Accountability and Ethics in Accounting
Accountability and Ethics in Accounting
Ethical behavior is of utmost importance in different areas of our lives. Journal articles and the media have been at the forefront of discussing ethical dilemmas people face in varying situations. Ethical dilemmas are encountered in the purchasing realm, professional, and corporate field, as well as individual and family decisions (Vosselman, 2016). Ethical behavior allows both leaders and employees to portray integrity and honesty when dealing with clients. Accountability ensures that people are responsible and answerable for their actions. In the corporate and professional realm, most people engage in unproductive and unprofessional behavior due to a lack of strong accountability and ethical system (Vosselman, 2016). In the past, people have argued that accountability is a leadership character trait implying that managers and other executive members are the only parties expected to portray accountability. Cox (2005) explains that both leaders and employees should portray accountability to guarantee operational efficiency. As stated earlier, ethical behavior plays a crucial role in forming productive client relationships. Therefore, ethics and accountability need to work hand in hand for positive outcomes in an organization.
In the accounting field, accountability and ethics play a crucial role in ensuring that a company does not fall into bankruptcy due to unprofessional and unethical behavior. The accounting department of a firm is responsible for tracking organizational expenditures and income, providing stakeholders with financial information, and ensuring statutory compliance (Cox, 2005). Accountability and ethics guarantee integrity in the preparation of financial reports that are issued to stakeholders. Research ascertains that accountability and ethics in the accounting department allow leaders to assess the real state of the firm. However, unethical reporting practices in financial reports and lack of accountable employees risks the survival of a firm (Jaijairam, 2017). Accountability and ethics play a crucial role in assisting corporate organizations from financial bankruptcy. For instance, the Enron scandal in 2001 was a result of ineffective accountability and ethics. Research ascertains that accountability and ethics should not only be observed from a law perspective. The paper will present various literature that analyzes accountability and its benefits in the accounting field. In addition, the review will show the ethics section, which will explain its importance in the accounting field. Finally, the report will merge both accounting and ethics. It will prove how the two realms interconnect and their relevance in the accounting field.
The Case of Enron 2001
The Enron scandal became public in October 2001 when Enron Corporation was declared bankrupt, followed by one of the largest accountancy and audit firms globally—Arthur Andersen (Segal, 2019). Enron’s bankruptcy occurred as a result of harmful ethical and accountability practices. Literature states that Jeffrey Skilling implemented the Mark-to-Market accounting technique. Segal (2019) says that the accounting technique is useful when trading securities but fatal for actual businesses. Under the leadership of Jeffrey Skilling, Enron would report the value of an asset based on the current value rather than the book value (Segal, 2019). As a result, the financial reports showed that the firm was making profits when, in reality, they had not earned any profits from the assets.
Enron’s leadership, as well as employees, hid the firm’s losses and tricked shareholders into believing that the firm was raking in profits. Notably, research points out that Andrew Fastow, Enron’s Chief Financial Officer, initiated a plan to prove to shareholders and the public that the firm was making profits when in reality, they were losing money (Connell, 2017). Jeffrey Skilling, Andre Fastow, and Arthur Andersen played a vital role in the failure of Enron. The latter was an accounting firm that was popular for its quality and high standards of risk management practices (Segal, 2019). Nevertheless, the auditing firm understood the financial status of Enron but still signed off their corporate financial reports for several years.
Enron’s case portrays the importance of accountability and ethics in accounting. As aforementioned, the accounting department is responsible for issuing the firm’s financial reports to stakeholders. Accountability and ethics ensure that the firm is willing to provide stakeholders with accurate financial data to ensure that stakeholders make effective business decisions for the firm (Jaijairam, 2017). In the case of Enron, the Chief Financial Officer and the Chief Executive Officer spearheaded the scheme to implement unethical accounting practices for the actual business and mislead shareholders into purchasing more shares (Healy & Palepu, 2008). The faulty reports kept Enron going until its foundation could not support the firm anymore, which is when they filed for bankruptcy after a series of legal cases by the Securities and Exchange Commission. Ethical behavior ensures that employees and leaders are willing to be accountable for the firm’s reports.
