Ethics and Auditing

As the world of accounting rapidly grows and expands, so does the issues and complications associated with the process. The auditing process is a major part of Accounting. The issues about ethics in relation to Accounting process are becoming a more serious problem in today’s world. The Accounting process is highly sensitive, because it deals with what many people consider one of the most important thing in life: “money” Accounting incorporates a variety of functions- such as auditing- in which activities must be carried out with utmost care, adequacy and most importantly, the appropriate use of ethical judgments.

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The public generally depends on auditors to provide accurate information in regards to financial data. Auditors are supposed to be highly skilled in their occupational field, and very trustworthy because they are dealing with the financial data concerning people and organizations. In this day and age, the trust that people embed on auditors has drastically declined due to the high profile financial disasters involving accounting fraud and deceptive acts. These events have reduced the high integrity that was once associated with Accounting professions, and has made the public very suspicious of auditors.

In the article, Ethics and Auditing Culture: Rethinking the Foundation of Accounting and Auditing, David Satava and his co- authors believe that the root of all the problems and fraudulent actions in Accounting is the fact that the people involved are abusing and manipulating the rules of accounting practices. The fact that financial accounting originated and functioned strictly on a rule basis provided an opportunity for people to bend the rules and get away with illegal actions including the infamous scandals associated with Enron, Arthur Andersen, Martha Stewart, etc.

Many accountants rely heavily on rules, even when it is clearly not the right or moral course of action. Although, it is good to follow rules, people tend to abuse rules sometimes by purposely interpreting them in a way that benefits them personally and thus becomes illegal. Rules basically provided a road map for some accountants to get around something because there are always a number of “gray zones” that are not obviously illegal but also not okay. A former accountant at Enron admitted that rules created opportunities for them to use the literature of it to their advantage. we got to where we did because we exploited that weakness” (Satava 273). In the Enron Scandal, much of their actions were out in the open, but the people who were affected chose to ignore the signs, and rather focus on the benefits “The business press which could have looked more closely at Enron‘s financial statement, couldn’t be bothered; the media was utterly captivated by the company’s transformation from stodgy pipeline to new economy powerhouse. and of course there any number of Enron’s own employees who could see for themselves how the company was making its numbers.

And yet, they all chose not to make the logical leap, to see where it was inevitably headed. Instead, they all chose to believe” (Satava 273). The main problem with Enron and its associates was the fact that they took a rule, exploited and manipulated it into becoming a whole new rule that fit to their own benefit, and then they completely believed in this new rule. No one was willing to step outside the box, and see what they were really doing to the public and themselves because they have formulated strong rationales of why their techniques were valid, and they were going to stuck by these rationales no matter what.

They failed to look beyond the circumstances and examine the negative impacts that could surface from their actions, towards the general public and themselves. Despite the fact that Enron was completely exposed of its fraudulent acts, the staff and staff of this company continued to maintain their innocence, claiming that they never took any actions that violated the laws of the Financial Accounting Standards Board.

The back to back financial scandals over the past few years have brought out a strong lack of trust from public and constant surveillances on auditors, putting them under extreme pressure. In a serious attempt to regain some integrity of accountants and auditors, practitioners and scholars have raised the idea of making the practices more principle-based and less rule-based. Also, new standards aligning some specific rules and principles that should be followed have been created, and the “Sarbanes-Oxley act has mandated that auditing firms must be held ccountable to the new standards” (Satava 274). In order to create effective solutions to a problem, we must first determine the root of that problem. Similarly, the authors of this article believe that “the decision to act ethically in conducting audits is likely to be made internally within each firm and followed by a careful review of commonly held ethical perspectives that provide a valuable insight into why auditors and auditing firms are seduced by a rule-based interpretation of their audit responsibilities” (Satava 274).

