Literature Review: The Importance of Professional Ethics for Accountants

Abstract

Ethical conduct is vital and essential in the accounting profession, as accountants have the potential to ruin the company’s finances because they deal with the finance and the financial statements of the company. They can easily manipulate the statements and lead to data infringement and fraud activities.

Ethical conduct must be taught to the accountants, and the managers and the organisations must have the regulating authority to view the overall organisations, especially accounting bodies. The current file aimed to analyse the importance of ethics in the accounting profession for the roles of accountants.

The existing file contains the critical analysis of the literature sources. The critical analysis of the previous literature sources highlighted that professional ethics is very important because it protects the company’s reputation, brand name, and finances.

Fraudulent activities and unethical conduct can ruin the reputation of the company trust between the stakeholders, investors, and customers and destroy the financial statement’s effectiveness.

The current file also highlighted the unethical and fake demonstration structure the organisation’s accountant brings about, letting the seniors completely go and creating an escape clause in the organisation’s finances information.

The unethical ways of behaving structure the accountant prompts the spillage of finances as well as to the break of information which can prompt the genuine wrongdoings like tax avoidance, extortion etc. so it so very important for the organisations to regulate the ethical awareness in the organisations among the accountants and other employees.

Introduction

The current research report contains a critical analysis of ethics education for accountants, and professional ethics is very important in the accounting sector to enhance financial operations and business functions. The current files will include detailed critical analysis foe the previous sources to highlight their research and findings on the importance of ethics in accounting.

The business sector highly relied on the accounting department. Therefore, some ethical norms and standard rules and regulations are necessary for the healthy conduct of activities. The selected topic is very important for today’s world because of increasing accounting mishaps and issues.

The 21^st century has encountered a startling number of accounting problems, scandals, and failures linked to ethical negligence. All the highlighted issues happened due to misconduct in the reporting and management processes despite the professional ethics standards are developed by the “institute of management accountants (IMA)”.

The analysis of the issues and the scandals highlighted that major problems were observed between the accounting roles and accounting professionals and the application of ethical awareness. The organisations are now understanding and remixing the importance of ethics in accounting.

They are now putting effort into implementing ethics regulations and training the individual to better handle the activities. Finances of the company are regarded as very sensitive information; therefore, the training and enhancement of the accountants and auditors about the work ethics should be mandatory.

The current research file will include a comprehensive critical analysis of the ethics for accountants and the importance of ethical education so that the company’s finances can be handled effectively.

The current file will contain information about the meaning of ethics under the light of previous studies, background ethics in accountings, case study examples, and impacts of ethics in accounting and the need for ethics in accounting. The critical analysis aims to highlight the importance of professional ethics for accountants.

Analysis and Synthesis of the Literature

A sufficient amount of literature is gathered to gather evidence about the importance of ethics in accounting. Significant research has been conducted on this topic before; however, many types of research focus on the ethics debate about the accounting profession but not on the role of accountant or auditor. This research report will analyse the importance of ethics for accountants and their roles with case studies examples.

Ethics in business organisations

Ethics is generally referred to as the morals or code of conduct system that aids in the differentiation of wrong and right (Banerjee & Ercetin, 2014). Ethical limitations and issues are very common problems in organisations, and they arise due to staff’s unawareness about the ethical code of conduct and rules and regulations.

Many organisations neglect the ethical codes, which result in misconduct and mishaps. Managers, investors and business owners must learn accounting ethics to avoid financial issues and reduce legal mishaps.

When the financial statements are generated after the proper evaluation, honesty and ethical knowledge, it showcases little errors and minimum mistakes (Stice & Stice, 2012). The user and the organisation rely on the accuracy of the financial statements. A slight error can cause losses of millions of dollars for bigger organisations.

Every user and individual associated with the financial statements require accuracy and error-free (Ronen, 2008). The auditor and the managers or accountants responsible for issuing and creating the financial statements can overcome the legal issues and slight errors with their knowledge about ethics in accounting.

