Term Paper On
The Importance Of Ethical issue In
Financial Accounting
1
Course Name: Advance Financial Accounting
Course code no: ACT-601
Submitted To:
Md.Hossen Miazee
Assistant Professor of Accounting
University Of Information Technology & Sciences
Submitted By:
Md. Delwar Hossain - Id.1944502025
Program: MBA
Department of Business Studies
Date of Submission: June 2, 2020
2
3
Letter of Transmittal
02-06-2020
To
Md.Hossen Miazee
Assistant Professor of Accounting,
Department of Business Studies
University Of Information Technology & Science
Subject: Prayer for submitting term paper .
Dear Mam,
With due respect and humble submission, I beg to state that for your
sympathetic consideration that we are the students of UITS Business Department. We
would like to submit our term paper on “The Importance of ethical issue in financial
accounting”. With our limited scope and knowledge, we have tried our best to gain
practical experience and reflect it there.
So, therefore we pray and hope that you would be kind enough to receive this
term paper.
Sincerely yours
Md. Delwar Hossain - Id.1944502025
4
Table Of Contents
1
Introduction:..........................................................................................................................................6
Meaning and Nature of Ethics..............................................................................................................6
Meaning of Ethics.............................................................................................................................6
The Nature of Ethics.........................................................................................................................7
Fundamental Principles of Accounting Ethics..................................................................................8
What is Financial Accounting?.............................................................................................................9
Financial Statements.........................................................................................................................9
Why is financial accounting important?.........................................................................................10
Conclusion:.........................................................................................................................................12
Reference:.........................................................................................................................................13
5
Acknowledgement
This report is the result of many people’s contributions and help. At this moment
we want to thank those people who extended their help providing suggestions and
advices.
Who helped us giving tips, suggestions and valuable advices regarding the report;
he is also credited for her excellent teaching in this course.
We also want to make thanks to those writers whose books helped us to make this
valuable report. And also thanks Inter Science Group to provide important
information.
Our friends who are in the following helped us a lot.
6
Introduction:
For accounting and finance professionals it is extremely important to be ethical in their practices
due to the very nature of their profession. The nature of accountants ‘work puts them in a special
position of trust in relation to their clients, employers and general public, who rely on their
professional judgment and guidance in making decisions. These decisions in turn affect the resource
allocation process of an economy. The accountants are relied upon because of their professional
statues and ethical standards. Thus, the professional and ethical conduct is a key to maintaining
confidence of clients and the public is professional and ethical conduct. Ensuring highest ethical
standards is important to a public accountant‘(one who renders professional services such as
assurance and taxation service to clients for a fee) as well as to an accountant in business‘(one who
is employed in a private or public sector organization for a salary). Both public accountants‘and
accountants in business‘are in a fiduciary relationship, former with the client and latter with the
employer. In such a relationship, they have the responsibility to ensure that their duties are
performed in conformity with the ethical values of honesty, integrity, objectivity, due care,
confidentiality, and the commitment to the public interest before one‘s own. Thus, accountants, as
professionals, are expected to maintain a level of ethical conduct that goes beyond society‘s laws.
This has made the professional accounting bodies to develop a code of professional conduct,
which sets rules or standards that define right from wrong to ensure that members‘behavior
complies with perceived public expectations of ethical standards. These rules have been developed
based on the principles of professional conduct‘, which form the basis for professional ethics.
However, in recent times accountants‘involved with large corporate scandals shows that they
have not complied with the expected ethical standards. It is argued that accountants‘focus too much
on technical issues and lack ethical sensitivity to recognize ethical dilemmas involved with their work,
which would ultimately lead to making wrong decisions. Thus, accountants should be trained to be
sensitive to identify the moral dimension of seemingly technical issues.
Accounting profession relies on the trust placed by the public on Accountants which means
accountants must exercise high level performance to win and maintain the trust and confidence of
the general public. This can be achieved only through ethical practices in the discharge of
professional duties. Consequently, professional accounting bodies at local (ICAB & ICMAB) and
international (ACCA, CPA, IMA etc) levels have developed ethical codes to guide their members
in discharging professional responsibilities. Table 1 below shows the fundamental principles of
accounting ethics.
Meaning and Nature of Ethics
Meaning of Ethics
7
The word ethics is said to have been derived from the Latin word ‘Ethicus’ or in Greek ‘Ethicos’.
