Basics of Accounting Ethics
Professionals in every industry are expected to adhere to a rigorous set of ethical standards. Failure to do so, their judgment and trustworthiness will get questioned. The same applies to accountants.
Accountants often deal with the financial information of individuals and companies. As a fact, some accountants may execute million-dollar transactions on behalf of their clients. But having such power brings up the issue of financial information abuse and manipulation of financial figures to enhance organization perceptions. That’s where accounting ethics come in.
These are fundamental standards that accountants stand by to maintain public trust, show professionalism, and demonstrate a high level of honesty. Basically, these principles force a certified public accountant (CPA) to act in the interest of clients. Unfortunately, not all professionals in the accounting field adhere to these ethical standards.
That said, here we will discuss everything about accounting ethics. Let’s begin!
What Is Accounting Ethics?
Accounting ethics refer to rules and laws that individuals in the accounting field need to follow to prevent misuse of financial information or violation of public and private trust.
They are usually published by different governing bodies, such as the Association of International Certified Professional Accountants (AICPA), the Institute of Internal Auditors (IIA), and the Chartered Institute of Management Accountants (CIMA).
While their ethical codes might vary, these organizations require accountants, auditors, and other accounting persons to act responsibly when doing accounting tasks (like auditing) and reviewing sensitive financial information.
It’s crucial for individuals in the accounting field to always exercise moral judgment while executing various accounting activities. That’s because they’re responsible for offering clients professional services and presenting the public with an accurate assessment of an organization’s financial health.
Basics of Accounting Ethics
Ethical codes in accounting emphasize three key messages to certified public accountants. They include:
- Comply with fundamental principles
- Be Independent
- Apply a conceptual framework to discover, analyze and deal with threats to compliance using fundamental principles
Fundamental Principles of Ethics for Accountants
The principle of integrity is essential in accounting. Accountants are required to show high-level integrity, which means being straightforward in all their dealings. Accountants, auditors, and other persons in the financial sector should restrict themselves from manipulating numbers or clients’ financial information for personal gains. Also, integrity requires that everything should get executed carefully. This way, accountants can avoid associating with misleading information.
Being objective means lacking favoritism towards one side or another. Accountants are required to make unbiased judgments based on professional criteria, free from influence, conflicts of interest, bias, or other questionable business relationships.
Failure to remain independent and objective can impact an accountant’s ability to make sound decisions or recommendations about an organization’s financial information. The same ethical values apply to auditors.
The accounting sector often regulates the number of services certified public accountants (CPA) and accounting firms can provide clients. Some common services offered include tax auditing, bookkeeping, management advisory services, and general accounting. If a firm or profession handles multiple accounting services for an individual or entity, they might find themselves compromising their objectivity and independence.
Professional Competence and Due Care
If you’re offering accounting services, it’s wise to stay up to date on the latest technology, legislation, and best practices in your field and to maintain appropriate knowledge and skill. This way, you can make sound decisions and judgments and provide your clients with a competent professional service.
Besides that, you need to practice due care. That means observing all technical and ethical accounting standards and recognizing your skill level. As an accountant, you need to exercise competence and diligence and demonstrate an in-depth understanding of financial information. And if you’re supervising other accountants or auditors, it’s crucial to ensure they receive proper training and guidance on how to execute their roles and responsibilities.
Confidentiality in accounting means knowing when you can and cannot disclose financial information. For example, if you reveal information about a potential merger without the permission of your client, you stand a chance of violating the trust and relationship you have taken the time to build. Your role as an accountant is to keep your client’s information safe at all costs unless there’s a legal reason to share it.
Accounting ethical codes require accountants and auditors to comply with laws and regulations. These professionals should avoid acting in ways that can impact their reputation and put their integrity in question. Also, they need to display respect towards their workmates, clients, officials, and even competitors.
Independence in accounting is a state of mind that allows accountants to perform an audit or review service without outside influences that can compromise their professional judgment. As a result, a professional can act with integrity and exercise intellectual honesty, professional skepticism, and objectivity.
Independence of mind and appearance usually comes in when accounting firms or individual professions perform an attest for clients. Auditors need to ensure that they have no ties whatsoever with the clients because this can affect their decisions and judgment. Plus, it can impair the course of the attest service. These professions should always apply a conceptual framework to discover, assess and tackle threats that can compromise their independence.
Types of independence in Accounting Ethics
Independent in fact: The auditor needs to possess an independent mindset when executing the audit to create an unbiased report. If you or your family member hold any interest in your clients’ firm, whether it’s through shares or other investments, you should not perform the audit.
Independent in appearance: This type of independence is based on perceptions. Take, for example, a case where an auditor attends a party at the client’s firm and receives a luxurious gift before living. Would the auditor appear independent during the audit, or will the public perceive this as problematic? In order to avoid this conflict of interest, it is wise for the auditor to maintain a professional distance from the stakeholders and employees of the client’s firm. This means not attending parties or making friends, or you will risk appearing biased.
Threats to Independence
There are several situations and threats that can compromise the level of independence of auditors. Below, we have mentioned a few.
Auditors risk falling for this threat if they hold a direct or indirect financial interest in the client's firm or depend on the company to get a large outstanding fee.
This threat occurs when the auditor has personal ties or relationships with individuals working at the client’s company, be it directors, managers, or employees. When an auditor becomes too familiar with the client, chances are his/her ability to work objectively will get influenced.
A self-review threat arises when the auditor handles both bookkeeping and auditing services for a client’s company. It’s more like the auditor is reviewing his/her own work. In this case, it’s very easy for the auditor to release a biased audit report.
Intimidation threat results when an auditor gets intimidated by the client's firm management team or director to the point where they can't act objectively. This threat compromises an auditor's level of independence, especially if they don't want to lose their clients. The auditors might end up releasing a report that favors the client’s company.
An advocacy threat occurs when the auditor gets involved in promoting the client’s company. If that’s the case, the auditor might manipulate financial figures. As a such, the audit report will show the company is doing well, resulting in increased sale price.
The Conceptual Framework
The code of ethics in accounting reminds professional accountants that the circumstance they operate in can give rise to threats to compliance with the fundamental principles. Failure to recognize these threats in advance can result in serious disciplinary actions.
Luckily, a conceptual framework can help accountants address ethical dilemmas. Plus, it can equip them with a way to recognize threats and act ethically when addressing them. Professional accountants and auditors should use this principle-based approach to:
- Identify threats to compliance with fundamental principles
- Evaluate identified threats
- Address the identified threats by eliminating the circumstances that created the threat, applying safeguards to reduce threats to an acceptable level, or declining or ending the specific service or activity
Accountants should employ professional judgment in applying this framework. They should get a clear understanding of facts and circumstances and watch out for changing circumstances and new information. Also, they need to apply reasonable and educated third-party tests so appearance concerns can get considered fully.
In conclusion, accounting ethics dictates a set of rules and regulations that accountants, auditors, and other individuals in the accounting space must adhere to when executing different activities for clients. These rules and guidelines protect the client and prevent the misuse of financial information and power by various accounting professionals.
Usually, accounting ethics are set by government authorized bodies like AICPA and IIA, and they usually vary from one organization to another. Another thing, the code of ethics emphasizes three key messages: fundamental principles, independence of accountants, and conceptual framework.
That’s all for today! We hope you now have a better understanding of the basics of accounting ethics.
Final Thoughts from the Hall Accounting Team
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