accounting essay

accounting essay

The Importance of Ethical Accounting Practices

1. Introduction

Fundamental changes are taking place in society’s attitudes and expectations, some of which are borne out in a recent study of community attitudes towards business’ behaviours that reports a stark contrast between the attitudes our business leaders hold and those of the rest of the community that feels business should be accountable to numerous stakeholders where business hold the views that they should be focusing on shareholders’ wealth. The results of similar research into accountants’ beliefs regarding business leadership and the competing interests faced by that profession are not encouraging and the National Institute of Accountants recently published some 10 questions that would tend to indicate that their members ignore studies predicting a fall in ethical standards in accounting. It could be argued that accountants have the means, the motive and the opportunity to exploit that trust by clear guidance to company directors and other stakeholders by getting their messages across to ministers in the preparatory stages of business law drafts and in submissions to the regulatory bodies around Australia who engage with legislation, standards, guidance notes and even staff explanatory letters.

This paper, introduced with an account of the increasing awareness of the importance of ethical behaviour by all business people, demonstrates that accounting has led the way in the field but has too often been concerned with the actions of others. The actions of accountants and auditors have been part of the ethical problem and are becoming more so with changing values that are in evidence. The paper details a company that is facing the problems occasioned by auditors’ failure to be alert to changes in risk. Some aspects of the ethical performance of buying organizations are also discussed as are some of the trade-offs between legislative and self-regulatory responses.

2. Benefits of Ethical Accounting Practices

4. Stock issues are also costs associated with manipulating earnings and accounting reports. Specifically, the capital market reacts unfavorably to the issuance of equity when adverse information is shadowed in the latest accounting reports. In contrast, capital markets react positively when firms issue stock accompanied by high earnings and other favorable accounting-related information. Favorable news is also coincident with smaller declines in the value of the firm’s securities. Firms, as well, greatly treasure the availability of capital and come to be what finance professionals call favorably news firms. Conversely, unfavorably news firms bear a high cost of capital due to a distinct spate of negative signals. The existence of asymmetric information between market participants, managers, and analysts results in diving stock prices. Lower stock prices flow from service due to the fact that they are indicative of lower future expected profits due to superior information in the management.

3. If managers and investors focus exclusively on stock prices, they should care about whether fraudulent accounting practices are detected promptly. In this regard, penalties for executives, managers, and firms that engage in accounting scandals should contribute to a higher detection rate of fraud. In addition, a higher probability of fraud detection should act as a deterrent to fraud. Loss avoidance and law-abiding consumers in the marketplace.

2. Accounting fraud has the economic consequence of increasing the differential of firm risk from what is accepted as normal. This is because fraud involves deliberate misinformation. That is, what a fraud is not a random event and an intentional action to deceive. When unique biased information is misleadingly introduced into the marketplace, rational behavior of price-sensitive assets becomes difficult to assess. When the accuracy of available information is suspect, trading becomes inefficient. The consequence is that the value of the firm’s assets and firm investment opportunities are masked by high accounting risk. High accounting risk depresses the firm’s stock price since it is an indication of an uncertain future with the potential of future negative shocks to income. Lower stock prices result in a higher cost of equity for investors. Higher cost of equity, coupled with a reduction in cash flows and increased risk, may expose investors to increased risk of insolvency or bankruptcy.

1. Higher legal and accounting fees can be seen as a penalty for abnormal or unethical practices. When fines and penalties for unethical or abnormal practices become great enough, managers will shy away from taking accounting risks. Also, obeying the law is less costly than incurring civil, criminal, and imprisonment penalties for breaking the law.

In an article titled “The Impact of the Sarbanes-Oxley Act”, Jeffrey Woolridge argues that there are a number of benefits of ethical practices in accounting. Below is a list of some of these potential benefits:

3. Consequences of Unethical Accounting Practices

A management accountant must remember the concept of social responsibility and service at all times. The Institute of Management Accountants has identified ethical behavior as one of the critically important learning skills in their Management Accounting Competency Framework. Management accountants are responsible for either implementing ethical accounting practices or preparing records for others to use in the decision-making process. Management accountants need to possess professional accounting skills, people skills, the ability to comprehend an organization’s businesses and their associated relationships, problem-solving skills, the ability to improve accounting activities and procedures, and the ability to create and communicate the accounting information to other members of the organization. Being honest should be a characteristic of an individual, group, or organization practicing ethical accounting procedures. Ethical principles should be incorporated into making managerial choices. Many people overlook honesty and fairness in their accounting environment.

