Ethics in accounting: analysis of current financial failures and role of accountants

The main purpose of this research is to contribute towards enhancing the knowledge regarding importance of ethics in accounting profession. Accounting profession is required to uphold the principles of trustworthiness, transparency, and accuracy in financial reporting. This research informs about the importance of effective ethical behaviour among professional accountants to reduce ethical issues in practice.

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ETHICS IN ACCOUNTING: ANALYSIS OF CURRENT FINANCIAL FAILURES AND ROLE

OF ACCOUNTANTS

Dr Giriraj Kiradoo

Associate Professor, Department of Management & Technology Government Engineering College Bikaner, Bikaner, Rajasthan, India

ABSTRACT

Purpose: The main purpose of this research is to contribute towards enhancing

the knowledge regarding importance of ethics in accounting profession Accounting profession is required to uphold the principles of trustworthiness, transparency, and accuracy in financial reporting This research informs about the importance of effective ethical behaviour among professional accountants to reduce ethical issues in practice

Methodology: This research adopted qualitative systematic review methodology

The careful selection of the studies and evidences was done, which enhanced the quality of findings This study includes peer reviewed papers and accounting and management books for ensuring the quality of evidences Critical appraisal of all evidences further helped in collection and synthesis of most relevant evidences

Findings: Findings of this research informs that there are various moral and

ethical dilemmas that can result in affecting the quality of accounting Therefore, compliance to ethical principles and ethical standards is necessary for ensuring the quality, fairness and trustworthiness of accounting statements It has been identified that financial crisis in the last decade was the result of various financial misstatements and financial frauds Therefore, analysing the role of accountants in financial frauds and scandals becomes imperative This study conducted the systematic review that specifically seeks to answer the research question This study informs regarding the importance of ethical principles that are important for reducing ethical dilemmas of various forms

Conclusion: This research concludes that professional and personal ethical

values are very important for reducing ethical issues in accounting that can result in diminishing the reputation and values of accounting profession

Keywords: Accounting and ethics, ethics of accounting, Ethical accounting, financial misstatements and accounting, accounting and public interest

Cite this Article: Dr Giriraj Kiradoo, Ethics in Accounting: Analysis of Current Financial Failures and

Role of Accountants, International Journal of Management (IJM), 11 (2), 2020, pp 241–247

http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=11&IType=2

1 INTRODUCTION

1.1 Rationale for Research

Last two decades have witnessed a significant rise in financial scandals related to misstatements and financial frauds involving a number of accountants and major accounting firms Failures of the management reporting and oversight process are being considered as some major ethical issues In response to the failure of many big firms and organisations all over the world, scholars have raised the questions and scepticism regarding the role of auditors and accounting professionals There has also been a growing concern regarding the ethics associated with accounting profession Ethical dilemmas could be very common in accounting profession Therefore, this research would re-examine some significant evidences regarding the role of ethics in accounting profession that can be successful in preventing legal and financial dilemmas

1.2 Research Question

Primary research Question that this research seeks to answer is:

“What is the significance of professional and personal ethics in accounting profession for reducing professional ethical dilemmas?”

1.3 Aims and Objectives

The aim of this research is to conduct a systematic review of existing literature Objectives of the study include:

 To understand what are accounting ethics

 To assess the significance of ethic in accounting

 To understand the cause of ethical dilemmas

2 RESEARCH METHODOLOGY

2.1 Research Design and Methods

This study has adopted the qualitative method of conducting the systematic review of the literature Systematic reviews are conducted for gathering, analysing and synthesising the evidences from the literature in order to answer the research question This qualitative systematic review will provide the synthesis of evidences that informs about the significance

of ethics in accounting profession

2.2 Data Collection and Analysis

Data collection is a very important process, as the quality of data collection is associated with collecting the evidences that could support in answering the research question [1] This research has focused on collecting evidences from the management databases and has specifically included the studies that were published with the period of five years (2015-2019)

3 WHAT ARE ACCOUNTING ETHICS?

According Zorna in his study, ethics can be understood as some set of the moral rules and norms that influence the individuals and organisations and also determine the ways in which individuals and organisations operate or function in business and personal activities [2] According to Mariana, and Maria Ciurea, in the context of accounting and accounting profession, ethics could be associated with the moral values and standards that provide guidance to professional accountant to ensure the quality of accounting and to report financial statement as “true and fair” [3] Studies have also argued that the main purpose of accounting

and auditing is to provide the accurate and fair financial status of the company in order to help stakeholders

Luca Paciol, who has also been known as the “Father of Accounting” had stated in his book “Summary of arithmetic, geometry, proportions and proportionality (Summa de arithmetica, geometria, proportioni, et proportionalita,)” the code of ethics have strong relation with profession of accounting (as cited by Sahar) [4] The basic principle of ethics associated with accounting profession encompasses professional integrity, confidentiality, as well as professional behaviour and competence [5]. International Federation of Accountants (IFAC) has also recognised the significance of these ethical principles in accounting profession and has informed that association of ethics with accounting profession is not just to fulfil the interest of individual clients, but to act in public interest [6] Addressing the problem

of accounting failures and financial frauds is also important because, it has resulted in causing

a significant financial loss to countries

Source: Office for National Statistics UK (2019)

