.

References

Albert, D., Oddo, A. (2012). It’s Time for Principle Based Accounting Ethics. Business media, U.S: Retrieved from: https://www.google.com/search?q=It%E2%80%99s+Time+for+Principles-Based+Accounting+Ethics&rlz=1C1CHMO_enKE580KE580&oq=It%E2%80%99s+Time+for+Principles-Based+Accounting+Ethics&aqs=chrome..69i57j0.1237j0j8&sourceid=chrome&espv=210&es_sm=93&ie=UTF-8

Duska, R., Duska, B. S., & Ragatz, J. (2011). Accounting ethics. Oxford: Blackwell Publishers.

Jeffrey, C. (2010). Research on professional responsibility and ethics in accounting. Bingley, UK: Emerald.