BUSINESS ETHICS

Chapter 7
Accounting and Auditing Ethics

LECTURER: DUONG THI HOAI NHUNG

(MBA)
FACULTY OF BUSINESS ADMINISTRATION
EMAIL: nhungdth@ftu.edu.vn
MOBILE: 0985867488
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 CHAPTER 7:
Accounting and Auditing Ethics
Readings:
Laura P.Hartman, et.al, 2014, Business Ethics-
Decision making for integrity and social
responsibility, Mc. Graw Hills.
-Chapter 10: Ethical Decision Making: Corporate
Governance, Accounting, and Finance

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 CHAPTER 7:
Accounting and Auditing Ethics
 Purpose and learning objectives
 The purpose of this chapter is to introduce some discussion relating
to the roles played by accountants in an organisation. These range
from information gathering and presentation within a company to
the essential auditing role which aims to protect stakeholders from
being misled by an organisation’s annual performance information.
This leads naturally into a consideration of Corporate Governance,
a topic mainly concerned with the ethical functioning of the most
senior levels of management in an organisation.
 You will be able to
- understand the ethical importance of the various accounting roles in
an organisation;
- appreciate the need for Corporate Governance and top-level
3 accountability in an organisation.
 CHAPTER 7:
Accounting and Auditing Ethics
Main contents:
1. Ethics and Accounting
1.1 Roles of Accounting
1.2 Ethical issues in accounting
2. Ethics and Auditing
2.1 Role of auditing
2.2 Conflicts of interests in auditing process
3. How Ethical Theories Relate to Accounting and
Auditing
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 Introduction
In this final chapter we briefly examine some further ethical
issues facing the management of a company as a whole.
We begin with an introduction to a very large and complex
area of practical management; the role of accountancy,
performance reporting and audit in an organisation.
The term ‘accountant’ in fact covers a range of professional
institutions who are chartered to qualify individuals who are
suitable to carry out such roles and whose professional codes
of practice are intended to show the standards of behaviour
expected of such individuals.
There is also a large amount of legislation relating to some of
the work of accountants in organisations, that is accounting
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roles are some of the most regulated forms of management.
 1. Ethics and Accounting
1.1 Roles of Accounting
If you were to look in a standard business textbook, you
might find the following definition of accounting: "the
process by which any business keeps track of its financial
activities by recording its debits and credits and balancing
its accounts."

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 1. Ethics and Accounting
1.1 Roles of Accounting
Recording financial data, its analysis, the
communication of information and the support of
the decision-making process.

Accounting offers us a system of rules and

principles which govern the format and content of
financial statements.

Accounting, is a system of principles applied to

present the financial position of a business and
the results of its operations and cash flows.
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 1. Ethics and Accounting
1.1 Roles of Accounting

It is hoped that adherence to these principles will result in

fair and accurate reporting of this information.

Accountants are considered as “Gatekeepers”

The intelligibility and trustworthiness of such information is

critical to a range of key decisions, which in turn implies a
need for clarity and honesty in terms of information
preparation and presentation
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 1. Ethics and Accounting
1.2 Ethical issues in accounting
 Leaving out key items of information may be as
damaging to the interests of stakeholders as presenting
false information

 Presenting information in ways be likely to mislead

shareholders and other providers of finance

 Potentially misleading, though not illegal, accounting

practices which take advantage of grey areas in the law
to present a firm’s activities in a way which furthers
management’s current objectives “Creative
9 accounting”
 How Different Ethical Perspectives Impact
Accounting-Based Decisions
Ethical perspective Summary of ideas Driving value Accounting
application

Self-interest

Utilitarian Beliefs

Government
Requirements

Universal
Rules

Individual Rights

Economic
Efficiency

Distributive Justice
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 How Different Ethical Perspectives Impact
Accounting-Based Decisions
Ethical Summary of ideas Driving value Accounting application
perspective

Self-interest everyone in society self-serving bias

would be better off if personal self-
drove the scandals at
each individual could interest
Enron and
pursue his self- WorldCom
interests
Utilitarian a law is “right” if the greatest good could be a huge gap
Beliefs benefits to society are for the greatest between short-term
greater than the harm number and long­term
benefits