Role of Accountability in accounting
Literature ascertains that accountability exists in an organizational culture that supports trust and teamwork. Notably, accountability is required to start from the leader for employees to emulate. Cox (2005), states that accountability in a firm possesses significant individual and organizational benefits. Research points out that accountability plays a crucial role in creating a positive and productive environment in the workplace. As a result, organizations need to strive for accountability. In the case of accounting, accountability guarantees that employees practice integrity in financial reporting.
Research states that most leaders complain about the challenges experienced in creating an environment of trust in the workplace. It is vital to understand that trust is not achieved as a result of leadership efforts; rather, it is as a result of accountability. Employees portray accountability when they keep their word and act according to their promises (Cardillo & Queen’s, 2018). Leaders, on the other hand, promote accountability by holding employees responsible and answerable to their commitments. Also, leaders incorporate accountability in performance assessments to ensure that employees remain accountable to their obligations. Research ascertains that accountability means that employees dare to tackle problems as they come without avoiding them (Cardillo & Queen’s, 2018). Managers and other members of the executive team are more likely to trust employees who match noble efforts according to the existing challenges.
Sahlberg (2010) states that accountability encourages communication, which, in turn, builds trust. Literature ascertains that communication improves organizational processes and plays a crucial role in building trust. Effective communication systems allow employees to convey information to their colleagues and leaders. Ineffective communication of results includes the passing of inaccurate data, which might create conflict in the workplace (Wang, Waldman & Ashforth, 2019). Accounting is reliant on effective communication, which is done through financial reporting. Accountability ensures that financial reports provide accurate information on the costs, revenues, and investments of a firm to the shareholder, which, in turn, creates an environment of trust.
Enhances organizational performance
As aforementioned, accountability in accounting incorporates effective financial reporting where shareholders are provided with accurate information on the financial status of a firm. Literature states that accurate financial information allows executive members and shareholders to make reasonable and practical decisions of the firm moving forward (Han & Hong, 2019). Therefore, a firm is less likely to rely on projected information if employees practice accountability. Hosain (2019) posits that organizational performance is directly influenced by trust and accountability. As aforementioned, trust allows employees to embrace teamwork and share information in the workplace. Also, trust ensures that employees concentrate more on their commitments and achieving them rather than placing blame on other colleagues for failing to fulfill their commitments (Hosain, 2019). This, in turn, influences organizational performance positively. However, studies discourage leaders from implementing too many accountability measures (Hosain, 2019; Abdul-Rahamon & Adejare, 2014). Leaders need to portray their trust in employees. As a result, accountability should not be made to feel like one is back to kindergarten.
Employees enjoy being treated as adults who understand the importance of a particular aspect. Abdul-Rahamon & Adejare (2014) states that leaders should avoid demanding too much accountability to the extent of it seeming like a dictatorial form of leadership. Cox (2005) guarantees that accountability works best in a transitional and transformational style of leadership. In such cases, leaders question employees only when they fail to fulfill their commitments. Therefore, it is vital to ensure that leaders trace out accountability to the level of it affecting organizational performance positively. In the accounting realm, accountability encompasses keeping accurate financial records. Hosain (2019) points out that accurate and up-to-date financial logs allow firms to understand the real reason behind the accrued deviations. As a result, leaders possess the capability of making decisions based on accurate and updated financial records, which maintains a direct influence on organizational performance.
Accountable employees blame each other less and become more proactive in developing solutions to existing challenges and hick-ups. Research ascertains that accountability allows employees to embrace teamwork and be quick to correct each other (Williams & Adams, 2013). An organizational culture that fails to support teamwork creates an environment of hatred, unhealthy competition, and resentment. Under accountability, employees understand that individual wins play a crucial role in building up organizational successes. Therefore, they are geared towards individual and team improvement. Notably, accountability encourages employees to set reasonable targets that go over and above their commitments (Azmi & Mohamed, 2014). Research ascertains that employees who set goals and also play a key role in assisting their colleagues to achieve their commitments are perceived to be accountable.
