The Importance of Ethics in Accounting and Financial Reporting

High-profile scandals such as the Enron and WorldCom cases shone a spotlight on the importance of ethics in business. Data manipulation, insider trading, misappropriation of funds, financial bribery and competing interests of financial professionals tested the public’s faith in the industry as a whole.^1,2 Following devastating losses by investors, regulatory changes were put in place to address and prevent unethical practices in the hope of preventing such scandals from occurring again.

These and other cases highlight why fair and honest behavior is the cornerstone of financial data integrity, boosting investor confidence, ensuring transparent business dealings, protecting against fraud and creating a fair market.

This post explores the ethical standards governing financial professionals, the role that ethics plays in financial reporting and steps to ensure that your business is following ethical practices.

What Is Ethics in Accounting?

Professional organizations such as the International Ethics Standards Board for Accountants (IESBA) and the American Institute of Certified Public Accountants (AICPA) have established accounting ethical standards for CPAs. Honesty, transparency and accountability are the core pillars of accounting ethics. Along with guiding professional behavior, these ethical standards establish public trust and maintain the credibility of financial institutions.³

Honesty

Finance professionals are duty-bound to refrain from purposefully deceiving clients by manipulating data to inflate revenue or hide debt. Professionals in the field are ethically required to provide unbiased financial advice that is not only truthful but also transparent in nature.

Transparency

Financial advice is to be clear, accurate and complete to assist clients in making informed decisions. Where a conflict of interest exists, the professional is required to disclose any potential for bias or personal gain.

Accountability

Professionals must answer to clients and stakeholders by providing a detailed accounting of transactions that have taken place. Ethical standards dictate that financial professionals are accountable for the financial decisions they make and should do everything in their power to discourage and prevent fraudulent practices.

Why Ethics Matter in Financial Reporting

Why are ethics important in accounting? There are several reasons that ethics matter in corporate governance and financial reporting:

• Investor confidence: They ensure that financial information is accurate and reliable so that investors and stakeholders feel confident in making financial decisions 
• Public credibility: Ethical practices create a foundation upon which the public can build its trust and help firms establish reputations of credibility and reliability in the eyes of the public
• Fraud prevention: These guiding principles prevent instances of fraud, manipulation and misrepresentation and seek to sanction bad actors

Common Ethical Challenges in Accounting

Even the most honest of financial professionals face challenges in upholding ethical principles in accounting. Caught between shareholders eager to maximize investments, corporations jostling to keep investors happy, and their responsibility to act in the interest of the public, CPAs and financial advisers frequently navigate these ethical dilemmas:

Conflicts of Interest

When an accountant’s personal, financial and professional interests have the potential to interfere with their professional judgment and ability to be objective, there is a conflict of interest. Examples include a CPA with personal investments in a client’s business or a close personal relationship with an investor. Such situations have the potential to lead to biased decision-making and to compromise the integrity and accuracy of financial reporting.

As a result, accountants have an ethical obligation to disclose any conflicts of interest that may exist.

Pressure to Alter Financial Data

Altering financial data, such as inflating earnings or hiding expenses, is an ethical violation that can range from number tweaking to outright fraud. Accountants are frequently under pressure to manipulate financial statements to make a company’s performance appear more successful than it is. This pressure comes from a desire to meet analysts’ financial forecasts, obtain monetary bonuses or maintain investor confidence in the company.

Insider Information and Confidentiality Issues

Accountants often perform a balancing act between maintaining client trust and meeting their legal and professional obligations. It’s both unethical and illegal to use financial information for personal gain, a practice known as insider trading. Some in the industry have even been in situations in which they are forced to report illegal client behavior to the authorities or risk their own professional reputation and license.

Consequences of Unethical Practices

Ethics violations lead to grave disciplinary actions for the individuals involved, including public rebuke, revocation of licenses and expulsion from professional organizations. At the most extreme, CPAs may face criminal charges and be ordered to pay restitution and serve time in prison.

Unethical behavior also damages a company’s reputation and undermines investor confidence in financial systems.

Promoting Ethical Behavior in the Profession

Individuals and financial firms can take steps to reduce the risk of unethical behavior and promote integrity within the profession:

• Require corporate ethics training for all employees working with sensitive financial data and put internal control measures in place to ensure no one can cover up unethical behavior
• Promote ethical practices by building a culture of honesty, transparency and accountability. Leadership should refrain from pressuring CPAs to alter data, even when the data is not fiscally advantageous to the organization
• Put protections in place for whistleblowers and make it safe for those within an organization to report unethical behavior without fear of retribution. Encourage professionals to hold one another accountable for ethical practices

How Ethical Accounting Protects Businesses and the Public

Ethics and corporate governance in accounting management protect the public from fraud and create fair, stable financial systems. However, ethics also benefit businesses and financial firms, leading to sustainable success. Establishing a culture of trust and transparency promotes a positive reputation and attracts future investors. It protects finance professionals and prevents future financial scandals as well.

Securing your future in the accounting industry requires a robust understanding of ethics and other professional standards. An Online Master’s in Accounting from William & Mary’s Raymond A. Mason School of Business prepares you to uphold ethical principles that exemplify honesty, transparency and accountability over the course of your career. Accelerate your professional journey and open doors to leadership roles in your chosen industry while networking with like-minded colleagues.

Reach out to an admissions outreach advisor to learn more about admissions requirements and begin your path toward a fulfilling career in accounting.