Accounting Ethics is highly important in business let us understand why.
What is the difference between ethics and law?
Simply law can be identified as structured set of rules and regulations created by particular authority such as government or an entity to govern the actions and behavior of its members and it can be enforced by imposing penalties. However, ethics are different from the law as it is not imposed by any party rather it’s an obligation to do the right thing in a given situation. It is more of moral values one’s have in themselves to choose right from the wrong. Ethics are the principles that guide a person or society to decide what is good or bad, right or wrong to lead a good life.
What are Accounting ethics?
Accounting ethics refers to following specific rules and guidelines set by governing bodies that every person associated with accounting should follow to prevent misuse of the financial information or their management position.
Many accounting governing bodies such as CPA, ACCA, CIMA, IFAC have introduced a code of conduct/code of ethics to their members or students, accounting professionals, to prevent the misuse of the information available of the client with the accountant, auditor, or any other accounting person. If any accountant professional does not follow these rules and guidelines then he/she will be liable to any punishment as decided by the governing body and it may risk their accounting profession as well.
Although the rules set out by different bodies are unique, some rules and guidelines are common and used by many governing bodies. Following are the five fundamental principles;
A professional accountant shall comply with the principle of integrity, which requires an accountant to be straightforward and honest in all professional and business relationships. An accountant should not be associated with any information that he/she believes contain a materially false or misleading statemen or which is misleading by omission.
A professional accountant shall comply with the principle of objectivity, which requires an accountant not to compromise professional or business judgment because of bias, conflict of interest or undue influence of others.
3. Professional competence and due care
A professional accountant shall comply with the principle of professional competency and due care, which requires an ongoing commitment to his/her level of professional knowledge and skill based on current development in practice, legislation and techniques. A professional accountant shall take reasonable steps to ensure that those working in a professional capacity under the accountant’s authority have appropriate training and supervision.
A professional accountant shall comply with the principle of confidentiality, which requires an accountant to respect the confidentiality of information acquired as a result of professional and business relationships unless he/she has specific permission or a legal or professional duty to do so.
5. Professional behavior
A professional accountant shall comply with the principle of professional behavior, which requires an accountant to comply with relevant laws and regulations and avoid any conduct that the accountant knows or should know might discredit the profession. A professional accountant shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession, and as a result would be incompatible with the fundamental principles.
Importance of Accounting ethics to the business
Accounting ethics is very important as accountants have the access to the financial information of individuals and entities and it creates the potential possibility of abusing information or manipulating numbers to enhance the company image or to cover up any fraud. Ethics are important factor, especially, in an audit and it is mandatory to follow accounting ethics in an audit.
If anyone fails to adhere these accounting ethics, a business could lose customers, have trouble retaining employees, struggle to stay afloat, lose other business relationships such as investors and have serious legal repercussions. In addition, investors, customers, and employees might lose faith in the business and brand.
One of the best examples in the history is the “Enron Scandal”, one of the biggest bankruptcy filings in the history of the United States. It involves series of events that resulted in the bankruptcy of the U.S. energy, commodities, and services company Enron Corporation and the dissolution of Arthur Andersen LLP, which had been one of the largest auditing and accounting companies in the world due to the accounting and auditing malpractices.
(Read more: https://www.britannica.com/event/Enron-scandal)
Moral of the story is regardless of someone being a professional accountant or a bookkeeper for their own company, everyone needs to follow ethics in accounting.