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The word ethics is derived from the Greek word ethos character and Latin word moras customs. By considering the two words together we can deduce how individuals choose to interact with one another, which mean that ethics is about 'choice'. In fact it shows how people act in order to make the 'right' choice and to produce 'good' behavior. Ethics can be considered as a practical discipline where, demands the acquisition of moral knowledge and the skills to properly apply such knowledge to the problems of daily life.
Ethical behavior is difficult to measure and analyze in real life. Most of the time result is imprecise due to the challenges in quantifying what is ethical and what is not.
The definition of ethics is shaped by personal, societal and professional values, all of which are difficult to specify. Some people stress the importance of society's interests and others stress the interests of the individual.
2.2 Role of ethical theory
Ethics is concerned with right and wrong and how conduct should be judged to be good or bad. It is about how we should live our lives and, in particular, how we should behave towards other people.
Business life is a fruitful source of ethical dilemmas because its whole purpose is material gain, the making of profit. Success in business requires a constant, avid search for potential advantage over others and business people are under pressure to do whatever yields such benefits.
It is essential to understand clearly that if ethics is applicable to corporate behavior at all, it must therefore be a fundamental aspect of mission. Managers and professionals are responsible for strategic decision making cannot avoid responsibility for their organization's ethical standing. It is important for them to apply ethical rules to all their decision in order to filter out potentially undesirable developments.
Ethical assumptions underpin all business activity as well as guiding behavior.
2.3 Ethics in accounting
"We do not act rightly because we have virtue or excellence, but we rather have those because we have acted rightly" Aristotle 384 B.C (Greek philosopher and scientist)
Many senior citizens anticipating retirement have found their assets and dreams decimated. Many ask, "Where were the auditors and accountant who were supposedly protecting our interests?"
Ethics in accounting requires individuals to understand their responsibilities to clients and to the public interests. Moreover, accountants have a unique ethical responsibility in business and also it is their duty to report information to maintain the public confidence. Additionally, integrity and ethics are two main elements that can help accountants avoid conflicts of interests. Accountants may be at risk in a conflict of interest when they provide advice to business owners and release audits to the general public. In this situation, accountants are in danger of presenting an opinion on the company & accounting process that is biased or not completely factual.
It is important that people need to have confidence in the quality of the complex services provided by professionals, because of these high expectations, professions have adopted codes of ethics, also known as codes of professional conduct. These ethical codes call for theirs members to maintain a level of self discipline that goes beyond the requirements of laws and regulations.
There have been many institutions which have been implemented in the world such like International Federation of Accountants (IFAC), International Accounting Education Standards Board (IAESB), International Accounting Standards Committee, International Financial Reporting standards (IFRS). These institutions help the professional to work under the ethical codes.
The accounting professionals are under the obligation of three main codes and the related professionals standards. All three require professional competence, confidentiality, integrity and objectivity. Accountants should only undertakes tasks that they must carry out their responsibility with sufficient care & diligence, usually referred to as due professional care or due care.
2.4 Influences on Ethics
Models of ethical that affects the decision making is divided into two categories Individual and situation.
Individual are the characteristic of the individual making the decision.
Age and gender
It has been observed that some evidence suggests that the ways in which men and women respond to ethical dilemmas may differ. Although different groups have been influenced by different experiences, again empirical evidence does not suggest that certain age groups are more moral than others.
National and cultural beliefs
National and cultural beliefs seem to have a significant effect on ethical beliefs, shapping what individuals regard as acceptable business issues.
Education and employment
Globalization is expected to influence positively the education and employment. In others words, there is differences in ethical decision- making between those with different educational and professional.
Integrity can be defined as adhering to moral principles or values. The ethical consequences are potentially significant such as in deciding whether to whistleblow on questionable practice at work, despite pressure from superior or negative consequences of doing so.
This refers to the level of awareness individuals have about the variety of moral consequences of what they do. The problems of wide moral imagination could be an ability to see beyond the conventional organization responses to moral difficulties.
