Why are ethics crucial in the profession of Accounting and Finance? Provide real life examples of companies with high ethical values.
The study of judgments along with moral values that are to be followed in the context of accounting is called accounting ethics (Engström, 1994). An example of professional ethics, they are crucial to the profession of accounting and finance as explained in the passage to follow.
Being ethical increases the confidence in record keeping. With no fraudulent entry or leftovers, it gives a better idea for the planning of the next fiscal year or any such planning, in general, the future. Without it, it would have caused overestimation hammering the business growth with a false estimate based on the record. Only with proper planning, a business can prosper and following ethical practice enables an organization to create an effective growth model.
Being transparent with taxes is a good way to boost the confidence of the investors. This can only be done if proper ethical practices are followed otherwise the income is often shown as a loss by showing a heavy loss and paying no tax for long-term like seen the United States with Trump Foundation. A research found out that the organization that is transparent would face less severe problems if any compared to organizations which try to avoid taxes and aren’t clear (Petrin, 2018). Following proper business standard and completing proper duties of paying taxes shows the business health as well in a way which all helps to give a good picture of the overall brand to the stakeholder and general people.
As an accountant, confidentiality must be held because much of private information are withheld by the accountant such as the customer income, taxes, physical address of the person, phone number, etc (Brasel & Daugherty, 2017). It is important for such information to not leak out to the public and if it does, not only to the accountant but the entire business will suffer the uproar causing damage to the organizational brand and overall business.
Following proper ethical practices, while paying taxes on time, filing the balance sheet and all the other documents and making them available easily to the general public shows that the company cares about the business and is transparent. Thus, helping change the perception towards the business in the eyes of the people which can often go a long way to contribute towards business growth.
Further, ethics is also important to be able to appropriately and efficiently advise clients and to not handover misinformation to them. Like in a restaurant while you’re to pay a bill of thousand rupees, if you receive the bill for two thousand, you won’t be happy. Similarly, people don’t like being played around and being miss-informed. That calls for following professional competence and due care while practicing the profession of accounting and finance.
Looking into companies with high ethical values, I would consider 3M company to be one of them. The company encourages its employees to make ethical decisions that follow the organizational core values. It also bases its ethical system on promise keeping, fairness, honesty, integrity, showing empathy and personal accountability. While another example would be Starbucks, they base their ethical system on the same principles. They believe in empowering local communities so they ethically source the coffee while supporting local farmers. They also clearly demonstrate where the items have been bought by along with providing its staff with proper training on the best practices to best serve the customers.
Brasel, K., & Daugherty, B. (2017). Balancing Auditor Liability, Client Confidentiality, and the Public Interest. Issues In Accounting Education , 32 (1), 17-32.
Engström, T. (1994). Accounting for Ethics. Business And Professional Ethics Journal , 13 (1), 51-53.
Petrin, M. (2018). Corporate Tax Avoidance - The Problem of Aggressive Tax Planning. SSRN Electronic Journal , 43-47.
Ethics is crucial in the profession of accounting and finance as these determine their success and failure. The customers are the investors of a company. If a company is perceived to have good ethical values they invest in the company else not. Companies these days have a pre-set code of conduct that the employees are expected to follow. Those companies that require the employees to adhere to the set code of conduct and ethics in their daily business transactions have been seen to face lower litigation and fines. Companies set high standards of ethics on their dealings are more valued and respected by the customers. (Moyer, McGuigan, Rao, & Kretlow, 2012)
According to the Association of Certified Fraud Examiners, 2010, on average the corporate fraud every year cost amounts to $2.9 trillion. This amount reflects 5% of annual revenue of the corporations and a median loss resulting from financial statement of $4 million. (WESKE, 2013)
"Employee fraud cost companies almost (pounds) 5 million, an increase of (pounds) 1 million on the amount reported in 1995, while management fraud cost almost (pounds) 1.5 million, an increase of (pounds) 1 million on the previous survey.” As we can see that the companies that are caught in fraudulent activity are made to pay huge amount. This is counterproductive to the goal of a profit company that aims to maximize shareholders wealth.
Some examples of companies that have good ethical value are as follows.
TATA has a high ethical value. The TATA group in India are very strict when it comes to fraud and sexual harassment.
"Goldman Sachs could easily be seen as the most controversial pick for this list because of its business ethics. But its vocal support of marriage equality has earned it some merit in terms of social ethics. (Shields, 2013)”
"Given the fact that it was started by Bill Gates, one of America’s most generous philanthropists, it follows that Microsoft would do well in following his example. The tech company and its employees donate over $1 billion yearly to charities and non-profit organizations. (Shields, 2013)”
These are the reasons why ethics is important in accounting and finance and from example we can see how big multinational companies have set themselves different with good ethical standards.
Moyer, C. R., McGuigan, J. R., Rao, R., & Kretlow, W. J. (2012). Contemporary Financial Management. Natorp Boulevard: South-Western, Cengage Learning.
