Ethics in accounting encompasses several aspects and perspectives. Generally, by accounting ethics we understand the integrity of financial reporting or ensure we don’t fall into a fraud trap. However, the scope of ethical accounting exceeds that. Embracing ethical principles in accounting can potentially change an accounting firm’s face value. It’s more about building a culture of ethical conduct in finance and accounting. The foundation of which is based on trust – with clients and within the firm.
The concept of ethics in accounting isn’t new. Luca Paoli, known as the “Father of Accounting”, in his first book in 1494, had mentioned ethics. It continues to be an integral part of today’s training for accountants.
The importance of ethics in accounting:
Ethical behavior in accounting fosters credibility and instills a sense of trust and capability. Ethical practices act as a shield against legalities for non-compliance. Accounting firms must uphold ethical standards to adhere to the regulatory framework and industry guidelines. It is also important for maintaining financial integrity and trust. Accountants play an important role in presenting accurate and reliable financial statements. Maintaining honesty, transparency, and objectivity helps strengthen the credibility of financial activities and advice they help their clients with. It is key in helping the clients make an informed decision.
Maintaining ethics in accounting practices also contributes to enhancing the corporate reputation and image of an organization. Their commitment to ethical accounting practices helps build a positive perception among stakeholders, clients, investors, and the members of the organization.
Myths about Ethical Accounting:
Although ethics is the foundation of accurate accounting, there are several myths around this. Let us delve deeper into them:
- Myth 1: Ethical accounting is only about avoiding fraud.
Reality:
There is no doubt that fraud avoidance is one of the key aspects of ethical accounting, but it isn’t just about that. Ethical accounting includes a broader commitment to accuracy, transparency, and integrity in all financial practices. It also includes:
- Accurate financial reporting: Ethical accounting is also about ensuring that all financial statements reflect the actual financial status of the organization. There shouldn’t be misrepresentation or omission of key aspects.
- Transparency: By practicing ethical accounting, firms are compelled to provide clear and comprehensive information to stakeholders. This allows them to understand the performance of the accounting firm.
- Conflict interest management: Identifying and addressing conflicts of interest may impact the objectivity and integrity of financial reporting.
Myth 2: Ethical accounting is costly for small accounting firms:
Reality:
Ethical accounting is important for all businesses, irrespective of their sizes. Firm leaders need to understand that the cost of unethical practices is far greater than the investment in ethical accounting. For small businesses, ethical accounting might seem to be an unnecessary expense, especially because they have limited resources and budgets. However, it is a necessary investment in the long run. Here are some of the major issues it can help them avoid:
- Penalties: Non-compliance with accounting standards and regulations can lead to hefty fines and penalties and even legal issues.
- Loss of reputation: The knowledge of unethical practices and their repercussions can damage a firm’s reputation beyond recovery. This could lead to a loss of customers and revenue.
- Operational disruptions: Investigations and legal battles that begin with unethical practices are often long-drawn. It leads to disruption in business operations and drains resources significantly.
Myth 3: Ethical accounting is the responsibility of the accountants alone.
Reality:
Within a firm, there are people with different roles and ethical accounting is a collective responsibility of all – right from the junior staff to the management. While accountants play a central role in maintaining financial integrity, ethical accounting is a shared responsibility across the organization. The key stakeholders in keeping up the ethical standards include:
- Employees: All employees, irrespective of their role in the organization must adhere to the ethical standards and report any suspicious activities or unethical behavior. This behavior could be on the part of another employee or the client’s side.
- Top management: Maintaining ethical behavior is more about building a culture. Leaders set the tone for ethical behavior and are responsible for building a culture of accountability, transparency, and integrity. They should lay out clear policies and procedures to maintain ethical standards.
- Audit committees: Whether it is in-house, outsourced, or a third party, the audit committees must oversee the financial reporting and ensure that ethical practices are thoroughly maintained.
Myth 4: Ethical accounting is immaterial in a competitive market.
Reality:
Ethics in accounting is more important in a competitive market. It helps foster trust, loyalty, and long-term success. Some businesses believe that in a highly competitive market, cutting corners or engaging in unethical practices will give them an edge. But the truth is just the opposite of that:
- Helps build trust: Ethical practices help leverage trust with customers, investors, and other stakeholders. Knowing that your firm will hold ethics in the highest regard, no matter what, strengthens their faith in you while increasing loyalty and establishing long-term relationships.
- Helps manage risks: Ethical accounting helps identify and mitigate risks, protects firms from potential scandals, and financial and reputational damage, and keeps them away from legal complexities.
- Enhances sustainable growth: Accounting firms that prioritize ethical practices are better positioned for sustainable growth. This is mainly because stakeholders view them as reliable and trustworthy in the market.
- Myth 5: Ethical accounting standards are universal
Reality:
Ethical accounting standards are not equal or universal. Each country and industry has its own set of standards, which require a contextual understanding and application. For example, if you are a real estate accountant, the context of ethical accounting will be different from if you deal in the healthcare industry. While the principles such as honesty, integrity, etc are the same for all, the regulatory obligations vary to a large extent. For example,
- Industry-specific standards: Different industries such as banking, healthcare, real estate, manufacturing, and education have their unique ethical requirements and standards.
- International standards: The International Financial Reporting Standards (IFRS) has set out guidelines for financial reporting. This is applicable at a global level. However, some countries have their standards that are different in different aspects.
Debunking myths in ethical accounting – End Note
Ethical accounting is not just another tickbox in the regulatory requirement section. It is a fundamental aspect of ensuring that you act as a responsible business. While ethics in accounting is important, these myths often cloud the judgment of the firm leaders. Knowing about them and choosing the path of ethical practice helps build trust, ensure legal compliance, and promote long-term sustainability. Ethical accounting is a shared responsibility – one that involves everyone in the organization
If you are struggling with maintaining ethical standards in your accounting practice, consider outsourcing to Finsmart Accounting, where our team of experts is acquainted with different regulatory standards and guides you through the process. To know more, write to us at connect@finsmartaccounting.com.
Director Growth Strategy & Alliance
Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.
