refers to the guidelines (consisting of judgments and moral values) that a professional needs to follow while practicing accounting
The people who receive the services of an accounting professional not only rely on his skill and ability, but also on his professional integrity.
The essence of accounting ethics is in the maintenance of professional objectivity and integrity.
deviate from traditional methods used to interpret accounting rule or standard
Often walks between the line of legal and illegality
One time charges
Raiding the reserves/cookie jar accounting
Off balance sheet items
Krispy Kreme was public listed in April 2000
The company’s strategy is to aggressively grow its chain of franchise store
From 2000-2004, number of store grew from 144 to 357 stores
Fortune magazine called it the ‘hottest brand in America’.
Firm under pressured having to constantly increase its financial performance to satisfy the premium that investors were paying for its stock
As a result, its CEO and COO ‘managed earnings’
Accounts are always adjusted to beat EPS targets by 1cent and claimed to having exceeded Wall Street expectations
Bonuses for top management were linked to surpassing the EPS forecast
Krispy Kreme also manipulated revenue by shipping doughnut making equipment with high margins to franchise owners before they requested the equipment, then booked the sale as revenue
Policing role of Auditors
Audit inspection on the accounting records is necessary to ensure accuracy and reliability of financial information
Unqualified Opinion – no material weaknesses in internal control over financial reporting
Adverse Opinion – one or more material weaknesses has exist
Disclaimer of Opinion – there are restrictions on the scope of the auditor’s work preventing the auditor from expressing an opinion on the company’s internal control over financial reporting.
Auditors’ duty to report matter suggesting dishonesty or fraud uncovered in the course of their audit process
To inform the authority when he ceases, for any reason, to hold office. Failure to inform will subject the offender to penalty of a fine
Auditor is an officer, not employee, of the company.
Companies Act 2006
Accounting information produced by Accountants impacts decisions about wealth transfers
Accountants can give legitimacy to organisations which may not otherwise be deemed legitimate
Personal preference of individual Accountant affects the “character” if information issued.
An Accountant who is not concerned with social and environmental responsibility will not record expenses for environmental preservation and therefore will not be brought to the attention of information user
Information generated should faithfully represent underlying transactions and be neutral and verifiable
Accountants objectivity – while accounting treatment of many transactions are regulated, many others are still unregulated. Accountants are expected to decide objectively and free from bias
IASC – International Accounting Standard Committee
Established in 1973
Formulate and publish worldwide accepted and observed accounting standards
to improve and harmonize regulations, accounting standards and procedures without overriding local regulations
IASB 2001 – International Accounting Standard Board
The successor of IASC
Responsible for developing the International Financial Reporting Standards (IFRS)
International Accounting Standard
Development of mandatory accounting standards in UK
problems with accounting information led to poor and uninformed investment decisions
Mandatory accounting standards was developed in UK by 1970s when the Accounting Standards Steering Committee was established
departures from principles had to be disclosed in footnotes
Standards provides Investors with some form of protection from fraudulent organisations producing misleading information
Regulation leads to uniform methods thus enhancing comparability
Argument against regulating a/c practice
Capital markets will punish firms that fail to provide information
Regulation restricts the accounting methods able to be used so organisations may be prohibited from using methods which best reflect their particular performance and position. This has implications on the efficiency with which the firm can inform the market about its operations.