Accounting profession and ethical issues in accounting Lecture 12 Chapter textbook Recap: Objective of Accounting The primary objective of accounting is to: provide information useful for making economic decisions The environment of accounting contains decision makers: who make demands for accounting information who are from a diverse group and who require information that are comparable with other sources Fields of Accounting: Financial Accounting involves preparing and auditing financial statements that are distributed to people who are not involved in day-to-day management Managerial Accounting involves providing information to those who are involved in day-to-day management Tax accounting involves determining the proper amount of income taxes to be paid, preparing tax returns, and tax planning Financial management involves providing information for the management of cash for investing and financing decisions Auditing involves providing assurance regarding the reliability of financial statements to management, shareholders and other stakeholders Defining ethics Most common definition of ethics: Ethics is the attempt to build a systematic set of normative prescriptions about human behaviour or codes to govern everyday morals and morality (Parker, 1998) In their moral contexts, ethics undertakes to analyse such concepts as: ‘right’ ‘wrong’ ‘permissible’ ‘ought’ ‘good’ and ‘evil’ (Pojman, 1988) Ethics is concerned with: action and practice values – not what is, but what ought to be For instance: How should I live my life? What is the right thing to in this situation? Should one always tell the truth? (Pojman 1988) The importance of ethics in accounting Accountants must perform their jobs ethically The information they supply has to be a true and accurate reflection of the facts if it is to be an effective tool in the service of society in terms of its usefulness for decision making Accounting choices tend also to be moral choices Francis (1990) noted: Accounting, to the extent that it is a choice about how to affect our lived experience is a practice grounded in moral discernment Accounting is important precisely to the extent that the accountant can transform the world, can influence the lived experience of others in ways which cause that experience to differ from what it would be in the absence of accounting, or in the presence of an alternative kind of accounting Ethical issues in accounting Therefore there are two broad levels of ethical issues that impact upon the accountant in the provision of accounting services The accountant is a member of professional body that has a professional code of ethics that must be followed but the accountant is also an individual with his/her own personal values Professional ethics - Linked Individual ethics Importance of the Accountancy Profession The ultimate test of a profession is the society’s recognition of that profession The accountancy profession was first given recognition in late nineteenth century In 1854, the Society of Accountants in Edinburgh, Scotland received official recognition by the grant of a royal charter (hence the term Chartered Accountants) What is a profession? Professionals: Command an intricate body of knowledge in a specialist area Require many years of higher education Have a relationship of trust with their clients Combine in professional societies to codify professional standards and for continuing education Adapted from Clarke & Robb 1997 Rights and obligations of a professional Rights: Status, image Semi-monopoly Generally higher levels of income Obligations Duty of care to society Self-discipline Adherence to a code of ethics Professional status Why should accountants have a professional status? Regulation in the provision of accounting information Regulation of independent audit of accounts Imposition of professional obligations on members in dealing with the public The accounting profession in New Zealand New Zealand Institute of Chartered Accountants of (NZICA) The Institute of Chartered Accountants Act 1996 established the statutory functions of the accountancy profession in New Zealand: The Promotion of quality, expertise, and integrity in the profession of accountancy by its members The promotion, control and regulation in the profession of accountancy by its members The promotion of training, education and examination of persons practising, or intending to practise, the profession of accountancy in New Zealand or elsewhere NZICA Code of Ethics Integrity Honesty as well as fair dealing and truthfulness Objectivity and Independence Fair, impartial, intellectually honest and free of conflicts of interest Competence Can the technical and professional work expected of them Quality performance Due care and diligence and abide with regulations Professional behaviour Good reputation & conduct important Does a Code of Ethics influence ethical behaviour? It was found in a doctoral study by Schwartz that it was rare for a Code of Ethics to directly influence the behaviour of an employee Instead there were a number of ways that a code might indirectly influence employee behaviour Schwartz’s Eight Metaphors As a rule book The Code acts to clarify what behaviour is expected of employees As a sign post The Code can lead employees to consult other sources to test whether certain behaviour is appropriate As a mirror The Code provides a way for employees to confirm whether certain behaviour is acceptable As a magnifying glass The Code encourages the employees to look more carefully at what is said and done As a shield The Code can give support to employees in challenging unethical requests As a smoke detector The Code can help to warn of danger while there is time to prevent harm As a fire alarm The Code may motivate employees to report violations As a club The Code spells out the consequences of inappropriate conduct Factors influencing an individual’s ethical decision making Education Life experiences Knowledge of the law Common sense and intuition Conscience Peer influence Cultural background Religious background Societal values Ethical decision-making models Gross-Schaefer’s ethical decision-making model (pp 159 – 160 of chapter) Looks at values, ethics and ethical standards Includes three basic ethical theories and tools in the model: Absolute values Utilitarianism Stakeholder analysis Stuart and Stuart’s ethical decision-making model (p 161 of chapter) Model helps the individual to recognise an ethical dilemma that arises when GAAPs are unable to help resolve an accounting issue Focuses on relevance and reliability issues ... alternative kind of accounting Ethical issues in accounting Therefore there are two broad levels of ethical issues that impact upon the accountant in the provision of accounting services The accountant... Imposition of professional obligations on members in dealing with the public The accounting profession in New Zealand New Zealand Institute of Chartered Accountants of (NZICA) The Institute of... promotion of training, education and examination of persons practising, or intending to practise, the profession of accountancy in New Zealand or elsewhere NZICA Code of Ethics Integrity Honesty