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Week 12:

Accounting Ethics

LO 1

The Importance of Ethics


The nature of the work carried out by
accountants and auditors requires a
high level of ethics.
Shareholders, potential
shareholders, and other users of the
financial statements rely heavily on
the yearly financial statements of a
company as they can use this
information to make an informed
decision about investment.

LO 1

The Importance of Ethics


They rely on the opinion of the:
accountants who prepared the statements
auditors that verified them, to present a true
and fair view of the company.
Knowledge of ethics can help accountants
and auditors to overcome ethical
dilemmas
the right choice
although may not benefit the company,
will benefit the public.

Ethical Obligations of Accountants


Aristotles Virtues
Trustworthiness,
benevolence, altruism
Honesty, integrity
Impartiality, openmindedness
Reliability,
dependability,
faithfulness
Trustworthiness

Ethical Standards for CPAs


Integrity
Truthfulness, non-deception
Objectivity, independence
Loyalty (confidentiality)
Due care (competence and
prudence)

Accounting Community Citizenship


Honoring public trust
Acting with integrity in
performance of professional
services
Being independent of clients
Making decisions objectively
Exercising due care in the
performance of services

LO 1

Ethical Standards
Are issued by many accounting bodies
Contain clear specific guidelines as to
what accountants/auditors can or
cannot do.
E.g. Auditors cannot receive gifts from
clients (may be bribes)
E.g. Accountants have a duty to
ensure that the work is done carefully

LO 1

Accounting scandals
From the 1980s to the present there
have been multiple accounting
scandals that were widely reported
on by the media and resulted in
fraud charges, bankruptcy protection
requests, and the closure of
companies and accounting firms.

LO 1

Causes of accounting scandals


Creative accounting
A primary benefit of public accounting
statements is that they allow investors to
compare the financial health of competing
companies.
However, when firms indulge in creative
accounting they often distort the value of
the information that their financials provide.
Can be used to manage earnings and to
keep debt off the balance sheet.

LO 1

Causes of accounting scandals


Fraud
deceptive accounting practices, manipulation
to maintain the appearance of sustainability
E.g. recording future expected sales
E.g. understating expenses through such means
as capitalizing operating expenses
E.g. inflating assets' net worth by knowingly
failing to apply an appropriate depreciation
schedule
E.g. hiding liabilities off of the company's balance
sheet

LO 1

Causes of accounting scandals


The motivations of creative accounting &
fraud
Personal incentives
Bonus-related pay
Benefits from shares and share options
Job security
Personal satisfaction
Tax management

LO 1

Enron
Fraudulent accounting practices - Nugan
Hand Bank, Phar-Mor, WorldCom & AIG.
Enron, a multinational company
For several years had not shown a true or
fair view of their financial statements.
Auditor Arthur Andersen signed off on the
validity of the accounts despite the
inaccuracies in the financial statements.

LO 1

Enron
Enron, a multinational company
When the unethical activities were
reported, not only did Enron dissolve but
Arthur Andersen also went out of business.
Enron's shareholders lost $25billion as a
result of the company's bankruptcy.
Although only a fraction of Arthur
Anderson's employees were involved with
the scandal, the closure of the firm resulted
in the loss of 85,000 jobs.

LO 1

Responses to scandals
New reforms, new regulations, ethical education to improve the credibility of the accounting
profession.
New regulations include the Sarbanes-Oxley Act
of 2002 (US).
limits the level of work which can be carried out by accounting
firms.
puts a limit on the fee which a firm can receive from one client
as a % of their total fees.
This ensures that companies are not wholly reliant on one firm
for its income, in the hope that they do not need to act
unethically to keep a steady income.

LO 1

Responses to scandals
Sarbanes-Oxley Act of 2002 (US)
protects whistleblowers
requires senior management in public
companies to sign off on the accuracy of
its company's accounting records.

LO 1

Responses to scandals
In 2003, the International Federation of
Accountants (IFAC)
determined areas for improvement within
organizations
Developed recommendations for companies
to develop more effective ethics codes.
recommended that companies improve
training and support so accountants could
better handle ethical dilemmas.