What Is 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.
Accounting Ethics is one of the critical concepts according to which every person associated with accounting has to follow certain types of rules and guidelines set by the different governing bodies having the power to set the same. These rules and guidelines prevent the misuse of the different powers given to the variousAccounting is the process of processing and recording financial information on behalf of a business, and it serves as the foundation for all subsequent financial statements. accountingAccountingAccounting is the process of processing and recording financial information on behalf of a business, and it serves as the foundation for all subsequent financial statements. professionals.
Accounting Ethics Explained
Accounting ethics are the various rules and guidelines required to be followed by everyone associated with accounting. Some of these rules include the rule of non-acceptability of the contingent fees, like setting the audit fees based on the net profits of the clients, Confidentiality whereAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws. the auditorsThe AuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws. have to keep all the information of their clients confidential and are not allowed to disclose it to any outsider, duty concerning the reporting of the breach of the rules by anyone, etc.
As the different accounting ethics code, rules and guidelines are set by the governing bodies that govern the person’s activities associated with the accounting profession, this prevents the misuse of the information available to the client by the accountant, auditor, or any other accounting person.
Also, in the areas where the proper accounting ethics are followed, there is decreased legal liability as almost all the things are taken care of well in advance by the concerned persons, and it creates a better Professional Environment as everyone has the proper mindset of maintaining the high level of ethical standards.
Thus, ethics in the accounting field helps in maintaining a credible and sustainable business practice so that the general public can have faith and trust on the financial information and reports that they use to make investment decisions. It ensures transparency, accuracy, and fair presentation of information and prevents unethical practices or fraud.
Some important ethics related to accounting procedures are given below:
- Integrity – Every accountant working in various industries are expected to have qualities like trustworthiness, high moral and honesty in their approach. They should have a professional attitude and work without compromising on their honesty and integrity related to the financial information that they are handling.
- Professional competence – They should have the capacity to upgrade and improve their level of skills and knowledge, know the current relevant accounting standards, laws and changes in them and provide reliable and accurate financial information.
- Protection of information – Accountants have the responsibility to protect the confidential information that the clients entrust them with. They are not suppose to disclose them to any outsider, unlawfully, for personal gain or without any authority to do so. This is a very important part of professional accounting ethics.
- Abide by laws – They should comply with the applicable rules, regulations or accounting standards. They must stay away from any fraud, or illegal act or even people doing so.
- Objective – Their attitude should be objective and unbiased. They should not make any decisions with information from unreliable sources or involving any personal bias. There should not be any conflict of interest in the work process.
- Social responsibility – Accounting ethics also involve a certain amount of social responsibility. Therefore, the accounting work should have a positive social and environmental impact. They should create a sustainable business process that contributes to society’s well-being.
It is essential to maintain and follow the above principles strictly while working as an accountant in any organization. Maintaining the accounting ethics code helps both the entity and the professional to grow and work for the benefit and development of each other.
Let us try to understand the concept with the help of some suitable examples.
There is a company, Y ltd. Who appoints a company as its auditor for conducting the audit of the company’s financial statements for the fiscal year 2018-19. At the time of deciding the fees of the audit assignment, the company offered the payments of $ 15,000 if the auditor gave a clean audit opinion about the company. Is it right to accept this offer from the auditor?
- In the above case, company Y ltd. Offers the fees of $ 15,000 to the auditor appointed by it if the auditor gives a clean audit opinion about the company’s working.
- These fees, which have the condition of the fulfillment of specific criteria, are the contingent feeThe Contingent FeeA contingent fee is compensation payable only if the outcome acquired is favourable or a particular objective is accomplished. It is a widely used fee structure in the US, especially in the law practice. Also, it is termed a conditional fee in the England and Wales. offered by the client to the auditor. This situation is a win-win situation for both client and the auditor as the auditor will get the extra fees, and the company will get a clean opinion from the auditor for its work.
- It is affecting the auditor’s independence as with the extra fees the auditor will help the company give a clean audit opinion as required, which is affecting the accounting ethics standards.
- However, suppose the auditor accepts such contingent fees. In that case, it is misconduct of accounting ethics because the firm is motivating the auditor to give a clean opinion by providing the incentive. Hence the auditor should not accept the terms and conditions of the client.
The above example clearly states the important of professional ethics in accounting. It also identifies the effects of accounting ethics issues, unethical behavior and how it negatively affects both the organization and accountant in the long run.
Every financial concept has its own advantage and disadvantage. Let us try to identify the advantages of the process first.
- As the different rules and guidelines are set by the governing bodies that govern the person’s activities associated with the accounting profession, this prevents the misuse of the information available to the client by the accountant, auditor, or any other accounting person.
- If the person does not follow professional accounting ethics, then the person will be liable for the punishment decided by the governing bodies. It creates fear in the person’s mind and leads to follow-up appropriately.
- The businesses that pay proper attention to the accounting ethics standards always do better compared to other businesses. It creates the right image in the eyes of the customers and the other parties and thereby helps increase the business in the long run.
- It creates a better Professional Environment as everyone has the proper mindset of maintaining a high level of ethical standards. Also, respect is given to that person who follows the ethics accurately in the workplace.
- There is decreased legal liability. It is so because almost all the things are taken care of well in advance by the concerned persons so that they are liable for any legal actions.
The disadvantages of the process are given below.
- As the proper training should be given to everyone associated with accounting to provide the information on the different rules and guidelines for accounting ethics, such training involves a considerable cost.
- As the person is required to know every aspect of accounting ethics issues that he has to follow and update the information regularly for any changes that take place, it requires lots of effort and time.
- When a person tries to follow accounting ethics, there are high chances that they will not get support from the company’s management. Management will try to find and work with the person who follows the rules and guidelines that benefit the company.
Proper understanding of the positive and negative sides of a concept is very important in order to be able to implement and use it for productive purpose that will guide the business as well as the society in proper direction of growth and expansion.
This has been a guide to what is Accounting Ethics. We explain its principles, along with examples, advantages and disadvantages. You can learn more about accounting from the following articles –