In the realm of accounting, teamwork is portrayed through the coming together of employees in the accounting department to ensure the provision of accurate and update financial information. Azmi and Mohamed (2014) state that teamwork directly influences quality control, which is a critical skill in accounting. The ability of accountants to work as a team guarantees the smooth flow of accurate information and the timely provision of financial information to senior members and shareholders. Teamwork allows individuals to own their responsibilities and take the organization’s performance personally. Also, Williams and Adams (2013) affirm that accountability allows accountants to hold existing challenges of a firm and innovate useful ideas to solve the financial shortcomings. Accountability is grounded on an inclusive organizational culture. Research ascertains that an inclusive corporate culture positively influences the participation and engagement levels, which, in turn, encourage ownership among employees.
Responsibility accounting is a tool that enhances accountability in accounting. As stated in the introductory paragraph, accountability plays a crucial role in organizational performance. Mojgan (2012) says that responsibility accounting provides accounting firms with a framework for gauging divisional performance. By definition, responsibility accounting is a control system where people are made responsible for the control of costs. It is essential to understand that no organization assigns one individual to be accountable for cost control (Mojgan, 2012). Therefore, the designated individuals are given the power of influence to ensure that they control all costs assigned to them. Literature maintains that the divisional structure upheld by responsibility accounting should be coupled with a compelling performance criteria system. Notably, the performance criteria should be in line with the goals of the firm.
Literature ascertains that responsibility accounting should contain specific features to ensure its effectiveness in a firm. First, responsibility accounting requires accurate inputs and outputs or revenues and costs (Tuan, 2017). It is essential to note that a firm’s financial status is reliant on effective reporting techniques of the costs and revenues. By definition, costs refer to the monetary value of physical resources utilized in a firm such as the hours of labor and quantity of raw materials. Second, responsibility accounting demands the use of budgeting. Research states that accurate accounting relies on both actual and planned financial information (Tuan, 2017). It is essential to note that practical accounting relies on both historical and future financial information. Mojgan (2012) indicates that responsibility accounting implements the use of budgeting to guarantee the implementation of reliable plans for an organization.
Third, firms are required to identify responsibility centers. As aforementioned, responsibility accounting encompasses the use of divisions, which are referred to as responsibility centers. Zimnicki (2016) states that decision centers consist of the individuals assigned the responsibility of controlling costs in a firm. The identification of responsibility centers is a crucial component of responsibility for accounting. It is essential to understand that the primary objective of responsibility accounting is to ensure accountability. By formulating decision centers, organizations know that a particular group of individuals is responsible for aspects such as the machines utilized in conducting manufacturing operations.
Responsibility accounting encompasses performance reporting. Tuan (2017) notes that performance reporting involves both positive and negative content. Responsibility accounting is similar to a control device. For a control system to function effectively, deviations should be included in the report. Leaders cannot know the deviations in the organizations, not unless they are indicated in the reports. Unlike authority which adopts a top to bottom approach, the preparation of performance reports implements a bottom-top procedure (Zimnicki, 2016). The decision centers at the bottom prepare financial reports of the assigned centers and provide them to the senior management team. The literature points out that accountability requires effort from both leaders and employees. By establishing decision centers, organizations have specific employees who are responsible for cost control in different units.
Weber and Larsson-Olaison (2017) ascertain that responsibility accounting should not be utilized to place blame on subordinate parties. The goal is to promote accountability. Therefore, punishing subordinates for certain deviations discourages employees from being accountable. It is essential to understand that accountability exists alongside honesty and integrity. Therefore, placing blame and punishing employees discourages the establishment of accountability in the organization. Research ascertains that achieving accountability in accounting demands the human aspect (Weber & Larsson-Olaison, 2017). Thus, accounting firms should seek to communicate the positive impact of responsibility accounting by initiating mutual interests, considering the needs of employees, and providing extensive information concerning control measures. It is proper to ascertain that considering the human aspect in responsibility accounting presents an increased likelihood of achieving accountability.
Ethics in Accounting
The contemporary business world and information age demand the accounting profession embrace transparency and the provision of accurate financial reporting. Notably, accountants are required to produce concise, reliable, and up-to-date financial reports while upholding the highest levels of ethical responsibility (Ahinful et al. 2017). Nevertheless, organizations are not always guaranteed that accountants will adhere to the set ethical guidelines. Research affirms the existence of numerous accounting bodies such as the Chartered Institute of Management Accountants, the Association of Certified Public Accountants, and the Institute of Internal Auditors (Ahinful et al. 2017). Accountants are required to adhere to the guidelines of the bodies they are registered under. It is essential to note that the ethical guidelines developed by various accounting bodies possess huge similarities.