Government fundamental rules laws represent the government

Requirements are developed from minimum regulations and
agreed on central standards of accounting standards
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authorities morality for set the rules for
society accounting
 How Different Ethical Perspectives Impact
Accounting-Based Decisions
Ethical Summary of ideas Driving value Accounting
perspective application

Universal rules will be used torules and principles

Rules inspired rules dictate
eliminate the self- must be integrated
action for the greater
interests of those to control self-
good
making the decisions interests
Individual focus on
Rights a summary o f protect each
rights that can be individual’s stakeholders’ rights
agreed on to guaranteed rights and when making
guarantee freedoms freedoms accounting
accountants
decisions must
Economic Maximize output economic efficiency understand the cost
Efficiency and level of of inaccurate
profitability financial statements
never implement a those individuals who inaccurate financial
Distributive course of action that
Justice are statement can harm
harms the less disadvantaged should society
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powerful be
 2. Ethics and Auditing
With the tidal wave of accounting scandals that have
occurred over the past ten years, a question that many
stakeholders are asking
 Where were the auditors?
How could firms continue to make up “imaginary
numbers” year after year without the internal and
especially the external auditors identifying the
problems and raising a huge red flag?

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 2. Ethics and Auditing
2.1 Role of auditing

 Be conducted each fiscal year for

companies that are publicly traded

 An inspection of the accounting

records and other information deemed
necessary to express an opinion on the
fairness and adequacy of the financial
statements.
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 Case7.1: Ignore the Error?

Questions to discuss:
1. What Are the Ethical Issues?
2. What action would you take if you were Kelsey?
Why?

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 2. Ethics and Auditing
2.2 Conflicts of interests in auditing process

Auditor-Firm Conflicts of Interest

Shareholder-Management Conflicts of Interest

Self-interest-Professional Standards Conflicts of

Interest
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 2. Ethics and Auditing
2.2 Conflicts of interests in auditing process
there are three potential conflicts o f interest that can take place
during the auditing process: auditor-firm, shareholders-
management, and self-interests-professional standards.
Auditor-Firm Conflicts of Interest
The firm will always want the financial statements to show
how well the executives at the top are managing the firm. As
a result, the firm could potentially put pressure on the auditor
to sign a “clean audit” regardless o f any concerns the
auditor has with the statements.
the auditor has a financial incentive to please the firm because
the firm is a revenue-producing client for the auditing firm
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 2. Ethics and Auditing
2.2 Conflicts of interests in auditing process (cont.)
 Shareholder-Management Conflicts of Interest

The firm wants its external stakeholders and especially its

shareholders to be given the financial statements o f the firm
without any conditional issues having been raised by the
auditors. Because the shareholders do not want any negative
issues relating to the firm’s financial statements, the managers
o f the firm will want to present “clean” financial statements
to the shareholders.
However, the auditor also has a duty to the shareholders to
review objectively the financial transactions of the firm
because the shareholders, via the board of directors, have
selected and assigned payment levels to the external auditors.
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 2. Ethics and Auditing
2.2 Conflicts of interests in auditing process (cont.)
 Self-interest-Professional Standards Conflicts of Interest

The auditor may face a situation where he or she can benefit by

violating the professional standards established by accounting
organizations.
For example, if an auditor has a financial interest in the firm,
there would be a self-interest incentive to disregard financial
transactions that have a negative impact on the firm.
 trust is essential to the workings of a market economy and the
continuing provision of reliable information feeds trust. The
reliability of the external auditing process as well as justifiable
trust in the probity of internal management accountants as well
as managers leads to a more effective market economy.
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 3. How Ethical Theories Relate to
Accounting and Auditing
Utilitarianism leans towards companies that provide goods
and services while doing the least harm, and condemns
companies that cause more harm than benefit to others.
Egoism creates complications because there are going to be
times within your career when you are not the best person to
help a client. You have to make the decision to send them
to another accountant, and by doing so you will lose their
business. Doing this is not the best decision for you, but it
is the best decision for the client.
 3. How Ethical Theories Relate to
Accounting and Auditing Cont.
Deontological ethics applies to accountants and auditors
because they have to maintain a fair and consistent
relationship with all their clients. They must also ensure
that they are following through with their commitments. If
they do not do this, clients will lose trust in them, and it
will be difficult for them to find new clients.
Categorical Imperative relates to auditors because if they
are upholding a high moral standard, they will encourage
the people working for them, as well as their clients, to do
so as well.