Professional Ethics in Accounting Case Study Analysis

Accounting as a distinct profession is founded on fundamental principles meant to govern its professionalism. As a professional accountant, individuals are mandated to develop a keen awareness of both their individual and social responsibilities. This is mostly because they are normally entrusted with critical and confidential information which if mishandled would lead to the detriment of their clients. Following this implication there is a growing concern on the ethical foundations of the accounting profession. In a bid to safeguard accountants and the public from repercussions of unethical behaviors, various governing bodies stipulate codes of conduct meant to regulate and monitor accountants behaviors. This paper seeks to provide an analysis of ethical issues in the accounting profession. As such, it will explore a particular case study showcasing codes of conduct and their elements of violations. More so, there will be an evaluation of theoretical frameworks associated with the ethical violations and thereafter a description of vital aspects of preventing unethical behaviors in the accounting profession.

As a professional accountant, John Smith was obligated to follow regulations stipulated by the Accounting Professionals and Ethics Standards Board. As per Section 100.1 and 100.1.1 of (APES 110, 20064) professional accountants are obligated to act in the publics interest. Consequently, they are not to work solely to satisfy their interests but should serve the needs of the public. More so, satisfying public interest involves complying with the professional code of ethics. As such, it is clearly evident that John Smith in violation of the APES 110 Code of Ethics for Professional Accountants failed to serve public interest. In addition, professional independence is a critical aspect of this profession and John regardless of the stipulated codes of conduct should have maintained impartiality and avoided conflicts of interest (Barry et al, 2008).  The first section of APES 110 violated by John is section 110 which underlies the principle of integrity. This principle mandates accountants to conduct their business in an honest and straightforward manner.  It also depicts that they must exact fairness and truthfulness. As such, John has violated this principle as he offered false statements for Armidale Hardware to the bank. These statements were a misrepresentation of the actual financial situation of the business. As asserted by Carey (198015), an accountants independence is effectively reinforced through the requirement that they are truthful without any elements of fear or favor. Clearly, John Smith compromised his moral integrity which according to May (199611) mandates individuals to maintain a disposition for acting in a principled manner. Furthermore, the APES 110 code section 110.2 (APES 110, 20068) outlines situations in which professional accountants should not be associated with. One such situation is being in contact with materially false or misleading statements. Johns unethical behavior was falsifying financial statements and this places his individual and professional integrity in question.

Johns unethical behavior also led to the violation of the principle of objectivity as stipulated in APES 110 (2006). This principle obligates individual members to safeguard the wellbeing of their profession as a result of biasness, conflicts of interest or undue influence. John Smith was requested by Anne who is his sister to falsify the financial statements. Therefore, he was inclined to do as his own family member requested due to their form of relationship. In addition, John had invested a substantial amount of money into the business and was therefore keen to protect his interests. His failure to comply with his sisters demands may have led to the collapse of the business and the loss of is investments. Observable from this scenario is an accountant who encountered a conflict of interest between safeguarding his and Anns welfare and upholding the integrity of his profession. The presence of these factors not only impaired Johns judgment but it also distorted his objectivity. He was placed at a quagmire and had to make very difficult decisions which resulted in compromising his professionalism. Also, Johns predicament was heightened by his sisters influence on his conscience which urged John to protect the wellbeing of his family members who rely on the proceeds from the business.

Section 130 of APES 110 (200610) the principle of professional competence and due care. Accountants are obligated to maintain professional knowledge and skills required in the execution of various duties. They are also expected to act diligently and offer professional services. Regardless of any exemplary level of professional competence upheld by an accountant they are expected to apply it accordingly in their assignments. In falsifying financial statements, John did not use his professional competence diligently and in accordance with the values of the profession. Instead he used his accounting skills and knowledge to manipulate the financial statements. This amounted to the misuse of the professional knowledge highly valued by professional and ethical accountants.

Finally, Johns unethical behavior is in violation of the principle of professional behavior stipulated by section 150 of APES 110 (200613). This principle obligates members to follow rules, laws and regulations and to avoid behaviors and actions which may impair the credibility of the profession. This is inclusive of making any omissions or falsifications which may be concluded to be of negative effects to the professions reputation. In relation to this principle, John has not upheld the principle of professional behavior in falsifying the financial statements. In carrying out such an action, John voluntarily disobeyed the laws which govern the accounting profession and also failed to follow the boards rules and regulation. As highlighted by Brooks and Dunn (200723) it is inevitable that professional accounting is highly dependable on the public and in line with such unethical actions as carried out by John, these third parties would be obliged to agree that his behavior affected the reputation of the accounting profession negatively. Individuals aware of Johns actions are likely to discredit his professionalism and fail to seek his services.

As observed above ethics in the accounting profession is guided by a specific codes of conduct. However, it is eminent that the accountants are expected to regulate their behaviors and succinctly choose to either act ethically or unethically. Since accountants face various ethical issues as they practice their professions it has been tantamount to develop frameworks for understanding various ethical issues. It is in this light that normative ethical theories are applied in professional ethics. These theories propose ways in which individuals ought to behave or act when faced with various scenarios in their professions. Furthermore, they provide an understanding of why individuals choose to believe in the rightness of a particular action or the wrongness of another one. This is particularly helpful because there are controversies on the credibility of possible choices which are normally considered to be either ethical or unethical (Devine et al, 200416). Such a predicament will be well understood in the illustration of John Smiths case and the underlying implications of the normative ethical theories.

