Accounting Ethics By Mahesh Bendigeri, Finance Faculty, INC-Hubli Employee Code: 18R06192 Published in The Accounting World – Journal, Vol-IX, Issue II, ISSN no. 0972-5164, Feb 2009. Of The ICFAI University Press.
Abstract In this article Accounting Ethics, an attempt has been made by making uses of real-life examples, including the Enron/Arthur Andersen debacle, to examine the ethical responsibilities of individual accountants as well as accounting firms The article explores the history of accounting and attempts to study in brief the nature and purpose of accounting .Further Ethical principles play an important role in determining an accountant’s responsibility. Hence, a regulatory framework of ethics governing accounting and examining the ethical imperatives are necessary for understanding the definite principles and rules of the code of ethics which determines the various accounting codes. An effort is also being made to explore the major types of practices in which accountants engage - auditing, managerial accounting, and tax accounting - and the responsibilities associated with those practices. The articles analyses the ethical responsibilities of accounting firms, and the hurdles faced by these firms in fulfilling these responsibilities Origin of Accounting Many people have the opinion that accounting has been developed in recent years. But from the puranas we see that Chitragupta maintains accounts for qualities and vices. History gives us many examples of kingdoms having financial ministers in charge of the financial transactions like cash transactions, collection and maintaining records of taxes levied on the subjects of the kingdoms etc. If we come across the chapter "The business of keeping of Accounts in the Office of Accounts" from the book named "Arthashastra" written by Kautilya, Minister of king Chandragupta, it becomes clear that Accountancy was practiced in India twenty-three centuries back. Luco Pacioli invented the modern method of accounting which is based on the principles of double entry system followed currently and was first published in 1494 at Venice in Italy. What is Accounting Ethics? “Accounting ethics is primarily a field of applied ethics, the study of moral values and judgements as they apply to accountancy. It is an example of professional ethics.” Following the code of ethics in accounting is of vital not only to accounting professionals but also to those who rely on their services. People using the services of accounting professionals like Certified Public Accountants (CPA) and other professionals for financial decision making and compilation of accounts expect them to be exceedingly reliable, competent, objective and well qualified with a high degree of professional integrity and possessing an untarnished reputation. The Nature and Purpose of Accounting: In the present business scenario the existing system of accounting has made a strong presence. The key to success of any business depends on the correct and timely financial decisions taken with the help of the accounting manager or financial officers. Owners can know whether they have made profitable investment. The cost accountant shows how to control the cost of production. Government can get date for tax and license purpose. So accountants provide information to different individuals and organisations according to their specific concerns.
Role of Accountant Accountants are personally responsible to deliver trust in business to all those who are concerned whether they are the stakeholders or the investors or the employees. Investors and other users of financial statements rely on the financial information. Most of them do not have access to any other source of information. They trust the management, the auditors, and the analysts. Trust is the foundation of all relationships whether at personal level or macro level. The economic growth of a nation and stability in market system is possible only when the trust in the accountant is not jeopardized. The role of accounting is vital in supporting and protecting the integrity, trust and consistency of the market. This is possible only when the investors are safeguarded against fraudulent and corruption. In addition to this the investors should also develop a trust on the financial information produced by companies. In modern and fast moving life numerous small enterprises raise the question need for an accountant; they feel that they can do their accounts on their computers instead of hiring the accountant. In former days accountants were used to work without computers individuals used to sent all the invoices and statements to the accountants who manually entered all the enteries in the ledger and finally posted to final financial statement, but now we have computers for maintaining day to day transaction. Most of the accounts holder in now days guiding their clients to manage their business with efficiency and effectively. An accountant may be a good advisor to the business since he controls the finance so no one can ignore this role of an accountant. Special Role of Auditor The importance of the responsibility of the auditor to deliver a fair, accurate and truthful opinion on financial statements and transactions surpasses and goes beyond his association with the client. The external auditor has to maintain total independence from the client. The auditor is supposed to be watchdog. The users of accounting information rely on the independence, integrity and objectivity of the auditors for maintaining secrecy of their business operation. These users of accounting information are non other then the Government, creditors, investors and the business and financial community who depend on auditor opinion on financial statements. Audit opinion The typical audit opinion states: “We conducted our audits in accordance with auditing standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. “ Roles & Responsibilities of Internal and External Auditor Responsibilities of Internal Auditor Internal Audit is a service to management and includes examination, evaluation and offering assurance to the organization. It is a part of the organization’s system of internal control and its scope includes ALL aspects of internal control, not just financial control... Internal audit has a broader scope than statutory or external audit. It should ideally cover all the organization’s activities. They include: Financial audit –accuracy, completeness and fairness of financial statements Operational audit- effectiveness and efficiency of operations Safeguarding of assets Review of projects Management audit Fraud detection- developing fraud exposures for every audit and detecting red flags Review of effectiveness of internal control Compliance with laws, regulations, policies and procedures Preservation of ethical culture – monitor the ethical climate and report on red flags that May compromise ethics
