Learn It 16.3.1: Ethics in Accounting

  • Understand how unethical practices affect the accounting profession
  • Understand how the Sarbanes-Oxley Act affects accounting practices

Why Should an Accountant Be Ethical?

Accountants hold the key to one of the organization’s most precious resources, their finances. There are so many benefits to understanding how to manage and interpret a company’s financial statements. However, the downside to having this knowledge is that some professionals have used this information to commit fraud.

Due to notable corporate collapses, attention has been drawn to ethical standards within the accounting profession. These collapses have tarnished the reputation of the accounting profession. To combat the criticism and prevent unethical and fraudulent accounting practices, various accounting organizations and governments have developed regulations and guidelines aimed at improved ethics within the accounting profession.

Ethical Standards in Accounting

A wide range of people and institutions rely on accurate accounting information to make important decisions. Despite the best efforts of FASB and GAAP, accountants and accounting firms have become increasingly “creative” in reporting the financial position of businesses and in some cases have committed outright fraud. The consequences of unethical practices in financial reporting have cost taxpayers billions of dollars and employees their jobs.

The American Institute of Certified Public Accountants (AICPA) has its own Code of Professional Conduct that describes the ethical conduct members should strive to achieve. Similarly, the Institute of Management Accountants (IMA)—the primary national organization of accountants working in industry and government—has its own code of ethics, as does the Institute of Internal Auditors—the national organization of accountants providing internal auditing services.

The AICPA issued guidance to help certified public accountants (CPAs) solve ethical dilemmas not explicitly addressed in the code. Even though this guidance is for CPAs, it makes sense for anyone facing an ethical dilemma:

  • Recognize and consider all relevant facts and circumstances, including applicable rules, laws or regulations,
  • Consider the ethical issues involved,
  • Consider established internal procedures, and then
  • Formulate alternative courses of action.
  • After weighing the consequences of each course of action, you select the best course of action based on your own judgment.

It is important to note that these codes of ethics only apply to members of their respective organizations. Thus, despite efforts by professional organizations like the AICPA and legislation by the U.S. Federal Government, there are others in the accounting profession that place profit before ethics.