Gray Areas in Accounting
Every profession is bound by written and unwritten rules and policies; some of them are set by organizations while others are an integral part of the occupation you choose. For example, doctors have to swear by the Hippocratic Oath, lawyers cannot divulge any privileged attorney-client conversations, and priests cannot reveal what was said to them in the confessional. The same kind of ethical code exists in the profession of accountancy because it is a means of public service. As Robert H. Montgomery put it, “Accountants and the accountancy profession exist as a means of public service; the distinction which separates a profession from a mere means of livelihood is that the profession is accountable to standards of the public interest, and beyond the compensation paid by clients.”
However, accountants are plagued by deep ethical dilemmas – there may be times when their employers ask them to twist and tweak the financial position of the company because they’ve had a bad year. The usual spiel given is that they’re definitely going to rake in the profits in the months that follow and that the deficits that have been covered up this year will more than be taken care of in the years to come. So the accountant is left wondering if he/she should be loyal to their professional ethics or show loyalty to the company that has hired them.
To overcome this type of problems, ethics is taught as a subject when you choose to study accountancy, because you are responsible not just to your employer, but also to the general public who believe in your reports and statements and take important decisions based on your word. An important question here if course is how effective are ethics classes, and even if they are successful how long would their influence last (a week? a month? a year? 2 years?). It is hard to believe that taking one or two classes on ethnics while studying accountancy is going to have a long term effect, and most likely higher standards and more strict definitions of continuing are needed (and maybe also higher frequency of education).
In other cases accountants are torn between reporting misbehaviors that are going on and between minding their own business – should they open up a can of worms and be at the center of a controversy or just take heart in the fact that they were true to the ethics of their profession? This type of cases present the “action inaction bias” where in general people view their own actions as much more important than inactions – which means that accountants are more likely to care about their own actions than about reporting the actions of others. Yet, accountants must remember that they are accountable for not just their actions, but also their non-actions, if either tend to affect the public adversely.
Overall the study of accountancy, and understanding its challenges is not only important in its own right, but it also provide an important case from which to view problems of conflicts of interest
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This guest post is contributed by Omar Adams, he writes on the topic of online accounting degrees . He welcomes your comments at his email id: omaradams47@gmail.com.
The Honest Truth About Dishonesty: How We Lie to Everyone - Especially Ourselves
A professional is one who is highly skilled in a particular field, like accounts, and enjoys certain level of autonomy in the discharge of his professional duties. This automatically enjoins upon him to maintain confidentiality, moralitiy and disinterested impartiality in his profession. In essence, he works, irrespective of his monetary gains, in the larger interests of the society, always and beyond the call of his duties, at times.
Ethics courses are not taught just during school; they are part of Continuing Professional Education requirements to be a CPA and CIA. Accountants aren’t robots. I know a CPA who was severely punished for a lapse in ethics, and the situation showed me that everyone is vulnerable to the elements of the fraud triangle, no matter what profession they are.
I studied accountancy nearly 30 years ago. The head of our program instilled the ethics he believed we should follow. He made it very clear we were to follow the Theory of Conservatism and informed us working to figure out “what we could get away with” as accountants had NO place in the accounting profession (I made the mistake of asking this question).
On the other hand, ethics courses are worthless. I’ve had them and they just teach ethics as an area of philosophy. If anything, learning there are different schools of thought in the field of ethics made me less ethical when I realized moral philosophers could not even agree on the definition of ethical behavior.
Each professional field needs to teach ethics (not as an area of philosophy) and explain the potential pitfalls; why adhering to professional standards is more important that any one job and examples of how people can face ethical dilemmas.
While it is very true that a code of ethics must be instilled, the child is father to the man and it is difficult, if not impossible, to reshape, rehabilitate, or instill a conscience later in life.
The many factors that do influence (or are lacking) our lives, morally and ethically, such as religion, parents, teachers, friends may overcome the best teachings of ethics taught in accounting class. Especially if it is broad and non specific.
Avarice and greed are so rampant in the financial field that even whilst helping to bring down the economy they were ‘doing God’s work’ as they were cooking books, shredding and hiding information. Does surrendering a licence and paying fines really compensate for such misdeeds?
Do a Google for accountants jailed and see that Australia and the United Kingdom fill the first 2 pages. Does anyone believe that those 2 countries have a greater amount of accountant fraud, tax fraud and embezzlement then North America?
The Capitalist’s ‘greed is good’ mantra means many who manipulate money are doing a good job, ethics are on a whole different American scale and the credo is not that they are to do the public no harm… but to not be caught.
Though most of us are not accountants, a dilemma we all face. Act (because it’s the right thing to do) and most assuredly suffer some kind of negative consequences or not act (knowing that this is the wrong thing to do) and maybe avoid negative consequences.
In the end I have to say honesty is the best policy.
I would think that the fact that accountants are paid by the customer whose books are being overseen would be one of the greatest problems. We saw this with Enron, which brought down one of the biggest accounting firms when the fancy accounting tricks came to light. It is not unlike the conflict of interest that involved the three big bond rating agencies (S&P, Moody’s and Fitch) who gave AAA ratings to the toxic collateralized debt obligations that eventually triggered the current Great Recession. There’s some talk about fixing the latter problem, but I haven’t heard that anyone is talking about the former.