The origin of these words is from ‘ethos’ meaning character. Ethics may be defined as a set of
moral principles, values, norms or rules of conducts of behavior and practice of a group,
community, society, organization or a profession. Ethics can also be seen as acceptable standards
of behavior or moral principles that guide the society, an organization or a profession. Ethics is
therefore, about the principles of right actions for the members of a profession. Virtually, every
profession has an ethical code of ethics, Including consulting, researching, and teaching, accounting
and writing among others. Ethics, therefore, deals with a set of moral standard for judging the
rightness or wrongness of intentions, actions and decisions of an individual or group and its
attendant consequences. Philosophers, religious organizations and other groups have defined in
various ways ideal sets of moral principles or values. Examples of prescribed sets of moral
principles or values at the implementation level include rules and regulations, religious doctrine,
codes of business ethics for professional and industry groups, and codes of conduct within individual
organizations. Ethics is therefore necessary as well as important to Accountants and the
Accounting profession. This is because in ethics lie morality, honesty and objectivity, which are
all necessary to ensure that accountants fully discharge their responsibilities to the society and
users of accounting information.
Ethics is about the good and about the right. Good as to the values and virtues we should
cultivate; and right, as to what our moral duties should be. Ethics are thus the moral principles
that an individual uses in governing his/her behaviour. Ethics is concerned with norms, rules,
principles or conducts of behavior and practice carried out by a group of people, community or
profession.
Accountants are increasingly facing complex challenges in both business and professional
environments as a result of the financial scandals of the last decade which led to the collapse of a
number of companies in different parts of the World resulting in loss of shareholders’ and
creditor’s funds. In order to counteract this, as well as ensure good ethical behavior in the
management of business organizations a number of countries passed Codes of Best Practices for
companies. The Codes emphasize the importance of internal control by businesses which include
but not limited to:
i. ensuring compliance with laws and regulations;
i. safeguarding company’s assets;
ii. avoiding falsification of information in the financial records; and
iii. Accountability and responsibility for functions assigned.
These measures are intended to deter fraud, falsification of financial records or any other activities
that may lead to misleading financial reports. In addition, each religion has its own moral rules
for conduct of individuals and groups. These are basically forbidding stealing, lying, deceiving,
8
killing, harming others and encouraging honesty, helping one another, respecting elders and keeping
promise, among others.
The Nature of Ethics
A critical look at ethics reveals the following peculiarities:
a. Variability in what is considered ethical: The determination of what is right or wrong varies
from individual to individual, society to society and profession to profession at any point in time.
b. Things ethical may be rule based or principle based: Much of what is considered unethical in a
particular society is not specifically prohibited, but it should be noted that, laws define what a
society’s citizens consider to be the more extreme forms of unethical behavior. Ethical behaviors that
are backed by laws are rule based, while on the other hand those that are not backed by laws
are principle based.
c. Ethical velocity: This is the rate at which individual consider the ethical implication of his or her
action. Individuals differ as to the rate at which they consider ethical implications of their
actions.
d. Ethical issues in most cases will arise from human relationship: Ethical issues usually arise in
relationships among people. Therefore, any relationship between two or more individuals carries
with it sets of expectations by each of the individuals involved. Certainly, the relationship between
an Accountant and a client/employer offers a number of interesting challenges.
Fundamental Principles of Accounting Ethics
S/No Ethical Component
1 Integrity
2 Objectivity
3 Independence
4 Professional competence and due care
5 Professional behavior
6 Confidentiality
Integrity: A professional accountant should be straight forward and honest in all professional and
business relationship. Integrity demands that Accountants must develop an unquestionable
ability to discharge their professional responsibilities. Therefore, the accountants must refuse any gift,
favor, or hospitality to avoid being influenced in their actions.
Objectivity: An accountant should not allow bias, conflicting interest or undue influence of
others to override his/her professional or business judgment. Accounting is basically about
information dissemination to enable users of the information make informed judgments and
decisions about an entity. Accountants must disclose information that is fair, adequate and
objective.
9
Independence: Independence is the ability to take judgments and decisions without interference.
The Accountant should not only be independent but he must be seen to be independent. The
public is the better judge of independence. Hence, independence in the actual context is
determined by the users of the financial statements. Users place reliance on the statements once
they view the professionals as independent.
