This essay focuses on the concepts and theories of Accounting Ethics and how they have been applied to organisations today, mainly focusing on the demise of, what used to be one of the 'Big Five' auditing firms, Arthur Andersen LLP. The concepts are; ethical, social and environmental accounting. The essay will also discuss the benefits and implications of applying these concepts into an organisation.
Montgomery had described this concept as profession that should be "accountable to the standards of public interest", (Vincent, J, Montgomery, R, 2008). It focuses on the ethical codes made by businesses to ensure that accountants behave in the work place ethically and consistently. There are many theories of ethical accounting one of them being relativism. Ethical relativism is ethics that is not subject universal conditons but cultural beliefs and traditions (Gowans C, 2008). This suggests that an issue which is 'morally wrong' may be true to one society's tradition, but false to another, this making judgement of 'right or wrong' is unclear. Therefore, businesses around the world are run and judged within their own cultures.
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For illustration of this theory, in 2002, Arthur Andersen had destroyed evidence related to the audits of, what used to be the American energy giant, Enron (Conford, A, 2004). There had been a debate within the jury, claiming that the employees of the auditing firm should be charged, believing that individuals commit crimes not companies (Arthur Andersen LLP Vs United States, 2005). However, it was then argued that the company itself set rules and regulations to guide its employees and therefore, the organisation is morally in charge of the employees' actions. This had destroyed the firm's reputation worldwide leading it to surrender its licences (Arthur Andersen LLP Vs United States, 2005). The theory of Slippery Slope can be applied to this scandal. Slippery Slope states that small actions can lead to a potential trend of events (BBC Ethics, 2011), in this case, the hiding of fraudalent auditing which lead to shredding these documents. Since the Enron scandal, organisations have become global, able to escape policies in certain countries.
Enron's fraudalent accounting has been kept hidden due to its internal parties. Due to the nature work, the profession has a high level set on ethics. Shareholders and stakeholders require financial reports in order make decisions on investments, however this can prove difficult as external investors have to rely on public interest. After an investigation with organisation, Britton had concluded that investors within the companies had better access to financial statements whereas external parties had to rely on public information (Britton, A, 2004).
Benefits & Drawbacks
Ethical codes have prevented the profession from any criticism and regulations have been made for improved ethics. As the employees follow these codes, they gain a high level of professionalism as work is carried out ethically (Vitez, O, 2006). Thereby, the companies gain a reputation due to an increase in positive opinions made by clients and businesses. Since the accounting scandals, rules and regulations have been set which has been beneficial for organisations as they can control misconduct as the codes guide employees toward correction of behaviour.
This focuses on a company's economic decisions, communicating its social and environmental effects towards a society (Gray, R 1987). It is an evaluation of the organisation's performance to particular interest groups, for example, its stakeholders. Stakeholders are also given a choice on how they receive the reports; H&M publish reports through their website and Vodafone publishes reports for its operating companies (EthicalCorp, 2005). Major accounting scandals such as, Arthur Andersen LLP and Enron, has had an affect on third parties' interest. Typical social accounting focuses on how activities affect; the natural environment, the employees, and the local and international communities. Due to the failure of Enron's social accounting conduct, employees had lost their pension funds as crumbling finances remained hidden (Bragg, R 2002).
Social Accounting is is needed as it is an "identification of socially relavant behaviour" determining that the company is responsible for its performance and techniques (Crowther, D 2000). This is a normative concept, a moral belief on how people should behave in context. In the scope of accounting, it should act on economic events and be responsible to stakeholders. The Stakeholder theory addresses the moral code of conduct when managing an organisation (Donald, T, 2005). A normative stance towards managing an organisation would be treating all stakeholders as equally important. However, Enron had made an instrumental stance, focusing on the key stakeholders (suppliers and investors) with more interest. Therefore, the company had taken its employees for granted. Another theory applied to social accouniting is Legitimacy. Lindbolm states that it is a "condition which exists when an entity's value system is congruent" (Lindbolm, 1994), therefore the business is enclosed by their social contract.
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As an agreement is made, after performing various actions in order for something in return, businesses gain rewards such as grants. In order gain rewards the actions to be taken are; educating stakeholders of the company's intentions on improving performance, thereby, changing external parties' perception on the company's auditing. The Institutional Theory can be interlinked with Legitimacy thoery as it is applied to auditing firms today. This is when organisations follow rules and regulations that have already been established as guidlines of social behaviour (Scott, W, 2004). Companies may be guided by mimetic isomorphism; copying the accounting activities of peers. These ethics and also be pressured by governments in form of Laws. Therefore, multinational organisations will face diverse pressure as they are operating in different countries. Scott believes that an organisation can only survive if only it follows the beliefs of the environment as this would gain legitimacy (Scott, W, 2004).
Benefits & Drawbacks
The benefits of social accounting are similar to ethical. This concept has a reputational impact; as stakeholders' perception of the profession changes, due to ethics, it generates a positive reaction, therefore, organisation gain better public relations. Due to better awareness of their performance, they gain legitimacy and receive grants. Due to positive opinions and good techniques of financial report, this, leads to an increase in competition.