ethics in accounting

1. Ethics in Accounting
Rakesh Nadig H S, Dept. of Commerce 1

2. Accounting
Practice and body of knowledge concerned
primarily with Methods for recording
transactions
• Keeping financial records
• Performing internal audits
• Reporting and analyzing financial information
to the management, and
• Advising on taxation matters.
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3. Role of Accountants
• The traditional external audit function
• Tax
• Corporate finance advice
• Finance, accounting and treasury functions in
industry and commerce
• Analysis & decision making for top level
management
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4. Ethics
• The word ethics‘ is derived from the Greek
word ethos‘ which stands for character and
Latin word moras‘ which means customs.
• Ethics refers to a system of moral principles-a
sense of right and wrong and goodness and
badness of actions and their motives and
consequences
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5. • Moral principles that govern a person's
behavior or the conducting of an activities.
• An area of study that deals with ideas about
what is good and bad behavior
• A branch of philosophy dealing with what is
morally right or wrong.
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6. Ethics in Accounting
• For accounting and finance professionals it is
extremely important to be ethical in their
practices due to the very nature of their
profession.
• Accounting ethics is primarily a field of applied
ethics and is part of business ethics and human
ethics, the study of moral values and judgments
as they apply to accountancy. It is an example of
professional ethics
• Provides fair and accurate reporting of the
financial position of a business.
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7. Importance of ethics in Accounting
• The nature of the work carried out by accountants
requires a high level of ethics
• Shareholders, potential shareholders, and other users of
the financial statements rely heavily on the yearly
financial statements of a company
• They rely on the opinion of the accountants who
prepared the statements, as well as the auditors that
verified it, to present a true and fair view of the
company
• accountants and auditors to overcome ethical issues,
allowing for the right choice that, although it may not
benefit the company, will benefit the public who relies
on the accountant/auditor’s reporting
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8. Ethical issues
• Reporting False Income
• Underreporting Income
• Falsifying Documents
• Allowing or Taking Questionable Deductions
• Illegally Evading Income Taxes
• Engaging in Frauds
• Pressure on Employees
• Knowingly using or distributing a fake document
• Forging a signature
• Using official letterheads without authorization
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9. Fraud in financial statement can be
committed in 5 ways
• Fictitious revenue-revenues not actually
earned
• Fraudulent Timing differences
• Concealed liabilities and expenses
• Fraudulent disclosures or Omissions
• Fraudulent asset valuation-false statement of
the inventory available
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10. Harms of Unethical Environment
• Loss of Repute
• Loss of Company in monetary terms.
• Loss of Country
• Restrictions in International Markets
• Pressure on Organizational Stakeholders
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11. How to make ethical Environment?
• Safeguards created by the profession, legislation
or regulation
• Educational, training and experience
requirements for entry into the profession
• Continuing professional development
requirements
• Corporate governance regulations
• Professional or regulatory monitoring and
disciplinary procedures
• External review by a third party of the reports,
returns, communications or information
produced by a professional accountant
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12. • Leadership that stresses the importance of
independence and the expectation that
members of the teams will act in the public
interest
• Policies and procedures to implement and
monitor quality control of the engagements
• A regular monitoring of the accounting firms
• Reasonable trade-off between the degrees of
responsibility and the audit cost to society
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13. Professional Ethics
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14. Code of Ethics:
“Ya Esha Supteshu Jagruthi” – Eternal Vigilance
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15. PART A: GENERAL APPLICATION OF
THE CODE
Introduction and Fundamental Principles - Section 100
• A Professional Accountant’s responsibility is not
exclusively to satisfy the needs of an individual
client or employer but also acting in the public
interest
• This Code is in three parts. Part A establishes the
fundamental principles of professional ethics for
Professional Accountants.
• Parts B and C illustrates how the conceptual
framework is to be applied in specific situations.
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16. Fundamental Principles
Integrity – Section 110
• The principle of integrity imposes an
obligation on all professional accountants to
be straightforward and honest in both
Professional and Business relationships.
• Professional Accountant should not be
associated with reports, returns,
communications or other information where
they believe that the information:
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17. Objectivity- Section 120
• The principle of objectivity imposes an
obligation on all Professional Accountants not
to compromise their professional or business
judgment because of bias, conflict of interest
or the undue influence of others
• Relationships that bias or unduly influence the
professional judgment of the professional
accountant should be avoided.
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18. Professional Competence and Due
Care – Section 130
• To maintain professional knowledge and skill at
the level required to ensure that clients or
employers receive competent professional service;
and
• To act diligently in accordance with applicable
technical and professional standards.
• Competent professional service requires the
exercise of sound judgment in applying
professional knowledge and skill in the
performance of such service
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19. Confidentiality- Section 140
• The principle of confidentiality imposes an
obligation on professional accountants to refrain
disclosing outside the firm or employing
organization confidential information
• Maintain confidentiality of information disclosed
by a prospective client or employer.
• Consider the need to maintain confidentiality of
information within the firm or employing
organization.
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20. Professional Behavior- Section 150
• Imposes an obligation on professional
accountants to comply with relevant laws and
regulations and avoid any action that may
bring discredit to the profession.
• Professional accountants should not bring the
profession into disrepute. Professional
accountants should be honest and truthful
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21. Part B: Professional Accountants In
Public Practice
Introduction – Section 200
This Part of the Code illustrates how the
conceptual framework contained in Part A is to
be applied by professional accountants in public
practice
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22. Threats and Safeguards
• Self-Interest
• Intimidation
• Familiarity
• Advocacy
• Self-Review
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23. PART C: PROFESSIONAL ACCOUNTANTS IN
BUSINESS
Introduction – Section 300
This Part of the Code illustrates the application
of conceptual framework contained in Part A to
Professional Accountants in Business.
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24. Meaning of Ethical Theories
• Ethical principles to address various problems
• Foundations of ethical analysis
• Principles are directed towards common goals
• Answers ethical dilemma
• Ethical guidelines for decision making

