The Importance of Ethics in Accounting: Best Practices for Maintaining Standards

Accounting is typically associated with numbers and managing finances, but in reality, it’s much more complex than that. It also requires a deep understanding of the ethical principles that underpin the profession.

Considering accountants are responsible for producing clear and definite financial statements, which form the basis of business decisions, it’s essential that accountants adhere to the ethical standards that define their profession to remain effective. 

Integrity, accountability and transparency are just some of the guiding principles of accounting, as the profession is often considered to maintain financial stability, foster growth and be the backbone of individual businesses and the economy as a whole.

In this blog we explore what ethical standards in accounting look like, as well as some tips on how organisations can maintain them.

Why are Ethics in Accounting Important? 

Although various accounting trends may come and go, as the industry evolves, ethics will forever be a constant for accountants (and rightly so).

In the accounting world, ethics refers to a set of moral principles and rules of conduct by which professionals are expected to abide, encapsulating standards such as fairness, objectivity, honesty and responsibility in delivering their services. These standards help guide accountants’ daily operations, forming the basis of their professional decisions and behaviours. 

Similarly to how civil servants are obligated to protect and serve the public’s interest, accounting professionals have the responsibility to provide investors with accurate and reliable information that will facilitate informed business decisions. 

The upholding of such ethics enables trust and credibility to be built among stakeholders, investors, and customers, who rely on ethical practices for accurate and fair financial reporting. When accountants remain honest and objective it's guaranteed that their financial reporting will reflect the true financial health of a company. Also, it helps safeguard all parties from legal complications, such as protecting sensitive data from unauthorised disclosure through confidentiality. 

Another element of significance is the employment of ethics to safeguard the reputation of accounting professionals. By employing the right measures, and keeping the appropriate ethics in mind, accounting scandals can be avoided. Otherwise, this can lead to considerable consequences for companies, such as financial losses, unsettled markets and loss of public trust. It can also be detrimental to the careers of the accountants associated with them. 

The most notable example is perhaps the infamous Enron scandal back in 2001. US energy company, Enron Corporation, was using accounting loopholes to keep billions of dollars worth of debt off the company’s balance sheet, while simultaneously inflating the company’s earnings. 

The results were catastrophic, with shareholders losing over $74 billion, while the company’s share price collapsed from approximately $90 to $1 within the space of a year. Along with that, an SEC (Securities and Exchange Commissions) investigation revealed that the company’s CEO was pressuring its auditing firm, Arthur Andersen, to simply ignore the issue.

As a consequence, Enron’s CEO received a 24-year prison sentence, which also led to the bankruptcy of Enron and the dissolution of Arthur Andersen.

Fundamental Principles of Ethical Accounting

Created to ensure that the integrity and trustworthiness of the accounting profession are maintained, fundamental ethical principles serve as guiding beacons, helping steer accountants in their daily practices toward upholding the highest standards of professionalism. 

As set out in the International Code of Ethics for Professional Accountants by IESBA (International Ethics Standards Board of Accountants), the five fundamental principles of ethics for professional accountants are: 

1) Integrity:

Considered the foundation of ethical behaviour, accountants must be honest, truthful and transparent in all their professional and business relationships, even when faced with the most difficult of situations. 

Through this, they’ll be able to build and maintain trust with their clients, colleagues and the public. 

2) Objectivity:

Accountants are expected to remain impartial and provide unbiased financial information, while always exercising professional judgement, without letting their personal interests or external pressures influence them. 

Therefore, all their decisions should be based on factual evidence, avoiding any potential conflicts of interest that could compromise their objectivity. 

3) Confidentiality: 

Confidentiality ensures the protection and privacy of sensitive financial information acquired through professional and business relationships. 

Essentially, accountants are expected to respect the confidentiality of their clients’ data and refrain from disclosing it without having the appropriate authorisation. 

4) Professional Behaviour:

Accountants should, at all times, uphold the dignity of their profession, conducting themselves in a manner that doesn’t discredit or disrepute them. 

