Many negative consequences can result from poor ethics in accounting practices. The first result is generally a lag in business.

Accounting firms rely heavily on word-of-mouth for promotion, and it’s all too easy for a few bad stories about unethical behavior to sway prospective clients away from a particular firm. There can also be serious legal repercussions for those who are found to be violating legal codes and standards for their jurisdiction

The American Institute of Certified Public Accountants (AICPA) is a professional organization responsible for developing professional accounting ethical values.

The AICPA requires professional accountants to act responsibly when engaging in accounting services and reviewing sensitive financial information. Accountants should always exercise sound moral judgment in all accounting activities.

Accountants have the unique responsibility to provide clients with professional services while presenting a truthful and accurate assessment of a company’s financial health to the general public.

• Why are Ethics Important in Accounting?
• What are the Ethical Issues in the Field of Accounting?
• What does Ethics Mean in Accounting?
• What are the Issues Currently Affecting the Public Accounting Profession?

Why are Ethics Important in Accounting?

One of the key traits of a professional is adherence to a rigorous set of ethical guidelines. When someone veers too far from ethical standards, their trustworthiness and judgment come into question.

Set Expectations

In the accounting profession, many organizations publish their own ethical guidelines. The codes of conduct from the Association of Certified Public Accountants (AICPA), the Chartered Institute of Management Accountants (CIMA) and the Institute of Internal Auditors (IIA) share several commonalities.

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Some ethical codes, like the IIA’s, are succinct at only two pages long; others, such as the AICPA’s Code of Professional Conduct, stretch to 191 pages and require not only agreement for membership in the organization but also initial and periodic ethical examinations to maintain CPA licensure.

Many states also enforce their own codes of professional ethics. These ethics examinations seek to ensure that CPA candidates and practitioners understand the state’s licensing requirements and other principles for recognition as a CPA in that state. 

Florida for example requires and tests the principles and rules of the AICPA Professional Code of Conduct as well as key Florida state statutes and administrative codes.

Purpose

Accountants deal with the intimate financial details of individuals and organizations. Some have the ability to execute million-dollar transactions, and others assist with safeguarding retirement funds of cab drivers and social workers.

Ethical codes are the fundamental principles that accounting professionals choose to abide by to enhance their profession, maintain public trust, and demonstrate honesty and fairness. People who join organizations and secure the credentials to present themselves to the public as CPAs or IIAs strive to protect the reputation of the profession.

Sadly, not everyone who works in the accounting field is trustworthy. Daily violations of public and private trust occur, and resolving ethical dilemmas doesn’t always end favorably. The following are five areas that deserve the attention of anyone considering working in the accounting profession.

1. Independence and Objectivity

Ethics and independence go hand in hand in the accounting profession. A critical component of trust is making unbiased decisions and recommendations that benefit the client.

Conflicts of interest, for example, demand exposure under independence guidelines. Benefiting from the sale of one financial product over another could lead to a bias that skews financial advice to a client.

To remain objective and independent, it is also necessary to ensure that recommendations are not subject to outside influence. An accountant’s professional judgment is compromised if they subordinate their judgment to someone else’s.

2. Integrity

Demonstrating integrity means being straightforward and honest in all business and professional relationships. Upholding integrity requires that accountants do not associate themselves with information that they suspect is materially false or misleading — or that misleads by omission.

3. Confidentiality

Disclosure of financial information or revealing the disposition of a potential merger by an accounting professional without express permission violates the trust that is the foundation of a professional relationship — unless there is a legal or professional reason to do so.

4. Professional Competence

As technology, legislation and best practices change, a professional accountant must remain up to date. To exercise sound judgment, an accountant must stay abreast of developments that could affect a decision’s outcome.

Practicing due care means recognizing your skill level and not suggesting that you have expertise in an area where you do not. Consulting with other professionals is a standard practice that helps to bond a network of individuals and generate respect.

Similar guidelines also apply to accounting professionals who supervise others. These accountants must ensure that the subordinates receive proper training and guidance as they carry out their responsibilities.

5. Professional Behavior

Ethics require accounting professionals to comply with the laws and regulations that govern their jurisdictions and their bodies of work. Avoiding actions that could negatively affect the reputation of the profession is a reasonable commitment that business partners and others should expect.