4 ETHICAL DILEMMA IN ACCOUNTING

Ethical dilemma in accounting and auditing of firms could be associated with the problem that auditors might face in presenting the true and fair financial statement of the firm and the pressure of protecting the interest of management [7] Ethical dilemmas can also occur in producing the fair financial statements because of the agency problem that could occur between the management and stakeholders as well as between the accountants and stakeholders [8] Management’s pressure, interest and greed could result in production of manipulated financial statements However, the dilemma could occur as the auditors have to maintain the long term working relationship with the management of companies, while also required to conduct their duties with scrutiny [9]

Financial frauds and misstatements could be the main problem in current accounting system because of the non-adherence of the accountants to accounting standards, rules and regulations Organisational governance and internal control systems are also responsible for affecting the quality of accounting and auditing, as in the case of Enron, WorldCom and Tyco

[10] All these cases have explained that pressure of management over accountants is one of the main reasons causing ethical issues The conflict of interest can also occur when the interest of the management of the organisation do not align with interest of its stakeholders Also, as management hold a significant influence over auditors and also have the power of harming interest of auditors, result in causing ethical dilemmas for accountants [11] Lack of supervision and quality control are also the reasons associated with increased ethical issues in accounting profession [12]

5 SIGNIFICANCE OF ETHICS IN ACCOUNTING

A wide body of literature has focused on identifying the significance of ethics in accounting and its role in reducing financial misstatements and financial frauds Steven Mintz has espoused in his book that accounts and auditors have the obligation and duty of working in interest of public and stakeholders of the firms [13] He further informed in his work that focus on public interest works as the duty that encompass ethical perspective and allow auditors and accountants to make balanced professional decisions Aghdammazraeh and Karimzadeh argued in their work that ethics in accounting helps in preventing the issues associated with self-interest [14] However, other studies have espoused that providing ethical education to accounting students could be significant in moral development of professionals [15]

The professional principle of integrity implies that accounts are required to display professional honesty and fair conduct, while objectivity implies that accountants are required

to apply the professional judgement in conducting audits [16] Principles of professional behaviour and professional competence in accounting are found to be significant for preventing any actions that diminish the reputation of profession and also help auditors and accountants to work by complying to legal and regulatory duties [17] Ethics in accounting is highly important for reducing fraudulent activities Poor corporate governance and internal control can result in creating loopholes, by which accountants can indulge in unethical activities This also results in diminishing the reputation of business Integration of ethical values, standards and principles are significant for ensuring the trust of stakeholders in accounting profession [18]

6 FINDINGS

The findings of this research have been significantly based on the gap that has been identified

in the literature Literature displays the dearth of evidences regarding the types of ethical dilemmas that could be faced by accountants and auditors and that particularly leads to ethical dilemmas The financial crisis in the last decades have informed that the major reasons that contributed towards the financial issues were associated with the financial misstatements and financial frauds that were not identified or that were hidden through unprofessional practices [2] There are various issues in financial management approaches that lead towards the increase of financial frauds Principle and agent problem have been identified in the research

as the reason that lead to ethical issues Management who work as the agent and the stakeholders who are principles have a very delicate relationship Stakeholders place their trust in management and financial reporting system of the firm as they have interest in financial position of the organisations [3-5]

However, the stakeholders have little access to information, while management have more power over company’s information, which also provides them the opportunity of manipulating it for their self-interest In such circumstance, the role of accountants or external auditors is to work as the whistle-blowers and to identify the accounting violations in internal audits However, findings of this research inform that need of protecting personal interest and

influence of management over auditors increase the chances of ethical dilemmas and may prevent auditors from their legal, ethical and statutory duties [6-9] Management of organisation may also have conflict of interest, as their personal interest and greed may not align with interest of stakeholders Therefore, in such circumstances, auditors must comply with their duty of protecting the public interest and must also comply with their ethical duties

to protect such interest [10-12]

Code of ethics in accounting is found to be based on five important ethical principles of integrity, objectivity, confidentiality, professional competence and professional behaviour

Figure 2

Lack of any of these principles in professional practice can lead to ethical dilemmas The findings of this research signify the importance of role of supervisors and oversight boards Currently, accounting industry lack the supervision and monitoring of such boards [13-14] The findings of this study also informed that codes and principles of ethics are fundamental for effecting accounting practice Accounting professionals are required to ensure professional integrity and public interest and must carry out their activities with fairness and honesty Professional administrators and supervisory groups must implement strict monitoring standards for ensuring that accountants fulfil their duties in professional and ethical manner The findings of this study significantly contribute towards the literature associated with importance of ethics in professional accounting Working in public interest and ensuring that professional practice is significant for contributing towards enhancing interest of stakeholders could be the most effective approach in reducing financial and accounting failures [15-18]

7 CONCLUSION

This study concludes that ethical principles and values are very necessary for ensuring the trustworthiness in accounting profession Different stakeholders place their trust in accountants and auditors to provide them with fair and true picture of financial statements Ethical values are also associated with professional and personal values of accountants and inform that such values help in making honest decision making Ethical dilemmas in accounting can only be prevented through strong and strict compliance to international accounting standards and ethical values This research contributes towards informing about the ethical dilemmas that accountants may face and how strict compliance can reduce such professional issues

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