Accountants have access to highly private financial information for an organization. Cristina and Florina (2008) state that some accountants might feel the need for abusing their access to an organization’s financial information due to conflicts in the workplace. Also, accounts might be tempted into manipulating an organization’s financial information to provide a positive earnings report (Sepasi, 2019). The case of Enron portrays the negative impact of unethical behavior in accounting. The firm’s Chief Financial Officer and Chief Executive Officer played a key and leading role in manipulating financial information to provide shareholders and the Securities and Exchange Commission with manipulated data. As a result, accounting bodies provide ethical guidelines that are used to guide accountants and prevent them from veering off the main path of ethical behavior in professional practice.
Lack of ethics in accounting increases the risk of fraud in an organization. Research ascertains that ethical behavior goes over and above doing what is legally right (Todorović, 2018). The accounting profession demands a high level of self-discipline, which allows professionals to uphold the moral principle of doing right and not following the law blindly. Mazraeh and Karimzadeh (2017) state that an occurrence of accounting fraud negatively affects the survival of a firm. The study notes that accounting fraud limits the value of the provided financial reports and creates uncertainty and a lack of confidence in the accounting profession. Consequently, it negatively influences the confidence and perception of the public and potential investors in the accounting process of corporations.
The Role of Ethics in Accounting
Ethics plays a crucial role in ensuring the reporting of accurate, concise, and updated financial information.
Promotes independence and objectivity
As aforementioned, ethical behavior is more than just abiding by the legal guidelines of financial reporting. It means going to the extent of self-restraining oneself from engaging in certain practices during financial reporting. The accounting principle of objectivity ascertains that financial reports and accounting data should be submitted alongside unbiased evidence (Hartman, DesJardins & MacDonald, 2014). Financial information submitted to shareholders should be grounded on facts and research, instead of an accountant’s opinion. The ethical guidelines provided by different accounting bodies are used to guide accountants in ensuring that they submit reliable and correct format of evidence. Research ascertains that creditors and investors utilize financial statements in making financial decisions (Hartman et al. 2014). Therefore, ethical behavior ensures that accountants submit valuable, reliable, and accurate financial information.
On the other hand, independence ensures that accountants exercise objectivity and act with integrity and professional skepticism in the submission of financial reports. Research ascertains that lenders and investors trust certified public accountants to provide accurate and unbiased financial information regarding a particular company (Mazraeh & Karimzadeh, 2017). Ethical behavior ensures that accountants act independently and provide accurate data of a company’s financials. In the case of Enron, Arthur Andersen failed to practice independence, which led to Enron’s bankruptcy. The audit firm signed off Enron’s financial reports, which provided shareholders, investors, and lenders with a false sense of security when investing in the firm.
As aforementioned, accountants have access to private financial information of an organization. Ethical behavior guarantees the promotion of confidentiality of a firm’s financial information. Research ascertains that accountants might release confidential financial information of a firm as a result of workplace conflict. International accounting bodies advise against such practices regardless of the form of conflict in the workplace (Amponsah, Boateng & Onuoha, 2016). Confidentiality goes a long way in building trust as well as cementing business relationships, which, in turn, benefit the company and the accountant.
In a world of rapid digital advancements, accountants are required to rise to the occasion and implement ethical practices when sharing financial information. For instance, ethical accounting guidelines emphasize the importance of encrypting emails with a company’s financial data to avoid information leaks to the public (Mazraeh & Karimzadeh, 2017). Also, the literature indicates that ethical behavior ensures that accountants do not share financial information with third parties unless it is legal. Upholding confidentiality depicts professionalism on the job. As a result, the accountant is more likely to receive contracts with different organizations as a result of their high professionalism levels. Notably, Voss (2018) states that confidentiality provides a competitive edge for a firm in that the competitors are unaware of the extent to which the firm can continue with research, development, and innovation.