Locus of control
Locus of control means how much influence individual believe they over the course of their own lives. Normally, individual with high internal locus believe that they can design their own lives significantly, whereas those with external locus believe that there will be shaped by luck or even circumstances.
2. Situation Influences
Situation is the features of the context which determine whether the individual will make an ethical or unethical decision. The importance for considering situational influences on moral decision making is that individuals appear to have multiple ethical selves. These circumstances will include two factors namely issued-related and context-related.
Issued related factor is the nature of the issue and how it is viewed in the organization. On the other hand, context-related factor mean that the expectations and demands that will be placed on people working in an organization.
2.5 Independence and conflict of interest
An organization making a loads of profits and paying dividend almost each year, will always be accountable by an expert in accounting and finance manager. These professionals may face conflict of interest between their own and clients' interests, or between the interests of different clients.
IFAC is an example of treats to independence and applicable safeguards. Independence is vital for professionals' accountants who sometimes act as auditors and assurance providers for many reasons:
Reliability of financial information
It has been highlighted by the corporate governance the reliability of financial information as key aspect of corporate governance. The owners and other stakeholders need to trust the record of director's stewardship to be able to take decisions about the company. Therefore to have the confidence of the shareholders, independent auditors play a key role on the reliability of information.
Value for money of audit work
To gain sufficient audit assurance, a special audit fees need to be set apart. It is vital that the auditors need to stand independents else the shareholders are not receiving value for the audit fees.
Credibility of financial information
It should represent the same views of independents experts, who are not motivated by personal interests to give a favorable opinion on the annual report.
2.5.2 SELF-INTEREST THREAT
The code of ethics and conduct of ACCA highlights a great's number of areas in which a self-interest threat to independence might arise.
Family and personal relationships
Loan and guarantees
High % of fee
Partner on client board
Close Business relationship
This refers when a firm and client have inappropriate arrangements to combine one or more services of the firms with one or more services. Or another fact is that marketing arrangement under which the firm acts as distributor of the assurance client's products or services or vice versa.
It is important to judge the materiality of the interest and therefore its significance. Therefore there exist appropriate safeguards to prevent or to end or to terminate the business.
Family and personal relationships
Family or personal relationships between firm and client staff could seriously threaten independence. There are some factors which need to be considered such like
The individual's responsibilities on the assurance engagement
The closeness of the relationship
The role of the other party at the assurance client
The audit firm should take into accounts whether there is any threat to independence if an employee who is not a member of the assurance team has a close family or personal relationship with a director, an officer or an employee of an assurance client.
A firm should have quality control policies and procedures under which staff should disclose if a close family member employed by the client is promoted within the client.
If a lending institution client lends an amount to an audit firm on normal commercial terms, there is no treat to independence. If the loan were materials it would be necessary to apply safeguards to bring the risk to acceptable level.
Loans to members of the assurance team from a bank or other lending institution client are likely to be material to the individual, but provided that they are on normal commercial term, these do not constitute a threat to independence.
But an audit firm should not enter into any loan or guarantee arrangement with a client that is not a bank or similar institution
This exist where an audit firm has a financial interest in a client's affairs, for examply, the audit firm owns shares in the client, or is a trustee of a trust that holds shares in the client.
There are some parties where the IFAC prevent to own a direct financial interest or even an indirect material financial interest in a client. Such parties are assurance firm, partners in the same office, member of the assurance team and an immediate family member of a member of the assurance team.
However, there are also some safeguards which may be applied, for instance, disposing of the interest, removing the individual from the team if required, keeping the client's audit committee informed of the situation.
Partner on client board
It is very important that a partner or employee of an audit firm should not serve on the board of a client. Whereas it may be acceptable for a partner or an employee of an insurance firm to perform the role of company secretary for an assurance client, if the role is essentially administrative.
High percentage of fees
It is obvious that a firm must be alert to the situation arising where when the total fees generated by an assurance client represent a large proportion of a firm's total fees. Factors such as structure if the firm and the length of time it has been trading will be relevant in determining whether there is a threat to independence. It is also necessary to beware of situation where the fees generated by an assurance client's area a large proportion of the revenue of an individual partner.
