Why Are Ethics in Accounting Important?

Accounting professionals hold critical positions in the businesses and organizations they support, and their actions can impact the lives of millions of people around the world. Read on for an overview of the moral issues and ethical standards for professional accountants.

In 2001, a series of bad business decisions and unethical accounting practices led energy giant Enron to bankruptcy, costing investors $74 billion. 5,600 Enron employees lost their jobs, along with billions of dollars in retirement funds.^{1, 2}

Enron's auditor, the accounting firm Arthur Andersen, was also decimated by the scandal. Andersen had been a "Big Five" firm with over 85,000 global employees before it was dismantled because it facilitated the unethical behavior Enron used to hide its financial losses.³

The financial chaos of the Great Recession later dwarfed the Enron debacle, but it was the biggest corporate bankruptcy up to that time. Enron focused public and regulatory attention on accounting ethics and professional conduct and triggered the creation of the Sarbanes-Oxley (SOX). Signed into law in 2002, Sarbanes-Oxley is a comprehensive set of financial and auditing regulations for public companies.

Both state and federal government agencies are involved in regulating the professional conduct of accountants, and accounting industry regulation have evolved as changes in the business environment have created new ethical conflicts. In addition to laws and licensing requirements, industry-organized governing bodies formulate and promote professional competence and ethics.

A Brief History of the Accounting Profession

Sometimes called "the language of business," accounting is an ancient activity. The accounting system that used marks to keep track of inventory five millennia ago contributed to the development of written language.⁴

In the 19th century, Queen Victoria created the profession of chartered accounting with a royal charter to the Scottish Institute of Accountants. British accountants came to the U.S. to monitor British investments, and many settled here. In 1887, they formed the first national association, the American Association of Public Accountants, which later became the American Institute of Certified Public Accountants (AICPA).⁴

The Great Depression Highlights Accounting Ethics

Unethical practices led to the stock market crash of 1929 and triggered a global financial meltdown that lasted more than a decade. Until then, there were no government standards for accounting ethics and practices. The U.S. Congress created the Securities and Exchange Commission in 1934 to help set official standards for financial disclosure, accounting and reporting.⁴

FASB Chartered in 1973 to Champion GAAP in Financial Statements

FASB stands for the Financial Accounting Standards Board. It is an independent organization empowered by the SEC and recognized by the AICPA and state licensing boards, among others. FASB sets and interprets standards for generally accepted accounting principles (GAAP) in the financial statements of public companies and non-profit organizations. The FASB is allied with similar U.S. governing bodies and is collaborating with the International Accounting Standards Board to improve international comparability and transparency in financial statements.⁵

Twenty-First-Century Regulatory Developments for the Accounting Profession

As noted, Congress enacted Sarbanes-Oxley (2002) to enforce higher standards of business ethics in response to Enron and other scandals. It amended and expanded several outdated laws, including the 1934 Securities and Exchange Act and the 1940 Investment Advisers Act. In addition to creating new accounting protocols, SOX created protection for corporate whistleblowers, established penalties for noncompliance and assigned responsibility for compliance to chief executive and financial officers.⁶

The Lehman Brothers implosion was the largest bankruptcy in U. S. history. It signaled the end of the low-cost debt party that led to the U.S. housing bubble and the start of the Great Recession of 2008. The worst financial crisis since the great depression drained $9.8 trillion from American pocketbooks and again highlighted the need for high standards of ethical behavior and professional judgment in the accounting profession. ⁷

One of the ways Congress responded to the crisis was with the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. At the time, the AICPA observed that the law would most impact CPAs working in the financial industry. However, AICPA noted sweeping new regulations for professional accountants working across fields and roles and found both challenges and opportunities for further professional services in the law's provisions. The law has since been partially rescinded, and its provisions are still in flux. ^{8, 9}

State and Industry Standards Require Teaching Students Accounting Ethics

In 1916, the predecessor of the AICPA published its first model licensing law to regulate the practice of public accountancy. In 1984, the National Association of State Boards of Accountancy (NASBA) began working with the AICPA to update the Uniform Accountancy Act (UAA). NASBA administers the CPA exam for all states and jurisdictions.^{10, 11}

NASBA and AICPA regularly refresh the UAA to reflect changes in accounting practice. In 2020, they updated the model to reflect requirements for teaching ethics that several states had adopted in the wake of the Enron, Worldcom and Tyco scandals. ¹²

Rule 5.1 of the UAA requires CPA applicants to have received an accounting ethics education that "provides students with a framework of ethical reasoning, professional values and attitudes for exercising professional skepticism and other behavior that is in the best interest of the public and profession."¹³

What is Ethics in Accounting?

Just as in any other human endeavor, ethics in accounting refers to a set of moral principles that guide a person's actions. In the case of a professional accountant, the ethical issues revolve around concerns for honesty and fairness in financial reporting, maintaining client confidentiality, and developing professional judgment to handle ethical dilemmas effectively.

Code of Ethics In Accounting

The applicable code of professional ethics for an accountant depends on where the client does business. For work in the United States, the AICPA code sets the standard for ethical codes in accounting and auditing, while individual companies may also have their own regulations.

The International Federation of Accountants code, formulated by the International Ethics Standards Board for Accountants (IESBA), is the international standard. It can help guide a U.S.-based accounting professional performing work for a multi-national client, although the country-specific guidance and regulations would take precedence.

The AICPA is a member of the International Federation of Accountants, and the accounting ethics codes articulated by AICPA and IESBA are similar, although there are substantive and formatting differences.¹⁴

Briefly, the IESBA framework uses a five-point conceptual framework of fundamental principles that encompasses these key areas of focus:

• Professional competence and due care
• Integrity
• Objectivity
• Confidentiality
• Professional behavior
• Independence¹⁵

The AICPA Code of Professional Conduct enumerates seven principles, which it then interprets in relation to all members of the organization, whether they are in public practice, in business, retired or unemployed. Those principles include:

Responsibilities - AICPA members are obliged to exercise sound moral and professional judgment and cooperate to maintain public confidence and uphold the profession's integrity.

The Public Interest - The accounting profession's public includes disparate groups such as clients, creditors, investors and governments. Because of this, accountants frequently have to exercise professional judgment to resolve ethical dilemmas posed by the conflicting interests of these groups.

Integrity - The code says, "Integrity is an element of character fundamental to professional recognition. It is the quality from which the public trust derives and the benchmark against which a member must ultimately test all decisions."

Objectivity and Independence - AICPA members, whether in public practice or in business, add value by maintaining their objectivity which relies on impartiality, intellectual honesty and freedom from conflicts of interest. Those in public practice must also maintain independence in fact and appearance.

Due Care - This principle relates to technical competence as well as the maintenance of high ethical standards. Members are expected to discharge professional duties with diligence and competence.

Scope and Nature of Services - AICPA members must consider the public interest, along with their own integrity, objectivity and independence, when determining the scope and nature of services they will provide clients. Members are expected to perform any services rendered with due care and diligence. ¹⁶

Build Your Career With A Solid Foundation in Accounting Ethics

The accounting curriculum at Yeshiva University's Sy Syms School of Business is deeply grounded in meaningful ethical values. In addition to specific coursework on accounting ethics, ethical principles thread throughout the accounting courses that make up the online MS in Accounting. Prepare for your CPA exam and a leadership position in the dynamic world of professional accounting with the Sy Syms School of Business.