ďƒ–providing advice on reducing waste or inefficiency
Responsibilities of External Auditor The external auditor has to cover authenticity of financial statements, verification of the internal controls used on financial reporting and other audit procedures. They have to communicate an estimation of the correctness and fairness of the financial information. A typical report includes inter alia, information on: whether they have obtained all the necessary information Whether the companies has kept all the requisite books of accounts Whether the financial statements are in conformity with books of accounts The financial statements present a true and fair view of the state of affairs Proper records for assets, inventory, loans etc. have been maintained by the company Adequacy of internal control procedures Existence of internal audit system commensurate with nature and size of business. Details of statutory dues and matters under litigation Although the duties and responsibilities of external and internal auditors appear to be different, in the broader sense they both have the same basic purpose to serve the public. They ensure that resources that are used comply the proper standards and regulations and that supervision and allocation of the same are done in a proficient and effective manner. In the areas where duplication of work is involved the coordination among the internal and external auditor results in maximizing the benefit and saving in time. Liabilities for Negligence and Misconduct. Under the Companies Act Penalty for non-compliance by auditor with sections 227 and 229. - If an audit report or document of a company is signed or validated by a third person, which does not adhere to the requirements of sections 227 and 229. Then concerned person who has a validated the document in place of the auditor is liable for a penalty of rupees ten thousand if the default is proved to be intentional. Ethical Responsibilities of Accounting Firms Generally, accounting firms are reputed to be honest and competent and command high respect for their integrity but in the past few years many auditors working as comptrollers and Chief financial officers have been in the limelight for being involved in financial scandals which have tarnished their reputations. The example of David Duncan who was the lead partner at Anderson and responsible for the Enron Account had to face adverse consequences for failing to follow regulatory guidelines. Such cases have weakened the confidence of the public for the accounting profession and accounting firms.
Responsibilities of accounting firms in rendering the services are; • • • • • • • • • • •
Making inquiries of management and others within the entity Considering the results of the analytical procedures performed in planning the audit. Considering fraud risk factors. Considering certain other information. Identifying risks that may result in a material misstatement due to fraud. Assessing the identified risks after taking into account an evaluation of the entity’s programs and controls. Responding to the result of the assessment. Evaluating audit test results. Communicating about fraud to management and audit committee. Expanding fraud risk assessment approach Professional skepticism
Ethical responsibility of Chartered Accountants: In the Principles on Professional Ethics for the Accountancy Profession the International Federation of Accounts (IFAC), has mentioned that: - “Persons who pursue a vocation in which they offer their knowledge and skills in the service of the affairs of others have responsibilities and obligations to those who rely on their work. An essential prerequisite for any group of such persons is the acceptance and observance of professional ethical standards regulating their relationship with clients, employers, employees, fellow members of the group and the public generally.” In the area of ethics the institute of chartered Accountant of India (ICAI) is continuously make stride in adapting the IFAC code of ehics and International Ethics Standards Board for Accountants periodically reviews the Code to ensure its relevancy both to the profession and to the public.
Chartered Accountants must: • • • •
must have competence To work by following professional rules and standards To refrain from conduct that may bring discredit to the profession To respect their clients confidentiality etc
A professional Accountants duties and responsibility is to not only satisfy or fulfill the requirements of individual client but also his main job is to act in the public interest
Problems That Militate against the Fulfilling of Auditor’s Responsibilities There are several of the ethical problems facing auditors that militate against the fulfilling of responsibilities. Auditors are offered large fees for engagements and this often hinders their commitment to give unbiased opinions on reports. Supplementary fees earned for services which are non audit in nature aggravate the matters. On the other hand the reputation of the auditors to win public confidence demands that they provide commentary which is fair and accurate. But structural deficiencies in the firms increase the above mentioned problems faced by auditors. Thus, In order to deal with ethical challenges successfully the accounting profession has to equip auditors with ethical awareness program. Conclusion: The birth, rise and development of accounting profession was to facilitate accuracy and honesty in the financial statements and transactions of the organization. That picture was important to a number of constituencies. The accuracy of the picture is crucial. So the main responsibility of an accountant is to provide a fair ,accurate and honest update on the financial history of organizations. And by creating a false, inaccurate image of the financial picture for those who have a legitimate right to access the correct scenario is equal to dishonesty in ethical behavior on part of the accountant and auditors. Changing market dynamics also put lot of pressure on accounting firms leading to window dressing of accounting information. In this regard it realized that a sophisticated code of ethics must be in place to examine what constitute good and bad accounting practice References Website: 1.
http://en.wikipedia.org/wiki/Accounting_ethics
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http://www.indianmba.com/Faculty_Column/FC677/fc677.html
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http://www.selfgrowth.com/articles/Ethical_Issues_for_Certified_Public_Accountants.html
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http://books.google.co.in/books? id=Y4LgVJgynCsC&pg=PT1&lpg=PT1&dq=ethical+responsibility+of+accounting+firms&source=web &ots=6UcKJt_aBA&sig=3Bi7UZr13AI_OP0blMP5gbHQD8&hl=en&sa=X&oi=book_result&resnum=6&ct=result#PPA223,M1.
Article: 1.
Article on Coordination between internal and external auditors written by Rajkumar S Adukia