Executive Summary
The foundation of any profession lies within its
ethical boundaries. After major corporate collapses, accounting scandals and
the great depression, the accounting profession has witnessed a paradigm shift
in how it is regulated. The accounting profession has been
subjected to constant scrutiny which has led to a credibility crisis. Pertinent
to the objectives, this research discusses the ethical and professional
attributes of practicing accountants and how corporate collapses have led to
major reforms in the accounting profession. This research also provides
discussions of ethics as a foundation for the accounting profession and how it
has become a back-bone for reporting and decision making.
Keywords:
corporate collapses, expectation gap, ethics, negligence
Literature
Review
Corporate
Collapses and Scandals
The accounting profession is heavily regulated by their governing bodies and is subjected to ethical guidelines for professional conduct. “Since accountants deal with the lifeblood of companies and organisations, accountants owe a fiduciary duty to act professionally and in the best interest of their employers or clients” (Armstrong, 1993). Apparently, the importance and the requirement for a continuous probe into the accounting profession is depicted by an ongoing frequency of major accounting scandals and corporate collapses. For instance, the Enron scandal, the fall of Saytam, WorldCom and Arthur Anderson.
Scandals and corporate
failures arose from intentional manipulation of financial statements. They led
to a paradigm shift in how the accounting profession is now regulated. These
scandals and corporate failures were the result of poor governance, problems
within the internal control structures and accounting misstatements. These were
further complicated by auditors failing to comply with ethical and objective
reporting.
The
Expectation Gap
To begin with, users of financial information expects professional accountants to provide objective and competent financial information which may not be possible all the time. This consequently results in an expectation gap. Leung et al (2019) states that an expectation gap consist of “the difference between what financial statement users believe the statement provides than what it actually provides”. The expectation gap is deemed to be a critical issue within the accounting profession because the higher the expectation from the users, the lower becomes the credibility.
There are several reasons why an expectation gap
may occur. Firstly, the nature of accounting function is complicated. A
research conducted by (Lee & Ali, 2009) found out
that users have a poor understanding of the complications involved within the
accounting profession. Such complexity arises because the objectives of
accounting and the role of accountants have always evolved, that is, they have
always been dynamic (Lee
& Ali, 2009), partly because
they are influenced by socio-economic
factors (contextual factors), detrimental historical events (corporate collapses) and the verdict of
the jurisdiction (case laws).
Secondly, the conflicting role of auditors is deemed to have a negative
implication on their independence. For instance, the more an auditor tries to
be obstinately ethical and objective in a conflicting situation, the higher the
chance for the manager to replace that auditor. This situation puts an auditor
under immense pressure by the manager which compromises the auditors’ independence. Auditors may
then be perceived by the public as acting in an unfavorable manner in order to
protect their self-interest. Armstrong
(1995) argues that that such expectation exerted by the users proves to be
costly for the accounting profession “since there will be break for existing
social contracts”.
Ethics and
Accounting
Development of ethical behavior for professional accountant is critically attributed to major corporate collapses that occurred in the early 21st century. According to Leung et al (2019), ethics is concerned “with the evaluation of choices where the options are not clear or where there is no absolute right or wrong answer”. It is important to note that ethics is the most rudimentary feature of any profession. It requires all professionals to behave ethically. When it comes to a practicing accountant, they are required to adhere to and observe underlying ethical principles such as objectivity, integrity, due care, confidentiality and professional competence.
Although a professional accountant is required to act in the interest of the public, they are also exclusively required to satisfy the demands of their employer or individual clients (Lee, 1995; Brennan, 2016). This indicates that a relatively higher level of ethical behavior becomes imperative when it comes to the credibility and continuous existence of the accounting profession (Nathan, 2015). Further to this, Ahinful et al (2017) argues that a credibility crisis has subsequently occurred in the entire accounting profession considering the amount of allegations made against professional and practicing accountants. This has consequently triggered public enquiries into the affairs of the profession.
Moreover, Smieliauskas et al (2016) argues that the professional decorum of accountants should be void of misconducts which could possibly discredit the profession. They also argue that the behavior of accountants should be in accordance with accounting rules and regulations. The Code of Professional Ethics outlines such rules and regulations which emphasizes a standard of moral behavior. A research conducted by (Lee & Ali, 2009) depicts that accountants are mostly affected by conflict of interest. Such conflict arise because of self-interest, interference to independence, lack of ethical sensibility, lack of ethical courage and failure to maintain objectivity. Negligence is yet another issue that confronts the accounting profession. Leung et al (2019) defines negligence as “any conduct that is careless or unintentional in nature and entails a breach of any contractual duty or duty of care in tort owed to another person”. The way to sound and ethical accounting require figures to be verifiable (Todorović, 2018).
(Disclaimer: this article was initially submitted to the School of Accounting and Finance as part of my research write-up)
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