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Ethical Standards in Accounting

In: Business and Management

Submitted By socalbanshee
Words 3480
Pages 14
Table of Contents
Abstract 3
Introduction 4
Importance of Transparency 7
What Regulation Typically Covers 7
Regulatory Agencies 8
Accounting Reform 10
Conclusion 13
References 15

Abstract
Within the accounting profession there are many complex ethical issues that must be dealt with quite often. It is important that the people working within the industry provide high quality financial statements and always pay close attention to ethical concerns that may arise. Since ethics is such a major concern in the accounting industry, a rules based system is in place for enforcing ethical concerns. There are many regulating bodies that exist that enforce many highly detailed regulations that people within the industry must follow at all times. Throughout history there have been several major accounting scandals that have been followed by new regulation to ensure that these problems do not come up again. CLERP 9 and the Sarbanes-Oxley Act are just a couple of acts that have caused significant changes to the accounting world in recent times. This paper will look at some of the different issues that accountants face as well as some of the regulations that seek to end unethical behavior.

Ethical Standards in Accounting
Introduction
The accounting industry is an always changing and constantly growing industry. Accounting plays a vital role in society and business and up until recently accounting was considered to have some of the highest standards for ethical and moral conduct in business. In recent years there have been many high profile business failures caused by the unethical behavior or accountants and accounting firms. Since some major companies, like Enron were involved in serious financial scandals, there has been a push to increase regulation and oversight over financial reporting. At one time accounting professionals were believed to have the highest integrity of all professionals; however, recent events have caused a loss of credibility and public trust. This loss of credibility shows that the public holds accounting professionals to a very high standard. Accountants are responsible for ensuring that financial statements are precise and provide factual information, for these reasons it is extremely important for there to be a high standard of ethics in the accounting world.
Reasons for Ethics and Regulation in Accounting
It is well known that creditability is an important virtue for an accountant to have. In a capitalist economy, the creation of wealth and the economy greatly depend on public and investor confidence. Ethics and transparency play a major role in ensuring that people within the accounting and financial industries continue to do the right thing. Accountants perform a number of tasks and contribute in nearly every aspect of the financial sector. This is one reason that there is a strong need for strong ethics and regulation in the accounting profession.
Every profession has specific skills, knowledge, and ethics that are needed for that particular job. The type of regulation needed in a particular field is highly dependent on the type of standards that must be met in that industry. “When a profession such as the accounting profession provides an important public service, it is imperative, it serves and acts in the publics interest” (International Federation of Accountants, 2011). Sustainability for the accounting industry is highly dependent on providing quality services and the ethical behavior of those who work within this field. As well as their ability to respond effectively and efficiently to the demands placed upon them by society and the economy. Regulation helps to ensure high quality, and consistent reporting in the accounting profession.
There are numerous reasons that regulation may be required to maintain suitable quality accounting services. Complying with ethical, technical, and professional standards as well as representing the needs of non-contracting users of accounting services such as creditors and investors are a few reasons compliance of accounting professionals must be ensured. Regulatory change will clearly be needed over time to ensure continued compliance; however, there seems to be some generally accepted reasons as to why regulation is an effective means of ensuring standards of quality and addressing inefficiencies of accounting services. The first reason that regulation is needed is:
Regulation can address the knowledge imbalance between the provider and purchaser of professional services by providing a level of comfort to the purchaser that the provider has the necessary qualifications and is obligated to meet the appropriate professional standards in his or her work. In this way, the purchaser is given comfort that they are receiving services of the right quality. (International Federation of Accountants, 2011)
The second thing that regulation does is ensure that any benefits and costs that may be incurred by third parties are taken into account. This means that the purchaser and provider of accounting services are not the only ones who can be affected by the quality of services provided. A great example of this is investors using a company’s financial statements to make decisions on where to invest. If unregulated, an unethical accounting firm could easily provide false information about a business that could then be used by an investor to make decisions. Obviously if these statements were not correct or not reported in a standardized way there could be severe consequences for the investor. This could potentially spiral out of control and lead to problems for the entire economy and society as a whole.
Regulation
In order to ensure that accountants continue to deliver quality services that provide ethical, reliable, and comparable products that will contribute to economic growth, many changes have been made to the regulatory environment in the accounting industry. There are still many debates regarding the ideal regulation; however, changes have been made because of various shortcomings in previous regulations. It is important to note that accounting rules and regulations are constantly changing to better ensure the quality of accounting regulation. In fact, the U.S. Securities and Exchange Commission (SEC) continually proposes new rules and even encourages the public to submit comments on the proposed rules during the comment period. We will further discuss the SEC and their role later. Anytime regulation is being proposed or implemented great care should be taken to ensure that the operation of the market and its characteristics are well understood. Failure to do so will likely cause the regulation from doing what it was intended to do. “To meet the public interest, regulation must be proportionate, transparent, non-discriminatory, targeted, implemented consistently and fairly, and subject to regular review” (International Federation of Accountants, 2011). Additionally, for the regulations to be worthwhile the benefits to the economy and society should be greater than the costs of the regulation.
