Importance of Ethics in Accounting

Importance of Ethics in Accounting

Ethics in accounting is the practice of following a laid down set of rules and regulations during the financial accounting process. It is important that all individuals that handle transactions of any nature uphold a high degree of credibility and honesty. Without accounting ethics, misuse of financial information becomes the order of the day and accountants benefit unfairly from their profession. To better understand ethics in accounting, let us consider an example;

Lillian works as an accountant in a manufacturing company. While at work one day, her boss Bob, summons her for a meeting to discuss the financial reports of the company. Bob informs Lillian that he has met a potential investor for the company and requests her to make the financial statements ‘impressive.’


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With full knowledge about the code of ethics that accountants must abide by, Lillian is obviously shocked by what her boss wants her to do. She feels that it would be going against her conduct as an accountant if she complies with those requests. This is what professional ethics entails – being aware that your conduct is governed by a certain code and sticking to it by all means.

In the world we live in today, it is not unusual for a random individual to suffer due to the actions of another person based in a different corner of the world. Clearly, the accounting profession cuts across many lives on a daily basis hence the need for control.

In public traded companies, the set of acceptable rules and regulations that accounting staff must abide by has been compiled into what is commonly referred to as GAAP. The generally accepted accounting principles covers the expected conduct of accountants in matters of liabilities, revenue and expenses, foreign currency, equities, assets, and non-monetary transactions. GAAP principles are often adopted by large corporates but small businesses are gradually finding it useful to begin early compliance.

Why is ethics important in accounting?

With the aid of technology and emergence of new techniques for making work easier, the need for ethical accounting cannot be downplayed. Every business in operation today relies on the services of an accounting expert to determine profitability and performance from time to time.

Accounting help is necessary in analyzing the flow of cash in a business as well as forming strategies for raising more revenue. An accounting mistake or negligence can therefore cause a ripple effect that will echo across industries and last a long time before it is resolved. So, what makes accounting ethics an important component of an accountant’s practice?

  • The nature of information that accountants deal with is sensitive and that means it could cause serious damages to an individual, company or family if it falls into the wrong hands.
  • A mistake made by an accountant has the potential to cause a chain of destruction immediately and in the long run.
  • If clients become aware that a partner organization does not uphold ethics when preparing its financials, it could cause mistrust and a tendency to invest sparingly leading to slow growth in business.
  • As an accountant, doctoring financial statements could land you in jail especially if an affected party ties criminal cause to the effects of an alteration made.

What are the five fundamental principles of ethics in accounting?

fundamental principles of ethics in accounting

Accounting refers to the process of keeping proper and accurate records of all financial transactions of a business. It involves making a summary of the transactions, analyzing them and then reporting them in the form of standardized reports that can be easily interpreted by others in the profession.

The conduct of all professional accountants must fall within a strict code of ethics. This is the standard of behavior expected from members within the profession. With a working code of ethics, professional accountants not only have a manual that defines their relationships but also upholds the reputation of the trade. Here are the five fundamental principles of the accounting ethics;

Integrity – a professional accountant must be honest and straightforward in their work. They must be able to communicate to their clients the expected outcome of the services they offer.

Objectivity – a professional accountant must carry out their duties with an open mind. The urge to pursue personal interest at the expense of their work should be avoided at all costs. This means that they must free their mind of bias and undue influence when serving their clients. Even when a situation arises that clouds judgment in a certain situation, an ethical accountant must consider his professional obligation above all else.

Professional competence and due care – it is the duty of an accountant to continually upgrade their knowledge to match the level at which they are operating on with various clients. All clients served must benefit from the latest best practices in the industry. A professional accountant is bound by their professional conduct to exercise diligence and adopt current standards.

Confidentiality – any information that an accountant comes across in the course of performing their duties should be treated as confidential. Disclosure of any personal or business information arising as a result of interacting with financial records should never be disclosed to third parties without authorization. At the same time, information acquired in the line of duty should never be used for personal benefit other than for the person to whom that information belongs to.

Professional behavior – any dealings that a professional accountant gets involved in must comply with corresponding laws and guidelines. Any conduct that brings shame to the profession must be avoided.

What do all accounting codes of ethics have in common?

All countries in the world where accounting is recognized as a profession have a certification body that issues practicing licenses and defines the code of ethics. Even though computations may differ from one jurisdiction to another, the code of ethics is more or less similar. What are some issues of interest that are covered when formulating these codes? Special attention is given to fostering healthy relationships between consumers and a business with the accountant in between.

Ethics in managerial accounting

Managerial accounting is also referred to as management accounting and is focused on making financial information available to decision makers and internal users. Whereas the objective of financial accounting is to report on past performance, managerial accounting offers stakeholders a breakdown of operational data geared towards improving the future. This approach makes the primary role of a managerial accountant to maintain and promote ethical culture of a business.

Clearly, there is no escaping the fact that the responsibilities and tasks of managerial accounting are intertwined into an organization’s business ethics and standards. Managerial accounting places emphasis on supplying a business leader with all the information required to make decisions, project the future and measure performance.

What role do ethical standards have in management accounting?

For a business owner to make critical decisions that will steer the operations of an organization in the desired direction, the process should be based on full and objective data. By maintaining ethical standards, financial information that lands on the decision makers’ table is accurate and free from bias. This remains the case whether what is in the reports is positive or negative. Since managerial accountants prepare financial reports for the c-suite, they frequently come across sensitive company data.

For an accountant to use or disclosure what they know about a company to other parties, it simply means that they are untrustworthy. The end result is serious legal implications which no one in management wants to be involved in. Accounting ethics offer business leaders the confidence to deal with managerial accountants without fear that they might misuse sensitive business reports.

What is the code of ethics for managerial accountants?

According to resources provided by the US Institute of Management Accountants that was established in 1919, all accounting professionals must be bound by an individual commitment. One of the core values of the ethics code is integrity – managerial accountants are duty-bound to provide financial statements that are free of alterations and personal judgment.

This code of ethics has been split into two main sections. The first one is concerned with offering a clear guideline on how to uphold, credibility, integrity, confidentiality and competence. The second part is dedicated to the procedures and actions to be taken when ethical misconduct is reported.

Global Commitment to Ethics

Every accounting professional must purpose in their hearts to live up to the regulations stipulated in the profession’s code of ethics. Even without the regulatory framework that exists to ensure that licenses are issued and misconduct is punished, business ethics must stem from a position of personal responsibility. Those that thrive in the professional are constantly plugging into the accounting fundamental principles.

An accountant is an important member of staff in any organization because of the role he/she plays to bring the financial health of a business to light. Every action whose result is to misrepresent the business should therefore be avoided. Many of those who pursue this profession are driven by a passion for accuracy, but not everyone is able to live the course. If you are keen on accounting accuracy for your business, consider hiring a professional accountant who will be independent and professional. Also ensure the professional hired understands the basics of fund accounting.

Additional Resources

Explore the additional relevant resources below.

  1. Prepaid Expenses Journal Entry
  2. Asset Management Ratios
  3. Conversion Cost
  4. Write Off Accounts Receivable
  5. Cannibalization Rate
  6. Net Operating Assets
  7. Substantive Audit Procedures
  8. Predetermined Overhead Rate