Accounting Ethics

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.

Example of Accounting Ethics

There is a company, Y ltd. who appoints a company as its auditor for conducting the audit of the financial statements of the company 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 gives a clean audit opinion about the company. 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 auditor gives the clean audit opinion about the working of the company.
• These fees, which have the condition of the fulfilment of specific criteria, is 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.read more that is offered by the client to the auditor. 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 a 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 providing the incentive of the same. Hence the auditor should not accept the terms and conditions of the client.

Advantages of Accounting Ethics

1. 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.
2. If the person does not follow it, 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 follow up appropriately.
3. The businesses which pay proper attention to accounting ethics always do better when compared with the other businesses as it creates the right image in the eyes of the customers and the other parties and thereby helps in increasing the business in the long run.
4. 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 place where they are working.
5. 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.

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Disadvantages of Accounting Ethics

1. As the proper training should be given to everyone associated with accounting for providing the information on the different rules and guidelines to be followed for accounting ethics, such training involves a considerable cost.
2. As the person is required to know every aspect that he has to follow and also to update the information regularly for any changes if taken place, it requires lots of efforts and time of the person.
3. When a person tries to follow the accounting ethics, there are high chances that it will not get the support from the management of the company. Management will try to find and work with the person who follows the rules and guidelines which provide the benefit to the company.

Important Points

• There are various rules and guidelines which are required to be followed by everyone who is 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 where 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.read more have to keep all the information of its 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 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.

Conclusion

Accounting Ethics is one of the critical 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 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.read more 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.

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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 –

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