I think the two problems are different in important ways. Accountants work with historical data, while ratings agencies give their opinion on what may happen in the future. This is a key reason that we can expect two accountants to come up with the same figures, but we would not necessarily assume malfeasance if two investment analysts arrived at wildly different conclusions. The problem they face is that predicting the future is notoriously tricky.
Another important difference is that Accountants produce exact objective values, such as dollar amounts. Investment ratings are a completely different beast. What the hell does a “AAA” rating even mean? I’m just a layperson, but that’s as helpful as telling me that an investment is “really really really low risk”; how is that different from an investment that’s just “really really low risk”? If I consider how much risk I’m willing to tolerate, how do I translate that feeling into a rating I’m comfortable with?
Another problem is that a rating agency arrive at a AAA rating in a completely ethical manner, and the investment collapses the next day. Ratings do not tell you what WILL happen in the future. It would be completely foolish for a rating agency to claim that something will happen with complete certainty. Ratings just tell you what outcome seems likely. In fact, they can give AAA ratings to every bad investment, and we would not be able to conclude that there was an ethics problem. It’s quite possible that a rating agency is not smart enough or don’t have enough data to make good predictions about the future.
In my 45 years in business, I’ve seen just as many unethical accountants as lawyers, marketing/sales people, doctors, scientists, and every other profession – right down to plumbers and electricians – and a helluva lot of preachers and politicians. One is not taught “ethics” in a semester-long course, it’s a way of life. Right now it seems to be optional in all professions.
I think it is a paradox all accountants face, and most lose out on ethics in real world. See the financial crises, it is hard to beleive that risk managers did not figure out something was going wrong. But they chose to keep shut to save their jobs, as business operations people would over-rule them. So the whole economy has gone down.
Bad choices resulting from decisions made considering short term self interest instead of long term ublic interest. Predictably irrational
Years of education ( as opposed to two short courses on ethics) didn’t stop the abuse of children by Catholic Priests.So don’t ever think it will be 100% effective.
However what we can’t see are the accountants who were tempted but resisted as a result of their education. How would find out how many of these there are and should these invisible people be the real measure of success?
Ethics courses focus on smug hypothetical scenarios and ignore real world pressures to cave in to corruption. Lecturers also unfortunately tend to demonstrate their anti business bias and this reduces the effectiveness of their message (especially in this subject) to most students in business degrees.
Two real world issues:
(1) Most assignments require you to sign a confidentiality agreement involving serous consequences for whistle-blowers.
(2) I witnessed a cover-up involving multi $bn issues that was hidden by two top international accounting firms and a royal commission. Exposing this cover-up would have probably failed or resulted in only short term political outcomes at the expense of almost certain destruction of my career. Therefore, acting ethically would be irrational
We need accountants with integrity to stand-up for their financial assessments. Without it, capitalism is gamed, inefficient, and not trusted in this interconnected world. As we go deeper into the 21st Century, more of a organization’s value is becoming intangible and we need to implement more intelligent measurements and standards. Will the accountants step up and lead this transformation to make the intangible more tangible?
How about ethics instruction that isn’t called “ethics” instruction? If we say, “in this course we’re going to talk about ethics,” then it’s obvious what we’re looking for.
Rather we might try to build ethical instruction into everything we do, and explicate why ethical issues in accounting often are intertwined with technical issues. (What is the most ethical value of the allowance for bad debts, when the number is by definition an estimate of future events?) Then we might truly teach an ethical accounting, not ethics as an optional add-on to accounting.
Allyourcode’s assumptions about accounting are incorrect. Not all of accounting deals with historical facts — quite a bit of it is estimating future events. (Warranty reserves, depreciable lives and salvage values of assets, collectibility of accounts receivable, future expenses for post-retirement benefits, contingent losses, etc. on and on.)
And putting a dollar amount on something doesn’t mean it’s an objective thing being measured — it’s putting a veneer of objectivity on something that’s often quite subjective. There might be a range of values (we may lose anywhere from $0 to $10 billion as a result of lawsuits against us) but we pick a most likely amount ($200 million) and effectively discard the range. See the turmoil caused in 2007-8 when “fair value accounting” (which is based largely on hypothetical transactions into which a company’s management has no intention of entering) caused massive regulatory capital crises.
Accountants do a great job of making murky, unpredictable and subjective things seem neat and tidy.
In the mid-90s, I had the opportunity to read over the transcripts of focus group discussions by managing partners and by the junior workers at KPMG. The workers agreed that they were reluctant to report real problems to the company being audited because the partners would deliberately erase them because they wanted the companies future business.
Yes, being an accountant or even other professions, you must have integrity and credibility.
You actually make it seem so easy with your presentation but I find this matter to be actually something that I think I would never understand. It seems too complicated and extremely broad for me. I’m looking forward for your next post, I will try to get the hang of it!|
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