According to the article, genuine ethical principles are not supposed to be transformable depending on circumstances such as culture, social and economic conditions; the duties of accountants should be based on ethical principles that remain stable despite varying situations, and a commitment to highly consider the public interest and stakeholders’ welfare in all their duties. The ten perspectives of business ethics, as presented in this article are as follows: 1. Self interest- the idea that if people pursue their own interest without negatively affecting other people, the society will be better. . Utilitarian belief- the idea that an action is considered just only if the consequences are more positive than negative. 3. Personal virtues- the idea that a person must have their own standards of rights and wrongs in dealing with their selves as well as other people. 4. Religious Injunctions- the golden rule- “treat others how you want to be treated” (with kindness, honesty, etc). 5. Government Requirements-the idea that there is a central authority with the power to implement general rules. 6. Universal rules- virtues rules are those that result in greater benefit for the society. . Individual rights- decisions are appropriate only if they protect and guarantee the natural rights of individuals. 8. Economic efficiency- the idea that people must acknowledge the importance and necessity of food, clothing, and shelter, and make economic decisions that will maximize these essentials. 9. Distributive justice- the idea that people must consider the minority and disadvantaged when making certain decisions and taking certain actions. 10. Contributing liberty- the idea that actions that conflict with liberty rights should never be taken.

These ten ethical perspectives provide an insight into the reasons and driving forces behind many business decisions, and also the influences that these perspectives have on accounting and auditing practices. The conflicting points of some of these perspectives, such as Universal Rules vs. Distributive justice, and the strong biases associated with some perspectives, like Self-Interest, indicates that the ethical foundation of auditing and financial reporting should definitely extend beyond specific rule-based models and move towards adopting principle-based models.

For instance, in the case of auditors and accountants at Enron and Arthur Anderson, the perception of self-interest and financial benefits to internal stakeholders allowed for rationalization and self-deception that permitted those responsible to reconcile misrepresenting the true financial status of the companies involved and overlook their financial and moral duties to the investing public” (Satava 276).

The authors of this article, along with several other Business scholars, have come up with six critical suggestions for implementing principled-based ethics, which they believe will discontinue the ethical problems that occur in the business world, today. Firstly, business ethics must be taught to students pursuing careers in the accounting field. A clear understanding of both rule-based and principle-based ethical perspectives will have a great and positive influence on the ability of accounting students to make adequate moral reasoning.

Secondly, CPAs should be required to continue taking business ethic courses as they advance to higher or different positions. This is so that they can retain the ability to make good moral decisions, and not fall into a pattern of immoral decisions. Thirdly, CPA firms should be evaluated frequently to make sure that they are operating ethically, and also “identify the impact of values, practices, and implicit assumptions on the behaviors of organization members” (Satava 279).

The fourth suggestions is an encouragement to the AICPA to provide financial support to accounting practitioners for academic research in regards to auditing practices, accounting firm culture, business ethics, etc. Fifthly, Professional associations have a duty to the public and the board of directors to disclose information about the ethical issues at hand and their connection to accounting and audit standards. The final suggestion for implementing principle-based ethics calls for an “increase in the funding of the enforcement division of the security and exchange commission with regard to the monitoring of corporate fraud” (Satava 280).

Right now, the enforcement division is “under-funded” making it hard to treat accounting fraud with justice, and prevent the likelihood of similar events. Increasing funding would help the SEC to treat fraudulent actions adequately, and thus reduce the rates of such actions in the business world. An important and valuable characteristic that accountants and auditors need to have is honesty. Without honesty, the public wouldn’t be able to trust accountants with their finances, and thus, accountants and auditors would have no jobs.

Additionally, the accountants and auditors who manage to get away with their fraudulent acts will continue to destroy the economy and our society in general. The authors of this article, along with business scholars, believe that there is still hope and a good chance of getting the profession of accounting out of this despicable situation. They strongly believe that if the business world implements the suggestions for changes, especially in regards to the rule-based and principle-based ethics, then we can attain a healthy, functional, and reliable accounting field in the business world.

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