When a person is well aware of his role in a firm, he can do it better with efficient outcomes. The accountant’s effective role and ethical performance enhance the reputation and productivity of the organisation and promote more investors, stakeholders, and creditors (Mukarushem & Kule, 2016).

What is ethics?

At the point when we hear the word ‘ethics’, the primary thing that strikes a chord is settling on the choice between good and bad. Numerous visionaries say that ethics is a restrictive term and what comprises as appropriate for one individual may not be ideal for another person.

While this might be valid, it isn’t this straightforward (Bonhoeffer, 2012). Ethics alludes to standards like trustworthiness, profound quality and respectability. These standards are laid out in accounting as a Code of Conduct set by overseeing bodies.

While the ethics code fluctuates in every country, the fundamental principles continue as before. In Accounting, ethics isn’t simply a rundown of decisions that should be followed but is built into the profession.

The accounting business has had its reasonable part of outrages – Enron’s accounting lack of experience in 2001 brought investors losing their retirement accounts and various representatives losing their positions (Bonhoeffer, 2012).

Another well-known embarrassment included India-based company Satyam Computer Services, controlling records to show high benefits from 2003 to 2008. Lately, controllers have become more mindful of exploitative practices in enterprises and have made it clear that data deception will be inadmissible.

After these outrages, numerous companies needed to settle on adjustments to their perspective making process because of their interests in deceptive practices (Treviño, and Weaver, 2003).

Financial revealing goes past the surface level to accomplish a more profound degree of straightforwardness incorporate detailing. The company needs to want to have a decent moral standing and advance this culture in the association.

Background to Ethics in Accounting

According to Treviño and Weaver (2003), Ethical accounting is generally regarded as “applied ethics” this aspect of ethics in the business focuses on the ethical functioning of the auditors and accountants in carrying out their duties and activities.

The ethics in accounting emphasise the human and business ethical values, moral values and their implication in accountancy. The good ethical factors enhance the good amounting practices and the efficient professionalism.

Micewski and Troy (2006) suggested that ethical accountability and the responsibilities in accounting are not holistic but are part of an individual’s ethical behaviours. Many organisations have inaugurated ethical stances in the accounting processes, which increases their chances of conflicts and errors.

The errors in the financial statements and the financial practices of the organisations due to ethical breach imposes a drastic impact on the reputation and name of the company, decreases the customer satisfaction and engagement and overall performance of the organisations also gets disturbed.

Johannes Brinkman (2002) highlighted that “ethics is the discipline that exhibits the matters related to evil and good, wrong and right, and vice and virtue” (Jaijairam, 2017). So, it can be claimed that ethics can be used to evaluate the good and bad in an individual and their moral principles.

The development of ethical regulation in a workplace can aid in the security and safety of financial errors and inaccuracy in business transactions. The activities and the accountant’s role in preparing the statements are significant to the managers, seniors and business owners.

Adherence to ethical values also aid in the proper management of the organisations’ internal system and the proper regulation of the policies and processes. Through awareness about the ethics and proper knowledge of the roles, the accountant can aid the organisations in many ways, measure the wastage and resource utilisation, enhance the organisations’ policies, and identify frauds and scams in the company.

They have the potential to secure the company from any sort of unethical manoeuvre (Elias, 2002). The unethical behaviours and conduct from the accounting individual degraded the company’s reputation and affected the organisation’s internal system.

It affects the credibility of the organisations and the employees. Also, the series of unethical conducts can lead to criminal activity and sometimes thefts (Sims, 2003). It is very important for the accountant to strictly follow ethical behaviours in the accounting profession.

Earnings Management and Ethics

The greatest and the highlighted problem of the accounting profession is “financial ethics” unethical activities in the finance sector happens when the accountants, auditors and seniors do not follow the rules and regulations and the ethical conducts of the organisations.

The accountants or responsible bodies often alter the financial statements and information. The alteration generally consists of frauds, misstatements, or fake entries to generate different results and create a monetary gap.

This creates an earning manipulation in the accounting profession (Ronen & Yaari, 2007). The alteration and earning gap lead to doubt in the financial statements and data infringement activities.

