Ethics in Accounting: Importance, Principles, & Examples

Commitment to ethics remains one of the critical determinants of the success of a professional. Since accountants handle a significant volume of sensitive information, ethics in accounting remains a crucial subject.

Professional accountants may execute high-volume transactions on behalf of their clients. Given all these, the success of an accounting professional lies majorly in the trust the professional builds in the minds of the investors, the general public, and company stakeholders.

The global accounting services market is expected to grow at 11.4% and is forecasted to reach $587.94 billion between 2021 and 2026. Adherence to the code of ethics in accounting is imperative for auditors and accounting professionals to render a trustable service.

This blog has covered the basics of accounting, ethical principles, and relevant examples. We have also outlined the consequences of unethical accounting practices.

What Is Ethics in Accounting?

Professional ethics in accounting is all about adherence and commitment to the set of guidelines that accounting professionals must follow to build trust and confidence in the minds of their clients, who, in turn, may be an individual or an organization.

Each organization is different, and so are their accounting practices. So, accounting professionals must invest their time and energy into understanding the basic ethical accounting standards, rules, and guidelines that govern the organization’s functioning. 

In dealing with sensitive business and individual information, demonstrating their commitment to integrity becomes imperative for accounting professionals.  Doing so helps build trust, avoid fraudulent practices, and win the public’s confidence.

History stands as proof of the fact that ethics in accounting isn’t a novel concept. Luca Pacioli, a renowned mathematician, is considered the “Father of Accounting.”

He speaks of ethics and its importance in the first book he penned in 1494. Accounting organizations and governing bodies worldwide have developed ethical accounting standards over time.

Given below are a few examples of such standards, 

What Is the Importance of Ethics in Accounting?

The role of ethics in accounting has become more critical than ever, with several cases of fraudulent activities and unwarranted disclosure of sensitive financial information getting reported. In this section, we have outlined the importance of ethics in accounting.

1. Build Public Trust

While making key investment decisions, the general public and investors depend on the information from accounts. Ensuring the dissemination of authentic information is a must in the accounting profession.

Otherwise, the public may lose trust in the profession, which impacts the reputation of the accounting profession and that of the business.

2. Maintain Confidentiality

Accountants deal with huge volumes of sensitive information daily, including business earnings, bank account details, credit card numbers, financial statements, audit reports, social security numbers, payroll data, financial projections, investment strategies, pricing information, etc.

Accountants are responsible for maintaining confidentiality and not sharing them with anybody outside the organization. If you are an accountant, never share sensitive information over email or public Wi-Fi. Even if you must email the data, use private Wi-Fi or a network while transferring information.

3. Mitigate Legal Risks

When accountants adopt ethical behavior ad adhere to standards and norms, it helps mitigate the legal risks and uncertainties associated with a business. Even a small unethical behavior of the accountants may lead businesses to fines and penalties, which could impact the business’s reputation in the long run.

4. Mitigate Business Risks

When ethics for accounting professionals become their guiding principle, it helps build trust in the minds of the customers, suppliers, investors, and other stakeholders. On the other hand, if they exhibit unethical behaviors, the business can lose customers, investors, clients, supplier networks, etc., eventually impacting their revenue and profitability. The cost of not adhering to ethical commitments and integrity may produce broad-based adversities apart from legal risks and complications.

5. Competitive Advantage

Today’s marketplaces are more crowded, and businesses endure cut-throat competition. Adopting ethical accounting standards helps businesses lure more customers on the one hand and investors on the other, which helps scale the customer base, revenue, and profitability. 

6. Win More Clients

Ethical behavior is the hallmark of integrity in the accounting profession. As much as accounting ethics is important for your client’s business, it plays a crucial role in promoting the success of your profession. No business would want to hire an accountant who lacks basic integrity. Upholding ethics and integrity may help win more clients and scale your profession.

7. Professional Competence

Given the scale and pace of technological advancements, businesses endure continuous disruption. Ethical accounting standards, compliance norms, accounting rules, etc., keep changing, and you must update yourself periodically. 

In case you don’t have the knowledge and expertise to perform a specific task or the accounting system, you must come forward and disclose it to your client. Or you should consult someone before you do the job. If you are employing junior cadres to do a job, ensure they have the required qualification and competence.