Dilemmas and Case Studies

Most of the situations that people encounter every day result in clear outcomes that anyone following these five guidelines would expect. However, ethical-decision making isn’t always cut and dried.

• When a subpoena arrives requesting a client’s personal financial records, should you surrender them?
• The CEO tells your staff member to apply a credit from an overpayment on one account to a disputed account, should you allow it?
• If a sale at year-end occurs but is not executed before the cut-off date, should the revenue be recorded in the current or prior year? What if the goods were in transit? What if there was an oral agreement but not a signed contract?
• If your boss, another CPA, instructs you to record the transaction in the earlier year, what should you do?

There can be more questions than answers in these situations. Codified ethical principles guide these decisions — as does ongoing professional development and financial research.

Black and White

Blatant fraud, theft and corruption may make better movies and front-page news stories, but accountants’ daily work involves much more subtle ethical situations. Decision-making doesn’t always come down to “yes” or “no.” The fine line between the two is subject to interpretation and will make up the bulk of the encounters that an accountant faces during his or her career.

Ethics in accounting includes both strict adherence to guidelines and careful assessment of unique situations where professional judgment is necessary. Understanding the ethical frameworks for independence, integrity, confidentiality and professional competence can guide decision-making and help preserve the reputation of the field.

What are the Ethical Issues in the Field of Accounting?

When you run a business it’s easy to think of your accounting staff as glorified mechanics, people with specialized skills needed to keep your company’s financial machinery running properly. That’s true to a point, but accountants also play a role as the watchdogs of the business world.

They’re responsible for making sure that businesses report their finances clearly and according to recognized standards, and that often puts them in situations that can be ethically or even legally dubious.

Pressure to Manipulate the Figures

Running a business puts you under a great deal of pressure, especially when things are not going well, or at least not as well as you need them to go. When that happens, the temptation to lean on your accountant to fudge the numbers can be hard to resist. It’s a real problem for accountants, whether they’re employees or an outside firm you’ve hired.

They have a clear ethical – and legal – obligation to report your financial situation accurately, and failing to do that can open them to civil or criminal liability, bringing their careers to a sudden stop. On the other hand, they also have to make a living and may fear losing their jobs, or clients, if they don’t play along.

Sins of Omission

An accountant might also feel pressure to simply leave things out of financial reports if they’d cast a shadow over the company. This is the flip side of actively misrepresenting numbers, and psychologically it might feel easier.

It’s the equivalent of a child choosing between outright lying to Mom or simply leaving room for her to stay happily unaware of some bad behavior. At the end of the day, though, both are equally wrong.

An investor who buys into your company without knowing about a potential problem isn’t in a position to assess the risks accurately.

Such was the recent case with Theranos founder Elizabeth Holmes who misrepresented the effectiveness of her medical devices by demonstrating the technology of other companies when pursing high-level investors.

In much the same way, an accountant who’s telling you what you want to hear can leave gaps in the management information you need to run your company effectively. That can come back to haunt you if you make a major business decision based on incomplete information.

Access to Information and Confidentiality Issues

Like doctors and lawyers, accountants naturally spend much of their time dealing with confidential information. Using that information inappropriately, or failing to protect confidential information properly, are both ethical issues for an accountant.

Insider trading – use of confidential information to take advantage of an upcoming growth or drop in the company’s value – is one of the most obvious issues. The high profile cases involving Martha Stewart and more recently Rep. Chris Collins are examples of insider trading.

Sharing knowledge of your company with a competitor, or making it possible for outsiders to steal your information through negligence, are two others. Ironically, taking a principled stand on an ethical issue can also be a breach of confidentiality.

If your accounting team leave abruptly at a sensitive moment for your company, and everyone remains tight-lipped about the reasons, outsiders might infer that you’ve been up to something.

Conflicts of Interest

Conflicts of interest can be an especially difficult ethical issue to recognize. If your senior accounting staff receives bonuses based on the stock price, for example, they have a motivation – consciously or unconsciously – to make decisions that favor higher stock prices, even if they’re not good for the company or its investors in the longer term.

For similar reasons, accountants doing audits of your company’s financials might follow the folk wisdom that says, “don’t ask questions you don’t want answers to.” Thinking clearly about the biases you’ve built into your company’s culture isn’t easy, but it can help keep those problems from coming up over time.

