Accounting Ethics

Ethics should be inborn, and not followed just because we fear the consequences of going against the set down requirements and standards. As tempting as the situations in the work place might be it is good to for an accountant to be professional.

Ethics is a term that refers to a code or moral system that provides criteria for evaluating right and wrong. An ethical dilemma is a situation in which an individual or group is faced with a decision that tests this code. Many of these dilemmas are simple to recognize and resolve.

Accountants, like others operating in the business world, are faced with many ethical dilemmas, some of which are complex and difficult to resolve. For instance, the capital markets’ focus on periodic profits may tempt a company’s management to bend or even break accounting rules to inflate reported net income. In these situations, technical competence is not enough to resolve the dilemma.

ETHICS AND PROFESSIONALISM

One of the elements that many believe distinguishes a profession from other occupations is the acceptance by its members of a responsibility for the interests of those it serves. A high standard of ethical behavior is expected of those engaged in a profession. These standards often are articulated in a code of ethics. For example, law and medicine are professions that have their own codes of professional ethics. These codes provide guidance and rules to members in the performance of their professional responsibilities.

Public accounting has achieved widespread recognition as a profession. The AICPA, the national organization of professional certified public accountants, has its own Code of Professional Conduct which prescribes the ethical conduct members should strive to achieve. Similarly, the Institute of Management Accountants (IMA)—the primary national organization of accountants working in industry and government—has its own code of ethics, as does the Institute of Internal Auditors—the national organization of accountants providing internal auditing services for their own organizations.

ANALYTICAL MODEL FOR ETHICAL DECISIONS

Ethical codes are informative and helpful. However, the motivation to behave ethically must come from within oneself and not just from the fear of penalties for violating professional codes. Presented below is a sequence of steps that provide a framework for analyzing ethical issues. These steps can help you apply your own sense of right and wrong to ethical dilemmas:

Step 1. Determine the facts of the situation. This involves determining the who, what, where, when, and how.
Step 2. Identify the ethical issue and the stakeholders. Stakeholders may include shareholders, creditors, management, employees, and the community.
Step 3. Identify the values related to the situation. For example, in some situations confidentiality may be an important value that may conflict with the right to know.
Step 4. Specify the alternative courses of action.
Step 5. Evaluate the courses of action specified in step 4 in terms of their consistency with the values identified in step 3. This step may or may not lead to a suggested course of action.
Step 6. Identify the consequences of each possible course of action. If step 5 does not provide a course of action, assess the consequences of each possible course of action for all of the stakeholders involved.
Step 7. Make your decision and take any indicated action.

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A business largely depends on good and trustworthy accounting. This builds trust from investors as the financial books will always show the true position of the company. This also influences on decisions on expansions or cutting down costs.

As with other professional disciplines, understanding and upholding ethics is very important in the accounting field. Small-business investors and leaders consistently rely on the ethical collection and delivery of financial information, and are sometimes placed at risk if accounting ethics are not preserved. For a small-business owner, investor or manager, learning the basics of accounting ethics and their function is a good way to avoid legal and financial trouble.

Need for Accounting Ethics and Integrity

Businesses rely heavily on accounting ethics, whether they’re aware of it or not. Unless investors, creditors and managers can be reasonably confident that the financial recordkeeping practices of their accounting professionals are honest, straightforward and consistent with industry standards, it is unlikely they can trust their records’ accuracy. In addition, either investors or creditors may be exposed to the risk of fraud if accounting ethics and integrity standards are not upheld, which can also undermine trust in the larger markets.

Codes of Ethics

The professional accounting organizations establish codes of ethics and integrity standards that their members must adhere to in their practice. The accounting boards in each state also lay out ethical standards for membership, and state law usually requires accountants to certify with the state board in order to legally practice. States punish the violation of state-adopted ethics and integrity standards with penalties that can include the suspension of an accountant’s license.

Generally Accepted Accounting Principles

At the core of accounting ethics is the strict adherence — as much as is possible — to generally accepted accounting principles (GAAP). These are the basic rules of accounting laid out by the Financial Accounting Standards Board, and their use ensures the reliability, comparability and integrity of financial statements. In some rare cases, business circumstances may require diversions from GAAP. In these situations, accounting ethics require that any departures are fully documented and clearly justified for investors or others reading the resulting financial statements.

Ethical Theory

In accounting, ethics and integrity standards are based on a broad commitment to honesty, impartiality and objectivity. Ethical standards also require that accountants present information in the clearest and most accurate way possible, with the expectation that the information constitutes an independent report of a business’ financial situation. In most cases, this requires not just observing professional rules but also recognizing the potential for harm, using reasoning and judgment to resolve ethical conflicts and displaying moral integrity and motivation to apply a resolution.

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