Wk 6 Ethics in Accounting (EXECUTIVE SUMMARY)

Ethical Analysis

Effects of ethical behaviors in an economy are far reaching to individuals, firms and the economy at large. Accountants play a vital role in ensuring the reliability and trustworthiness of accounting data and affect the moral culture of business and society. In order to achieve this, accountants are advised to observe the American Institute of Certified Public Accountants (AICPA), Professional Code of Conduct. Undoubtedly, private and public organizations employ professional accountants who are mandated to provide financial information regarding its business cycles. In some situations, an accountant may feel compelled or pressured to provide false financial information or alter financial results. In these cases, this creates a threat to the moral and ethical character of an accountant and is known as an ethical dilemma. Ethical dilemmas constitute a circumstance in which an individual faces a situation or a decision that test his/her moral system or ethical code. In these circumstances, an individual must choose whether to live out consistent moral attitudes or act contrary to what one personally believes or what has been established by ethical code. Ethical accounting codes require accountants to have a high level of integrity, to maintain confidentiality and behave according to a high degree of professional standards.

This dissertation will discuss how ethical accounting standards impact accounting fraud. Accounting fraud involves the intentional manipulation of financial information, which misleads shareholders, creditors, investors and the general public. These actions are premeditated attempts to deceive and attract investors by intentionally altering financial statements. Often, this is accomplished by overstating revenue and assets and under reporting expenses and liabilities. The perpetrators of accounting fraud are employees, managers, accountants and top executives. Thus, to reduce business fraud, ethical codes have been instituted within corporations, industries and state and national accounting boards. For certified public accountants, the AICPA Code of Professional Conduct has been adopted to tackle the ethics of accounting.

Professional Conduct Diminishes Fraud

An accountant’s professional conduct is a key quality used to minimize fraud. As mentioned, state accountancy boards and the AICPA are mandated to formulate and enforce professional standards for all accounting members who are responsible for providing financial services. The AICPA Code of Professional Conduct was recodified in June 2014, and became fully effective in December 2015. This code of conduct requires all accountants to act with integrity, due care, objectivity, competency and ensure confidentiality for their client. In addition to this, accountants are required to disclose any conflict of interest in their work and to ensure that their clients are aware of any referral fees and commission. Moreover, the obligation to guard public interest is also required to be met by accountants in the cause of accounting. Steven Mintz writes, “the public relies on the ethics and professionalism of CPAs to protect their interests. Professionalism is demonstrated by behavior that is consistent with the ethical obligation to serve the public interest…” (Mintz, 2018). Reasonably, aligning the conduct of accountants though an obligation to conduct their activities to serve the public good, and not employers, investors or themselves, will reduce the temptation to commit fraud. In this manner, strengthening the accountants’ determination to conduct and execute their duties faithfully and confidently and diminishing fraud.

Integrity Withers Fraud

Without a doubt, integrity is the fundamental ingredient necessary for all professionals. It is the essential character trait that dictates the professional and ethical actions of an accountant. Accountants who have strong moral values and who are honest in conduct will help to eliminate accounting fraud. As mentioned, the AICPA has been entrusted with the responsibility of ensuring and developing professional ethical values in accounting. The key attribute and cornerstone to the entire code of ethics is integrity. “Having integrity means acting out of moral principle and doing what is right, even if there are negative consequences” (Metzger, 2011). In basic terms, integrity is choosing to do the right thing because it is right. It requires accountants to be honest in their work, to be candid and forthright with the financial information of a client. An accountant with high integrity restricts themselves from any personal gain or advantage in the cause of their work through the utilization of important information. Moreover, integrity restricts accountants from manipulating financial information intentionally or for any other reason other than to correct accounting errors. Instilling and insisting that accounting professionals maintain high levels of integrity has a significant impact on reducing fraud. Accountants with high integrity will not alter or allow any unnecessary manipulation of financial information for personal gain or gain of a third party. In fact, accountants with high integrity will forego their work when pressured by employers to manipulate financial information. Undeniably, this ethical fortitude and commitment to professional integrity will uphold the accounting industry and diminish fraud.

Recommendations

Accounting fraud is estimated to cost one organization approximately 5% of revenue per year. In 2016, the Association of Certified Fraud Examiners (ACFE) found that $6.3 billion in total losses occurred due to fraud, with an average of $2.7 million per company. These are extraordinary losses and every possible measure should be deployed to ensure the reduction of fraud cases. Accountants and accounting regulatory bodies play an essential role in ensuring cases of fraud are minimized. Certainly, apart from implementing ethical rules, other measures to reduce fraud should be engaged. It is suggested that the greatest detection method of fraud is whistleblower reports. Organizations should consider instituting hotlines or other systems of anonymous reporting to encourage employees to report ethical violations (ACFE, 2016). Of course, other detection methods should also be engaged. Businesses should also consider implementing technology, such as surveillance and monitoring systems to detect and minimize fraud. In spite of these fraud barriers, it would be naïve to think these tactics alone would fully eliminate fraudulent activities. With that said, it important to encourage current professionals and future accountants to grow in their moral reasoning. William Stephens explains in his article, Embracing Ethics and Morality, that most individuals have not reached the highest levels of moral reasoning described by Kohlberg’s cognitive framework of ethical behavior. He further explains that most people have stopped at stage four, which says ethical behavior is dictated by punishment and reward. Thus, it is advisable that colleges, universities and accounting authorities develop studies that cultivate moral teachings that will move accountants to stage five and six, which says that ethical actions are based on the welfare of others and because principally it is the right thing to do (Stephens 2012). More importantly, today’s accountants can continue their commitment to truthfulness in financial transactions along with the continual professional investment and development of ethical values. Ultimately, it is human virtue and the high righteousness of actions and deeds that will positively affect the financial integrity of business and our society, thereby extinguishing fraudulent activity.

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