Why are ethics important in accounting? The answer to this question might seem obvious, but the damage of dishonest accounting goes beyond the white-collar elites so few of us know. Even if they’re not aware of it, most people’s everyday lives are affected significantly by the work of accountants. Because of that it is best to follow a set of accounting standards like the GAAP Finance Rules or the International Finance Reporting Standards (IFRS).
The Pervasiveness of an Invisible Problem
You don’t hear much about accounting ethics these days. In fact, public debates on the topic have decreased over the last several years. This lack of attention probably began when memories of the Enron and WorldCom scandals started to fade from our collective memory. Throw in the persistent criticism of Wall Street’s much-maligned indulgences during the most recent financial crisis, and it’s easy to see that the perceived dullness of accounting ethics has dropped out of the public consciousness.
This lack of attention is unfortunate. Even if it’s not as dramatic as the huge scandals that necessitated the Sarbanes-Oxley Act in 2002, ethical accounting practices are more important now than they’ve ever been before. In the globalized markets of today, the sheer complexity of corporate dealings demands that accountants act in a fair and transparent manner. Among other things, this entails accurate assessments of liabilities and assets involved in these massive transactions.
Why are Ethics Important in Accounting and How Does it Affect Me?
The need for principled accounting methods is the fact that people all over the world are affected on a daily basis by the actions of people they’ve never met. This includes individuals who contribute to retirement funds, invest in the stock market, or have become company stakeholders in some other way. Accountants make a vital contribution to the world economy, and the ethical obligations they have are readily apparent.
Accounting ethics are currently on the verge of a sea change. In the United States, we’re gradually shifting away from the home-grown standards mandated by the GAAP (Generally Accepted Accounting Principles) and starting to embrace the International Finance Reporting Standards (IFRS). While both systems provide a strong ethical framework, GAAP rules offer direct guidance, while the IFRS emphasizes the need for sound professional judgment that’s flexible enough to apply to an ever-changing financial world.
What Tempts Accountants to Bend or Even Break the Rules?
There are many different reasons that accountants are tempted to break the rules of ethical accounting practices. Needless to say, these temptations are usually of a financial nature. With the access they have to sensitive financial data, accountants can steal vast amounts of money through unethical actions from stock price manipulation to brazen embezzlement schemes.
Many corporate financial scandals result from the unethical actions of small groups or individuals who are driven by a thirst for illicit gains. The examples of Enron and WorldCom are emblematic of this unfortunate tendency. There are other occasions when accountants are driven to break the rules by a desire to make their company seem like it’s performing better than it actually is. However, even when accountants discard their ethics for reasons like this, the ultimate motive is still a financial one.
Accounting Regulations: Who’s Actually in Charge Here?
Accountants have their own national trade organizations, and most of them work to codify and force professional standards. One such organization is the American Institute of Certified Public Accountants or AICPA. Their ethics committee works diligently to enforce accounting standards at the national level, while analogous agencies oversee accounting practices in individual states.
These organizations have the power to suspend accountants for dishonest behavior and have their official designations taken away. Outside of their set of personal values, the consequences that these agencies can mete out deter many accountants from engaging in unethical behavior because their livelihood depends on their designation. Government agencies such as the SEC also regulate accounting practices in the United States.
One possible flaw in this regulatory system is that accountants are effectively policing themselves. On the other hand, the desire to maintain the profession’s integrity encourages accountants (and their trade organizations) to enforce strict ethical standards.
It might seem like a dull subject, but accounting ethics play a key role in the modern world. When accounting professionals choose to defy ethical standards, their behavior has tangible, real-world implications. Unethical accounting practices can wreak havoc on people’s financial and personal lives. This fact alone should answer the question ‘why are ethics important in accounting?’
About Stewart R. Custis, CPA
CPA with 20+ years assisting individuals and small businesses navigate the ever changing and ever complex tax and accounting regulations.
Email: [email protected]
License ID: 29421 – State of Virginia