Blowing the Whistle

One final ethical dilemma accountants may face is the thorny question of when to blow the whistle on a company or a division that’s unethically manipulating or misstating its numbers. If the accountant’s information is damaging enough, it could cause a company to fail or lose much of its stock value overnight.

That can hurt thousands of investors, or put the accountant’s own friends and co-workers out of work and into financial jeopardy. There’s a very real risk of backlash and intimidation, and a reputation as a troublemaker can be a career-breaker.

While it’s one thing to raise questions inside the company, bringing in regulators or criminal investigators raises the ante in a big way.

However, for those who take the moral high road, the Securities and Exchange Commission (SEC) offers a Whistleblower Program to assist those wanting to come forward about financial indiscretions. The program offers confidentiality and in some cases financial reward for successful enforcement action.

What does Ethics Mean in Accounting?

Accounting concerns itself with truth in the form of faithful numerical descriptions of business activities. The ethical principles that drive the profession speak to the importance of providing accurate and unbiased information. This allows business owners to glean the information they need, and auditing agencies can make useful assessments.

Ethics in accounting is a matter of both guidelines and principles. Specific standards are set by governing bodies and trade organizations who craft the rules of accounting, but personal values and professional ethics must guide accountants. This extra layer of ethical judgment helps in making decisions in the face of ambiguities and gray areas.

Ethics in Audits

Auditing is one of the most important tasks that accountants perform. It involves verifying information to assess the truth and accuracy of accounting information, whether for internal purposes or external evaluations for tax and lending institutions.

To act ethically during an audit, an accountant should evaluate numbers with the primary objective of getting to the truth. There should be no conflicts of interest, such as owning stock in the business and standing to gain if the numbers portray operations in an advantageous light.

When a company hires an outside auditor to review its accounting data, it is the job of that accountant to be thorough and fair and to search for inconsistencies even if these red flags will add additional work or create other problems for the company.

An auditing accountant who works for a bank or government agency should not be swayed by personal feelings such as greed or even sympathy but should be concerned only with making sure that the numbers line up and accurately express the company’s financial activity.

Code of Ethics in Accounting

The International Ethics Standards Board for Accountants, itself an independent agency, has created a code outlining the principles at play in ethical accounting. These principles cover many facets of ethical behavior for accountants, although unique situations may call for judgment calls that aren’t explicitly reflected in these principles.

• Integrity: Integrity isn’t a set of rules or a course of action, but rather a state of mind oriented towards honesty, straightforwardness and a commitment to acting following principle rather than for the sake of personal gain.
• Objectivity: To the extent that it is humanly possible, accountants shouldn’t be influenced by the interests or perspectives of the individuals or businesses who hire them. An accountant also shouldn’t let personal biases or interests influence either the numbers that go into an accounting system or the results that come out of it. Figures and results should be taken at face value and should drive conclusions and decisions.
• Professional Competence and Due Care: The field of accounting isn’t a static body of knowledge but rather an evolving frame of reference that changes as legislation and best practices are redefined over time. It is the responsibility of an ethical accountant to stay abreast of these developments and provide clients with up-to-date information and the highest quality service.
• Confidentiality: Accountants handle sensitive information, and it is an accountant’s ethical responsibility to refrain from disclosing any of this information to outside parties who may stand to gain from it. Similarly, an accountant shouldn’t use any information obtained while performing professional services for the sake of personal gain, such as selling stock in a business whose books appear questionable.
• Professional Behavior: As with any profession, an accountant should perform tasks and responsibilities with an eye to the highest personal and professional standards. These include completing tasks thoroughly and on time, following through on commitments and only accepting payments for services that have been rendered.

Ethical Dilemmas in Accounting

Although governing bodies and rules of accounting use a clearly stated code of ethics in accounting, it may create the impression that there are clear and consistent rules for every accounting situation. However, the situation can be much murkier when you begin working in real cases.

An accountant may be working for two different businesses and may have access to one company’s privileged information that could affect the well-being of the other company.

Company A may be considering investing in Company B, but the accountant may know from working with both businesses that Company B is struggling. In this case, the most ethical course of action would be for the accountant to step back and avoid providing inside information to either company.

