The role of ethics in financial management is legal, practical and moral. You must keep your books with honesty and integrity because you are legally required to do so in a way that accurately reflects your company's financial workings. Ethical accounting also makes sound practical sense because an accurate set of books will give you more useful information than pure fiction. Of course, using a moral compass in accounting and financial decision-making is simply the right thing to do.
TL;DR (Too Long; Didn't Read)
Ethics requires honesty and accuracy in accounting. Moral principles also address conflicts of interest in financial decision making.
The Importance of Ethics in Accounting
Ethics is important enough in accounting to have earned a dedicated set of principles.
- Independence and objectivity. In order to provide fair and accurate information, accountants must approach their work free from bias or agenda. Having preconceptions can affect the accuracy of financial data. Having a stake in the outcome can likewise interfere with letting the numbers tell their own story as clearly and honestly as possible.
- Integrity. Accountants are morally and legally obligated to do their work with conscience — that is, to exercise honesty and a willingness to handle information thoroughly and carefully. It is their responsibility to engage in fair and accurate reporting with regard to the veracity of the data they provide as well as its completeness.
- Confidentiality. Accountants handle sensitive information, and they are morally obligated to make sure this information isn't shared with anyone who doesn't have the right to see it. This ethical obligation is especially important for public accountants who handle the books for multiple companies but must not divulge one client's information to another.
- Competence. It may seem strange to include as an ethical guideline for accountants the obligation to perform work competently. However, the act of performing a professional service includes both an ethical and a professional commitment to do it right. Shoddy accounting puts a client at risk of legal trouble and poor decisions.
- Professional behavior. Accountants are also responsible for performing work in accordance with the standards set by their profession. These include legal parameters as well as guidelines set by trade organizations that protect the integrity of the industry as a whole.
The Importance of Ethics in Finance
Whether your company hires an outside financial manager or manages its finances in house, ethical considerations are both necessary and expedient. Finance is the process of managing money and maintaining a set of books that provides insights on how your company earns and spends its cash. Attending to this process with honesty and integrity allows you to present your financial situation accurately, both internally and externally.
Your financial reports represent your profit and loss, net worth and cash flow situation. When you use them to understand and improve operations, it is an ethical imperative to present this information in ways that are clear and honest. Whether you are assessing efficiency and profitability or evaluating whether it makes sense to invest in future growth, approaching these documents with a sound moral compass helps you to provide the people who review them with the information they need to make the best possible decisions.
Business partners and stakeholders have a right to know whether your business is earning or losing money and whether they are making investments in an organization with a firm or shaky foundation. Showing a crooked set of books may help you to secure financing that will be convenient and expedient but may be in neither your best interest nor the lender's if your business model is not sound enough for you to repay what you borrow.
Utilitarian Ethics and Accounting
A utilitarian approach to ethical thinking argues that moral behavior yields the greatest good for the greatest number of people. If you present financial statements that inflate your net worth and secure financing for a risky venture, you may further your own short-term interests, but you deceive lenders and investors by not offering them the benefit of an honest evaluation of your loan worthiness.
By borrowing money that you secure via false information, you may not even be acting in your own best interests, especially if you are pledging collateral for a loan. The bank's process of evaluating your financial reports may seem cumbersome and inconvenient, but it is designed with an eye toward the mutual best interests shared by you and the lender. If your business isn't ready to expand or invest in pricey infrastructure, it isn't a good idea to do so.
Even if the money you borrow or land in investments is unsecured, and you lose nothing by losing someone else's money, you can still do broader damage by misrepresenting your situation. If a bank makes too many unsound investments, it will be forced to use stricter criteria going forward. This may lessen the possibility that someone else who is more deserving may not be able to get useful capital. You may further your own interest, but your actions are immoral by utilitarian standards because they ultimately do more big-picture harm than good.
Categorical Imperatives and Accounting
A categorical imperative is a more abstract approach to ethical thinking. Rather than expressing moral principles in terms of their costs and benefits, a categorical imperative weighs the motivation behind an action and judges whether it has merit on principle. The 18th century philosopher Immanuel Kant framed the categorical imperative as a question of whether the maxim behind an action could be used as a universal moral principle.
If you misrepresent your financial situation to borrow undeserved funds or lower your tax liability, you act out of pure self-interest, disregarding the needs of lenders, other taxpayers and other patrons of your lending institution. Self-interest works in the short term for a limited number of people, but if everyone acted purely out of self-interest, the world would be entirely vicious and morally bankrupt.
Most unethical practices in accounting and finance stem from a desire for more money that has not been rightfully earned. If this single-minded pursuit of money at the expense of honesty, integrity and kindness were a universal practice, then ethical principles would be largely irrelevant, and charity and generosity would be obsolete. Although this may seem like a leap from simply fudging some numbers on your financial reports, ethical evaluation based on a categorical imperative requires you to take this perspective.
Understanding Gray Areas
Questions of ethics in finance and accounting are often framed in black-and-white terms, with moral choices presented as simple and clear. In reality, ethical questions in finance can be fuzzy and complex, forcing you to ask difficult questions and make ongoing judgement calls.
For example, you may have had a difficult year when you lost money, but you fully understand your market and your opportunities, and you know that a cash infusion would be a sound investment for a lender or banker despite your problematic recent financial history. In addition, you may have the opportunity to create high-quality jobs if you receive the funding you seek.
It's possible that the potential moral benefits of misrepresenting your financial situation may outweigh the ethical questionability of presenting inaccurate financial statements. However, the good that comes from your ability to provide jobs may be outweighed by the risk you take for yourself and the employees you hire. It is important to keep asking difficult questions even if the answers are unclear and inconvenient.
- International Federation of Accountants: The International Code of Ethics for Professional Accountants: Key Areas of Focus for SMEs and SMPs
- Corporate Finance Institute: Accounting Ethics
- University of West Florida: The Importance of Ethics in Accounting
- GestioPolis: Corporate Finance in Relation to Ethics