Importance of Transparency
Transparency is an important mechanism to ensure that ethical behavior is followed; however, it also does things like increase consumer confidence. Not only is transparency important in accounting, it is also important in the regulation process. Transparency by the regulating agencies enables the public to understand and know exactly how the accounting profession is being regulated. This unquestionably adds to the credibility of the regulation and gives the public a way to judge the importance of the regulation and the full extent of its influence over the market.
After the public is aware of how the industry is being regulated, not only do they gain trust, but they also gain a better understanding of how accounting professionals should be behaving. According to John White and James Kroeker (2008) “transparency is the cornerstone of world class financial reporting.” When unbiased and transparent information exists, investors are able to make informed decisions based upon a company’s actual financial performance. White and Kroeker (2008) go on to say, “transparent financial reporting that conveys a complete and understandable picture of a company’s financial position reduces uncertainty in our markets.” When clear and concise information is available for decision makers about a company surprises are much less likely. This greatly reduces the risks for investors and the market. As you can see transparency is an important part in maintaining ethical behavior in financial reporting and we will discuss what regulatory agencies are doing to ensure greater transparency a little later.
What Regulation Typically Covers
Every industry has regulations that are designed to help prevent industry specific problems. The accounting industry is no different and there is a tremendous amount of regulation throughout all aspects of the industry. The goal of these regulations is always to provide a strong foundation for all stakeholders. Regulation is also typically standardized in order to ensure that high standards exist in all areas.
In the accounting profession regulation generally covers the following: licensing the professionals within the industry, creating rules for education and continued professional development, supervising these individuals after they are licensed to ensure that they behave in a professional manner and meet performance expectations, provide ethical guidelines, create standardized ways of reporting that ensures accurate representation of financial statements, and of course outlines disciplinary rules and procedures. There seems to be endless regulation in the accounting profession, yet most all of the regulations set out to ensure that people within the accounting industry remain ethical and follow the law.
Regulatory Agencies
The number of regulatory agencies in the accounting industry is astounding; listing all of them is nearly impossible. Regulatory agencies exist at all different levels, including: international, national, state, and local. Below we will identify and briefly discuss the main functions of some of the most important and well know agencies.
We will first look at the international level; in today’s global economy there is increasingly more global companies, investors, and lenders. This has raised the demand for accounting reports to be more comparable. “To that end, the International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS) that identify preferred accounting practices” (Wild, Shaw, Chiappetta, 2011, p. 9). Regulations between other agencies and IASB are becoming much closer to being the same, meaning that many companies can use one set of financial statements, while still meeting the requirements of multiple agencies. An important thing to realize is that IASB is an independent, not for profit organization that works to protect public interest by ensuring performance and ethics in financial reporting.
We will now take a look at the two main groups that establish what are known as generally accepted accounting principles in the Untied States. One of these groups is the Financial Accounting Standards Board (FASB). Much like the IASB, FASB is an independent organization that has been the appointed organization for the private sector in the United States for establishing standards. The second main group in the U.S. known as the Securities and Exchange Commission (SEC) officially recognizes these standards. “The mission of the FASB is to establish and improve standards of financial accounting reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports” (Financial Accounting Standards Board, 2012). The FASB has a structured procedure for overseeing and creating new standards, which constantly adapt to and improve current conditions in financial reporting.
As stated above the SEC is the other main entity responsible for setting standards in the United States. “The Securities and Exchange commissions (SEC) is the government group that establishes reporting requirements for public companies” (Wild, Shaw, & Chiappetta, 2009, p. 8). This is different then the FASB which only sets standards for the private sector, although they share many of the same regulations. The SEC was created as a result of the Securities Exchange Act of 1934 at the peak of the great depression. The SEC was designed to restore investor confidence in the markets by providing more reliable information and a set of concise rules.
The SEC works hard to create and enforce regulations that protect everyone from the individual first time investor the billion-dollar company. “The mission of the U.S. Securities and Exchange Commision is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation” (U.S. Securities and Exchange Commision, 2012). Within the SEC there are many different divisions that all work closely together one such division is the Division of Enforcement, because above all else, the SEC is a law enforcement agency this is a rather important division of the SEC. The agency has the ability to bring both civil action as well as administrative action against those who violate the SEC rules and regulations. The SEC has proven to be a valuable enforcer of the rules as well as a major deterrent for unethical behavior.
Accounting Reform
