The Importance of applying ethics to auditing

The objective of this report is to demonstrate the importance of using ethics in auditing specially for accounting, based on analysis of the concept and investigation. The paper will show the turning point from traditional auditing to ????? in relation to accounting process, including and evolving the advantages and capabilities of implementing the new concept that used in most of the organizations. The results of the report will guide the others to develop and perform mixture of ethics and auditing which used to provide effective and accurate information in regards to financing data.

Abstract:

The purpose of this report for term paper is to provide review of ethics in auditing and view example case study, which is in Arthur Anderson Company. Actually this document is not only contain rich and qualitative information but also it can be good reference for others who depends on auditors to provide accurate information related to financial, IT, accounting and managerial data. Indirectly, it will enhance the development of the place.

This paper presents introduction about the ethics and auditing with a brief overview to the history and background of using ethics concept in business specially in auditing. In addition, it will define Arthur Anderson/Enron case study, the ethical characteristics that auditors should exhibit. Furth more, the indicators for the failure of the business will be clarify based on misusing the auditing in unethical way.

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Introduction:

The business world in the first decade of the new millennium has suffered lots of scandals the led to the collapsing big names like Enron, Martha Stewart, leehman brothers and recently what would be appeared as the latest one Goldman Sacks company. All of them have raised question that relate to ethics in business and the role of auditing in raising signs of warning if there is any problem with these businesses earlier. Also it has shaken the foundations of investor confidence in the transparency, integrity and accountability of corporations and capital markets.

In recent years there were rise the topics in media about failure role of audit in detecting the problems in these companies because of ethical failure in auditing. Enron case had led to collapse one of the big 5 auditing firms, which is Arthur Anderson. In same time it’s posing questions about ethics in auditing that suffered business world today, Is there any crisis in ethical standards of auditing field and what are the ethics that governs.

As mention in modelle 2010 article, auditing in accounting is sensitive processes because auditors are dealing with money which ranking as more important and valuable consideration than other things like health, happiness and education. Accounting is not only considered the monetary activities but also auditing and the proper apply of ethics. In addition, trusting and depending on the auditors has decreased since last 15 years because of unfair deceptive acts and fraud which make people to suspect from auditors. Most of authors believe that main reason of frauds, monument and problems of the companies is from manipulating the rules of accounting practices. Actually, financial accounting is functioned strictly on rules which provide an opportunity for people to bend the rules with unethical behavior and illegal actions. Many accountants rely heavily on rules, even when it is clearly not the right or moral course of action. Although, it is good to follow rules, people tend to abuse rules. All of these reasons led the government, organizations and auditing companies to consider ethics as one of the pillars of auditing profession.

Actually, recent statistics among 1500 surveys show that 40% of managers feel pressured by their employers to commit ethically questionable acts. Respondents reported that huge number of employee who had compromised to their personal principles to meet an organizational demand. This development had led many individuals and managers to believe that the level of ethics in auditing is playing important role in business successful or failure. (http://www.coursework.info)

In this paper, we will present the following:

Review some cases and relevant works.

Overview about the concept and then focus on using ethics in auditing with details as well as deep investigation.

Discussing and analyzing the results, highlight the issues that identified, provide recommendation and conclusion on the work presented in this paper.

Background and Related Research:

In most cultures, ethics are connected with divine origins:

Babylonian civilization received laws of Hammurabi from sun god

God gave 10 commandments to Moses

In Greek civilization, Plato says that god Zeus gave morality to help mankind

Manusmriti Samhita incorporates earliest code of social and legal ethics in India

In fact both religion and ethics serve a common need: society

Societies are built on the plank of co-existence and mutuality

All societies, whether those of humans or non-humans, need mutual support, forbearance and care:

Observed in societies of wolves, baboons, dolphins, etc.

Thus, two important pillars of all societies are:

Reciprocity

Kinship

Ethics in Auditing:

What does ethics in auditing mean?

Ethics: Tom Campbell describes ethics as something difficult to reach because it’s not only means knowing what we ought to do, but also how to do right things. Therefore, everybody knows these concepts; honesty, care, loyalty, integrity but we don’t know how to adapt these.

Ethics are codes that govern the person action and make him/her do the right thing. Some times it is not breach of law. For example lying is unethical but if a person lies in a court testimony he/she will be punished by law however if he/she lies in private life it is not punishable.

Adrian (2005) defines Ethics as the moral principles and values that govern the actions and decisions of an individual or group. They serve as guidelines on how to act rightly and justly when faced with moral dilemmas.