Ethical guidance highlight that the public may perceive that a member's objectivity is likely to be in jeopardy where the fees for audit and recurring work paid by one client exceed 15% of the firm's total fees.
It will be difficult for new firms to establish themselves to keep within these limits anf firms in this situation should make use of the safeguards mention below:
Discussing the issues with the audit committee
Taking steps to reduce the dependency on the client
Obtaining external and internal quality control reviews
Audit firms should guard against fees building up and being significant by discussing the issues with the audit committee or others involved in governance, and, if necessary, the possibility of resigning if overdue fees are not paid.
2.6 The importance of ethics for professional accountants
Ethics are important for Professional Accountants because throughout the foretimes, it has been attested that accounting partially reflects moral orders of the world in which it is initiated. It has become a moral discourse, because of the injustice that has occurred in regards to ethics within the accounting profession.
Ethics are crucial for Professional Accountants because accounting requires ethical knowledge and skills to a great farness. They clear the climate of opinion of positive and negative. They aid the professional accountants to construct personal fearlessness to make a right choice. Bear in mind the ethical factors where accountants can easily declare peer pressure. Accountants will never congress in short term pressures to increase the turnover or to accomplish the satisfaction of investors. It has been proved that in successful companies, accountants usually take long term decision making rather than short term decision. Ethical behavior force to cause close relations in case of sham. Concentrating on ethical factors makes the accountants to aggrandize an inner power which forces them to make an ethical decision of not ignoring the sham. Accountants, whose first objective is ethics, can easily deal with ethical dilemmas, areas that are not black and white. They feel at ease dealing with grey situations. They never under represent their time for completing a job. They can easily go along with the crowd or do what their managers tell them to do, by never compromising with ethical factors.
Ethical behavior are one of the important personal skill that professional accountants must preoccupy but it has been proven by the research reports that professional accountants are respect all the rules relating to their profession except moral duty and obligations or ethics. An accountant can never succeed in his acreage if he ignores ethics. It is vital to define ethics within the accounting profession. Professional accountants must possess high degree of integrity. Ethics are particularly pertinent as a foundation of the accounting profession. Working to the highest standards of ethics and professionalism allows the public, investors and regulators to have confidence in them. Ethical behaviors not only protect the professional accountants but that of the accounting profession as a whole.
Professional accountants can learn a lot from the mistakes like Enron scandal, Tyco, Adelphia, world com etc. these were the corporations who were taking easy road to success by compromising ethical factors.
These early scandals fairly or not, have ruptured the reputation of professional accountants and have also damaged the shrinking public confidence in accounting profession. After these scandals ethics have become an important topic for all professional accountants as well as student accountants. The accounting profession must take public and universal steps to repair the damage, the scandals of the past several years have done to its eminence.
2.7 Problem facing Accountants in business
The professional accountants in firms may sometimes face a variety of difficulties including contends between master and employment obligations, squeeze to prepare misleading data. Despite that an accountant has sufficient experience and inducement, that does not matter they got pressure from board to prepare the information like they wish.
2.6.1 Conflicts between professional and employment obligations
Ethical guidance stresses that a professional accountant should normally support the consistent and ethical obligations ascertained by the employer. However, it may be pressurized to act in ways that threaten compliance with the essential professional ethics. Such ethics may include:
Acting contrary to law, regulation, technical or professionals standards
Aiding unethical or illegal earning management strategies
Misleading auditors or regulators
Issuing or being associated with a report that misrepresents the facts
It is in the responsibility of the accountant to use the formal procedure within the organization when these principles mentioned above are detected.
2.7.2 Preparation and reporting of information
The professional accountant in business should scheme to adjust information that describes clearly the nature of the business proceedings, classifies and records information in a betimes and proper manner and represents the facts accurately. It is the duty of the accountant to report to his superior or any appropriate authorities when he is facing pressure to prepare misleading data.
