About Ethics in Accounting
With large-scale financial debacles like the Enron fiasco sweeping the media, there is more focus on accountants than before. People want to know why the accountants for Enron knowingly prepared fraudulent financial information and why auditors placed their seal of approval on it. The answer is simple; they were unethical.
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Function
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When applied properly, accounting ethics protect business owners, employees and investors from decision-making that ultimately results in the favor of a handful of people at the expense of the whole. The American Institute for Certified Public Accountants (AICPA) and other professional accounting associations have codes of professional conduct to which all members are required to adhere.
Features
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Accountants are generally viewed as having a responsibility to the public to maintain accurate, unbiased records of a company's performance. Accounting ethics include such items as confidentiality of client data and due diligence toward maintaining objective financial records. The key component to maintaining objectivity is independence, meaning an accountant is not considered objective if there is a conflict of interest. For example, an auditor is not independent from a corporation if he owns stock or has any other financial investment in the corporation.
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Considerations
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Some areas of accounting ethics are governed by regulatory agencies. For example, the Securities and Exchange Commission (SEC) is responsible for creating and enforcing audit standards for publicly held corporations. For privately held businesses, the state licensing board has the authority to revoke an accountant's license if he is found guilty of ethics violations. If the violation is intentional and fraudulent, the accountant can be prosecuted for a crime.
Prevention/Solution
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There is some discussion among the education community about whether universities should require an ethics course for accounting majors. An ethics course might point out unethical situations to students that the student would not have viewed in that manner before the course. However, a course cannot guarantee that accountants will practice ethical behavior, nor can an entire host of courses ensure an accountant will never make a costly mistake with no intention to defraud.
Expert Insight
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While ethics courses might help keep honest people from making honest mistakes, the real crux of preventing the kind of financial fall-out experienced during the Enron scandal is with a solid set of checks and balances from multiple sources. Companies should have procedures for internal checks and balances as well as external validation that the financial data adheres to their policies. Before investing in any business, you should always schedule an independent audit of the company's financial data.
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