Accounting Ethics

What is Accounting Ethics?

Accounting ethics is a set of rules set by the Accounting Standards Board (ASB) that every company must follow to ensure data accuracy, accurate presentation, trustworthiness, integrity, and accountability. 

Ethics and the Code of the Conduct

According to ethical standards, anyone who possesses access to financial information for any reason should be bound by the rules that govern access. Management positions must adhere to specific regulations for dealing with money; this includes reporting on all revenues and expenses of a company, big or small.

These ethical principles layout how to conduct business in a way that protects people’s money and economic interests while protecting the accountability of any company. They can be complex, but if followed correctly, they can help to increase an organization’s efficiency and effectiveness.

Rules and Guidance

The profession of accounting requires auditors to adhere to a strict code of ethics. Auditors must be impartial and may not have relationships with their clients.

There are two forms of independence:

Independence in fact, information refers to any matter of fact. These may include ownership of client shares, contract terms, etc.- Information that is not in the company’s favor.

Independence in appearance can be explained with example- An auditor with a close relationship with one party in a transaction or who is aware of confidential information about either party might lack the objectivity and lack independence needed to conduct an audit properly. Such information could give the auditor unrealistic expectations about the performance of either party and create the incorrect perception that one side will perform better than it actually will.

Threats to Independence

No matter what environment you work in, there will always be challenges. Let’s consider some of these potential threats to your independence:

  • Familiarity Threat: If an audit client is a close friend or family member of the auditor, it may compromise their objectivity and lead to ethical issues.
  • Intimidation Threat: The client threatens to switch auditors if the auditor changes the financial statements.
  • Self-Interest Threat: If the auditor gets a decent share of the client’s company or is owed a huge fee from that client, they might not mind if the balance sheet looks just fine.
  • Self-Review Threat: There is potential for a conflict of interest when auditors perform audits and bookkeeping services.

Other Important Rules

  1. A contingent fee is not allowed, which means an audit fee cannot be based on a percentage of the net income figure or a bank loan received.
  2. Audits must be performed following Generally Accepted Auditing Standards (GAAS). In addition, auditors must audit with honesty and integrity.
  3. To be considered professionally competent, auditors must have skills and experience beyond the academic education typically required of an auditor and must understand the unique challenges investigative auditors face while performing primarily financial audits.
  4. Suppose a CPA, employee, or someone with knowledge of the company they provide services to, observes another CPA violating any of the profession’s rules. In that case, they have a responsibility to report it.
  5. The auditor should respect the client’s confidentiality. They should not disclose to any third parties any personal information about the client under audit.

Accounting Ethics is believed to be one of the essential building blocks of a business, ultimately responsible for how well the company can meet its financial obligations throughout the year. Yet, this concept is quite vague and ambiguous when put into practice. As a result, businesses with poor accounting practices put themselves at risk of failing financially and lose their customer trust, ultimately resulting in losing profit.