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Ethics
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Ethics About using judgement, to make choices about what one should do
No formula – applying judgement to a specific situation
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Rationalizations to justify unethical behaviour - Gellerman (1986):
Pretending the behaviour is not really unethical or illegal. Excusing the behaviour by saying it's really in the organizations or your best interest. Assuming the behaviour is okay because no one else would ever be expected to find out about it. Expecting your superiors to support and protect you if anything should go wrong.
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Ethics Does trust matter?
Why is ‘controlling’ how people behave so hard? Causes of unethical behaviour Impact on regulation – think beyond accounting standards and types of regulation
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Is Accounting Life or Death
Can accountants ruin your life? Enron Enron employees lost their jobs and retirement savings 28,000 employees at Andersens US lost their jobs 1,750 partners lost their entire savings JP Morgan and Citigroup suffered steep losses Ken Lay – chief exec died during the trial Andrew Fastow and Jeff Skilling – served long prison sentences
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Does Trust/Ethics Matter?
Macro Level Would profession exist without trust? Micro Level Accountants face ethical issues during careers Who is directly/indirectly effected by this accounting decision? If I was in their position how would I feel about the accounting decision in terms of fairness?
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Does Trust/Ethics Matter?
Accounting Profession status – damaged (Turner 2002) Enron Worldcom Parmalat “Many of the examples of reporting failure evidence a failure to act ethically by at least some of the participants” 2003 IFAC task force Self regulation – no regulation? Regulation – or ethics Accounting Education – part of professional training?
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What’s so hard? Individual Guidelines Family Parents Professional
Religion Social Group Religion Culture Peer Group
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Reasons for unethical behaviour by accountants – Jackling et al 2007
Self interest Failure to maintain objectivity and independence In appropriate prof judgement Lack of ethical sensitivity Improper leadership and culture Failure to withstand advocacy threats Lack of competence Lack of organisational and peer support Lack of prof body support
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Implications to regulators
Objective is to ensure Relevant and Faithfully Represented financial information is produced Integrity of the accounting profession is integral to achieving objectivity Presence of unethical behaviour will Raise the cost of capital for organisations May impact whole market – liquidity and share price volatility Implications for the content but also the application of accounting standards
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IFAC Fundamental Principles …..
‘ A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest …’ A professional accountant shall comply with the following fundamental principles:- Integrity Objectivity Professional Competence and Due Care Confidentiality Professional behaviour
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Accounting standards – A start or the answer?
Accounting standards – production is the start, application is what matters? “To attribute US accounting failures to a deficiency in US GAAP was totally inappropriate” Imhoff 2003 “ Corporate governance is much more than the accuracy of the balance sheet” EIU (2002) Can accounting regulation achieve globally consistent standards Cultural differences, may result in different user needs and apply the same ethical criteria when assessing results e.g. some countries may put more emphasis on employees and the community Current standards heavily biased towards western attitudes
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Application of practice – Earnings management
Companies as well as business-unit manager have been found to engage in earnings management (Healy and Wahlen 1999) Earnings Management – ‘Probably the most important ethical issue facing the accounting profession’ Levvitt ‘Overall consequence of earnings management is the erosion of trust between shareholders and companies’ Levvitt 1998 Alternative view Dye 1988, Kaplan 2001 – current shareholders have a positive demand for earnings management - Merchant and Rockness 1994 Parfet 2000 ‘ Earnings management is a logical result of flexibility in financial reporting options’
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Application of practice – Earnings management
Regulator – tried to address the issue of earnings management. Debate as to whether earnings management is an issue Debate as the to extent to which additional regulation is the answer Increased focus on ethics may be more effective(Amat and Growthorpe 2005)
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Implications to the regulator – the bigger picture
Shortcomings of capitalism results in negative behaviours - Low et al, 2008 Corporate transparency Corporate values and behaviour Money culture Vices of a capitalistic society Legalistic culture
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Ethics Does trust matter? Role of Accounting Information
Role of an accountant Impact on regulation – think beyond accounting standards and types of regulation
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Reading Elliott and Elliott– chapter 11 VLE for articles
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