Over the years there has been a number of reform acts designed to ensure that companies and individuals do the right things. Throughout history we have had the Securities Act of 1933 immediately followed by the Securities Exchange act of 1934, which was that act that created the SEC. More recent reform acts include the Coporate Law Economic Reform Program Act (CLERP 9) and the Sarbanes-Oxley Act (SOX). CLERP 9 was created in Australia in response to the collapse of HIH. This created many changes in financial reporting, auditors independence, disclosure, and enhanced penalty provisions. “As part of the Corporate Law Economic Reform Program 9 (CLERP 9) reforms, specific whistleblowing provisions were introduced into the Coporations Act 2001 in 2004, with the insertion of Part 9.4AAA entitled ‘Protection for Whistleblowers” (Pascoe, Welsh, 2011). Whistleblowing protection can be a major factor in discovering and promoting ethical behavior. Pascoe and Welsh (2011) state that “one of the principal ways of ensuring the effectiveness of a company’s ethical guidelines is the establishment of a well-supported whistleblower program for dealing with disclosure of problems and misconduct within the company.” There is strong evidence that shows that whistelblowing programs in companies can greatly increase ethical standards within a company. This is just one of the many ways that CLERP 9 has helped increase the ethical behavior of companies in Austrilia. In America without a doubt the biggest reform measure in recent history came as a result as SOX. Sox was proclaimed in 2002 to restore integrity and public confidence to the financial markets after major accounting scandals were uncovered at some major companies including Enron, Adelphia, WorldCom, Tyco International, and Peregrine Systems. SOX created new standards for public accounting firms, the boards of publicly traded companies as well as their management teams. The act was named after Paul Sarbanes of the U.S. senate and Michael Oxley form the U.S. house of representatives.
The SOX act is made up of eleven different sections that outline corporate board responsibilities, criminal penalties, and everything in between. The SEC has been given the job of enforcing the act. One of the major differences between SOX and other acts that have been created over the years is the fact that SOX includes specific rules that aim to ensure ethical behavior.
Ethics is an extremely important when reporting sensitive financial information. Richard Orin (2010) says, “Sarbanes-Oxley contains a variety of provisions regarding business ethics” (p. 142). The sections that we are particularly concerned with are sections 406 and 203 because they both create a strong foundation for ethical behavior. Section 406 is called Code of ethics for senior financial officers, this part of the act requires publicly traded companies to create a code of ethics for their financial officers that include methods for enforcement. The additional section that we are concerned with is section 203.. This section mandates that outside auditors be rotated after a set period of time to eliminate any conflicts of interest. Each of the sections describe above work together to create higher ethical standards within companies. Section 406 of SOX does more to ensure ethical behavior in companies than any other. One reason that ethics are so tough to enforce is because not everyone agrees on what is ethical, as individuals and companies all have their own beliefs. “Consistent with the philosophy of individually, the SEC did not set forth a model code of ethics” (Orin, 2010, p. 149). Instead, the SEC came up with some general guidelines that should be followed and that each company’s code of ethics should address. A few of the recommendations included include accuracy and retention of business records, payments and gifts to third parties, conflicts of interest, tax violations, and many others. “Similarly, without delving into details, the rules make clear that every code should contain an enforcement mechanism that includes both “severe penalties for violations” and a formal procedure for waivers of compliance” (Orin, 2010, p. 149). In a completely random analysis of 39 different company’s codes of ethics, it was found that most companies have in fact, created a code of ethics that is in compliance. This is a direct result of part 406 of the act. The general consensus is that most companies are adopting a code of ethics as well as enforcing these codes; this will undoubtedly lead to more ethical companies. Section 203 also works to improve ethics and eliminate conflicts of interest. First section 203 requires that companies rotate external audit partners every five years. “The accounting profession has long recognized that auditor independence is essential to achieving the essential goals of being objective and avoiding conflicts of interest” (Orin, 2010, p. 153). It seems obvious that having an outside, independent, auditor go over a company’s financials is great ways to ensure actuate and unbiased information is passed on to the public. The problem with this is that after a period of time companies may develop relationships that could potentially cause conflicts of interest. This is what section 203 of SOX aims to prevent by requiring that companies change auditors on a regular basis. There are many other things that SOX does to promote ethical behavior in addition to sections 406 and 203. “For example, under the Sarbanes-Oxley Act, the U.S. Department of Labor (DOL) directly protects whistle-blowers who report violations of the law and refuse to engage in any action made unlawful” (Ferrell, Fraedrich, Ferrell, 2011, p. 191). Whistleblowing protection can greatly improve ethical conduct within a company, as people are more likely to report unethical behavior. In addition, “compliance with Sarbanes-Oxley 404 requires not merely changes in accounting but a change in corporate culture” (Ferrell, Fraedrich, Ferrell, 2011, p. 183). The purpose of this section is to reveal mismanagement and other problems within a corporate culture. It is indisputable that the Sarbanes-Oxley Act has done a great deal to ensure more ethical behavior throughout the financial world.
Conclusion
It is easy to understand that ethical concerns in accounting are extremely important as misleading financial reports can cause havoc on the markets. This is why there are endless rules and regulations in the accounting profession. A number of high profile scandals have provoked even grater regulation of the industry. Many argue that a values based ethics system is a better way to motivate ethical behavior in people; however, in an industry as large as the accounting industry, which has a major impact on many parts of society a compliance based system seems like a better way to ensure ethical behavior. As illustrated above regulations created as a result of programs such as CLERP 9 and Sarbanes-Oxley have done a lot to increase ethical behavior throughout the accounting industry. It will be interesting to see how these relatively new regulations work to create accounting professionals that provide high quality financial statements. It is likely that new ethical dilemmas will arise in the future and new laws and regulations will have to be implemented to ensure the continued ethical behavior of people within the industry.