Their behaviour should always be respectful, courteous, maintaining healthy professional boundaries with their clients and colleagues, as well as complying with the relevant laws and regulations of their profession. 

5) Professional Competence and Due Care:

This principle expects accounting professionals to process the required knowledge, skills and expertise to perform their duties adequately and competently. 

Additionally, they should also engage in continuous professional development in order to stay updated with the latest accounting standards and regulations.

Examples of Ethical Concerns in Accounting

While most accountants work to align with their ethical principles, there continue to be many ethical issues in accounting, which professionals in the industry should be aware of. Some of the most common ethical concerns are: 

• Insider Trading: this involves insider knowledge of a company's finances, such as an accountant or investment banker, using confidential information to trade on the stock market before the information is made public, making it unfair for innocent investors who aren’t aware of that information. 
• Embezzlement: this refers to an individual, in a position of power, stealing money from their employer or company, which is considered a serious crime and can have devastating consequences for the company involved. 
• Tax Fraud: when businesses or individuals avoid paying their shares of taxes, which doesn’t only harm the government and society as a whole, but also gives those who perform fraud an unfair advantage over their honest competitors. 
• Misappropriating: also commonly referred to as ‘cooking the books’, is when a business deliberately manipulates its financial numbers to make them appear better than what they really are, which in turn misleads investors about the true financial state and health of a company. 

Best Practices for Maintaining Accounting Standards 

Ethics in accounting play a significant and crucial role in preserving integrity and trust for the accurate reporting of financial information. Therefore, it’s imperative that accountants adhere to ethical principles to ensure transparency. 

Organisations, nonetheless, must establish controls and practices which actively seek to safeguard accounting transparency and honesty, to improve ethics in the accounting industry. 

1) Establish a code of conduct

Composing a well-rounded and detailed code of conduct can act as a guiding framework, outlining the standards and behaviours according to professionals are expected to follow in line with their work

Through clear communication of these expectations, organisations can foster a culture of integrity and responsibility, while also being able to regulate and discipline those who fail to do so.

2) Encourage whistleblowing 

While measures may be in place to quickly capture unethical behaviours, something may still go unnoticed. Therefore, it’s essential that employees feel comfortable reporting any behaviours they notice which may be deemed unethical. 

To this end, employers should establish a safe environment where whistleblowing is encouraged. Mechanisms such as reporting channels and anonymous hotlines enable employees to raise and report their concerns without fear of retaliation. 

This can help improve accountability and help with the prompt solution to unethical practices. 

3) Allow open discussions

Management should continuously encourage open ethical communication and discussions, giving employees the confidence to voice any concerns or seek guidance when they’re faced with ethical dilemmas. Along with that, open discussions will further reinforce the organisation’s support towards whistle-blowers. 

Such discussions will inevitably help clarify ethical expectations set by employers, while forums can provide a great platform for sharing best practices and experiences. 

4) Implement controls and checks

Implementing a system of controls and checks, where several individuals review and control a transaction in the accounting process, is an effective way to prevent fraud and ensure accurate financial reporting. 

From carrying out regular audits and thorough review processes, to segregation of duties, organisations can easily identify irregularities earlier on, and minimise the risk of unethical behaviour. 

5) Utilise cloud-based accounting systems 

Through employing software, such as cloud-based accounting systems, organisations can detect incorrect and misleading data, reducing the likelihood of falling victim to fraud.

Automated workflow approvals, for example, can stop an unapproved financial transaction from slipping by unnoticed, while applying charts of accounts can improve the integrity of accounting data, more efficiently and consistently than manual accounting environments can.

Maintaining Ethical Standards 

All in all, ethics play a significant role in accounting and industry professionals must understand and uphold ethical standards within their work. Failure to adhere to the ethical expectations of the accounting industry can be detrimental to a business and accounting professionals alike.

The preservation of accounting ethics ultimately reinforces integrity and trust for the profession, both of which are vital, especially as it deals with sensitive and confidential information. 

Help your organisation employ ethical accounting by gaining a 100% online AAT qualification. Enrol with ICS Learn today.