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A line in the sand, maintaining ethics on million dollar accounts

BY :  Kay Easton | February 19, 2013

What's the current state of ethics in accounting? Accounting professionals have moral and ethical obligations to follow in their work.
Ethics in accounting seem straightforward
If you read the American Institute of CPAs (AICPA) standards of professional conduct, they are crystal clear about the responsibilities and behaviors of accounting professionals. They should:

  1. Exercise sensitive professional and moral judgments in all activities.
  2. Act in a way that serves the public interest, honors the public trust, and demonstrates commitment to the profession.
  3. Maintain and broaden public confidence by performing with the highest sense of integrity.
  4. Maintain objectivity, be free of conflicts of interest, and be independent in fact and appearance.
  5. Observe technical and ethical standards and strive to improve competence and quality of service.
  6. Observe the Principles of the Code of Professional Conduct.

The Chartered Institute of Management Accountants and the Institute of Internal Auditors have similar codes of ethics. Last year, the International Ethics Standards Board for Accountants proposed a revision to the Code of Ethics for Professional Accountants addressing the circumstances under which a professional accountant has a right to "override the fundamental principle of confidentiality and disclose a suspected illegal act to an appropriate external authority."

However, since 2000, more than 40 major accounting scandals have rocked the financial world. Large corporations like Enron, Xerox, Freddie Mac, Merrill Lynch, Chiquita Brands International, and AIG have set aside integrity and trust to falsify financial results, understate earnings, overstate assets and liabilities, inflate revenues, make illegal payments, and use misleading accounting practices. And where was the accountability of their Big Four accounting firms - Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers?

The three top reasons to manipulate financial statements are not going to go away, says Troy Adkins, investment consultant, in an article on Investopedia. Compensation for corporate executives is tied to financial performance, the Generally Accepted Accounting Principles are quite flexible, which allows a company to paint a "rosier than reality" financial picture, and auditing firms are compensated by the companies they are auditing, which provides a reason to keep the client happy.

Everyone seems to acknowledge that there is an ethics problem in the world of accounting, so what should be done?

What's the solution?

The Securities and Exchange Commission is charged with monitoring and prosecuting corporate and accounting abuses, but an online Forbes article by Francine McKenna suggests that they're not doing a very good job.

In response to financial and accounting abuses, the Sarbanes-Oxley Act was enacted in 2002. In addition to increasing the severity of penalties and requiring top management to certify the accuracy of financial information, it increases the oversight responsibility of a company's board of directors, and increases the independence of outside auditors. It also includes enhanced whistle-blower protection provisions. The Dodd-Frank Act of 2010 established a Public Company Accounting Oversight Board with the authority to provide oversight of certified public accounting firms.

There are federal rules and laws and codes of conduct and codes of ethics that prohibit abuses and clearly outline right and wrong behaviors. However, with millions and even billions of dollars involved, the line between right and wrong is apparently blurred for many.

Is it up to individual accounting professionals to make the moral choice?

Many accounting professionals are reluctant to blow the whistle on wrong or illegal accounting and financial behavior because it can cause a company to fail and necessitate laying off thousands of employees; corporate executives could also be saddled with huge fines and even go to jail.

Some audit firms pressure accountants to make sure deadlines are met no matter what, and in some cases, to overlook certain errors. Accountants may be asked to document audit procedures that haven't been performed and record fewer hours than they actually worked to meet time budgets - both ethical missteps. But an accountant's job could hang in the balance if he or she refuses. They could also lose their jobs and much more if they comply and are caught.

What about ethics courses?

A battle has been raging since the time of Socrates as to whether or not ethics can be taught. Socrates posited that ethics is "knowing what to do" and that knowledge can be taught. Santa Clara University published an article that discusses the observations on ethics by noted psychologist James Rest, who believed that behavior is influenced by moral perceptions and judgments, which can be positively influenced by formal education. The research of late Harvard psychologist Lawrence Kohlberg shows that the ability to think morally develops in stages and he believed it could, therefore, be influenced by education.

To this end, more and more accounting curriculums are requiring students to take accounting ethics classes. Hopefully, future accounting scandals can be avoided by accountants who pay closer attention to their moral compasses.

Can Ethics Be Taught? • http://www.scu.edu/http://www.scu.edu/ethics/practicing/decision
• Republished from 1987

Code of Ethics • https://na.theiia.org/https://na.theiia.org/standards-guidance/mandatory-guidance/pages/code-of-ethics.aspx

Code of Ethics • http://www.cimaglobal.com/http://www.cimaglobal.com/Professional-ethics/Ethics/CIMA-code-of-ethics-for-professional-accountants/

Exposure Draft • Aug 01, 2012 • https://www.ifac.org/https://www.ifac.org/sites/default/files/publications

Francine McKenna • The SEC and Accounting Fraud Enforcement: There's no • Nov 12, 2009 • http://www.forbes.com/http://www.forbes.com/sites/francinemckenna/2012

Jonathan Freedman • What Is an • http://smallbusiness.chron.com/http://smallbusiness.chron.com/ethical-issue-financial-accounting-57889.html

Jonathan Lister • Ethical Issues Facing the Accounting Profession • http://smallbusiness.comhttp://smallbusiness.chron.com/ethical-issues-facing-accounting-profession-18307.html

Standards of Professional Conduct • http://www.aicpa.org/http://www.aicpa.org/research/standards/codeofconduct

Troy Adkins • Financial Statement Manipulation An Ever-Present Problem For Investors • Nov 03, 2009 • http://www.investopedia.comhttp://www.investopedia.com/articles/fundamental-analysis/financial-statement-manipulation.asp#axzz2JJaTuBGv

About the Author:

Kay Easton graduated from the State University of New York with a BA in English Literature. As a freelance and technical writer with more than 20 years experience, she writes articles for the Internet on a variety of topics.