Term Paper on Ethics of Accounting

The ethics of business is currently a high profile issue. This may be both due to the increased social pressure on companies to adopt a more socially responsible approach to doing business and more specifically, to media coverage of some sensational business collapses such as BCCI and Enron. Detailed analysis of these events had subsequently led to the questioning of the morality of businessmen and women in general and accountants in particular. Many experts argue that accountants have been the main contributors to the decline in ethical standards in business. The decline in ethical standards in the profession of accounting has led many experts to reexamine the type of education system that produces accounting professionals who, consciously or otherwise, appear to act unethical.

It is extremely important that accountants and accounting professionals be very ethical in their practices due to the very nature of their profession. Many people particularly managers and especially stockholders rely on accountants to present a clear and correct picture of the organization’s finances. The stockholders decision to reinvest in a company will depend on the accounts that are presented to them. This in effect means that the accountants are indirectly but very prominently responsible for whether the investors gain or lose money.

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This great responsibility should mean that accountants act as ethically as possible but the reality is far different. Since accountants cannot always be trusted to be morally responsible for the work they produce, organizations need to have strict internal controls in place.

Internal controls are all measures taken by an organization for the purposes of (a) protecting its resources against waste, fraud, or inefficient use; (b) ensuring the reliability of accounting data; (c) securing compliance with management policies; and (d) evaluating the performance of all employees, managers and departments within the organization. The accounting system depends upon internal control procedures to ensure the reliability of accounting data. Many internal control procedures on the other hand make use of accounting data in keeping track of assets and monitoring the performance of departments.

In order to achieve strong internal controls and to ensure the reliability of accounting statements it is important for the company to establish clear lines of responsibility i.e. the persons or departments responsible for functions such as sale, purchasing, paying bills and maintaining accounting records should be clearly indicated. In addition, there should be routine procedures for processing each type of transaction and duties should be clearly subdivided. Responsibilities should be assigned so that no one person or department handles the transaction completely from beginning to end.

Other steps to achieve greater internal control include internal auditing. Internal auditors test and evaluate accounting controls in all areas of the organization and prepare reports to top management on their findings and recommendations. Apart from internal audits, companies should annually conduct external audits. This helps present an accurate and unbiased picture of the company’s financial state of affairs. The company should also maintain a rotation of employees from one job assignment to another. When employees know that another person will soon be taking over their duties, they are more likely to maintain records with care and vigilance and also to follow established procedures. The rotation of employees also may bring to light errors of irregularities caused by the employee formally performing a given task. Obviously, the chances of fraud can also be narrowed by having serially numbered documents. Therefore, if a document is misplaced or concealed, the break in the sequence of numbers will call attention to the missing item. Apart from being serially numbered, accountants and auditors should ensure that each transaction is supported by relevant documents in the form of receipts, bills and invoices.

As far as accounting ethics is concerned, the most prevalent and publicized problem in this regard is fraud and its perpetration. Fraud may be defined as the deliberate misrepresentation of facts with the intent of deceiving someone. Frauds are either perpetrated by employees or management. Employee fraud means dishonest acts committed by employees in spite of management’s efforts to prevent these actions.

Examples of such fraud are theft of assets, overstating working hours, embezzlement etc. Management fraud means deliberate misrepresentation made by top management of a business to persons outside the organization. The effects of management fraud are more disastrous and far reaching as compared to employee fraud because they can actually result in affecting the economy of a country.

In addition to these aspects of internal control and account preparation, accounts should also be presented in a clear way according to the rules and policies of the organization as well in compliance with federal rules and regulations. Obviously no numbers should be concealed, under or overstated in an account presentation. Apart from this accounts should also be disseminated at regular periods of time. The disseminated accounts should be accurate and proved to be so by internal and external auditors.

In conclusion, it is important to understand that business and accounting ethics are a part of social responsibility. Being so, prospective accountants and businesspersons should be clearly aware of the laws and practices governing their professions. Having learnt these, accountants need to have the integrity and morality to provide accurate and fair accounts. However since morality is often an uncommon asset in money matters, internal control procedures must be strictly imposed to ensure that the business upholds its social and moral responsibility and the fairness and authenticity of accounting systems is maintained.