Definition of Ethics in Accounting

by Devra Gartenstein - Updated October 29, 2018
Senior professional man consulting with his client

Accounting concerns itself with truth in the form of faithful numerical descriptions of business activities. The ethical principles that drive the profession speak to the importance of providing accurate and unbiased information. This allows business owners to glean the information they need, and auditing agencies can make useful assessments. Ethics in accounting is a matter of both guidelines and principles. Specific standards are set by governing bodies and trade organizations who craft the rules of accounting, but personal values and professional ethics must guide accountants. This extra layer of ethical judgment helps in making decisions in the face of ambiguities and gray areas.

Ethics in Audits

Auditing is one of the most important tasks that accountants perform. It involves verifying information to assess the truth and accuracy of accounting information, whether for internal purposes or external evaluations for tax and lending institutions. To act ethically during an audit, an accountant should evaluate numbers with the primary objective of getting to the truth. There should be no conflicts of interest, such as owning stock in the business and standing to gain if the numbers portray operations in an advantageous light.

When a company hires an outside auditor to review its accounting data, it is the job of that accountant to be thorough and fair and to search for inconsistencies even if these red flags will add additional work or create other problems for the company. An auditing accountant who works for a bank or government agency should not be swayed by personal feelings such as greed or even sympathy but should be concerned only with making sure that the numbers line up and accurately express the company's financial activity.

Code of Ethics in Accounting

The International Ethics Standards Board for Accountants, itself an independent agency, has created a code outlining the principles at play in ethical accounting. These principles cover many facets of ethical behavior for accountants, although unique situations may call for judgment calls that aren't explicitly reflected in these principles.

  • Integrity: Integrity isn't a set of rules or a course of action, but rather a state of mind oriented towards honesty, straightforwardness and a commitment to acting following principle rather than for the sake of personal gain.
  • Objectivity: To the extent that it is humanly possible, accountants shouldn't be influenced by the interests or perspectives of the individuals or businesses who hire them. An accountant also shouldn't let personal biases or interests influence either the numbers that go into an accounting system or the results that come out of it. Figures and results should be taken at face value and should drive conclusions and decisions.
  • Professional Competence and Due Care: The field of accounting isn't a static body of knowledge but rather an evolving frame of reference that changes as legislation and best practices are redefined over time. It is the responsibility of an ethical accountant to stay abreast of these developments and provide clients with up-to-date information and the highest quality service.
  • Confidentiality: Accountants handle sensitive information, and it is an accountant's ethical responsibility to refrain from disclosing any of this information to outside parties who may stand to gain from it. Similarly, an accountant shouldn't use any information obtained while performing professional services for the sake of personal gain, such as selling stock in a business whose books appear questionable.
  • Professional Behavior: As with any profession, an accountant should perform tasks and responsibilities with an eye to the highest personal and professional standards. These include completing tasks thoroughly and on time, following through on commitments and only accepting payments for services that have been rendered.

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Ethical Dilemmas in Accounting

Although governing bodies and rules of accounting use a clearly stated code of ethics in accounting, it may create the impression that there are clear and consistent rules for every accounting situation. However, the situation can be much murkier when you begin working in real cases. An accountant may be working for two different businesses and may have access to one company's privileged information that could affect the well-being of the other company. Company A may be considering investing in Company B, but the accountant may know from working with both businesses that Company B is struggling. In this case, the most ethical course of action would be for the accountant to step back and avoid providing inside information to either company.

Accountants can also face ethical dilemmas when deciding how to report accounting information; a process that allows for some discretion and judgment calls. Deciding whether to expense or depreciate a piece of equipment can affect net profit on an income statement, which may affect the value of the company that investors evaluate. It may not be illegal to report the expenditure in a way that adds to the company's value, but it does skew information in ways that aren't entirely transparent. Similarly, the decision to allocate an item of expenditure to one department rather than another can create an imbalance in the success metrics of the departments in question even if the expenditure was beneficial to both.

There are no clear and easy answers for these dilemmas, but an ethical accountant can follow guidelines that may make these decisions somewhat simpler. It's important to think of the spirit behind both the accounting code of conduct and the law, as well as their specifics. Even if an accountant can't discuss the details of a situation with an outsider, even just imagining such a conversation can provide him with a valuable perspective. And although they hardly provide rigorous or objective criteria, intuition and gut feelings can be helpful ethical guides.

Training Programs and History

Because ethics in accounting is such an important aspect of the field, many universities and training programs have begun offering and even requiring courses that provide training in accounting ethics and explore ethical questions. This development was spurred in part by high-profile cases such as the collapse of Enron, which was notorious for questionable accounting practices. The availability of classes in accounting ethics serves in part to address perceptions that professional accounting practices can be shady, and also to discourage people who are entering the field from engaging in any ethically questionable activity.

Although the requirement to take classes in accounting ethics may be a recent development, ethical principles were built into the very core of modern accounting. Luca Pacioli, commonly known as the father of accounting, lived and wrote during the Italian Renaissance. Rather than being a mathematician or businessman as you might expect, Pacioli was a theologian who believed that accounting was a moral science.

Pacioli believed that the purpose of accounting was to express a business owner's financial relationship to vendors, customers and creditors. The accounting equation, which is at the heart of accounting activity, states that assets minus liabilities equals the owner's equity. In other words, a business owner only owns whatever is left over after accounting for sums that are owed to creditors. A business may seem to have a surplus if it has money in the bank, but if that money is owed to outsiders, then it isn't really an asset. This emphasis differs from the principles of ethical accounting laid out by modern trade organizations and accounting professors, but it speaks to a profound truth that is as old and relevant as the profession itself.

About the Author

Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.

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