Running head: ETHICS IN ACCOUNTING 1
Ethics in Accounting
Student Name
Liberty University
Intermediate Accounting
ACCT 301
December 12, 2016
ETHICS IN ACCOUNTING 2
Ethics in Accounting
Ethics in accounting has seen an increased interest in the decade. It is by no means a new
subject though. “In the United States, there have been some form of ethical standards for public
accounting since the beginning of the 20th century” (Melé, 2005, p. 97). What is the importance
of accounting ethics and why is it needed in today’s accounting profession? To answer this
question, one must understand the terminology being used. Ethics is defined in the Merriam-
Webster dictionary (2016) as a set of moral principles governing an individual or group.
Accounting ethics, therefore, refer to the moral principles that apply to the accounting
profession. Accounting professionals have a code of conduct to assist with upholding ethical
behavior. The following paragraphs will discuss the importance of ethics in the accounting
profession, the need for ethics education, and the code of ethics for accounting professionals.
Importance of Ethics in Accounting
Accounting is a systematic process of identifying, recording, measuring, classifying,
verifying, summarizing, interpreting and communicating financial information ("Accounting,"
2016). Accounting provides information that helps plan and control the operation of an
organization, appraise performance and make decisions about the future of the organization, and
allows the government to determine the amount of tax an organization must pay (Druska,
Druska, & Ragatz, 2011). Because of the nature of this profession, ethical decision making is of
the utmost importance. An accountant is tasked with developing a “true picture” of the financial
status of an organization. In reality, several pictures of a company’s well-being can be
developed. The picture an accountant develops may serve the interest of the party who hires the
accountant more than other need-to-know parties (Druska et al., 2011). The picture developed
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by the accountant, if based off unethical means, could cause the company’s reputation to be
damaged. For this reason, an organization will want to ensure that the person responsible for
reporting the financial status adheres to the ethical standards set for by the International Ethics
Standard Board of Accountants (IESBA).
Benefits of ethical behavior
In one study on the importance and benefits of ethical behavior in a company,
“researchers measured companies with integrity (having attributes such as creativity, emphasis
on ethics and allowing employer input) against gains, operating earnings, return on investment
and increase in stock prices. Of the 207 major companies studied over an eleven-year period, it
was found that the top twenty companies were those that emphasized integrity. They averaged
571% higher earnings, 417% higher return on investment and increased stock prices of 363%
when compared with the ones that did not have a strong focus on integrity” (Cafferky, 2015, p.
45). This study reveals that by paying attention to ethical issues can bring positive benefits to
organizations. There are several benefits associated with ethical behavior for businesses. These
benefits include: higher employee retention and loyalty, better morale, higher employee
motivation, strengthened reputation of the organization, better customer relationships, and higher
profits and stock prices (Cafferky, 2015).
Costs of unethical behavior
“As unethical behaviors are manifested by upper-level management, workers throughout
the organization note them, and unethical behavior becomes an organizational cultural norm”
(Cafferky, 2015, p. 46). Research has shown that the cost of unethical behavior results in
significant negative financial return to shareholders (Cafferky, 2015). Costs that are associated
with unethical behavior include: a decrease in productivity, damaged reputation, lawsuits,
ETHICS IN ACCOUNTING 4
absenteeism and lower productivity, difficulty recruiting and retaining good employees, damage
to profits and organizational culture (Cafferky, 2015).
“There is evidence indicating that where organizations have codes of ethics and top
management serves as appropriate role models for stakeholders, the likelihood of ethical
behavior throughout the organization is greatly enhanced” (Stephens, Vance, & Pettegrew, 2012,
p. 21). The accounting profession must prescribe to the moral principles of honesty, character,
uprightness, honor, and fairness—not just in appearance, but in action (Stephens et al., 2012).
“If the accounting profession is to set a standard of ethical behavior for others to follow, then its
leadership must be dedicated to achieving that goal. For the accounting profession to acquire
people with this quality, the profession must attract a core of individuals with a passion for
becoming leaders who are honest, trustworthy, and of high personal integrity” (Stephens et al.,
2012, p. 18).
