Volume : 4 | Issue : 5 | May 2015 ISSN - 2250-1991

Research Paper Commerce

Ethical Issues in Accounting & Finance

Ms. Bhumika Parmar [Link], NET, Ph.D (Purs.)

The ethics of a business is currently a most important issue owing to sensational corporate scandals that had taken place
in many countries which are damaging to the economy and society. These corporate scandals question the morality of
businessmen in general and accountants in particular. The accountants are the main contributors in ethical standards of
ABSTRACT

a business. The financial scandals raised in the recent times were characteristics of deeper problems and identified
that improvement of ethical standards, adequacy of financial management, reporting mechanisms, audit quality and
strengthening of governance regimes as means to improve public confidence in financial reporting. The accounting
profession has a responsibility towards these areas, whose deficiencies have led to corporate scandals and collapses. Hence,
today, ethical conduct of accounting and finance has become a topical issue. In this context, this paper focuses on the
following aspects: the concept of ethics, various ethical issues in accounting and finance, and steps to prevent those issues.

KEYWORDS
The concept of ethics: fidentiality, and the commitment to the public interest before
The word ethics‘ is derived from the Greek word ethos‘ which one‘s own. Thus, accountants, as professionals, are expected
stands for character and Latin word moras‘ which means to maintain a level of ethical conduct that goes beyond soci-
customs. These two words define how individuals choose to ety‘s laws. This has made the professional accounting bodies
interact with one another. Thus, ethics is about choices. It sig- to develop a code of professional conduct, which sets rules or
nifies how people act in order to make the right‘ choice and standards that define right from wrong to ensure that mem-
produce good‘ behaviour. It encompasses the examination of bers‘ behaviour complies with perceived public expectations of
principles, values and norms, the consideration of available ethical standards. These rules have been developed based on
choices to make the right decision and the strength of char- the principles of professional conduct‘, which form the ba-
acter to act in accordance with the decision. Hence, ethics, as sis for professional ethics. However, in recent times account-
a practical discipline, demands the acquisition of moral knowl- ants‘ involved with large corporate scandals shows that they
edge and the skills to properly apply such knowledge to the have not complied with the expected ethical standards. It is
problems of daily life. argued that accountants‘ focus too much on technical issues
and lack ethical sensitivity to recognise ethical dilemmas in-
Ethics refers to a system of moral principles-a sense of right volved with their work, which would ultimately lead to mak-
and wrong and goodness and badness of actions and their ing wrong decisions. Thus, accountants should be trained to
motives and consequences. The definition of ethics is shaped be sensitive to identify the moral dimension of seemingly tech-
by personal, societal and professional values, all of which are nical issues.
difficult to specify. Some stress the importance of society‘s in-
terests and others stress the interests of the individual. These Importance of ethics in Accounts and Finance:
conflicting viewpoints have dominated the discussion of ethics The nature of the work carried out by accountants requires
for a long time. Decision making based on intuition or per- a high level of ethics. Shareholders, potential shareholders,
sonal feeling does not always lead to the right course of ac- and other users of the financial statements rely heavily on the
tion. Therefore, ethical decision making requires a criterion to yearly financial statements of a company as they can use this
ensure good judgment. information to make an informed decision about investment.
They rely on the opinion of the accountants who prepared the
Ethics in Finance and Accounting: statements, as well as the auditors that verified it, to present
For accounting and finance professionals it is extremely im- a true and fair view of the company. Knowledge of ethics can
portant to be ethical in their practices due to the very na- help accountants and auditors to overcome ethical issues, al-
ture of their profession. The nature of accountants‘ work puts lowing for the right choice that, although it may not bene-
them in a special position of trust in relation to their clients, fit the company, will benefit the public who relies on the ac-
employers and general public, who rely on their professional countant/auditor’s reporting.
judgment and guidance in making decisions. These decisions
in turn affect the resource allocation process of an economy. Ethical Issues in Accounting:
The accountants are relied upon because of their professional Accounting is the process through which any business keeps
statues and ethical standards. Thus, the professional and ethi- track of its financial activities by recording its Debits and Cred-
cal conduct is a key to maintaining confidence of clients and its and balancing its accounts. Accounting is a system to pres-
the public is professional and ethical conduct. ent the financial position of a business and the results of its
operations and cash flow. Accounting ethics has been deemed
Ensuring highest ethical standards is important to a pub- difficult to control as accountants and auditors must consid-
lic accountant‘ (one who renders professional services such er the interest of the public (which relies on the information
as assurance and taxation service to clients for a fee) as well gathered in audits) while ensuring that they remained em-
as to an accountant in business‘ (one who is employed in a ployed by the company they are auditing. They must consid-
private or public sector organizationfor a salary). Both public er how to best apply accounting standards even when faced
accountants‘ and accountants in business‘ are in a fiduciary with issues that could cause a company to face a significant
relationship, former with the client and latter with the em- loss or even be discontinued. Due to several accounting scan-
ployer. In such a relationship, they have the responsibility to dals within the profession, critics of accountants have stated
ensure that their duties are performed in conformity with the that when asked by a client “what does two plus two equal?”
ethical values of honesty, integrity, objectivity, due care, con- the accountant would be likely to respond “what would you

