Financial Accounting Ethics

Ethics is a major long-term business asset.

Maintaining true and reliable statements is the main objective of fair financial reporting. However, many aspects of corporate governance suggest that significant mistrust exists between shareholders, managers and auditors, which often results in management fraud and embezzlement. Therefore, ethical behavior in financial accounting is presenting shareholders with reliable financial information about a company's operations based on objective principles and not influenced by the interests of managers, agents or auditors.

Governing Bodies

There are a number of governing bodies that establish regulating and reporting standards for the accounting industry. The most common U.S.-based organizations are the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB). The main purpose of these organizations is to establish appropriate rules and policies so all investors and stakeholders make informed and educated decisions based on reliable and fair financial information that complies with the standards of these watchdog organizations.

Economic Logic

Ethical standards in the accounting profession are driven by sound economic logic. Companies with a reputation for quality, service and ethical business practices are highly valued by investors and creditors, partially because their financial statements can be trusted. Such companies and their managers tend to be less involved in lawsuits and have a high public profile.

Ethics and Accounting

The role of ethics in financial accounting is to ensure the public's as well as investor confidence about the company's reporting methods. As financial numbers can be influenced by political initiatives, investors should take a closer look at the reporting standards and principles of the organization they are interested in. The most common way of misleading investors' opinion is hiding or omitting key information by overstating operating performance, creating hidden reserves and using off-balance sheet financing.

Auditor's Perspective

Auditors also benefit from ethical behavior and strong reputations. Independent and reputable auditors face fewer liability suits and can generally charge client companies higher fees, primarily because their audit reports are trusted by the public.

References

• "Financial Accounting in an Economic Context"; Jamie Pratt; 2009
• Texas A&M University: Business and Accounting Ethics
• Department of Economics Universitat Pompeu Fabra: The Ethics of Creative Accounting (PDF)