The need for ethics education
According to a poll published in 1999 by Marianne M. Jennings, 82 percent of all
students believe that right and wrong are relative terms and that morality is a ridiculous concept
(Stephens et al., 2012). Unfortunately, there is little evidence that today’s youth have values
about ethical behavior that are consistent with the profession’s needs (Stephens et al., 2012).
A study using Lawrence Kohlberg’s six stages of moral reasoning demonstrates the need for
ethics education today. The six stages are: (1) being ethical for fear of being caught or punished;
(2) being ethical out of concern for one’s self-interest; (3) being ethical because of peer pressure
to do so; (4) being ethical because it’s the rule, regulation, law, or standard; (5) being ethical out
of concern for the good of others, because of a sense of social responsibility; and (6) being
ethical out of a concern for the moral principle involved and knowing that it’s simply the right
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thing to do (Stephens et al., 2012). Kohlberg’s research concluded that stage 4 is the highest
level achieved by most young people. This supports the position that many people do the right
thing only because a law or rule tells them to. If stage 4 is the highest level considered by most
accountants making ethical decisions, then it helps explain why codes of ethics are often
ineffective for organizations and professional groups (Stephens et al., 2012, p. 19).
“In 2004, the National Association of State Boards of Accountancy’s (NASBA) education
committee recommended that accounting programs include a requirement for a course in
theoretical ethical philosophies and a course in the application of business ethics to apply for
licensure” (Mastracchio, Jeménez-Angueira, & Toth, 2015, p. 50). According to D. Melé (2005),
some steps have been made in ethical accounting education, but, after the well-known
accounting scandals, it seems absolutely essential to pay increasing attention to ethics in
accounting and to improve ethical education for accountants. “Today, accounting academics and
practitioners generally agree that ethics can be taught and that it should have a more prominent
role in accounting curricula and professional education (Mastracchio et al., 2015, p. 49). While
professionals agree that ethics education is a must, many colleges and universities still have not
adopted an ethics curriculum. As of 2015, only five states required a college ethics course for
licensure: California, Illinois, Maryland, Texas, and West Virginia. In addition to these five
states, New York requires either a course in ethics or integration of ethics in accounting courses;
Nebraska requires the subject of ethics to be covered in a business class; and Ohio requires
course work to include professional ethics and responsibilities. No other state has a college
ethics course requirement for licensure (Mastracchio et al., 2015).
For the accounting profession to produce quality, moral professionals more must be done
in the area of ethics education. Ethical education should require the development of intellectual
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skills as well as attitudes for moral behavior. The goal for ethical education in accounting
“should be to impact on the ethical behavior of those receiving this education, and not only to
provide a set of theories tools to solve ethical dilemmas” (Melé, 2005, p. 106).
Code of Ethics for Accounting Professionals
Most large companies and professional groups have a code of ethics. These codes
generally require that members maintain a higher standard of conduct. They rely on a set of
rules for achieving ethical behavior (Stephens et al., 2012). These codes of ethics are sensitive to
changing events and are affected by the changing social and economic conditions of the time. In
the early 20th century, big businesses began to grow and the need for consistent, independent
financial reporting also grew. During this time, the American Association of Accountants
emerged. The first code of professional ethics was developed in 1907. “The 1907 code
consisted of a formal article on professional ethics in the organization’s bylaws” (Backof &
Martin, 1991, p. 101). As the years, have gone by, the codes have been developed, discussed,
and updated as seen necessary to help enhance the profession. The current code of conduct for
professional accountants has seen many changes throughout the years. In 1988 a new code was
passed that represented the AICPA’s response to the changing social, economic and regulatory
climate; “for the profession felt it was facing a crisis of confidence and credibility that demanded
action” (Backof & Martin, 1991, p. 107).
