What is Accounting Ethics?
Accounting ethics refers to following certain rules and guidelines set by governing bodies which every person associated with accounting should follow in order to prevent misuse of the financial information or their management position.
Example of Accounting Ethics
There is a company Y ltd. who appoint a company as its auditor for conducting the audit of the financial statements of the company for the financial year 2018-19. At the time of deciding the fees of the audit assignment, the company offered the fees of $ 15,000 if the clean audit opinion about the company is given by the auditor. Is it right to accept this offer by the auditor?
- In the above case company Y ltd. offers the fees of $ 15,000 to the auditor appointed by it, if the clean audit opinion about the working of the company is given by the auditor.
- This fees which have the condition of the fulfillment of certain criteria is the contingent fee which is offered by the client to the auditor and this situation is the win-win situation for both client as well as for the auditor as the auditor will get the extra fees and the company will get the clean opinion from the auditor for its working.
- This is affecting the independence of the auditor as with the extra fees auditor will help the company in giving the clean audit opinion as required.
- However, if the auditor accepts such contingent fees, then it is the misconduct of the accounting ethics because the firm is motivating the auditor to give a clean opinion by giving the incentive of the same. Hence the auditor should not accept the terms and condition of the client.
Advantages of Accounting Ethics
The different advantages related to the Accounting Ethics are as follows:
- As the different rules and guidelines are set by the governing bodies that govern the action of the person associated with the accounting profession, this prevents the misuse of the information available of the client with the accountant, auditor or any other accounting person.
- If the accounting ethics are not followed by the person then the person will be liable for the punishment as decided by the governing bodies. This creates fear in the mind of the person and leads to proper follow up of the accounting ethics.
- The businesses which pay proper attention to the accounting ethics always do better when compared with the other businesses as it creates the good image in the eyes of the customers and the other parties and thereby helps in increasing the business in the long run.
- When there is proper accounting ethics, 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 properly in the place where they are working.
- In the areas where the proper accounting ethics are followed, there is decreased legal liability. This 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.
Disadvantages of Accounting Ethics
The disadvantages related to the Accounting Ethics are as follows:
- As the proper training should be given to everyone associated with accounting for providing the information on the different rules and guideline to be followed for accounting ethics, such training involves huge cost.
- As the person is required to know each and every aspect that he has to follow and also to update the information on the regular basis for any changes if taken place, it requires lots of efforts and time of the person.
- When the person tries to follow the accounting ethics, then there are high chances that it will not get the support from the management of the company because the management will try to find and work with the person who follows the rules and guidelines which provide the benefit to the company and are thus set by them.
The different important points related to the Accounting Ethics are as follows:
- There are various rules and guidelines which are required to be followed by everyone who is associated with the accounting and some of these rule includes rule of non-acceptability of the contingent fees like setting the audit fees on the basis of the net profits of the clients, Confidentiality where the auditors have to keep all the information of its clients confidential and are not allowed to disclose it to any outsider, duty with respect to the reporting of the breach of the rules by anyone, etc.
- As the different rules and guidelines are set by the governing bodies that govern the action of the person associated with the accounting profession, this prevents the misuse of the information available of the client with the accountant, auditor or any other accounting person
Accounting Ethics is one of the important concepts according to which every person associated with the 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 various accounting professionals.
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.
This has been a guide to What is Accounting Ethics and its Definition. Here we discuss the example of accounting ethics along with advantages and disadvantages. You can learn more about accounting from the following articles –