Strohm (2006) claimed, “The social norms or the organisational culture linking earnings management ethics play an extensive role in determining the norms observed in an organisation. It is believed that the acts, amendments and the articles of Sarbanes-Oxley Act may help in bringing the ethical standards within the financial set-ups” (Vay, 2006).

It is also claimed that the failure to decrease the fraudulent mismanagement of earnings in response to the “Sarbanes-Oxley Act” result in a substantial discrepancy between the organisational environment and the society standards (Jaijairam, 2017).

It is noted that the CEO, CFO, and company managers have the authority to regulate the accounting activities and ethical code of conduct. The organisations should have a zero-tolerance policy towards the breach of ethical code of conduct (The Institute of Internal Auditors (2008).

The Sarbanes-Oxley act was proposed and developed after the accounting scandal of high profile organisations like Enron, Tyco, WorldCom etc. (Grama, 2015).

Case Study: Earnings Management and Inappropriate Accounting in Enron

The case study example of Enron highlights the importance of ethics in accounting. Grasso et al. (2009) indicated that Enron and Andersen encountered a huge “infamy” that resulted in their bankruptcy.

Enron and Andersen were considered the two giant firms of the market of utility and accountings that took advantage of the investors and the government bodies to enhance their profit and finances.

They did this through illegal and unethical conduct, triggering the Securities Exchange Commission (SEC). The investigations commenced by the SEC highlighted that Enron was actively engaged in unethical business conduct and had fraudulent behaviours in financial reporting (Jennings, 2009).

It is indicated that due to the negative and unethical conduct of the Enron Company, their downfall was crashed upon them. Grasso et al. (2009) also indicated that the frauds in the financial reporting and the financial statements degraded the company’s reputation, which decreased the company’s stocks in the stock exchange markets (Jaijairam, 2017).

These major setbacks resulted in the bankruptcy of the firm. After exposing their frauds, the company was imposed huge penalties and fines. After the incident of the Enron Company, strict laws were also developed and implemented in the countries to ensure transparency and efficiency in the financial statements.

Louwers (2007) identified that distinct safety measures were implicated on the companies after the Enron setback, which aided in protecting the public and investing firms. The most effective and empanelled measure included “Generally Accepted Auditing Standards (GAAS), Generally Accepted Accounting Principles (GAAP), Statements on Auditing Standards (SAS), and professional ethics”.

Impact of Ethics in Accounting on Society

Ethics in accounting ensures that the financial statements are clear, transparent, and useful. The financial statements should be very convenient to ease the users’ decision-making processes.

The organisations require and expect ethical awareness and conduct from the accountants in their activities and roles to ensure the time affectivity, transparency, accuracy and efficacy in the accountancy processes and audits.

The ethical conduct of the accountant enables information availability and transparency for the end-users. Slight mistakes or errors in the accounting processes can cost the chunks from the organisation about their finances, legal matters and reputation. Oraka and Okegbe (2015) conducted a detailed analysis of the impact of ethics in accounting and identified the following elements.

Chances of fraud and criminal activity

The accountant’s unethical behaviours and conduct can lead to fraud activities and eventually to criminal activities, including thefts and larceny. The unethical and fraudulent activity from the company’s accountant results in the loss of control from the seniors and generates a loophole in the company’s financial data. The accountant’s unethical behaviours lead to the leakage of finances and the breach of data, which can lead to serious crimes like tax evasion, fraud, etc.

Harm to the reputation of the organisation

The unethical conduct by the accountants can result in the defaming of the organisation and put them under the blacklist or the list of fraudulent companies. It also affects the trust and faith of the stakeholders, customers and investors (Oraka and Okegbe, 2015). The lack of trust taints the company’s identity and reputation, resulting in the lack of opportunities and business chances.

Inadequate expediency of the financial statement

The unethical conduct and the behaviours in the accounting result in the violation of the rules and regulations and the violation of the financial statements (Gaa and Thorne, 2004). The financial statements with manipulation and errors have less utilisation and effectiveness.