The current code of ethics for professional accountants establishes the fundamental
principles of professional ethics for professional accountants and provides a conceptual
framework that they must adhere to. According to the Handbook of Ethics for Professional
Accountants (Code of Ethics, 20162016), the fundamental principles are:
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a) “integrity—to be straightforward and honest in all professional and
business relationships
b) objectivity—to not allow bias, conflict of interest or undue influence of
others to override professional or business judgments
c) professional competence and due care—to maintain professional
knowledge and skill at the level required to ensure that a client or
employer receives competent professional service based on current
developments in practice, legislation and techniques and act diligently and
in accordance with applicable technical and professional standards
d) confidentiality—to respect the confidentiality of information acquired as a
result of professional and business relationships and, therefore, not
disclose any such information to third parties without proper and specific
authority, unless there is a legal or professional right or duty to disclose,
nor use the information for the personal advantage of the professional
accountant or third parties
e) Professional behavior—to comply with relevant laws and regulations and
avoid any actions that discredits the profession.”
These codes of conduct for accountants provide a needed guideline for proper behavior.
They contain a set of principles and rules, which specify what society expects to be considered in
decision making (Melé, 2005).
Throughout the years, many scandals have plagued the accounting profession. “In 2004,
the accounting profession had been portrayed negatively in the media due to various scandals
and the fall of the accounting firm Arthur Andersen. As a result, NASBA president David
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Costello led the effort to create the NASBA Center for the Public Trust (CPT) with support from
over 160 founding members. The CPT’s goal was to publicize the majority of businesses and
individuals who acted in an ethical manner, and dispel any idea that businesses and CPA’s were
generally unethical” (Mastracchio et al., 2015, p. 51). Many efforts have been made to restore a
positive reputation to the accounting profession, however, without continued education and
ethical standards, history will repeat itself. Much of what was wrong in the accounting world
can be traced to the unethical practices of society as a whole. To correct these issues, ethical
decisions must be continually stressed. The bible is a guide to help Christians make moral,
ethical decisions. “For we are taking pains to do what is right, not only in the eyes of the Lord
but also in the eyes of man” (II Corintians 8:21). If professional accountants live by this verse,
we can be assured that ethical and moral decisions will be followed.
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References
Accounting. (2016). In Business Dictionary. Retrieved from
http://www.businessdictionary.com/definition/accounting.html
Backof, J. F., & Martin, C. L. (1991). Historical perspectives: Development of the codes of ethics
in the legal, medical and accounting professions. Journal of Business Ethics, 10(2), 99-
110. Retrieved from http://ezproxy.liberty.edu/login?
url=http://search.proquest.com.ezproxy.liberty.edu/docview/1302649549?
accountid=12085
Cafferky, M. E. (2015). Business ethics in biblical perspective: A comprehensive introduction.
Westmont, US: IVP Academic.
Druska, R., Druska, B. S., & Ragatz, J. A. (2011). Nature of accounting and the chief ethical
difficulty: True disclosure. In Accounting ethics (2nd ed., pp. 9-30). Retrieved from
http://www.ebrary.com.ezproxy.liberty.edu
Ethics. (2016). In Merriam-Webster Dictionary. Retrieved from https://www.merriam-
webster.com/dictionary/
Handbook of the Code of Ethics for Professional Accountants, International Ethics Standards
Board for Accountants § 100 (2016).
Mastracchio, Jr., N. J., Jeménez-Angueira, C., & Toth, I. (2015). The state of ethics in business
and the accounting profession. The CPA Journal, 85(3), 48-52. Retrieved from
http://ezproxy.liberty.com/login?
url=http://search.proquest.com.ezproxy.liberty.edu/docview/1674982097?
accountid=12085
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Melé, D. (2005). Ethical education in accounting: Integrating rules, values and virtues. Journal
of Business Ethics, 57(), 97-109. http://dx.doi.org/10.1007/s10551 004 3829 y
Stephens, W., Vance, C. A., & Pettegrew, L. S. (2012). Embracing ethics and morality. The CPA
Journal, 82(1), 16-21. Retrieved from http://ezproxy.liberty.edu/login?
url=http://search.proquest.com.exproxy.liberty.edu/docview/923404663?
accountid=12085