2.7.3 Acting with sufficient expertise
Guidance arsis that accountant should only undertakes duties for which he has sufficient specific training or acquaintance. Certain pressures may afflict the ability of the professional accountant to perform duties with appropriate coordination and due care:
Lack of time
Lack of data
dissatisfactory training, experience or education
2.7.4 Financial interests
Ethical highlights financial interest as a self-interest threat to objectivity and confidentiality. In particular the temptation to manipulate price- sensitive information in order to gain financially is stresses. Financial interests consist of shares, profit-related bonuses or share options.
This threat can be countered by the individual consulting with superiors and revealing all appropriate information. A remuneration, form by independent non-executive directors, might be a motivation for the senior level.
The probability that an accountant may be offered inducement to influence actions or decisions, encourage illegal behavior or acquire confidential information.
2.8 Ethical dilemmas
An ethical dilemma is an angle of vision wherein moral precepts or ethical obligations conflict in such a way that any possible resolution to the dilemma is morally intolerable. Business ethics can play a crucial role in our economy.
"The mood at Baileyville High School is tense with anticipation. For the first time in many, many years, the varsity basketball team has made it to the state semifinals. The community is excited too, and everyone is making plans to attend the big event next Saturday night.Jeff, the varsity coach, has been waiting for years to field such a team. Speed, teamwork, balance: they've got it all. Only one more week to practice, he tells his team, and not a rule can be broken. Everyone must be at practice each night at the regularly scheduled time: No Exceptions.Brad and Mike are two of the team's starters. From their perspective, they're indispensable to the team, the guys who will bring victory to Baileyville. They decide-why, no one will ever know-to show up an hour late to the next day's practice.
Jeff is furious. They have deliberately disobeyed his orders. The rule says they should be suspended for one full week. If he follows the rule, Brad and Mike will not play in the semifinals. But the whole team is depending on them. What should he do?"
Another example of ethical dilemmas, "Suppose you are working in a firm, when your supervisor enters your office and asks you to prepare a cheque of Rs 3500.00 for expenses. He then tells you that he incurred entertaining a client last night. He even produces the receipt from the restaurant and lounge. However, at lunch time, your supervisor's girlfriend stops by to pick him up for lunch and you overhear her telling the receptionist that she and the supervisor had a wonderful time at dinner and dancing last night. What should you do?"
2.9 Purpose of accounting ethics education
We can notice that with such dilemmas, many institutions have been set up such like ACCA and IES (international education standard) to facilitate discovery by the individual of what ethics means to the individual, the community, the world at large and the Transcendence. Because ethics is implicit constructs, the education of ethics should deliberate around accelerating self-discovery and building a acute foundational framework of ethics rather than only "teaching" what ethics is. As mentioned previously, an accountant's function is to be ethical instead of knowing ethics. Ethics is about how one performs the purpose.
Hence, the importance of ethics education would be about to enrich insight for promoting one's own philosophy of and belief system about ethics.
Ethics is about the manner by which an end or outcome is achieved, and this manner has meaning only to the individual. It is impossible to provide a standard operating procedure to make accountants ethical. While we accept the merit of an outcome-based learning approach for some technical and skill-based disciplines, we call for a re-thinking of the necessity to spell out the learning outcome for ethics in the same manner.
"One is presented by ethical challenges on a continual basis and only passes when one upholds basic human values in one's daily activities". For example, one must not only confounded the seduction of corruption but also evade befriending others for the atomic counsel of future merits they might confer. It is crucial to be ethical - not simply know about ethics and behave ethically. The purpose of ethics education should not be offered at a macro level that creates detachment of the individual human's responsibility as a human. Organizational behavior is only a casting of human behavior in the system, while human behavior is an adherent of human essence. Ethics is about the essence of human.
2.10 The Sarbanes-Oxley Act 2002
The Sarbanes-Oxley is a legislation which has been implemented, in accordance to the high profile Enron & WorldCom Financial scandals, to advocate the owners of company & the general public from accounting errors and fraudulent practices in organization.
This act also encloses the responsibility for financial priority and accuracy to the board's audit committee. The Sarbanes-Oxley Act 2002 command companies to blow up their financial statement disclosures, to implement an internal code of ethics and to impose restriction on share trading and also loan to corporate officers.