Basics of Accounting Ethics

As explained in the previous sections, accounting ethics refers to the standards, principles, and frameworks that guide accounting professionals. Because accountants work closely with the financial information of other individuals and businesses, ethical conduct remains a natural expectation of the profession. 

Moreover, accountants deal with critical information worth a major stake in a business. A leakage of such confidential information may impact the business’s functioning and financials on a large scale. For example, disclosing major decisions like mergers, acquisitions, etc., may impact stock prices. So, such information should never be disclosed without the approval of the business management.

As financial statements and accounts reveal the business’s health at any point, the accountant should not manipulate any data. The reports should reveal the real picture of the business. This trust is essential for the long-term conduct of the business.

The business world is rapidly evolving, and so it becomes important that accounting professionals amp up their skills needed to survive the rapidly evolving world. They must understand the intricacies of accounting software tools and systems that can be used to streamline accounting operations.

Having a high level of professional competence would save them time and money, which they can invest in performing crucial operations that require human intelligence and skills. 

6 Ethical Principles in Accounting

Six basic principles govern ethics in accounting. In the coming section, we have elaborated on the 6 ethical principles in detail.

1. Work in The Public Interest

Accountants must aim to build trust in the public’s minds and prioritize their interests. They must commit themselves to meeting the expectations and interests of the public, companies, and individuals in society. Doing so enhances their trust in the process and confidence in the financial statements.

For businesses, adherence to accounting ethics and standards helps build credibility in financial statements, eventually leading to a more stable business environment.

2. Act with Integrity

Accountants should adhere to integrity and remain honest in their professional endeavors. They must not endorse or participate in activities that may be suspicious, false, or misrepresenting. Accounting professionals should not engage in activities that may result in a conflict of interest between their business or individual clients. They should commit themselves to fair and complete reporting. 

While working with clients, auditors and accounting professionals must not manipulate their clients’ financial information for personal or professional returns. They should disassociate themselves from participating in illegitimate activities.

3. Avoid Conflicts of Interest

Accountants must always refrain from participating in activities with conflict of interest. They should commit themselves to maintaining professional conduct of business at all times. Accounting professionals should not engage in activities beyond their skillset or expertise. They must make informed recommendations to clients and avoid bias and judgments. 

For instance, if you are engaging a junior-level staff to work for a client, you should only engage them to perform tasks they are qualified for. You must not offer an advisory unless you have the expertise and educational background in financial products and services. Even if you have the certificate, you must not recommend the products or schemes of a certain business and receive benefits and incentives from the supplier.

4. Be Objective

As an accounting professional, you must remain objective and not let subjective factors and biases rule your decisions or behavior. Such influences are detrimental to your profession and ethical commitment. You should commit yourself to being impartial and unbiased in your professional endeavors.  

Never let personal or professional relationships influence your decisions or behaviors. They should distance themselves from questionable relationships and connections. Demonstrating favoritism may impact the professional’s decisions and recommendations about a company’s financial conduct, information, and account statements.

Many associations restrict public accountants from offering multiple streams of services to their clients. It is important to adhere to such principles as offering multiple services together may lead to a comprise of objectivity and commitment to staying away from external influence. 

5. Respect Client Confidentiality

Commitment to confidentiality is a crucial principle that accounting professionals uphold, no matter what. They should never disclose sensitive financial information of a firm.

Doing so can ruin the trust you have built with the clients over the years. Accounting professionals must never disclose any information to people inside and outside the organization without the consensus of the respective business stakeholders. 

You must check your accounting practices and ensure they fall within the legal and business expectations. Unless there is a legal necessity, accountants and auditors must refrain from sharing financial information about a business with the outside world. 

6. Build Professional Competence

The business landscape is rapidly evolving, and so does the accounting requirements, practices, and standards. Accounting professionals must stay updated on the latest technologies, legislation changes, and best practices in the industry, which in turn, requires that they update their skills and competencies constantly. 

Updating themselves to the latest business requirements and developments would help them stay aligned with factors that impact their decisions. Professional competence also means being conscious of the boundaries of your expertise and not moving beyond the fringes of your skillset and knowledge. 