Accountants can also face ethical dilemmas when deciding how to report accounting information; a process that allows for some discretion and judgment calls. Deciding whether to expense or depreciate a piece of equipment can affect net profit on an income statement, which may affect the value of the company that investors evaluate.

It may not be illegal to report the expenditure in a way that adds to the company’s value, but it does skew information in ways that aren’t entirely transparent.

Similarly, the decision to allocate an item of expenditure to one department rather than another can create an imbalance in the success metrics of the departments in question even if the expenditure was beneficial to both.

There are no clear and easy answers for these dilemmas, but an ethical accountant can follow guidelines that may make these decisions somewhat simpler. It’s important to think of the spirit behind both the accounting code of conduct and the law, as well as their specifics.

Even if an accountant can’t discuss the details of a situation with an outsider, even just imagining such a conversation can provide him with a valuable perspective. And although they hardly provide rigorous or objective criteria, intuition and gut feelings can be helpful ethical guides.

Training Programs and History

Because ethics in accounting is such an important aspect of the field, many universities and training programs have begun offering and even requiring courses that provide training in accounting ethics and explore ethical questions. This development was spurred in part by high-profile cases such as the collapse of Enron, which was notorious for questionable accounting practices.

The availability of classes in accounting ethics serves in part to address perceptions that professional accounting practices can be shady, and also to discourage people who are entering the field from engaging in any ethically questionable activity.

Although the requirement to take classes in accounting ethics may be a recent development, ethical principles were built into the very core of modern accounting. Luca Pacioli, commonly known as the father of accounting, lived and wrote during the Italian Renaissance.

Rather than being a mathematician or businessman as you might expect, Pacioli was a theologian who believed that accounting was a moral science.

Pacioli believed that the purpose of accounting was to express a business owner’s financial relationship to vendors, customers and creditors. The accounting equation, which is at the heart of accounting activity, states that assets minus liabilities equals the owner’s equity.

In other words, a business owner only owns whatever is left over after accounting for sums that are owed to creditors. A business may seem to have a surplus if it has money in the bank, but if that money is owed to outsiders, then it isn’t really an asset.

This emphasis differs from the principles of ethical accounting laid out by modern trade organizations and accounting professors, but it speaks to a profound truth that is as old and relevant as the profession itself.

What are the Issues Currently Affecting the Public Accounting Profession?

Constant changes to the tax system, hiring and retaining staff, and understanding the impact of technology on your practice – these are all challenges for the modern accounting firm. Here are eight of the top issues for public practitioners.

1. Staying on top of tax changes

Constant changes to the tax regime mean the need for public practice accountants to stay up to date is greater than ever.

Whether those changes are intended to stimulate parts of the economy, benefit certain taxpayers, close loopholes or directly raise greater revenue, they can affect many taxpayers when only targeting the behaviour of a few, says Robyn Jacobson, a senior tax trainer from TaxBanter Pty Ltd.

At the CPA Australia Public Practice Conferences in May and June 2018, Jacobson outlined the most important changes of the previous 12 months.

“Most of the tax policy I’m seeing at the moment is in response to groups of taxpayers who are not complying,” Jacobson says.

“Sometimes there are only small groups of people in certain industries who are not complying, but the government will turn its attention to that entire industry. It’s like the old expression, ‘using a sledgehammer to crack open a walnut’.” 

“In some cases, there are just a few people doing the wrong thing but the government introduces integrity measures which affect everybody.”

Jacobson says some of the measures are “incredibly complex” and can increase the likelihood of taxpayers and their advisers making inadvertent errors. 

“Practitioners need to be across all of these changes in order to correctly advise their clients,” she says.

2. Being alert to work-related expenses crackdowns

The Australian Taxation Office is also focusing on work-related expense (WRE) claims, with Tax Commissioner Chris Jordan repeatedly saying that the WRE gap (the difference between what you can claim and what is being claimed) is estimated to be greater than the corporate tax gap of A$2.5 billion. 

Overclaiming is worse when an agent prepares the return, says Jacobson. 

“It is so important to remember that you must have incurred the expense to claim it; there is no standard deduction.”

“The message is that it never stands still – tax changes are a constant,” Jacobson says.

“I go out to clients once a month and speak with them about the changes, and a month later there is always so much more to talk about.”

