Professional accountants are vital to our economy and society. Accountants ensure the effective use of resources by recommending ways to reduce cost, increase revenue, and mitigate risk. The accountancy profession is only as good as the quality of service provided by its members. The regulatory environment of the accounting industry seeks to ensure the quality and consistency of these services. This means accountants must comply with ethical, technical, and professional standards. Accountants must represent the interests of their client (or company) and the indirect users of accounting services, such as investors and creditors.
Accounting and Regulation
In addition to helping managers keep control of their business, good accountancy allows investors, managers, and regulators to compare companies directly. To ensure all accounting practices of all companies could be compared directly, the Generally Accepted Accounting Principles (GAAP) were developed as the guideline for accounting in the United States.
GAAP is a set of accounting rules and standards used for financial reporting. In the United States, public companies operate under the rules of US GAAP.
Most of the world uses the International Financial Reporting Standards (IFRS). However, through convergence, the US is moving from US GAAP to IFRS standards. The purpose of convergence is to have US GAAP closely mirror IFRS standards. These are the basic rules that companies and their accountants must follow when creating financial statements.
Financial Accounting Standards Board (FASB) is to establish and improve US GAAP. There are also auditing standards, enforced by the Public Company Accounting Oversight Board (PCAOB), and required by the SEC. The purpose of the PCAOB is to protect the public interest in the preparation of audit reports. The FASB and PCAOB are responsible for the oversight of all United States accounting. Internationally, the IFRS Foundation and the International Accounting Standards Board (IASB) oversee international accounting.
Regulation of accounting practices is constantly evolving to reflect the needs of the growing economy. In the early 2000s, there were numerous accounting scandals that rocked the accounting profession.
These scandals resulted from manipulated financial statements that were intended to mislead investors, creditors, and/or shareholders. Failures in the regulatory system that allowed these scandals to occur created mistrust of corporations and the accounting profession in our society.
To remedy this, the Sarbanes-Oxley Act of 2002 (SOX) was passed by U.S. Congress in 2002. The SOX Act is a United States federal law that introduced major change to the regulation of financial disclosures and corporate governance. The SOX Act has closed loopholes in accounting practices and increased the consequences for fraudulent activity. The accounting profession is constantly changing and must adapt effectively and efficiently to meet the demands of the economy and society. Developments in the accounting profession, economy, and society affect the profession and how it performs its role. The SOX Act is one example of how a new regulation forced the profession to adapt to change.
The primary purpose of the SOX Act was to make management responsible for their own financial statements. Before the SOX Act, management of companies caught up in fraudulent activity would pass the blame on to other employees and claim to be ignorant of wrongdoing. However, now management must certify that financial statements are accurate. Management must also personally review internal control systems of their company. Management is responsible for the preparation and accuracy of financial statements. The role of auditors is to ensure that financial statements are as fair and accurate as possible (per US GAAP). While auditors do uncover fraud, that is not their primary purpose.
For regulation to be effective, it must be accompanied by ethical behavior. Ethical behavior is the final step in guaranteeing good service and quality. Therefore, regulations must be designed in a way that promotes ethical behavior. Ethics can be defined as a broad set of moral principles.
The Accounting Profession
Accounting is considered a profession because it is a field that requires specialized knowledge. People outside of the profession must be able to trust that their accountant is competent and ethical. This is because they rely on the accountants who prepare the financial statements, as well as the auditors who verify them, to make decisions. Therefore, cultivating trust within the industry is extremely important to business, the economy, and society.
Ethics in Accounting
Accountants regularly face ethical dilemmas. Accountants seek to add value by reducing costs and increasing revenue. An accountant wants to produce favorable results for their company or client. Accountants must also have the public best interest in mind. Therefore, information must be represented fairly and accurately to be ethical.
However, there can be pressure for accountants to produce favorable results for a company, even when favorable results are lacking. Do you bend the rules to make the client happy or serve the public interest by reporting information fairly and accurately? Are you bending the rules? Do other accountants bend the rules? By how much?
Good accounting practices can be used to make better personal and business decisions because they offer guidance on how situations should be handled. Accountants must follow the rules; however, the rules are not black and white for every situation. This means accountants must exercise their best judgement on a regular basis. To be ethical, we must: do what is right, do what we think is right, and not do what we think is wrong.
AICPA Code of Professional Conduct
The AICPA Code of Professional Conduct establishes a code of ethics for accountants to follow:
- Responsibilities Principle. Member should exercise careful professional and moral judgement when carrying out their responsibilities.
- Public Interest Principle. Every action taken by an accountant should serve the public interest. The public interest refers to clients, employers, investors, creditors, and so on.
- Integrity Principle. Accountants should perform responsibilities with a high sense of integrity. Integrity is the quality that creates public trust.
- Objectivity and Independence Principle. This is an obligation to be impartial, honest, and free of conflicts of interest.
- Due Care Principle. Accountants should be aware of the profession’s technical and ethical standards. Accountants should continually improve the competence and quality of their services.
Being aware of professional codes of conduct such as this helps guide our decision-making process.