When accounting professionals gain experience and rise to leadership roles, they should ensure that the juniors and subordinate colleagues have the knowledge, skills, and proper training to do a particular job. You should never falsely represent your experience, expertise, or educational background.

The Consequences of Unethical Accounting Practices

Unethical accounting practices impact the moral conduct of business, damaging the professional and business reputation and leading to losses. We have highlighted some of these major losses in the coming section.

1. Damaged Reputation

Not adhering to the principles that govern ethics in accounting can impact the reputation of a business. It creates a lack of trust in the minds of business partners, customers, and clients. It must be noted that consumers, investors, employees, and other key business stakeholders prefer to participate and engage in a business that adheres to ethical practices.

Unethical accounting practices impact not only the reputation of the business but also that of the accountant or auditor. Businesses may not hire you if you are not committed to ethical accounting standards. Ethical issues in accounting may be lethal for accounting firms and auditors and potentially damage the goodwill, trust, and reputation they have built over the years.    

2. Lost Customers

Customers always choose to buy from and associate themselves with businesses that unwaveringly commit themselves to ethical standards. Today’s consumers are extremely conscious about the buying decisions they make. Given all these, they may choose not to buy from businesses that lack transparency, misrepresent financial information, or breach ethical conduct.

Given the massive reach of news and social media platforms, the information transfer happens in seconds. If a company breaches trust, misrepresents financial facts, or has ethical issues in accounting, the information may spread like a wild forest fire, and the business might lose a major customer base. 

3. Legal Problems

Unethical accounting problems may lead to legal issues and problems at the state or federal level. If a business engages in fraudulent activities or other financial crimes, the business stakeholders and the accountants stand a chance of facing legal complications. In the case of less serious offenses, the accountant may endure fines, loss of license, etc., and the business may experience hefty fines, penalties, tax liability, etc. 

On the other hand, if they commit a potentially serious fraud or misrepresentation, the accounting professional and the business owner may face imprisonment.

4. Lost Employees

Beyond customers and investors, employees prefer to engage in a firm that adheres to ethical commitment. Trust is a major factor that bonds employees and employers. If the employees know that their firm is engaging in unethical accounting practices or ethical issues in accounting, they will not want to work with the firm.

One, they might get worried about the firm’s financial health and its impact on their salary and paychecks. Two, the employees might be worried about the reputational damage they would experience when such fraud opens to the public. 

Firms engaging in unethical accounting practices risk losing the talent pool.

Accounting Ethics Examples

Following are some of the common accounting ethics examples. 

1. ABC Limited is a pharmaceutical company manufacturing and exporting drugs and medicines to several countries worldwide. The company hires an accountant to maintain the stock details and plan pricing accordingly. The accountant reveals sensitive details, like the expected stock price fall, to his connections. 

As a result, his friends formed a team and bought more shares. On investigation, this was deemed unethical, and the accountant was punished. Accountants should never reveal confidential information or engage in unethical accounting practices.

2. XYZ is a financial service consultant, and he is known for offering financial advice to many customers. Some financial product vendors offer incentives and rewards to the consultant for promoting and suggesting their products to their customers. In return, he endorses the products of that vendor. This is an example of unethical accounting practice and misuse of customer trust. 

3. In PKG Limited, an accountant handles all reimbursements. Ideally, the accountant is expected to clear the reimbursements on a first-come, first-serve basis. But he displayed favoritism and bias and paid his favorite employees first. This is another example of accounting misconduct. Accountants should never display subjectivity and favoritism in their commitment. They should always be objective and unbiased.

Conclusion

Ethics in accounting is a crucial determinant of the success of a business as well as the accountants and auditors. Accounting professionals must always be vigilant about evolving standards and work out ways to mitigate the risk associated with each process step. Unethical accounting practices may lead to loss of reputation, customer base, investor trust, employee pool, etc.

With technological evolution, accounting software tools have gained prominence and offer an easy way to streamline accounting practices in a business firm. 70% of businesses have garnered higher returns on investment after automating the accounting process. Businesses and accounting professionals must develop their competence to put the features and functionalities to the best use.