Why do we have an Ethics Code in accounting?

The critical analysis of the literature sources has indicated that issues in the organisations’ financial section result from ethical unawareness and unavailability. The awareness about the ethical values of the accountants has the potential to stop reducing misstatements and fraudulent activities.

The ethical codes ensure that the organisations are functioning properly under the aligned and implemented regulations. Some of the reasons or the advantages of the ethical codes in accounting are

It is inborn to the accounting profession

The accounting profession and the ethical values were interlinked with each other. The accountant of an organisation must make honest and unbiased choices to reduce the risk of partiality and errors in the financial statements. The statements’ errors affect the stakeholders’ decisions (Brooks and Dunn, 2020).

When the company starts to benefit from different items’ finances, the malfunctioning and misstatement situation arise, leading to data breaches and data infringement. The ethical codes implicate in the accounting profession that the information in accounting should not be affected by the external environment or situation.

In India, the organisation must consent to the “Ind AS”, which is “Indian accounting standards”. The standards regulated by Ind AS regulate the system in the organisation, and their approaches ensure the effective maintenance and functioning of the accountants concerning the financial statements. The main aim of the Ind AS is to maintain consistency in the organisations and their financial systems.

Information necessities to stay confidential

The information of the company’s finances or the stakeholders is very confidential, and their misconduct can result in data preachment. This act affects and disregards the trust between the responsible parties, and therefore the name and reputation of the company get shattered. The ethical code has proper rules and regulations for all data types and finance-related aspects. Their proper follow can save the company from harm (Brooks and Dunn, 2020)

The integrity of the employees

Implementing the ethical codes in the organisations ensures that all the employees, especially accountants, are working with integrity and honesty. They are offering trustworthy services to the clients and the stakeholders. The ethical code in accounting also aids the organisations through protecting the information and by keeping the accountant away from the malfunctioning of information.

The European Union (E.U. have collaborated with the GDPR “General data protection regime” to protect the safety of the financial statements and the stakeholder information. The regime includes a list of regulations, and its duplicate is provided to all the organisations and the companies so that they can effectively shape their policies and processes according to them and implement an effective check and balance system within their organisations (Brooks and Dunn, 2020).

The ethical codes protect the client’s information and the organisation’s reputation from breaching. When the organisations neglect the safety regulations, their financial bodies encounter several issues, and miss conducts regarding the financial statements transactions and the audits.

The finance of the company is a very sensitive aspect. It is why the law-making bodies emphasised three protections of data finance whereas teaching ethics to the entire accountant and the organisation’s manager. GDPR “General data protection regime” has strict rules and regulations for fraudulent organisations and the people.

The accountant should be knowledgeable

The accounting business is continually developing, and with the presentation of innovations, for example, computerisation of records payable, the job of accountants is evolving (Bayou et al. 2011). This implies that accountants need to remain refreshed on their abilities to give an exact judgment on issues looked at by clients.

Professional capability also incorporates monitoring where your abilities and mastery lie and not inferring that you have information in regions you are inexperienced with. Assuming you are a manager, the principles guarantee that your subordinates just do their obligations after getting the appropriate preparation.

The company’s standing

The implicit set of principles expresses that accountants need to comply with every one of the guidelines and guidelines recorded by the overseeing body. This will assist the company with keeping up with professionalism and guarantee that the financial assertions are a fair and precise portrayal of the company’s situation. Inability to conform to the Ethics code can influence the company’s standing and might land them in lawful difficulty!

In the U.K., organisations need to agree with the U.K. GAAP, an administrative body that states how financial articulations should be ready in the U.K. The objective of the GAAP is to normalise accounting rehearses and guarantee that all organisations keep up with integrity and professionalism regarding getting ready financial articulations(Bayou et al. 2011).

Tax instalments

All organisations have a lawful commitment to address precise financial information on their tax structures. Organisations can give wrong information to the tax position to lessen their financial weight. Notwithstanding, they can confront prevarication and high fines, assuming they get found out. The Code of Ethics guarantees that exact information is given while recording taxes and keeps you free.