3. Delivering to deadline without killing yourself

Public practice accounting businesses are all about client service delivery. A practice without a client service focus is not going to be in business for long. Where there used to be downtime between client deadlines, time to regroup and plan for the next project, today’s practitioners leap from one extreme deadline to the next.

“People with fantastic technical skills are being smashed by deadlines and burning out,” says Alena Bennett, leadership expert from alenabennett.com.au. 

“It’s not because they’re no longer good at what they do. Rather, it’s because they haven’t had the opportunity to experience how leadership skills can support their superb technical skills.”

Why is there no longer any downtime?

“There is an increasing number of changes in the market and that means the volume of work is also growing,” says Bennett, a qualified accountant.

Of course, there are also changes in staff attitudes to work and to work-life balance. Where once everybody stayed until the work was complete, an exodus at 5.15pm is now not uncommon.

“That leaves the partners to get the remaining work done themselves,” Bennett says.

4. Getting clients on board with new technology

Bennett says, “There are constant regulatory changes that public practitioners need to stay on top of and guide their clients through.

“Technology continues to evolve and that can create great opportunities for practices, but it also throws up the challenges of making the right investment, successfully deploying the new technology solutions and getting their clients on board.”

5. Growing or sustaining your accounting practice

What’s the solution? How does a business existing under constant pressure remain not only sustainable, but achieve growth? How does a practice lurching from one project to the next find time to innovate, or to surprise and delight clients with improved delivery and tailored communication?

Bennett shares four practical tips:

1. Get clear on your critical path. The landscape has changed, so must your practice. Delegate or drop non-critical activity.
2. Understand how changes as a result of #1 might impact the nature and frequency of interactions with your client and how you spend the rest of your time. Optimise your workflow.
3. Be transparent with your clients and staff about how the changes in your practice will impact them. Have effective conversations (see below).
4. Remember that any actions from #1–3 need to be congruent with your practice philosophy. If you don’t have a practice philosophy, or you haven’t revisited it in a while, now’s a great time!

6. Thinking of small changes you can make

Bennett says, “My challenge to those that attend my presentations is to go back to work the next day and do one thing differently.

“It can be as simple as communicating to your clients or staff differently, or simply considering the impact of your conduct and behaviour. How can you do things differently based on that awareness?”

Small changes that inspire the people around you lead to greater clarity and thus a better ability to make decisions, which comes back to improving the business, Bennett says. It’s about turning a painful cycle into a positive one, and that’s good for everybody.

7.  Working on your communication skills

When she first went into business 21 years ago Ondina (who these days goes without a surname), director and personal presence expert from Ondina Studio, had what she describes as “dreadful workplace conversation habits”.

It wasn’t until six or seven years later that she realised something had to change. Her business was growing and she had less and less time to manage her people.

“People go into business because they have really good skills around their chosen field,” Ondina says.

“When they do that, they don’t necessarily have other skills that are vital for running a business and particularly for managing staff.”

Relationships in the office are defined by conversations, she says, and the quality of those conversations affects the quality of the business.

“We all expect our team to come in and just do the job,” she says. 

“Very little time is spent on having a conversation because everybody is so busy. A lot of the managers I’ve come across are very concerned about pleasing the shareholders and increasing profit. 

“Along the way proper conversations with staff, which make these things happen, get pushed to the back.”

Ondina breaks it down into easily digestible pieces that go back together to build powerful change in the workplace, from active listening to self-awareness and knowing how one’s own mood will affect the conversation, to tone of voice and conscious intention.

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The most important fact, she says, is that good conversation is more than words.

“I help people to understand and be aware of how they come across, how they forge relationships, what their body language means and what stories they tell other people,” she says.

“In your thoughts you create a feeling and that feeling creates behaviour. The better your thoughts, the better the behaviour. What are your behaviours like? What are you known for? What do people say about you? Develop a good understanding of these things and your influence will increase dramatically.”

8. Keeping an eye on the future

Accounting firms have to be proactive if they are to attract top talent. The sector faces an ongoing skills shortage, so small- to medium-sized practices need to shift gears to ensure they attract and retain the next generation of practitioners.

This can be challenging for smaller firms competing against larger organisations with more resources, but there are some key tactics that smaller firms can use to attract top talent, including highlighting the benefits of working for a small or medium practice and developing prominent brand awareness so the company is known as an attractive place to work.