Professional Ethics in accounting

PART TWO – Professional Ethics (40% of coursework)

“Accountants have an obligation to the organisations they serve, their profession, the public and themselves to maintain the highest standards of ethical behaviour”, (Fatt, 1995, Journal of Business Ethics, Vol.14, No. 12, p997).

Introduction

Accountants and auditors have an obligation to practice with integrity and objectivity in the interest of public welfare. The recent spate of corporate accounting scandals has damaged the reputation of the accounting profession, and calls for improved ethical decision-making in accounting have been numerous. Armstrong et al. (2003) observe that “the sheer number of accounting abuses serves as prima facie evidence that something more is needed in terms of accounting ethics,” and also note that “calls for teaching more ethics in accounting education” have come from nearly every source, including the AACSB, AAA, AICPA, AAEC, NCFFR, and IFAC.

Write a short essay based on the above statement which includes the following:

-       An explanation why accountants have an obligation to the groups listed in the above statement to maintain the highest standards of ethical behaviour

The role of ethics in accounting is a guideline for the accountants to follow certain rules for conducting the job of accounting in a fair way. This is just to facilitate the public confidence in their accounting. The business community depends on accountants to perform their jobs with the highest degree of accuracy and ethical standards. The stability of a free-market system depends, in large part, on unimpeachably exact audits and statements. As more traditional accounting firms become involved in consulting, which to some slightly grays the line of impartiality, it is more important than ever that the accounting profession operate according to the highest ethical standards. Most ethical lapses are so small as to seem insignificant. However, they add up over time, and can snowball into a serious situation. Poor ethical standards are most damaging in the long-term. The biggest victim of ethical lapse is trust. A small breach of ethics is often known only between a few people. But this knowledge can destroy trust between fellow employees, and from there make its way up the ladder, destroying trust between employee and supervisor, and between divisions of companies. When ethical lapses become rampant, employee productivity declines, loyalty follows, soon major breaches such as employee theft begin to appear. Eventually, and worst of all, the most important advantage a firm has, the trust between a firm and its clients, erodes.

-       A description of the fundamental principles, threats and safeguards as defined in the ICAEW Code of Ethics

The Code sets out five fundamental principles, which guide members’ behaviour:

INTEGRITY is to be straightforward and honest in all professional and business relationships.

OBJECTIVITY is not to allow bias, conflict of interest or undue influence of others to override professional or business judgements.

PROFESSIONAL COMPETENCE AND DUE CARE is to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques and act diligently and in  accordance with applicable technical and professional standards.

CONFIDENTIALITY is to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose nor use the information for the personal advantage of the professional accountant or third parties.

PROFESSIONAL BEHAVIOUR is to comply with relevant laws and regulations and avoid any action that discredits the profession.

Threats

Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances.

Many threats fall into the following categories:

(a) self-interest – the threat that a financial or other interest will inappropriately influence the professional accountant’s judgement or behaviour;

(b) self-review – the threat that a professional accountant will not appropriately evaluate the results of a previous judgement made or service performed, on which the accountant will rely when forming a judgement as part of providing a current service;

(c) advocacy – the threat that a professional accountant will promote a client’s or employer’s position to the point that the professional accountant’s objectivity is compromised;

(d) familiarity – the threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work; and

(e) intimidation – the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures.

Safeguards

Where threats are significant, safeguards need to be applied, or the action/relationship at issue should not be undertaken.

The Code discusses the types of safeguards which might be applied. The nature of the safeguards to be applied will vary depending on the circumstances. In exercising professional judgement, a professional accountant needs to consider what a reasonable and informed third party, having knowledge of all relevant information, including the significance of the threat and safeguards applied, would conclude to be unacceptable.

-       Evaluative comments on the ICAEW Code of Ethics.

How effective can the code of ethics be is a debatable topic. Thorne (1998) proposes a model that integrates James Rest’s Four-Component Model of ethical behaviour which are as follows

Moral sensitivity:	interpreting the situation, role taking how various actions would affect the parties concerned, imagining cause–effect chains of events, and being aware that there is a moral problem when it exists.
Moral judgment:	judging which action would be most justifiable in a moral sense.
Moral motivation:	the degree of commitment to taking the moral course of action, valuing moral values over other values, and taking personal responsibility for moral outcomes.
Moral character:	persisting in a moral task, having courage, over-coming fatigue and temptation, and implementing subroutines that serve a moral goal.

According to virtue ethics theory, virtues characterize the decision maker. Possession and exercise of virtues tend to increase the decision maker’s propensity to exercise sound ethical judgments. Virtues increase the likelihood that one will act in accordance with one’s ethical judgments. ‘‘To use Aristotle’s wonderfully concise description of personal character—‘We are what we repeatedly do’’  (Gough, 1998). Thorne observed that the first two components of Rest’s model are primarily intellectual in nature, while the last two components are intimately connected with virtue. Thus, the two basic categories of Thorne’s model are moral development (the cognitive acts of recognizing moral issues and thinking them through) and virtue (the ethical motivation and intention to act morally and the ethical character to bring that intention to fruition). Integrating Rest’s four-component model and virtue ethics theory leads to Thorne’s Integrated Model, (Thorne, 1998). Thus, moral development and virtue are both required for ethical behaviour. Also, moral development comprises sensitivity to the moral content of a situation or dilemma and prescriptive reasoning, or the ability to understand the issues, think them through, and arrive at an ethical judgment. Similarly, virtue comprises ethical motivation, which describes an individual’s willingness to place the interests of others ahead of his or her own, and ethical character.

Furthermore, according to the cognitive-developmental perspective, an individual’s ethical character affects his or her willingness and ability to act in accordance with his or her ethical intention. According to virtue ethics theory, the property of character critical to an individual’s ability to implement his or her ethical intention is instrumental virtue. Hence the integrative perspective suggests that an individuals’ ethical character is a reflection of his or her instrumental virtue. Thus, a mere outlining of ethical code does not guarantee issuance of ethical behaviour from accountants.