Financial preparation

The accountant of the organisation has loads of information. Much of the information is very sensitive; therefore, the accountant should provide limited and the required information so that the customers and the stakeholders can make a genuine and processes information (Bayou et al. 2011). The miss conduct or the inability of the accountant in this regard can impose huge risk to the organisation.

The ethics and code of regulation revising around the ethics aid the companies in balancing their finances and financial statements and saves them from any sort of financial, legal or social harm (Ragatz et al.2010). The ethics in accounting ensures that the financial statement is deprived of any sort of errors or manipulations.

It also ensures that the information transferred to the stakeholders is transparent and effective to aid them in future decision-making. Accountants can possibly destroy the organisation’s finances since they manage its finances and financial reports.

Without much of a stretch, they can control the assertions and lead to information infringement and extortion exercises. Ethical conduct should be educated to the accountants, and the managers and the associations should have the directing power to see the general associations, particularly bookkeeping bodies.

All the accountants and organisations must adhere to the ethical rules and conduct stated in the document to eliminate the miss conducts and financial issues. The adherence to ethics in accounting gives the company more clarity in the grey area of doubt.

Conclusion and Recommendations

The critical analysis of the accounting ethics highlighted the significance of ethics in the accounting profession, t is very important to maintain the reputation and the credibility of the organisation, the accountant or the managers must overview all the ethics and regulation for their riles to enhance the company’s name and processes.

The current exploration report contains the basic examination of the ethics training for the accountants, and expert ethics is vital in the accounting areas to improve the financial tasks and business capacities. The current records will incorporate nitty gritty basic investigation enemy the past sources to feature their exploration and discoveries about the significance of ethics in accounting.

The business area exceptionally depended on the accounting office. Subsequently, a few ethical standards, principles, and guidelines are fundamental for the sound direction of exercises. The chosen theme is vital for the present world because of expanding accounting incidents and issues. The twenty-first century has experienced an alarming number of accounting issues, embarrassment, and disappointments connected to ethical carelessness.

Ethical restrictions and issues are exceptionally normal issues in organisations, and they emerge because of staff’s ignorance about the ethical code of behaviours and rules and guidelines. Numerous organisations ignore the ethical codes which bring about unfortunate activities and accidents.

Managers, financial backers, and entrepreneurs must learn about accounting ethics to avoid financial issues and diminish legitimate accidents. Whenever the financial statements are created after the appropriate assessment, trustworthiness and ethical information, it features little blunders and least mix-ups.

The compelling job of the accountant and his ethical exhibition improves the organisation’s standing and usefulness and advances more financial backers, partners and loan bosses. The examination of the issues and the embarrassments featured that serious issues were seen between the accounting jobs and accounting proficient and in the use of ethical mindfulness.

The organisations presently understand and remix the significance of ethics in accounting and invest energy in executing ethics guidelines and preparing the person for better giving of the exercises.

The organisation’s finances are viewed as exceptionally delicate data and matters; consequently, the preparation and upgrade of the accountants and inspectors about the hard-working attitudes should be compulsory.

The current exploration document will incorporate the complete basic examination of the ethics for accountants, and the significance of ethical instruction to the organisation’s finances can be dealt with really. The client and the organisation rely on the precision of the financial statements.

A slight mistake can cause misfortunes. Each client and individual related with the financial statements requires exactness and blunder free proclamation. The inspector and the managers or accountants liable for the issuance and making of the financial statements can beat the lawful issues and slight mistakes with their insight about the ethics in accountings when an individual is very much aware of his job in a firm, he can improve effective results.

Ethical conduct in the accounting profession aids in many forms. It aids in the maintenance of reputation and aids in generating effective financial statements. It also aids in the attraction of investors and the stakeholders etc. It is recommended to the organisations that they should organise awareness programs for the accountants to train them about the ethics of the accounting profession.

Additionally, all the organisations must develop a monitoring committee that major aims are to check and monitor the actions and activities of the accountants and the managers of the organisation.

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