AC4006 Financial Markets: Ethical Principles in Accounting & Finance

This essay provides an in-depth analysis of ethics, ethical dilemmas, and ethical principles in accounting and finance, with specific attention to ethical guidelines for accounting firms and the financial reporting council. It highlights the critical role of ethics in finance and accounting, emphasizing...Read More

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Finance
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Topic: "Ethics, ethical dilemmas and ethical principles in accounting and finance;
ethical guidelines for accounting firms and financial reporting council"
Introduction:
Finance and Accounts are regarded as the only business functions that shoulders the
responsibility of acting the interest of public. Hereafter, the professional’s responsibility of
finance and accounting is not limited to meet the needs of any particular individual or
business. While acting in the interest of the public, it is necessary that the professionals of
finance and accounting complies with the certain basic ethics so that they can attain their
objectives.
For the accounting and financial professionals, it is necessary to be ethical in their
practice because of the nature of their profession. The nature of the works of accountants
places them in the special position of trust in respect of their clients, employers and general
public that depend on their expert decision and guidance in making decision (Loeb 2015).
The business ethics is presently the most vital issue because of the astonishing business
scandals that has happened in several countries which is damaging to the economy and
society as well. The scandals question the morality of the business in general and the
accountants as well. In context of this issue, the paper emphasises on the ethics in accounting
and ethical dilemmas surrounding ethics with steps to avert ethical issues.
Discussion:
The term ethics imbibes both the individual and community culture. Several
individuals have their different opinion on the similar subject where what is perceived as
right might appear wrong for someone else. The ethical behaviour suggests the course of
actions that are taken following a proper consideration of their impact on the community and
other stakeholders (Cameron and O'Leary 2015). Henceforth, at Enron when the accounting

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and financial professionals did not report of any wrongdoings which they believed was done
by the top level, their behaviour was referred as unethical despite the fact that they were not
involved in the fraudulent or manipulative activities.
On the contrary when Cynthia Cooper, the vice-president of internal audit of World
Com noticed wrong bookkeeping entries resulted in inflated profits, she directly stated the
matter to the board of directors, despite the fact that she was reporting against the senior with
whom she worked together (Franklin 2017). These two examples provide an understanding of
the term ethical dilemmas. Ethical dilemmas happen when in finance and accounting
professionals are required to choose from the alternatives. This includes the significant value
resulting to conflict of interest, real alternatives that can be justified and the significant
consequences to all the stakeholders.
Accounting is the procedure based on which a business keeps record of its financial
activities by recording its debits and credits and balancing its accounts. Accounting is
regarded as the system of presenting the financial position of a business along with the results
of operations and cash flow (Grace and Cohen 2015). The accounting ethics and accounting
dilemmas is considered difficult to control as the accountants and auditors should consider
the public interest while assuring that they continued to be employed by the company in
which they are auditing. The professionals should consider the best way of implementing the
accounting standards when they are faced with accounting issues that might result the
company to face significant loss or even cessation of business.
The role of accountants is critical to the success of the society. The accountants act as
the financial reporter and intermediaries in the capital markets. Ethical dilemmas surrounding
the profession of accounting is the underreporting of income in order to avoid the payment of
taxation is an illegal practice (Duska, Duska and Kury 2018). When individuals understate

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their incomes, the federal government loses their tax that may move towards the societal
security, Medicare and other government projects. The unethical accounting can easily
change the financial records of companies and manipulate the numbers to provide false
picture of the business success.
The ethical dilemmas surrounding finance also includes the insider trading. The
insider trading generally refers to purchase and sale of security by breaching the fiduciary
duty or other relationship of confidence and trust by possessing materials that contains non-
public information regarding the security (Chawla et al. 2015). The violations of insider
trading comprises of leaking information’s that are misappropriate for public.
An accounting and financial professionals must take the responsibility in public to
recognize the circumstances that may pose as a threat of conflict. These circumstances may
result in threats of compliance with the fundamental principles (Voss 2018). For instance,
there may be threat to objectivity that might be created when the professional’s accountant
practicing publicly directly competes with the client or has the joint venture with the major
competitor of a customer.
The financial and accounting professionals has the obligations of complying with the
certain fundamental principles. There may be situations where the responsibilities of
professional accountants in an employer organization and their professional’s obligations of
complying with the fundamental principles is in conflict. There are certain fundamental
principles relating to ethics in accounting that must be followed. This includes the principle
of integrity.
According to Ferrell and Fraedrich (2015) this principle requires all the financial and
accounting professionals to comply with the honest and straight forwardness at the time of
discharging their respective duties during their professional duties. The professionals are