Mulqueen, E. (1997, October 17). Companies are being choked by escalation in white collar crime Poor internal controls is acknowledged as being the most significant factor infacilitating company fraud according to a new KPMG survey. Irish Times . Retrieved from https://proxy.lirn.net/MuseProxyID=mp01/MuseSessionID=co10e3saj/MuseProtocol=https/MuseHost=search.proquest.com/MusePath/central/docview/310187300/104FACED0782407DPQ/2?accountid=158986
Shields, A. (2013, February 16). Good Business: 10 Companies With Ethical Corporate Policies . Retrieved from Minyanville: http://www.minyanville.com/sectors/consumer/articles/Good-Business253A-Corporations-with-Great-Ethical/2/16/2013/id/48045
WESKE, J. L. (2013). Share Price Changes and Price/Earnings Ratios as Predictors of Fraud Prior to a Fraud Announcement. United States: ProQuest LLC 2013. Retrieved from https://proxy.lirn.net/MuseProxyID=mp01/MuseSessionID=co10e3saj/MuseProtocol=https/MuseHost=search.proquest.com/MusePath/central/docview/1442697672/104FACED0782407DPQ/3?accountid=158986
The professional accountant is exposed to demands caused by globalization, the fundamental role he/she plays in corporate houses and its role in preparing financial - accounting information (Jaijairam, 2017). Therefore, the professional accountants should exercise their professional activity according to the rules of conduct laid down by the Code of Ethics for Professional Accountants, and according to national and international professional regulations.
According to the National Code of Ethics for Professional Accountants (2009), the fundamental ethical principles respected and applied by professional accountants, and financial manager are:
The principle of integrity: The principle of integrity imposes an obligation on all professional accountants to be straightforward and honest in professional and business relationships. Integrity also implies fair dealing and truthfulness.
The principle of objectivity: The principle of objectivity imposes an obligation on all professional accountants not to compromise their professional or business judgment because of bias, conflict of interest or the undue influence of others.
The principle of confidentiality: A professional accountant should not disclose or use, for themselves, confidential information obtained from the exercise of its duties. A professional accountant should maintain confidentiality even in a social environment. The professional accountant should be alert to the possibility of inadvertent disclosure, particularly in circumstances involving long association with a business associate (Copeland, 2015).
The principle of professionalism: Requires professional accountant’s compliance with laws and regulations in force and avoidance of any action that may discredit the profession (Louwers, 2007). The principle of professionalism imposes an obligation on professional accountants to comply with relevant laws and regulations and avoid any action that may bring discredit to the profession.
The principle of professional competence: Imposes a number of obligations of professional accountants such as: maintaining skills and professional knowledge to an acceptable level so that corporate governance to benefit of adequate professional services, and the exertion of professional services in concordance with the technical and professional standards.
The principle of respect for professional norms and standards: Professional accountants are required to comply with professional, quality and education standards, this representing a guarantee for the protection of public interest.
By applying the fundamental principles of integrity, objectivity, professional competence, confidentiality and professional behavior, professional accountants directly contribute to establishing a climate of confidence and normalcy to draining the economy, but also to improve the relationship between the entity’s board and the external environment (customers, credit institutions, investors, suppliers and so on).
ACCOUNTANT, N. C. (2009). Code of Ethics for Professional Accountants. The 5th Edition, revised and supplemented according to the International Code of Ethics for Professional Accountants issued by IFAC , 7-51.
Copeland, M. K. (2015). The importance of ethics and ethical leadership in the accounting profession. Bingley: Emerald Group Publishing Limited , 61-67.
Jaijairam, P. (2017). Ethics in Accounting. Journal of Finance and Accountancy.
Louwers, T. J. (2007). Auditing and assurance services. USA: New York, NY: McGraw-Hill Press.
Ethics in accounting and finance, which is also known as applied ethics emphasizes on human and business ethics, judgments, moral values and their application in the field of accounting and finance. The accounting ethics revolves around independence, objectivity, integrity, confidentiality, professional competence and professional behavior. Performing the accounting and financial tasks following the ethical standards can help the company succeed and have good reputation. On the contrary, the breach of ethics in finance and accounting damages the reputation of organization, reduce the customer satisfaction level and lose the trust of investors in the company (Jaihairam, 2014).
Major financial decisions are based on the information provided through accounting and financial statements. Thus it is important for the accountant and finance personnel to be honest in their work. They should not allow biases, pre-judgments, interest conflicts or other variables to interfere or effect on their decisions. Similarly, they should not disclose the financial information to any party without the permission of management or employer unless they are bound by legal or professional rights or requirements. They should offer professional services based on professional standards avoiding actions that stigmatize his own or the company’s name. In addition to these, following the different rules are regulations set by government or legal bodies is also equally important (Yarhmadi & Bohloli, 2015).
It is important to keep in mind that falsifying the financial information for personal benefit or reducing the tax payable can backfire the organization at any moment. Though these seems profitable for some time, it has negative impact on the productivity and profitability of the organization in long run. Following ethical standards can ensure compliance with internal control system that helps to minimize wastage and errors. Being unethical not only hamper the credibility and reputation but also increases the likelihood of criminal activities.
Business rely on ethics either good or bad. The ethics has the power to make or break the company. The unethical practices in finance department not only affect the particular department but the performance of overall organization. Thus it is important to follow the ethical standards to provide accurate, concise and timely reports to stakeholders that helps in maintaining transparency and credibility of the organization. It also helps to establish the company as a role model in the business world.
3M Company has been listed as the most ethical company in 2017 by Forbes (Kaufin, 2017). As per the vice president Kristen Ludgate, the code of conduct at 3M is responsible for this honor as they believe the way of doing business is more important than making profit. The employees who make ethical decisions every day and speak up against anything that they find inappropriate or unclear are responsible for the success of the organization. This proves that success will follow us if we practice being ethical.
Jaihairam, P. (2014). Ethics in Accounting. Journal of Finance and Accountancy .
Kaufin, J. (2017). The World’s Most Ethical Companies 2017. Retrieved from Forbes: https://www.forbes.com/sites/jeffkauflin/2017/03/14/the-worlds-most-ethical-companies-2017/#23367b307bc3
Yarhmadi, H., & Bohloli, A. (2015). Ethics in Accounting. International Journal of Accounting and Financial Reporting, 5 (1). doi:10.5296/ijafr.v5i1.7829