We all know that ethics and a strong moral compass are essential for all walks of life, but why are ethics so important in accounting? In this article we take you through ethics in accounting, and how they impact both accounting businesses and your business as their client.
So why do accountants need to be ethical?
Your accountant is, essentially, an extended arm of your business, and how they operate, good or bad, can have an impact on both the legalities and the reputation of your business. As such, it’s important to ensure that any accountants that you intend to work with operate under an Ethics Code.
Read on to learn more about the importance of ethics in accounting.
Why is it So Important for Accountants to be Ethical?
It is important for accountants to be ethical, and to operate by the Code of Ethics, as one bad, unethical decision can have a huge impact on the accountant, the accounting company, and their clients.
1. Ethics Impact the Client’s and the Accounting Company’s Reputation
They say not to judge a book by its cover, but bad ethics come with a bad reputation for both the accounting company, and their clients. For accountants, this can result in loss of clients, or difficulty retaining clients and gaining new clients which, in turn, will have a negative impact on revenue.
For clients, the association with the bad ethics of their accountant (even if they have left), may have an impact on their reputation. Some may make the assumption that they intentionally sought out bad ethics or illegal practises.
2. Information Needs to Remain Confidential
Given the nature of the business, and in compliance with various laws, accounting information needs to be kept confidential. Clients trust accountants with sensitive information, therefore ethics need to be strongly adhered to in order to protect it’s confidentiality.
3. Ethics Encourage Integrity
Having a strong ethics code in accounting businesses encourages individual integrity, both inside and outside of work.
4. Ethics Ensures a Good Level of Knowledge
Ethically, accountants need to be knowledgeable about all aspects of accounting, particularly if they are a general accountant that may be required to work across numerous industries.
Or, if they don’t have an answer to a specific question or query, good ethics ensures that they are upfront about this, and will do what is required of them in a given situation, whether that is asking a colleague, or going away and doing research.
5. Ethics Helps and Encourages Accurate Reporting and Planning
Good ethics ensures that all accounting practices are accurate to the best knowledge of the accountant. It also ensures that planning is done based on accurate data, and plans are not made that are either unrealistic or, unsustainable, or even illegal.
What is the Code of Ethics in Accounting?
The International Code of Ethics for accountants is a set of ethical guidelines that are built upon four key principles and establishes a standard of behaviour that is expected of professional accountants. These four principles are:
- Professional competence
- Due care
The Code of Ethics also ensures that accountants take into account public interest and public trust. What’s more, the Code of Ethics also outlines several categories that pose a threat to the four principles above;
- Self- review
- Intimidation / threats
What are the Consequences of Unethical Practices in Accounting?
Consequences of unethical accounting practices vary depending on the specific circumstances surrounding the case. However unethical accounting practices can result in prison sentences, fines, withdrawal of accounting licences, and other legal implications. Punishments will largely depend on the severity of the action, and it’s impact.
Examples of Unethical Accounting
So, now you know about ethical accounting, and why it’s important, it might be useful to consider some examples of what are considered to be unethical accounting practices.
1. Criminal Accounting Practices
When an accountant feels comfortable acting unethically, but not yet illegally, it can be easy to slip into criminal territory. This may also happen if an accountant has too much control over a company’s accounts, and little oversight.
2. Personal Gain & Conflict of Interest
It can be difficult to recognise issues regarding conflict of interest and personal gain, but it can have a huge impact on day-to-day practices. If an accountant is motivated by unethical means in one way or another, they are likely to begin acting in ways that benefit that outcome, rather than for the good of the company or client.
3. Manipulating Figures
If things aren’t going well, it can be tempting to manipulate the figures when calculating the accounts. However, this is not only unethical but illegal. Any accountant pressured into manipulating figures is duty-bound to report such a situation. Failing to do this risks a criminal liability case.
4. Omitting Information
Similarly, omitting information is equally unethical as you may be omitting crucial information that, for example, an investor needs in order to make sound financial decisions. Likewise, choosing to omit information can have a negative impact on a company when it comes to running the company effectively, and when planning for the future.
5. Confidentiality Issues
Any breaches of confidentiality are unethical at best, but can also be illegal, depending on how the information is used. For example, using the information in company accounts to inform stock trading (insider trading) is illegal and will be prosecuted as such.
However, issues of negligence, whilst not necessarily illegal, breach the trust placed in accountants, and the International Code of Ethics (professional competence and due care).
About ARB Accountants
ARB Accountants provide a wide range of accounting and bookkeeping services in Southend, Essex. Both Xero and Quickbooks certified, ARB Accountants is committed to helping your business grow, providing you with your own dedicated accountant that will help you to navigate your business’ financial landscape, whatever your needs.