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Volume : 4 | Issue : 5 | May 2015 ISSN - 2250-1991

like it to be?” This thought process along with other criticisms such as corporations can also be charged with falsifying doc-
of the profession’s issues with conflict of interest, have led to uments.
various increased standards of professionalism while stressing
ethics in the work environment. Many different types of acts can be considered as falsify-
ing a document, including:
The role of accountants is critical to society. Accountants serve • Altering or misrepresenting factual information such as
as financial reporters and intermediaries in the capital markets prices or monetary amounts
and owe their primary obligation to the public interest. • Stating false information when requested to provide truth-
ful statements
The information they provide is crucial in aiding managers, • Forging a signature
investors and others in making critical economic decisions. • Using official letterheads without authorization
Accordingly, ethical improprieties by accountants can be det- • Concealing assets or property (especially in bankruptcy pro-
rimental to society, resulting in distrust by the public and dis- ceedings)
ruption of efficient capital market operations. • Knowingly using or distributing a fake document

“Every company in the country is fiddling its profits. Every set Again, a person can only be held criminally liable if they are
of published accounts is based on books which have been acting with the intention of deceiving or defrauding anoth-
gently cooked or completely roasted. The figures which are er party. So, if a person was using a document but did not
fed twice a year to the investing public have all been changed know that it was fake, they usually cannot be found guilty of
in order to protect the guilty.‖ falsifying a document.

Ethical Issues in Accounting Falsifying documents is a very serious offense and is generally
Underreporting Income: classified as a felony. This means that a person charged with
Under-reporting income in order to avoid taxes is an illegal falsifying documents may be subject to the following legal
practice. When people under report their incomes, the feder- penalties:
al government loses tax revenue that could go towards social
security, Medicare and other federal projects. Corporations are • Having to pay a monetary fine
especially watched by auditors because of the large tax bills • Incarceration in a prison facility
at stake each tax year. If caught under reporting, individuals
and companies will be subject to penalties and, in extreme Depending on the nature of the offense, as well as individ-
cases, criminal charges. Sometimes applies to public compa- ual state laws, falsifying documents can result in a prison
nies reporting lower revenues in a fiscal quarter than were sentence of 5-10 years. Also, if government documents or
actually recorded. If the company has already been reporting authorities were involved, the legal penalties may be more
bad news and the stock is down, executives may try to take severe. Finally, legal penalties may increase with repeat of-
some revenue from the current quarter and push it into the fenses. Illegally evading income taxes and Allowing or taking
next quarter. This way, the bad news can be “flushed out”, questionable deductions When a person, organization or cor-
and the company canreport an upside surprise in the com- poration intentionally avoids paying his/her/its true tax liability
ing quarter, potentially boosting the stock price. This practice it is an illegal practice. Those caught evading taxes are gener-
is also illegal! The burden for public companies to succeed at ally subject to criminal charges and substantial penalties. There
high levels may place undue stress and pressure on account- is a difference between tax minimization/avoidance and tax
ants creating balance sheets and financial statements. The evasion. All citizens have the right to reduce the amount of
ethical issue for these accountants becomes maintaining true taxes they pay as long as it is by legal means.
reporting of company assets, liabilities and profits without giv-
ing in to the pressure placed on them by management or cor- Creative accounting:
porate officers. Accounting practices that follow required laws and regula-
tions, but deviate from what those standards intend to ac-
Unethical accountants could easily alter company financial re- complish. Creative accounting capitalizes on loopholes in the-
cords and maneuver numbers to paint false pictures of com- accounting standards to falsely portray a better image of the
pany successes. This may lead to short-term prosperity, but company. Although creative accounting practices are legal,
altered financial records will ultimately spell the downfall of the loopholes they exploit are often reformed to prevent such
companies when the Securities and Exchange Commission dis- behaviours.
covers the fraud.
A primary benefit of public accounting statements is that they
Falsifying Document: allow investors to compare the financial health of competing
Falsification of Documents is to change details on the original companies. However, when firms indulge in creative account-
document and try to pass them off as real. ―Falsifying Doc- ing they often distort the value of the information that their
uments‖ is a type of white collar crime. It involves altering, financials provide. Creative accounting can be used to manage
changing, or modifying a document for the purpose of de- earnings and to keep debt off the balance sheet.
ceiving another person. It can also involve the passing along
of copies of documents that are known to be false. In many Ethical Issues in Finance:
states, falsifying a document is a crime punishable as a felony. When we put our hard- earned saving in the care of finan-
cial firms- asset managers, banks, insurance and all kinds of
Some types of documents that are commonly falsified funds- and we trust them to look after the money. We want
may include: the best return, but there is a balance between the risk and
• Tax returns and income statements reward. We need to feel confident that we can trust the fi-
• Personal checks nance professionals to act with integrity, in our interest.
• Bank account records
• Business record keeping books Ethical Issues in Finance are:
• Immigration documents (such as visas, passports, etc.) 1. Insider trading
• Identification cards and birth certificates “Insider trading” is a term that most investors have heard and
usually associate with illegal conduct. But the term actually
Basically, any type of official form or document can be illegal- includes both legal and illegal conduct. The legal version is
ly modified. Falsifying documents is usually done in connec- when corporate insiders—officers, directors, and employees—
tion with broader criminal aims, such as tax evasion. In order buy and sell stock in their own companies.
to be convicted of falsifying documents, the accused person
must have acted with criminal intent. Some businesses forms Illegal insider trading refers generally to buying or selling a

