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The Importance of Accounting Ethics

Essay by   •  March 21, 2016  •  Research Paper  •  1,699 Words (7 Pages)  •  1,616 Views

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Accountants play a significant role in a company’s operations.  The ethics for this job has a great influence, within the company.  Accounting ethics determines the ethical obligations and responsibilities of an accountant.  A professional accountant has an obligation to record, provide, and demonstrate to information regarding the economic affairs of an organization.  The fundamental ethical responsibility of an accountant is to fulfill this obligation, which is critical to the functioning of commerce in any market.  The purpose of ethics in accounting is to preserve public trust in the profession and to maintain its integrity.  Statements of the profession's ethics are found in the rules and regulations of the American Institute of Certified Public Accountants (AICPA), state accounting societies, the general accounting office.  The accounting ethics is important for companies and organizations, it helps to build a better professional environment, increase the reputation, improve professional competence, and decrease legal liabilities.  By the availability of information is increasing, and the more attentions on the right of public acquisition, more and more unethical accounting scandals are disclosed.  In This research paper provide the principles of accounting ethics and the reasons of its importance.

Principles of Accounting Ethics

Ethics is a form that behavior is concerned with right or wrong.  It is either a set of principles held by an individual or group or the discipline that studies those ethical principles (Duska, Duska, Ragatz, 2011).  It is a analysis and evaluation of human behaviors.  Ethics in accounting is the most importance to accounting professionals and those who rely on their services.  People who use their services have high expectation on competent, reliable, and objective behavior.  Accountants working must be well qualified and performing at a professional integrity.  A professional's good reputation is one of his or her most important possessions.

According to the AICPA code of profession conduct, Sweeney (2007) summarized the six principles to which the Certified Public Accountant (CPA) must adhere are:

Commitment—to the public interest and honoring public trust

2. Integrity—sensitivity to professional and moral judgments

3. Objectivity—requires the CPA to be unbiased and impartial in assessing facts, making estimates and arriving at judgments

4. Independence—unbiased, impartial, and free of conflicts of interest when providing auditing or other attestation serves.

5. Confidentiality—information known to accounting professionals may not be disclosed to outsiders except when professional work papers are subpoenaed by a court.

6. Professional competence—should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the CPAs ability.

Commitment

According to AICPA Professional Standard,“Accountant should accept the obligation to act in the way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism” (AICPA, 2013).  Commitment is a responsibility to the public. The public consist of clients, credits, government, employers, investor, the financial community, and others who rely on accountants to maintain the functioning of commerce.  When accountants encounter pressures from each of these group, they should act with integrity.

Integrity

Integrity is a basic characteristic when performing work honestly, industriously, and responsibly. Integrity is related to the professionalism displayed by accountants, it affects confidence of public and the reliability of shareholders. When the unethical scandals exposed, it makes this conception important.  Lacking professionalism has led to loss of trust.

Providing a reliable financial report and audit report is the responsibility of accountants.  The information is related the performing of the company and the investment values of the company.  Accountants should not manipulate the accounting figures in order to hide any information. In terms of balance sheets, the information concerning, cash, receivables, inventory, prepaid expense, long term receivables etc must be presented accurately.  Investors make decisions by evaluated the reports.  Therefore, companies will face the risk of fraud without integrity standard.

Independence

“A CPA lacks independence and may not audit a company if he or she, even the spouse or dependents, owns stock in that company and/or has certain other financial or employment relationships with the client” (Greenawalt, 2001).  In the case Enron, the consulting company Arthur Andersen is a lack of independence of Enron’s auditing.  Enron is the second large client of Arthur Andersen.  For the year 2001, Andersen earned $52 million US dollar from Enron including $27 million for consulting and other services.  The internal audit service is a part of the consulting service that Andersen provided.  In other words, both external audit and internal audit are provided by the same company.  It is against the principle of independence, the internal auditing and external auditing should be separated, to keep the work fair and independent.  On the other hand, many of the top management in Enron were Andersen's former employees, especially Enron's chief financial director, chief accountant director and deputy general manager of company development and other senior management.  This close relationship between them at the very least detrimental to the independence of Andersen (Thibodeau & Freier, 2011).

Objectivity

“Objectivity refers to the necessary independence and freedom from conflicts of interest”(Greenawalt, 2001).  Objectivity is a state of mind.  When providing auditing and other services, accountants are expected to be objectivity and independent in fact and appearance.  It is necessary to mention all parties of any actual, apparent, or potential conflicts of interest.  The principle of objectivity, therefore, has two key components: impartiality and disclosure.  Accountants are expected to behave impartially, and they are required to disclose any information that could be viewed as distorting their assessments.  Professional accountant should protect the honesty of the work, maintain objectivity, and avoid any submission of their evaluation(AICPA, 2013).   In this way, their assessments of their clients' financial can be considered valid and trustworthy.

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