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Why is ethics an important part of accounting?

April 30th, 2019

ethics, accounting, accountant, guidelines

What does ethics have to do with Accounting? Everything. Accounting is a representation of the business processes with numbers. In order to provide stakeholders with an accurate picture of the business operations from a financial perspective, the bookkeeping needs to be honest and accurate. While accountants adhere to ethical guidelines, the topic of ethics has become more important than ever as the corporate world has been littered with financial scandals from Enron in 2001 to Satyam Computer Services in 2009. As accountants, it is our responsibility to represent the information in a way that truly shows what is going on in the company. Failure to do so can lead to serious consequences for the company and its stakeholders.

What is ethics?

When we hear the word ‘ethics’ the first thing that comes to mind is having to make the decision between right and wrong. Many idealists say that ethics is a conditional term and what constitutes as right for one person may not be right for someone else. While this may be true in reality, when it comes to accounting it is not this simple. Ethics refers to principles such as honesty, morality and integrity. In accounting, these principles are established as a Code of Conduct that is set by governing bodies. While the ethics code varies by each country, the basic rules remain the same. In Accounting, ethics isn’t just a list of rules that needs to be followed but it is inherent with the profession itself.

The accounting industry has had its fair share of scandals – Enron’s book-keeping mis-adventure in 2001 that resulted in investors losing their retirement accounts and numerous employees losing their jobs. Another famous scandal involved India based company, Satyam Computer Services manipulating accounts to show high profits from 2003 to 2008. In recent years, regulators have become more aware of unethical practices in corporations and have made it apparent that misrepresentation of information will be unacceptable at all costs.

After these scandals, many corporations had to make changes to their decision-making process in response to their concerns over unethical practices. Financial reporting goes beyond the surface level to achieve a deeper level of transparency in corporate reporting. The company needs to have the desire to have a good ethical reputation and promote this culture in the organisation.

Why do we have an Ethics Code in accounting?

As discussed above, scandals in the global financial crisis reinforced the need for an ethical code in accounting and the need for accountants to provide a fair portrayal of the entities they work for. Ethical codes help companies ensure that they meet the standards for accurate financial reporting. Here are the reasons why the Code of Ethics exists:

1. It is inherent to the accounting profession

Accounting and ethics go hand in hand with the accounting profession. As accountants, it is important that we make neutral, unbiased decisions that help the client. If the company benefits from the sale of one financial product over another, it could lead to bias and misrepresentation of information for the client. As part of the ethics code, it is important that the information provided is not subject to any external influence.

In India, companies have to comply with Ind AS which stands for Indian Accounting Standards. These policies provide companies with principles for recognition, measurement and treatment of accounting transactions in the financial statements. The goal of Ind AS is to bring consistency to the accounting principles and practices followed by companies.

2. Information needs to remain confidential

Disclosure of any financial information during, for example, a merger or an acquisition by an accounting professional would violate the trust code. It would also be considered unethical on the part of the accountants. The Ethics code prevents a firm or organisation from doing this unless there is a legal reason for doing so.

3. The integrity of the employees

The Ethics code ensures that all members of the company demonstrate integrity and honesty in their work with clients and other professional relationships. The ethics code also prevents accountants from associating themselves with any information that could be misleading or damaging to the client or the organisation.

The European Union has regulations to protect the privacy of the clients with the General Data Protection Regime (GDPR). This is a set of privacy regulations that is applicable to all companies that store or process the client’s personal information. The policies include the right to receive a copy of the information retained by the company, data breach notifications and the requirement of each company to name the individuals who are in charge of protecting the client’s personal information. This helps ensure that the integrity of the client’s personal information is retained and there are no unsolicited leaks. If companies or individuals fail to comply with the rules and regulations listed under GDPR, it could result in serious consequences. Therefore, it is essential for companies to maintain the integrity of the employees and ensure that they abide by GDPR rules.

4. The accountant needs to be knowledgable

The accounting industry is constantly evolving and with the introduction of new technology such as automation of accounts payable, the role of accountants is changing. This means that accountants need to stay updated on their skills to provide an accurate judgment on issues faced by clients.

Possessing professional competence also includes being aware of where your skills and expertise lie and not implying that you have knowledge in areas you are not familiar with. If you are a supervisor, the code of Ethics ensures that your subordinates only carry out their duties after they receive the proper training. 

5. The company’s reputation

The code of Ethics states that accountants need to abide by all the rules and regulations listed by the governing body. This will help the company maintain professionalism and ensure that the financial statements are a fair and accurate representation of the company’s position. Failure to comply with the Ethics code can affect the reputation of the company and could even land them in legal trouble!

In the U.K companies need to comply with the U.K GAAP which is a regulatory body that states how financial statements should be prepared in the U.K. The goal of the GAAP is to standardise accounting practices and ensure that all companies maintain integrity and professionalism when it comes to preparing financial statements.

6. Tax payments

All companies have a legal obligation to represent accurate financial information on their tax forms. Some companies can provide inaccurate information to the tax authority to reduce their financial burden. However, they can face perjury and high fines if they get caught. The Code of Ethics ensures that accurate information is provided when filing taxes and keeps you in the clear.

7. Financial planning

It is the duty of the accountants to provide information that helps facilitate planning for the future of the business. In addition to accuracy, the information needs to be provided in a timely manner so that the company can make sound judgments based on the numbers. Failure to do so can result in missed opportunities and higher costs for the organisation.

The Code of Ethics helps companies ensure that there is no misrepresentation of the numbers or information provided to the stakeholders in the company. The rules and regulations stated on the document by the governing body need to be followed by every accounting process in the organisation to ensure that accurate and reliable information is presented to the users of the information. Decision-making doesn’t always come down to a ‘yes’ or ‘no’ and there is always a grey area. Ethics gives accounting companies more clarity in this area of doubt.

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