WHAT IS ACCOUNTING ETHICS?
Accounting ethics is a very important topic because, as accountants, we have key access to the financial information of individuals and organizations. Such power also involves the potential and scope of misusing information or manipulating numbers to improve corporate perception or impose profit management. Ethics is also essential in the context of auditing. If the requirements on auditing and accounting professional ethics are not met, the audit must be terminated immediately.
ETHICS AND CODE OF CONDUCT
Ethics and ethical behavior refer to general principles such as honesty, integrity, and ethics. However, a code of ethics is a specific set of rules by public Accounting Dubai regulatory bodies. Although the rules established by various bodies worldwide are unique, some are common. Let’s take a look at some of these important rules.
RULES AND ADVICE
The idea of independence is one of the main rules established by professional accounting bodies in North America. As an auditor, you should be completely objective and have no ties or relationships with the client, as this can reduce your judgment and adversely affect the process—overall audit.
THERE ARE TWO INDEPENDENT FORMS:
De facto independence
True independence refers to any factual information, such as whether you, as an auditor, hold shares or other investments in a client company. These facts are usually easy to identify.
However, independence is more subjective. For example, suppose you, as an auditor, are invited to a year-end party at a client. The party was extremely luxurious, and you were also given a beautiful watch. Could the auditor, who was invited to the party and received a gift, maintain their independence in the audit? To resolve potential conflicts of interest, the rational observer test is used – i.e., what would a reasonable observer of the situation say?
THREATS TO INDEPENDENCE
There are always multiple threats and situations that can reduce the level of independence. Let’s take a closer look at these threats:
If the auditor has a long-term relationship with the client or if they are close friends/relatives
If the auditor changes any of the financial statements, the client threatens to change the auditor
Threat of self-interest:
The auditor has any direct financial interest through actions or substantial fees unpaid by the client
Threat of self-test:
If auditors perform audit and bookkeeping services, this is a review of their work.
OTHER IMPORTANT RULES
Some other rules prescribed by professional accounting bodies include:
- Unauthorized contingency fees – For example, audit fees based on a percentage of net income or a percentage of a bank loan received
- Integrity and Diligence – Audit work must be done thoroughly, carefully, and promptly.
- Professional competence – Auditors must be competent, meaning they must have the required academic knowledge and experience in the relevant field.
- Obligation to Report Violation of the Code – This rule is often called the whistleblower rule. If a CPA observes a fellow CPA violating any of these rules, they are responsible for reporting it.
- Confidentiality – Auditors must not disclose any customer information to third parties.
WHY IS ETHICS IMPORTANT IN ACCOUNTING?
There are several benefits to establishing ethical principles when handling financial information. But what role does ethics play in Accounting Companies In Dubai? Accounting ethics prohibits accountants and the natural or legal entity that is the custodian of financial information from disclosing this information. Disclosure of financial information is considered unethical and violates the Code of Trust unless legal reasons justify doing so. Businesses can preserve their reputation and those of those who handle financial information by following accounting ethics. Accounting ethics also applies to audits. Auditing is the confirmation of various accounting books and inventories to maintain standards and accuracy.
BUT WHY IS ETHICS IMPORTANT IN AUDITING?
Regulatory bodies have established audit ethics to ensure auditors maintain honesty, prudence, and integrity during audits. The Sarbanes-Oxley Act is one of the most important codes of ethics guiding the accounting profession. This law was enacted in 2002 to guide all accounting and auditing activities in enterprises and corporations. The financial negligence of Arthur Andersen (an accounting firm) and Enron prompted the enactment of the Sarbanes-Oxley Act.
The Enron Company was founded in 1986 as an energy company in Houston, Texas. During its operation, the company began fabricating financial information to give a false impression of profitability. In addition, during its operation, the accounting firm Arthur Andersen made unethical choices in the Enron scandal. After Enron went bankrupt, the Securities and Exchange Commission analyzed the financial reporting performance of Arthur Andersen and Enron. As a result, the Sarbanes-Oxley Act was developed to ensure senior executives provide secure financial information. It also stipulates the types of financial information a company can keep, how long companies must retain it, and penalties for non-compliance.
PROFESSIONAL SKILLS AND COMPETENCIES
Accounting is a detail-oriented career that requires knowledge and skills to do the job properly. Errors lead to problems with investors, business partners, lenders, and the Internal Revenue Service. Therefore, anyone at any level in the accounting industry must understand what is required of the job and how to do it correctly.
Accountants see the good, the bad, and the bad of the financial situation of a company or a person. Customers have the right to know that this information is held in the strictest confidence and is only shared with other professionals if consultation is required to resolve a particular issue.
Failure to keep the information confidential can lead to bad publicity and dishonor a business or individual. It can also lead to fraud, identity theft, and other illegal activities if the information is shared with inappropriate parties.
STANDARDS OF HONESTY AND INTEGRITY
Integrity encompasses a variety of ethical standards, including honesty and professionalism in all circumstances. Accountants should always present facts objectively and avoid misleading information. An accountant who fails to demonstrate a high level of integrity is unreliable and loses the trust of his clients.
INDEPENDENT AND OBJECTIVE
Most accountants are partners or licensed to advise clients on financial services and investments. Accountants must maintain fiduciary responsibility, seek objective solutions, and provide advice based on that objectivity. A common problem in the financial services industry is that products are recommended to clients simply because they offer the highest compensation to the advisor. Therefore, accountants must be objective with an independent point of view, especially when dealing with the business’s financial details.
PROFESSIONALISM AND MANNERS
Professionalism is a standard that goes beyond the office. Maintaining a professional demeanor is good business, whether at a networking event or a party. Accountants must be law-abiding citizens, free from bad habits, such as gambling, that put them at risk of compromising client information. No one trusts a drunken accountant at a party who starts spewing out information that security standards could constrain.