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The Enron Corporation used to be one of the worlds leading electricity, natural gas, communications, and pulp and paper companies. However, the Enron "scandal", revealed in October 2001, leads to this company eventually becoming bankrupt at the end of 2001. Enron had used false accounting statements to cover financial losses and create the illusion of high value shares. The accounting firm Arthur Andersen has also been convicted for obstruction of justice in the government's investigation of Enron Corporation. These lead Paul A. Volcker (2002), former chairman of the Federal Reserve System, to refer to the Enron collapse as the "Accounting Crisis". These corporate scandals and accounting failures have drawn attention to the importance of professional ethics in accounting. However, there is no obvious boundary between professional ethics and behavioral norms, and therefore it is necessary to distinguish professional ethics and behavioral norms.
What are professional ethics?
According to Richard G. Schroeder, Myrtle W. Clark, and Jack M. Cathey (2008), ethics are "concerned with the type of behavior society considers right and wrong", and accounting ethics "incorporate social standards of behavior as well as behavioral standards that relate specifically to the profession". This explains the meaning of accounting professional ethics which is a study of moral values and judgments as they apply to accountancy. Richard and Clark also establish the status of professional ethics as a kind of applied ethics. Thus, the professional ethics are an integral part of the accounting standards.
What are behavioral norms?
It is widely acknowledged that accountants should prepare, record, and summarize financial statements according to some rules-based standard known as behavioral norms. Behavioral norms refer to the standard framework of guidelines for financial accounting used in any given jurisdiction. They vary in different countries. For example, the US uses the Generally Accepted Accounting Principles (GAAP), while the UK uses the Statements of Standard Accounting Practice (SSAPs). The International Financial Reporting Standards (IFSCs), published by International Accounting Standards Board (IASB), are also approbated in many countries. Due to the foundation and the widespread use of these behavioral norms, the quality and reliability of financial reports will be dramatically improved, as accountants are able to obey the rules. Moreover, according to Paul B. W. Miller and Paul R. Bahnson (2002), these norms also set uniform standards for informing the capital markets. That will remove the barrier of exchange of information between different companies, make a further development of the market economy, and also increase countries' involvement of international activities.
Relationship between professional ethics and behavioral norms
Financial reports should meet the users' need. Different user groups look at accounting information from a different perspective and each group has its own particular interests. For example, owners and managers focus on cost management, while investors and lenders tend to pay more attention to company profit. This can present problems for an accountant, such as confliction of interests. In order to meet the needs of owners and managers, they may compile reports in the interest of maxing profits risking their accounting integrity by creating fraudulent accounting reports, as was the case at Anthur Andersen. What is more, as there is no uniform standard to constrain accountants' ethics, accountants are responsible for making judgments and negotiating conflicts of interest. This requires not only behavioral norms but also professional ethics.
Differences between professional ethics and behavioral norms
In addition, Martin T. Stuebs Jr. and C. William Thomas (2011) point out the differences between "principles-based" standards and "rules-based" standards in accounting. First, both "principles-based" standards and "rules-based" standards are attempting to approach to the financial reporting purpose, but they use the different ways. Principles-based standards teach that accountants should decide what needs to be done, which are professional ethics in other words. In contrast, the rules-based standards attempt to tell accountants how to do it, which are behavioral norms. Moreover, the forms of "principles-based" standards and "rules-based" standards are quite different. Specifically, rules-based standards rely on precise rules with more guidance, interpretations, and exceptions to guide compliance; while principles-based standards rely more on practitioner judgment in both the ''micro'' transaction level (substance over form) and the ''macro'' financial statement level (''true and fair view'' override). As Stuebs Jr. and Thomas concluded, "While applying any standard requires judgment, applying principles-based standards requires more judgment", which seems that the principles-based standards seems more important than the rules-based standards.
Historical background of Chinese accounting
Since 1949, when the People's Republic of China has formed, the Administration of Accounting Affairs (AAA) has established a uniform accounting system. However, according to Liu Kin Cheung and Zhang Wei Guo (1996), this system is "implicitly embedded in the uniform accounting system rather than the explicitly codified into laws or formalized in the name of accounting standards". It is just a way that the government controlled the whole Chinese economy. By the end of 1970s, China started its economic reform and opened the door for the business to the outside world, after which the uniform accounting system was gradually considered inadequate to cope with the international accounting affairs. Five years later, to meet the need of specialist in accounting, the Chinese Institute of Certified Public Accountants (CICPA) has been established, and till the year 2010, there were more than 12 million Certified Public Accountant (CPA) in China (Statistics by the Chinese Ministry of Finance). Despite the improvement of accounting system in China, accounting frauds continue.