Enhances customer loyalty
Ethical behavior among accountants guarantees the release of accurate and reliable financial information. Investors, lenders, and borrowers are potential customers who are usually on the lookout for firms that record effective, ethical practices. In the modern world, stock or share prices do not influence investors into selecting a firm. Investors are lured by other intangible aspects, such as a company’s reputation (Ali Yazdani, Nikzad & Alinia, 2013). Ethical accounting behavior encourages investors to place to purchase more shares. Alternatively, unethical accounting practices reflect a firm’s selfishness and need to extort investors, which adversely influences public image. Ali Yazdani et al. (2013) affirms that customers want to be associated with firms that possess a positive record of ethical behavior. Unethical accounting practices influence factors such as pricing decisions, which play a crucial role in retaining customers.
The Connection between Accountability and Ethics in Accounting
Accountability and ethics need to go hand in hand to ensure effective and reliable accounting practices. As stated earlier, accountability revolves around employees being proactive and responsible for fulfilling the set commitments. In the case of accountability, leaders are required to make employees responsible for delivering specific tasks within a specified period. In the realm of accounting, accountability is of utmost importance as it guarantees the submission of reliable and timely financial reports. Also, accountability creates a positive and productive environment in the workplace. Unlike ethics, accountability systems are organization-specific, implying that firms are allowed to tailor-make systems that enhance accountability in accounting.
Ethics, on the other hand, is the ability of an individual to go over and above the legal guidelines and engage in morally right behaviors and practices. The success of the accounting profession is grounded on the laid out ethical guidelines. It is essential to note that accountants are registered under different accounting bodies. However, the accounting bodies possess almost similar ethical guidelines for accountants (Ahinful et al. 2017). The first similarity is that both ethics and accountability revolve around an individual’s proactivity. Under accountability, an accountant is required to be proactive in setting targets, achieving them, and finding solutions to challenges they experience in the course of conducting financial analysis and preparing financial reports. Under ethics, accountants are required to be proactive in deciding the morally right practices during financial reporting (Cox, 2005). Potential investors utilize financial statements in making financial decisions. The intentional manipulation of financial information to lure investors is an example of unethical behavior and falls under the category of accounting fraud.
Second, ethics are upheld in all forms of accountability. Literature ascertains that there exist four types of accountability: liability, attributability, blameworthiness, and answerability. Under answerability, accountants are required to provide financial reports in a timely and accurate manner (Dubnick, 2003). Most importantly, they are necessary to ensure that the provided information is based on factual evidence, as stated in the principle of objectivity. Also, blameworthiness is the act of blaming other employees for the failure of achieving the set target and commitments. As aforementioned, accountability promotes teamwork, which, in turn, ensures that accountants feel responsible for the achievement of their colleagues’ tasks. On the other hand, ethics encompasses doing what is morally right. Consequently, accountants should ensure that their counterparts engage in morally right accounting practices during financial reporting (Dubnick, 2003). Ethical behavior demands honest accounting practices and the ability to agree to any form of deviations in the financial reports rather than reporting false information.
Accountability and ethics play a crucial role in ensuring that a company does not fall into bankruptcy due to unprofessional and unethical behavior. Both ethics and accountability revolve around an individual’s proactivity. The intentional manipulation of financial information to lure investors is an example of unethical behavior and falls under the category of accounting fraud. The paper ascertains that accountability encourages communication, which, in turn, builds trust. Notably, communication improves organizational processes and plays a crucial role in building trust. Accountability in the accounting process builds trust, enhances organizational performance, and encourages ownership. The success of a firm relies significantly on the existing relationship with clients, shareholders, and investors. An accountable process in financial reporting influences business relationships positively. Responsibility accounting provides accounting firms with a framework for gauging divisional performance. Ethics promotes objectivity and independence in the accounting process. Accountants are required to act independently and report the real financial situation of the firm. In the 2001 case of Enron, Arthur Andersen turned a blind eye to the manipulation of information in the company’s financial reports, which led to bankruptcy and a shutdown of the business giant. Financial information submitted to shareholders should be grounded on facts and research, instead of an accountant’s opinion. Ethical behavior guarantees the promotion of confidentiality of a firm’s financial information. Research ascertains that accountants might release a confidential financial report of a firm as a result of workplace conflict. International accounting bodies advise against such practices regardless of the form of conflict in the workplace. Confidentiality provides a competitive edge for a firm in that the competitors are unaware of the extent to which the firm can continue with research, development, and innovation. Based on the literature reviewed, it is proper to ascertain that accountability and ethics play a crucial role in ensuring integrity in the accounting process.