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required to avoid from being engaged in the activities that would damage the organizations
goodwill. This principle requires the professionals to communicate both the adverse and
favourable information with the concerned people. The principle of integrity requires the
accounting and finance experts to refuse taking any gifts and indulgence in any activities that
may influence the actions undertaken or impact the organizations objectives.
The principles of objectivity require the finance and accounting professionals to stick
with their financial and professional judgement. They must not allow any bias, conflict of
interest or any undue influence to override their business judgements (Trevino and Nelson
2016). The objectivity principles require the end users to communicate information fairly and
objectively with the end users in a transparent manner.
The confidentiality principle necessitates the experts of bookkeeping and financial
management to abstain from revealing any information that are confidential to their work.
This information might however be disclosed to their subordinates and due care must be
given that the subordinate maintains the confidentiality. The principle of professional
competency and due diligence requires the accounting professionals to update their
professional skills from day to day (Bowie 2017). This has been assumed as having greater
significance in the modern world of competition where up to date knowledge and skill should
make sure that the clients or the employer gets knowledgeable service from the professionals
depending upon their current and up-to-date progresses in the interrelated areas.
Finally, the principles of professional behaviour requires the accounting professionals
to adhere with the relevant laws and regulations by avoiding those actions that might lead to
discredit to their professionals. Knowledge regarding ethics may help the accountants and the
auditors to overcome the ethical issues (Melé, Rosanas and Fontrodona 2017). This would

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allow the inflow of right choice even if it is not beneficial for the company but it will be
beneficial for the public that remain dependent on the auditors or accountant’s reports.
According to (Tormo-Carbó, Seguí-Mas and Oltra (2016) there are certain ethical
guidance that must be followed by the accounting firms. An organization should establish the
appropriate policies and process to make sure that the owners and shareholders together with
the members of administrative, supervisory body and management of the company does not
intervene while carrying out an activity that jeopardises the objectivity, integrity and
independence of the company. An organization must establish suitable and effective
organizational and administrative arrangements which is designed to identify, avert or
disclose any threats to its independence.
An organization must be able to demonstrate to the financial reporting council that the
procedures and policies that are designed to attain the compliance must eliminate, recognize
and manage any threats relating to audit independence. Complying with the overarching
principles of ethics and the supporting the ethical provisions helps in complying with the
requirements of integrity, objectivity and independence which acts as the responsibility for
the organizations, individual partners and staff as well (Armstrong 2017). The financial
reporting council of UK in its revised ethical standard stated guidelines for the accounting
firms to establish the policies and procedure that are suitable to nature and size of a company.
This would help in promoting and monitoring the meeting of the ethical outcomes of
overarching principles and supporting the ethical provisions by complying with the firm’s
specific requirements and its partners.
The ethical guidelines require the senior management of the company and those that
are directly responsible for the management of the company’s audit must lay down suitable
quality control procedures and policies to monitor the system by dedicating suitable resources

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and leadership to comply with the supporting ethical provisions (Payne, Corey and Raiborn
2018). The guidelines require appropriate arrangement with the network firms to assure that
the appropriate policies, procedures and quality control are implemented to monitor the
accounting system effectively.
To promote a strong controlled environment arrangement for the prompt
communication of probable and actual breaches of company’s policies to the relevant
engagement partners must be made. This requires reporting by the engagement partners of
particular situations or relationships as needed by the ethical standard (Bowie 2017). The
operation of enforcement mechanism would help in promoting ethical compliance with the
policies and process.
The ethical dilemmas in accounting and finance can be prevented through IFRS
accounting rules as this is useful in preparing and standardizing the reporting of financial
statements for the companies that are trading publicly. From the perspective of potential
investors and stakeholders the IFRS standard measures the information provided in the
financial statement to make economic decisions regarding a company.
The IFRS is applied through the measurement and disclosure principles. The
measurement principles identify and ascertains the timing as well as basis of items that enters
into the accounting cycle and effects the financial statements namely the period in which the
transactions are recorded (Franklin 2017). The disclosure principles ascertain the specific
numbers and other information that are necessarily required to be presented in the financial
statement. The management must frame the rules and regulations in a manner that it yields
positive impact on the business activities by ascertaining the vital business elements such as
business objectives and assuring that the funds are allocated in different activities depending
upon their activities.

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Conclusion:
The study emphasised on the concepts of ethics, ethical dilemmas and its effect on the
role of the professional accountants. Currently, ethics has turned into most topical issues in
accounting and finance due to the series of corporate scandals that took place around the
world impact the credibility of professional accountants. The scandals have thrown the
effectiveness of contemporary accounting, auditing and corporate governance practices for
which the accountants are accountable. Conclusively, ethical conducts are directly related
with the profession of accounting. Henceforth, it can be said that ethics is an integral part of
professional accountants.

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References:
Armstrong, M.B., 2017. Ethical issues in accounting. The Blackwell guide to business ethics,
pp.145-164.
Bowie, N.E., 2017. Business ethics: A Kantian perspective. Cambridge University Press.
Cameron, R.A. and O'Leary, C., 2015. Improving ethical attitudes or simply teaching ethical
codes? The reality of accounting ethics education. Accounting Education, 24(4), pp.275-290.
Chawla, S.K., Khan, Z.U., Jackson, R.E. and Gray III, A.W., 2015. Evaluating ethics
education for accounting students. Management Accounting Quarterly, 16(2), pp.16-16.
Duska, R.F., Duska, B.S. and Kury, K.W., 2018. Accounting ethics. Wiley-Blackwell.
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Trevino, L.K. and Nelson, K.A., 2016. Managing business ethics: Straight talk about how to
do it right. John Wiley & Sons.
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