Reasons to Implement Accounting Ethics

"We do not act rightly, because we have virtue or excellence, but we rather have those because we have acted rightly."
- Aristotle 384 B.C.-322 B.C. (Greek philosopher and scientist).

Aristotle couldn't have stated this better about ethics and virtues. Morals and ethics are the boundaries which define a person's thoughts and character. However, they also define boundaries for business and accounting.

Wherever there are investors and creditors involved, ethical codes in accounting can never be ignored. Accounting ethics can be defined as a set of distinct guidelines for a business to maintain clean balance sheets, accounting for their profits, losses and expenses incurred, and prevent it from mishandling financial reports and statements.

For an accountant, it is very important to understand the rules and regulations of his position in an organization. Any deviation from the moral code of conduct or abusing the ethics can result in dire consequences for him, such as suspension of license, termination of right to practice, and severe penalties.

A major example citing the importance of business ethics concerning accounting is the infamous case of Enron Corporation.

When the real picture of Enron was the organization racing towards bankruptcy, it was camouflaged by schemes covering up for heavy losses through fictitious organizations (raptors), indicating profitability. It was a situation when ethics in accounting were definitely questionable. This kind of scheming is as good as defrauding investors.

All this was an outcome of mishandled accounts and a severe audit failure. Because the investors rely on every bit of information generated by accountants. And the cascading effects of abusing professional ethics (like divulging confidential information concerning a client) are severe.

After the investor's confidence and trust are broken, the financial situation of a company begins to collapse gradually. And in no time, the economy is shattered. Accountability is the priority of accounting ethics in business. Precisely, a business is no business without ethics.

Lessons learned from Enron debacle came at a price for sure. Hence, the code of ethics in every organization has become stringent. The Code of Professional Conduct of the American Institute of CPAs (AICPA) has set explicit rules and regulations as guidelines for all the accountants to follow.

Institute of Management Accountants Standards of Ethical Conduct (IMASEC) applies to all facets of financial management and accounting. For auditors, there is a set of strict rules as defined by Institute of Internal Auditors Code of Ethics (IIACE).

The code of ethics is a major responsibility for an organization. The responsibilities include accounting and auditing as the information generated by them is accepted by clients, employers, governments, investors, credit grantors, and the business and financial community.

The code of ethics is an integration of the four important qualities: Confidentiality, integrity, competence, and objectivity. Hence, professionals undertake the tasks, adhering to the code of ethics defined by AICPA, IMASEC, and IIACE.

Ethics enforcement is a primary concern of any organization. Violations of ethics important in business, can lead to expelling the person from the organization and black listing him. Many a time, violating ethics can actually lead to more stringent disciplinary measures, involving state and federal laws.

The auditors, specially have to be more serious when it comes to auditing financial statements of a public corporation as any case of fraudulent conditions can result in revoking their CPA license (which could be temporary or permanent).

The licenses are provided by the State Board of Accountancy (SBA) and all investigations that are carried by the AICPA will be forwarded to SBA for further probe. CPAs who are found guilty of any fallacious instances are subject to federal securities laws and regulations (as stated in Securities Exchange Act, 1934).

The SEC (Securities Exchange Act) has the authority to decide on auditing standards and procedures, inclusive of CPA's responsibilities.

Accounting ethics articles help in understanding the importance of a business code of ethics, besides the profit/loss, balance sheets, and financial statements.

Some effective measures such as personal policing of every accountant, having a third party as an audit tool to keep an eye on the internal audits of the organization and oversight with peer review can be adopted to prevent any more issues and economical fiasco (like Enron).

"Ethics in its broader sense, deals with human conduct in relation to what is morally good and bad, right, and wrong. It is the application of values to decision-making. These values include honesty, fairness, responsibility, respect, and compassion."
- Rushworth Kidder (President, Institute for Global Ethic).

The quote just summed it all. Ethics in accounting is as important as ethics followed in personal life. This is because one fraudulent affair can possibly derail the bulwark of any organization. Accounting ethics is definitely an unavoidable aspect of any organization, which must be followed at any cost.