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Volume : 4 | Issue : 5 | May 2015 ISSN - 2250-1991

security, in breach of a fiduciary duty or other relationship of ciency of management.

trust and confidence, while in possession of material, nonpub-
lic information about the security. Insider trading violations Steps to be taken by the management for true, fair and
may also include “tipping” such information, securities trading reliable management accounts:
by the person “tipped,” and securities trading by those who The management should frames the rules and policies in such
misappropriate such information. a way that have positive effect on business activities; deter-
mining the key elements of the business like objectives and
2. Campaign financing see how they are defined and measured, and make sure that
Campaign finance refers to all funds raised in order to pro- the funds are allocated in different activities on the basis of
mote candidates, political parties, or policies in elections, ref- their importance.
erendums, initiatives, party activities, and party organizations.
Thefunds could also detract from the opponents of the above. Conclusion:
Campaign funds are the subject heading under which all This paper focuses on the concept of ethics and its implica-
books dealing with money in politics are catalogued by the Li- tions on role of accounting professionals and important issues
brary of Congress. in accounting and finance. Ethics has become a most topical
issue of concern in accounting and finance at present owing
The above Issues can be prevented through: to the series of corporate scandals that had taken place in the
GAAP (generally accepted accounting principles) GAAP for world affecting the credibility of the accounting profession.
short of Generally accepted accounting principles, are the ac- These scandals have placed in doubt the effectiveness of con-
counting rules used to prepare and standardize the reporting temporary accounting, auditing and corporate governance
of financial statements, such as balance sheets, income state- practices, for which accountants are responsible. Thus, the
ments and cash flow statements, for publicly traded compa- ethical code of conduct is closely linked with the accounting
nies and many private companies in the United States. GAAP- profession. Hence, we can say that the ethics has become an
based income is measured so that the information provided essential part for accounting professionals.
on financial statements is useful to those making economic
decisions about a company, such as potential investors and
creditors and other stakeholders. Financial statements pre-
pared under GAAP are intended to reflect an economic real-
ity; GAAP makes a company’s financials comparable and un-
derstandable so that investors, creditors and others can make
rational investment, credit and other financial decisions. In
order to be useful and helpful to users, GAAP requires infor-
mation on financial statements to be relevant, reliable, compa-
rable and consistent.

GAAP is implemented through measurement principles and

disclosure principles. Measurement principles recognize and
determine the timing and basis of items that enter the ac-
counting cycle and impact the financial statements, such as
the period in which transactions will be recorded. Disclosure
principles determine what specific numbers and other infor-
mation are essential to be presented in financial statements.
Basically, GAAP is concerned with:

• The measurement of economic activity;

• The time when such measurements are to be made and re-
corded;
• The disclosures surrounding this activity; and
• The preparation and presentation of summarized econom-
ic information in financial statements.

Without GAAP, companies would be free to decide for them-

selves what financial information to report and how to report
it, making things quite difficult for investors and creditors who
have a stake in that company.

Indian Accounting Standards:

Accounting standards may be defined as uniform rules for
external financial reporting, which may be applicable either
to all or a certain class of entity.‖ (Accounting Theory – Lele
and Jawahar Lal) The ethical issues can be prevented through
the implementation of accounting standards. The account-
ing standards are originally framed for informality in the
presentation of accounting statements. Through accounting
standard the account are become uniform and comparable.

The accounting standards provides the guidance for making

the financial statements in the true and fair manner, it helps
the accounting professionals to increase the credibility of fi-
nancial statements as well as useful in determining the effi-

REFERENCES

1. [Link] | 2. [Link] | 3. [Link] | 4. [Link] | 5. [Link]

| 6. [Link] | 7. [Link] | 8. [Link]

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