References
Ferrell, O. C., Fraedrich, J., & Ferrell, L. (2011). Business ethics: Ethical decision making and cases. (9th ed., Vol. ed.). Mason, OH: South-Western Cengage Learning.
Financial Accounting Standards Board. (2012). Facts about FASB. Retrieved July 30, 2012, from FASB: http://fasb.org/jsp/FASB/Page?sectionPage&cid=1176154526495
International Federation of Accountants. (2011). Regulation of the Accountancy Profession. New York: International Federation of Accountants.
Orin, R. M. (2008). Ethical Guidance and Constraint Under the Sarbanes-Oxley Act of 2002. Journal Of Accounting, Auditing & Finance, 23(1), 141-171.
Pascoe, J., & Welsh, M. (2011). Whistleblowing, Ethics and Corporate Culture: Theory and Practice in Australia. Common Law World Review, 40(2), 144-173. doi:10.1350/clwr.2011.40.2.0213
U.S. Securities and Exchange Commision. (2012, July 30). How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation. Retrieved July 31, 2012, from U.S. Securties and Exchange Commision Web site: http://sec.gov/about/whatwedo.shtml
White, J., & Kroeker, J. (2008, September 18). Testimony Concerning Transparency in Accounting, Proposed Changes in Accounting for Off-Balance Sheet Entities. Retrieved July 30, 2012, from Securities and Exchange Commission: http://www.sec.gov/news/testimony/2008/ts091808jww-jlk.htm
Wild, J., Shaw, K., & Chiappetta, B. (2009). Financial an Managerial Accounting (Vol. 3rd ed.). New York, New York: McGraw-Hill/Irwin.

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...Accounting ethics is primarily a field of applied ethics and is part ofbusiness ethics and human ethics, the study of moral values and judgments as they apply to accountancy. It is an example of professional ethics. Accounting introduced by Luca Pacioli, and later expanded by government groups, professional organizations, and independent companies. Ethics are taught in accounting courses at higher education institutions as well as by companies training accountants and auditors. Due to the diverse range of accounting services and recent corporate collapses, attention has been drawn to ethical standards accepted within the accounting profession.[2] These collapses have resulted in a widespread disregard for the reputation of the accounting profession.[3] To combat the criticism and prevent fraudulent accounting, various accounting organizations and governments have developed regulations and remedies for improved ethics among the accounting profession. ------------------------------------------------- Importance of ethics The nature of the work carried out by accountants and auditors requires a high level of ethics. Shareholders, potential shareholders, and other users of the financial statements rely heavily on the yearly financial statements of a company as they can use this information to make an informed decision about investment.[4] They rely on the opinion of the accountants who prepared the statements, as well as the auditors that verified it, to present a true and fair...

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Reporting Practices and Ethics

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