In addition to the fact that Johns behavior was in violation of the various principles stipulated by the professionals code of conduct, there are normative ethical theories which consider this behavior ethical. As explained by Barry et al (2006) and Gaffikin (2007) teleological theories are applied in ethics by justifying various actions through the evaluation of their perceived consequences. Such theories are concerned with the end result and whether it benefits the involved parties. According to the theory of ethical egoism individuals are warranted to act in accordance to ways which will maximize their benefits. As such they are to make decisions with regard to their self interests. As Duska and Duska (200349) argue, the element of self interest if normally very strong and this makes the theory more appealing. As an egoist, John decided to falsify the financial statements because the outcome would be of great benefit to him and he failed to consider the consequences for others. The desirable consequences which would emerge from his actions involved the recovery of the business in which he had invested and also the expected profits. John would also get to maintain his job as an accountant which was his source of livelihood. On the other hand, his refusal to misrepresent the statements would have resulted to the collapse of the business and the loss of his job. The evaluation of these consequences amounts to the conclusion that Johns actions were right. He would be the ideal beneficiary and his profession would be at risk of losing its credibility.

Another teleological theory which would be in favor of Johns actions is the utilitarian framework. This theory underlies that actions are only right if they conform to the principle of utility and amount to the productivity and happiness of involved individuals. This is related to the alternative of such actions which would not amount to the happiness of individuals and groups. As such, it concerns itself with the overall benefit of the public. Johns actions can be evaluated as a consequence of determining whether his action of falsifying financial statements would lead to more good than harm to himself and his family. This claim is well supported by Duska and Duska (200345) who argues that the element of more good than harm justifies a utilitarians actions. Utilitarianism is more adept at forming explanations for such behaviors as it is coupled with the intent of serving and maximizing the happiness of others as opposed to an individuals happiness. This theory goes hand in hand with the theory of ethical parochialism which indicates that ethical behavior should be able to protect the welfare of the individuals close relations. Such an in group can be that of family members as it is the case for John Smith. His actions are obligated by his desire to protect his sisters interests. In falsifying the financial statements, John seeks to protect the livelihood of his sister who needs the hardware business so as to support her two children. In addition, John is not prepared to put their lives and wellbeing in jeopardy or even bear the responsibility of doing so if he fails to falsify the statements.

Among the normative theories which would have found Johns behavior as unethical are deontological theories like theological theory and social contract theory. These theories emphasize that there are more important considerations when making decisions on ethics than outcomes of the situation. Deontologists value the intention of the decision itself and expect individuals to comply with duties and responsibilities given to them. In reference to the social contract theory, Johns behavior was unethical because he failed to perform his duties and responsibilities to the public. Since there is a social contract between John and the public, his violation of the professional code of ethics indicates an unfair representation of the publics interests.

After the analysis of the situation John Smith found himself in, it is observable that he had experienced an ethical dilemma prior to the decision to misrepresent the financial statements. The main components in direct conflict were the choice between ethical behavior and unethical behavior. Moreover, the indirect interests which were in conflict were Johns self interest, his desire to protect his sisters familys interests and Johns obligations to uphold the integrity of his profession, following stipulated regulations and maintaining his moral principles. John Smith was responsible for choosing between ethical and unethical conduct. As asserted by Fawcett (200988) professional ethics comprises of an individual professional who is at the center of control with regard to ethical decision making considerations.

If John had sought advice on what to do prior to making the decision to falsify the financial statements I would suggest that he considers the costs of misrepresenting the financial statements.  His unethical behavior has the potential of being highly detrimental not only to his professional career but also to his integrity and the well being of his family which he is driven to protect. John should consider the cost which relates to tarnishing his moral integrity. Moral principles are what make human beings the conscience driven individuals that they are. Beyond his professionalism John has an obligation to uphold his integrity as a moral individual who is capable of understanding what is right or wrong. Therefore, John should not at all contemplate falsifying the financial statements as it is not worth losing his moral integrity. Furthermore, he should appreciate having a clear conscience which will be erased by feelings of guilt if he chooses to falsify the documents. A clear conscience is always the best alternative as it will prevent the development of anxiety and stress related disorders. Considering this, John should decline his sisters request to falsify the financial statements.

Another factor which John must consider is the cost of losing his professional credibility and right to practice. As above mentioned, professional accountants are governed by particular regulatory bodies which ensure that the members are ethical. One purpose of such bodies is to help accountants in resolving any ethical dilemmas they may face in their practices. As such, they are aware of the negative repercussions which may arise from the failure to follow regulations. If Johns fraudulent dealings are discovered he is bound to face disciplinary actions from the board. When found guilty, John would face both the board and the law. He would lose his practicing license and overall credibility as a competent accounting professional. As pointed out by Jeffrey (20083), professionals who act in the interests of the public are expected to uphold an ethic of accountability. John should know that his actions will determine his future as a professional accountant. He should not falsify the financial statements because if he does so he would be liable to prosecution in a court of law for fraud which can have extensive consequences. Not only would he lose his career but he may also lose his freedom especially because laws against fraud serve harsh sentences to fraudsters.

John Smith must also understand that falsifying the financial statements could severely damage the lives of those he wants to safeguard. His sisters business would be in danger of closure when the bank discovers that the financial statements have been altered. Instead of having to deal with issues of financial recovery only, they would be forced to terminate the business and also face legal action. Therefore if John examines the extent of such damages he is likely to opt not to put his family in harms way.

Davis and Stark (2001107) insist that professional accountants are equipped with many techniques of resolving issues of conflicts of interest. John had access to the codes of conduct which should have guided him in choosing the ethical alternative. From the case study analysis, it is evident that professional ethics are an integral part of accounting and it is up to practitioners to uphold both the integrity and credibility of the profession. In future, John would be best advised to be principled in terms of upholding integrity, objectivity and professional behavior. Using these guidelines it will be easier to prevent and resolve any arising ethical dilemmas.

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