Unethical accounting practices have led to the downfall of many businesses, many of whom collapse due to accounting fraud. Calls for greater corporate social responsibility and the better disclosure of corporate activities are the result of financial scandals involving numerous corporate failures and the losses associated with them. Liability and reputation concerns appear to create strong incentives for corporations and their managers to preserve their credibility by voluntarily engaging in more transparent and socially responsible disclosure practices. Company culture and management integrity are considered particularly important in safeguarding high accounting standards. To reinforce the qualities that underpin professionalism, financial institutions and multinational corporations have applied penalties for violations of honesty and fairness principles and have assessed management’s and accountants’ performance using responsible behaviors. This is particularly true in the field of management accounting.

4. Implementing Ethical Accounting Standards

Overall, the high standards of ethical accounting are necessary because it is an essential foundation for capital and financial markets. When stakeholders are depending on credible financial information, high earnings management abuses the quality of the financial reports. Therefore, the investment decisions are negatively affected. High earnings quality levels constitute that the financial accounting reports have a high level of credibility and reliability because the income smoothing and general types of earnings are very valuable. The occurrence of early warning signals about the company’s survival can help with decision making in advance, so that managers or auditors have time to intervene in order to avoid financial distress. A lack of high-quality financial reports will have negative impacts on the manager or the auditor because the company may collapse due to the falsified/adulterated financial reports, which can lead to liability issues on the financial auditor or the company’s management. This paper can make some practical contributions; it did include an array of qualitative research of the collected managerial opinions, by addressing only four focused items in depth having different emerging performance and strategic management issues. The findings should be comprehensively investigated.

The importance for a company of ethical accounting practices cannot be underestimated. Having accurate and ethical accounting practices is a very important part of an organization. Businesses require accurate accounting reports to ensure they are able to achieve regulatory requirements and to identify which areas of the organization are doing well and which areas require focusing on. Therefore, it can be said that accurate and honest accounting reports are critically important to business. However, achieving ethical accounting can be difficult to implement. In most cases, mammoth fines are levied against businesses whose ethical reporting has been found to lack transparency. The solution to this problem is for businesses to be more vigilant and to take a proactive approach by communicating their ethical policy issues. In addition, the public and the media must continue to demand more thorough ethical accountability. The negative impact that financial failures have not only on the individual stakeholders but also close counterparties like investors, suppliers, customers, and the overall economy can be very detrimental, and therefore the economic implications are very critical.

5. Conclusion

In Turkey, more than 116,000 accountants perform important tasks in financial and commercial organizations, public institutions, and the economy. Since individuals in different professions and organizations taking part in the business environment are expected to accomplish ethical behaviors to perform an accounting job, the number and importance of accountants in Turkey is a useful indication of the need to increase the importance of the way to apply accounting ethics. The conceptual framework of professional accounting organizations should be taken into account. To safeguard accountants reflecting a professional understanding of accounting training, having responsibility and capable of adapting to the changes in the globalizing world economy, accountants should attend many ethics courses. Conscientious accountants should also work towards the restrictions imposed on the company, found just operations, and the fulfillment of directors’ accountability. Prompt delivery of economic mega-tasks should be followed and monitored.

The aim of this chapter is to examine the importance of accounting ethics and the relationship between ethics and accounting education. For this purpose, the related literature and the data obtained from the undergraduate students who are educated at different departments of faculties belonging to two universities in Turkey are analyzed. Results show that accountants should attend more ethics courses to gain professional ethical behavior. The increasing demand of society requires at least minimum accounting understandings of public organizations and ethical behavior. Therefore, accountants should take care of respecting the sustainable political culture and utilize the ethical accounting standards. Ethical principles should be internalized by the accountants. Such services can be used to prevent internal pressures, while the conscious behavior towards ethic codes and fundamental qualities of accountants on behalf of society and professional organizations is the most important process.

Ethical accounting practices refer to accounting practices that protect the integrity of financial figures published by a company. These ethical accounting practices enable stakeholders to assess a company in a better way. In today’s business world, making reliable decisions fully depends on ethical issues. So, the importance of ethical accounting practices for financial markets and to maintain the financial situation of a firm increases constantly. This paper examines the importance of accounting ethics, the relationship of ethics and accounting education, and ethical accounting practices.