Professional Competence and Due Care: A professional accountant has a continuing duty to
maintain professional knowledge and skill at the level required to ensure that a client or
employer receives competent professional service based on current developments in practice,
legislation and techniques. Accountants should act diligently and in accordance with applicable
technical and professional standards when providing professional services. They must maintain an
appropriate level of professional competence by continuous development of their knowledge and
skills.
Professional Behavior: A professional accountant should comply with relevant laws and regulations
and should avoid any action that discredits the profession.
Confidentiality: This means keeping information secret. Professionals are ethically expected to keep
all information pertaining to the client secret, except that which is necessary for disclosure to the
public and not to utilize the same for personal benefits or the benefits of any third party. A
professional accountant should respect the confidentiality of information acquired as a result of
professional and business relationships and should not disclose any such information to third parties
without proper and specific authority unless there is a legal or professional right or duty to
disclose.
What is Financial Accounting?
Financial accounting is the process of preparing financial statements that companies’ use to show their
financial performance and position to people outside the company, Including investors, creditors,
suppliers, and customers.
Financial Statements
Most companies put together quarterly and annual financial statements, which they make
available to shareholders and the investing public. There are four basic financial statements used
in the corporate world to show a company’s financial performance:
1. The income statement (also called the profit and loss statement) covers a specific period of time
(such as a quarter or a year). On an income statement, Revenues - Expenses = Net Income. In
accordance with the Generally Accepted Accounting Principles (GAAP), revenue is always recorded in
the period of the sale of the goods and services, which may not be the same period when cash is
10
actually received.
2. The balance sheet is a statement of assets and liabilities at the end of an accounting period. In
others words, the balance sheet is a financial snapshot at a specific point in time.
On a balance sheet, Assets = Liabilities + Stockholders’ Equity.
Stockholders’ equity is the amount of financing provided by operations (retained earnings
not distributed to stockholders) and by stockholders who reinvest through contributed
capital.
3. The cash flow statement shows the actual flow of cash into and out of a company over a
specific period of time, in contrast to the net income on the income statement, which is a non-
cash number.
A cash flow statement shows cash flows from operating activities, investing activities, and
financing activities.
4. The statement of retained earnings covers a specific period of time and shows the dividends
paid from earnings to shareholders and the earnings kept by the company. Notes to financial
statements provide additional information about the financial condition of a company. The
three types of notes describe accounting rules used to produce the statements, give more detail
about an item on the financial statements, and supply more information about an item not on
the statements.
Why is financial accounting important?
Financial accounting is integral to companies of all sizes because it helps in the following:
1. Communication of information externally. The statements and reports generated by
financial accounting are used to communicate information about the overall health and well-
being of the company to the external parties. Such external users may include suppliers,
banks and leasing companies etc. who are not part of the company but require all this
information to analyze the progress of the company and compare it with their
expectations.
2. Communicate information internally. A company’s finance team or its employees who
are interested in stock-based compensation etc. constitute the internal users of the
information generated by financial accounting practices. The reports generated with the
help of financial accounting skills are helpful for this purpose as well.
3. Comparison through analysis. Since financial accounting requires the use of
standardized guidelines, the financial statements generated by all companies are
comparable, providing a standard method of analysis.
The Importance of Ethical Issues in Financial Accounting:
Accountant plays an important role for a wide range of business organization worldwide just as
the integrity of the numbers matters for business. It matters at least as much at not-for-profit
11
organization. Proper control and reporting help ensure that money is used the way donors
intended. Donors are less inclined to give to an organization if they think the organization is
subject to waste or theft. The accounting challenges of some large intentional not-for-profits rival
those of the world’s largest business.
The nature of the work carried out by accountants requires a high level of ethics. Shareholders,
potential shareholders, and other users of the financial statements rely heavily on the yearly financial
statements of a company as they can use this information to make an informed decision about
investment. They rely on the opinion of the accountants who prepared the statements, as well as
the auditors that verified it, to present a true and fair view of the company. Knowledge of ethics
can help accountants and auditors to overcome ethical issues, allowing for the right choice that,
although it may not benefit the company, will benefit the public who relies on the accountant/
auditor’s reporting.
Proper ethics and ethical behavior are extremely important in accounting for a variety of reasons.
To begin with, accountants are often privy to sensitive information regarding their clients, such
as Social Security or bank account numbers. This gives accountants a good deal of power in regard to
their clients and it is important that the trust between an accountant and their clients not be
abused. In the same way it is important that the industry itself does not become stigmatized as an
unethical one, something that could potentially harm business for all accounting firms.