Basically, the meaning of ethics is hard to pin down and there are many views from many people and authors about ethics. Ethics can be defined in two definitions. First, It will define what human should do in terms of rights, obligations, benefits to society and fairness based on the standards of right and wrong. For example, standards that impose the reasonable obligations to refrain from rape, stealing, murder, assault, slander, fraud or encourage honesty, compassion and loyalty. Also it can be standards relating to rights such as the right to life, the right to freedom from injury and the right to privacy. Secondly, ethics refers to the development of one ethical standard. Increase feelings, laws and social norms will increase the ethical standards. So it is important to look at one standard of ethics which is defined and identified to ensure that they are reasonable and well-founded. Studying our own moral beliefs and conduct is part of ethics to ensure that we live up to standards that are reasonable and solidly-based. (Manuel, Claire, Thomas and Michael, 2010)

Code of Ethics: or auditors there is an official

As mention in Mollie book 2010, over the past few years ethics concept became very common and widespread than in the first few years of the twenty-first century. As a result of business scandals which have shaken community, Government released and created codes of conduct, ethics management programs and ethics offices. In fact, an investment in business ethics has become a prerequisite for an organization’s continued participation in formal business networks. Also the approach of ethics in auditing is currently being discussed in most of business academic forum. In general, Board of Directors, CEO, CFO and Audit Committees will establish a code of ethics and conduct that for both internally and externally because it can’t be generic document by officer . Code of ethics is mainly used to guide the behavior of employees based on a written document that states values and ethical standards. The main purpose of it is to help the employee to make choices among alternative behaviors. As a result law will use the words ethics, accountability, integrity and transparency in the financial reporting process which required code of ethics that laying down minimum standards of ethics.

Auditing:

Ethics in auditing:

Ethics is a company’s values, which are for auditing changed in to actions, as every company has its own values and beliefs, ethical auditing measures both, values and beliefs, in and out of the company, as in how is serves its costumers, and how it is giving every employee his, her rights as employers, and in how is the company managing its financials and managements.

Ethical auditing has become something very important for companies in order to improve its performance. “Ethical auditing is impartial, third-party supportable process to understand, measure, report on, and help improve an organization’s social and environmental performance”. A lot of companies now days follow unethical practices in order to compete their competitors, though they could be punished if any of their practices were found and proven.

Ethical auditing makes sure the company stays with a good reputation as possible, it actually focus on the work done during the year, and corrects any mistake that might had happened accidentally, focusing on the company’s ethical transparency

Ethical auditing is something like examining a company’s ethical behavior; well, why doing so is the thing we would want to know. As each company is a part of it’s society, which in other words any company is formed to serve it’s society and people, its ethical view would either bring it up and make it a trusted company, or just pull it down to no where. Identifying its ethics confirm to be a base for any future developments. Companies have started ethical auditing after noticing many failures in following the business law that the company should follow, which may cause mistrust or loss for the company.

Why companies and governments are using ethics in auditing?

How ethics is playing effective and important role in auditing?

“The public accounting profession has long relied on its reputation for integrity and veracity as justification for its professional status and monopoly privilege predicated

on claims of acting in the public interest. If such status and privilege are to be justified and sustained, serious consideration of what constitutes ethical behavior, how such behavior is motivated as well as an explicit recognition of the rights and interests of affected parties constitutes an ethical imperative for the profession. Traditionally, work on ethics and auditing is quite narrow, failing to recognize the social context of individual actions, failing to identify the relevant constituencies of the profession, and failing to articulate processes through which the constituencies interests can be identified. Generally, the accounting literature has taken a cognitive perspective on ethical decision making which views the resolution of ethical dilemmas as primarily a function of the moral makeup of the actor responding within the context of the Code of Professional Conduct. The purpose of this paper is to broaden the theoretical base of ethical research, specifically within the area of professional accounting and more generally in the area of business. We propose the application of structuration theory in conjunction with stakeholder theory and a responsibility ethic. The application of stakeholder theory is a means for identifying affected constituencies. A responsibility ethic recognizes the situatedness of an individual within an ongoing professional community. Structuration theory provides a theoretical framework for articulating and investigating both the structures within which action is carried out as well as the interaction between the social structures and the actors. Taken together, the theories allow for an enhanced ability to define ethical behavior within a business context and to understand the contextual antecedents and consequences of ethical acts”.

Overview for Arthur Anderson/Enron case study:

Arthur Anderson was founded in 1913 in Chicago, it had about 20000 employees [1] there were lots of speculation about the degree of ethical violation from the company when World Com which was one of clients has collapsed.

Before the fall of Enron in 2002, there were five major auditing firms and now the number is reduced to four because of the fall of Arthur Anderson which was the auditing firm that was responsible for auditing Enron. The law suits that accused the auditing firms of being one of the factors of Enron crises has damaged the company reputation in a way beyond saving and lead to its collapsing after losing the trust of its clients. The company has in business for decades.

The case has revealed that Arthur Anderson has conspired to cover billion dollars of loses [2] , shredded document that pertain crucial information about Enron and deleted computer records. The auditors were not independent in terms with Enron board of dirctors [3] .

In addition to Enron, World Com and Waste Management were among Arthur Anderson clients.

Sorban Oxley law

The law came as reaction to public demand in United States to regulate the industry and regain the trust tarnished by many scandals by issuing more regulation.

Conclusions And Future Work

Ethics topics are increasing popularity in the literature concerning the industry the

Companies are facing lots of challenges to achieve higher profits and more gains constantly as a result some one will look at the regulation as obstacle to overcome which place many challenges on auditing profession.

Auditor are facing lots of pressure to place their ethics value at highest priority when dealing with clients.