The following are some of the reasons why ethics is very important in financial accounting
profession:
1. Accountants have a responsibility to consider the public interest and maintain the reputation of
the accounting profession and their personal interest must not prevail over their duties.
2. Accountants deal with a range of issues on behalf of their clients. They often have access to
confidential and sensitive information and auditors are expected to give an independent view.
3. The professional sees himself or herself as responsible to the customer; the mission is to solve
the problem of the customer, to create the value that the customer requires. If that value is not
created, if the problem is not solved, then the professional has failed in his or her job.
Technically, accountants should carry out their professional services in accordance with the
relevant technical and professional standards. The professional accountants have a duty to carry out
with care and skills, the instructions of the client or employer in so far as they are compatible
with the requirements of integrity, objectivity and independence (in the case of professional
accountants in practice)
12
Conclusion:
This paper focuses on the concept of ethics and its implications on role of accounting professionals
and important issues in accounting and finance. Ethics has become a most topical issue of
concern in accounting and finance at present owing to the series of corporate scandals that had
taken place in the world affecting the credibility of the accounting profession. These scandals
have placed in doubt the effectiveness of contemporary accounting, auditing and corporate
governance practices, for which accountants are responsible. Thus, the ethical code of conduct is
closely linked with the accounting profession. Hence, we can say that the ethics has become an
essential part for accounting professionals.
Many negative consequences can result from poor ethics in accounting practices. The first result
is generally a lag in business. Accounting firms rely heavily on word-of-mouth for promotion,
and it's all too easy for a few bad stories about unethical behavior to sway prospective clients
away from a particular firm. There can also be serious legal repercussions for those who are
found to be violating legal codes and standards for their jurisdiction. To begin with, study your area's
legal statutes regarding accounting practices. While it is true that what is legal and what is ethical
can be two different things, the legal code is a good basic guide to help you understand the
prevailing feeling towards what is right. Likewise, make sure that you always put the interests of
your clients ahead of your own, that you safeguard client information doggedly and never behave
in a fashion that you know to be wrong while handling accounting work.
Install a reward system. Ideally, ethical conduct should be its own reward: Employees should want to
act ethically because it's the right thing to do and instills in them a sense of self-worth. But it
doesn't always work like this, and employees might need material motivation, if just to remind
them to do the right thing. What employees will be rewarded for and how they will be rewarded
will vary by workplace. For example, in a telemarketing office, an employee could be rewarded for
receiving high customer ratings from clients, which may indicate a lack of deception on the part of
the employee when speaking to clients. Many office managers mandate training seminars in
which employees attempt to develop ethical behavior by listening to speakers and participating
in activities designed to make them more aware of ethical aspects of their job. For example, a
group of employees might be given hypothetical
13
Reference:
1. Chowdhury, D. (2004), Incentives, Control and Development-Government in private
and Public Sector with Special Reference to Bangladesh, Dhaka Viswavidyalay
Prakashana Sangstha, Dhaka.
2. Committee on Corporate Governance (September 1999), Code of Best Practice for
Corporate Governance, Korea.
3. Corporate Governance Committee (1997), Corporate Governacne Priciples-A
4. ICAB (2004), Bangladesh Standard on Auditing, Bangladesh.
5. ICAB (1999), Study Manual on Auditing: Intermediate Group-A, Lesson-1, pp. 1-20.
6. Japanese View (Interim Report), Corporate Governance Forum of Japan, October
30.
7. IASB (2006), International Financial Reporting Standards (IFRSs) 2006, London,
UK.
8. Kabir, M. H. (2005) Setting Accounting Standards: Bangladesh and International
Perspectives, The Cost and Management, 33(6), pp. 5-17.
9. Otley, D. and Berry, A. J. (1980) Control, Organization and
Accounting, Accounting , Organization and Society, 5(2), 231-244.
10. McMahon, J. T. and Ivancevich, J. M. (1976) A Study Control in a Manufacturing
Organization: Managers and Nonmanagers, Administrative Science Quarterly, March,
66-83.
11. Tannenbaum, A. S. (1968) Control in Organization, McGraw-Hill, NewYork.
12. Zikmund, W. G. (2003), Business Research Methods, Thomson Learning, USA.
~ 14 ~