25. Classifications
• Teleological - Consequential
• Deontological – Means and process
• Hybrid (Ethical Egoism) – Self centered
• Concept of virtue – only by virtue
• Concept of care – Normative theory

26. Teleological - Utilitarianism
• Greek – Telos – end or consequence
• Doctrine of final cause
• Utilitarianism – action should result in
greatest possible balance of good/evil
• Ability to predict consequences of action
• Greatest benefit to most people

27. Deontology
• Greek ‘Deon’ – Duty
• Act on certain principles and rules regardless
of outcome
• Religious deontology – divine commandments
• Immanuel Kant – 1788
• Secular deontological moral theory
• Theory for human reasons
• Differ from utilitarianism

28. Hybrid Theory
Ethical Egoism
• Normative position that a moral agent ought
to do what is in their own interest
• We ought to do in our self interest even
though we have conflict with others because
we value it most.
• Differ from psychological egoism – people can
only act in their self interest
• Differ from rational egoism – it is rational act
in one’s self interest

29. Virtue Ethics
Aristotle’s Nicomachien Ethics
• Ancient Greek
• Defines concept of virtue
• List of virtues
• Justification to virtues and vices
• Virtue is a character or trait that manifests
itself in habitual action.
• Virtues are excellence of human conduct.
• Qualities to lead a better life

30. Theory of care
• Against to universal theories
• Developed by feminists
• Opposed universal standards
• Universal standards are morally problematic and crate
blindness
Beliefs:
• All individuals are interdependent to achieve the goal
• Extra consideration for vulnerable people who are
affected by our choices
• Necessary to safeguard the interest of people who are
involved

31. Window Dressing
• Window dressing is a technique used by
companies and financial managers to
manipulate financial statements and reports
to show more favorable results for a period.
• window dressing is illegal or fraudulent, it is
slightly dishonest and is usually done to
mislead investors.
• Window dressing refers to actions taken or
not taken prior to issuing Financial
Statements in order to improve the
appearance of the financial statements.
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32. • Difficult to detect – Involvement of higher
management
• Used to attract potential investors
• Window dressing is probably most commonly
found in investment brokers and mutual fund
houses. Mutual fund managers often sell off
poor performing stock and other investments
near the end of a period and use the money
to buy high performing stock.
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33. Objectives
• To present better financial and liquidity position of
the business by showing increase in revenue and
profitability
• To attract potential investors by over-stating
profitability of business
• To avoid higher taxes to be paid on the income of the
business by showing low profits.
• To avail credit and loans by banks or financial
institution by showing a healthy financials with
repayment capability.
• To increase the share value in market by attracting
investors sentiments and to build up trust of the
stakeholders in the business performance.
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34. Methods
• Creation of Secret Reserve
• Showing contingent liabilities as actual
liabilities
• Under-valuation and Over-valuation of
inventories
• Switching to different method of depreciation
• Selling off fixed assets
• Postponing cash payment
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35. Creative accounting
• Accounting practices that follow required laws
and regulations, but deviate from what those
standards intend to accomplish
• Creative accounting capitalizes on loopholes in
the- accounting standards to falsely portray a
better image of the company
• creative accounting practices are legal, the
loopholes they exploit are often reformed to
prevent such behaviors
• when firms indulge in creative accounting they
often distort the value of the information that
their financials provide
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36. Reasons
• Income Relaxing
• Survive from Bankruptcy
• More Profit
• Pay Less Tax
• Boost the Share Price
• To increase (fake) transaction
• To Attract Investor
• Boost Assets to avoid Takeover
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37. Practices
• Allow company to choose between different
accounting methods
• Artificial transactions can be used to manipulate
balance sheet
• Genuine transactions can be timed to give desired
impression in the accounts
• Overstatements of Assets
• Adjustment in the capital employed o Movement in
inventory
• Manipulating the value of goodwill and intangibles
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38. Advantages
• Innovative way of accounting
• Follow rules and regulation
• Financial Position looks healthier
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39. Disadvantages
• Deviates from law
• Misleading financial statemenst
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40. Insider trading
• Insider is the person who is “connected” with
the company , who could have the
unpublished price sensitive information
• The legal version is when corporate insiders—
officers, directors, and employees— buy and
sell stock in their own companies.
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41. • Illegal insider trading refers generally to
buying or selling a security, in breach of a
fiduciary duty or other relationship of trust
and confidence
• Insider trading violations may also include
“tilting” such information
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42. Connected Person
• Any person who is or has been associated
with company, in any manner, during the six
months prior to the concerned act:
• An immediate relative to the connected
person.
• A banker of the company.
• An official of stock Exchange or of clearing
corporation.
• A holding/associate/subsidiary company.
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43. What Includes Insider Trading
• Subscribing
• Dealing
• Buying
• Selling
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44. Governing Regulation
• SEBI Act – 1992
• SEBI (Insider Trading) Regulation – 1992
• SEBI (Amendment) Act – 2011
• SEBI prohibition of Insider Trading regulation
1995.
• Section 11(2) E of companies act 1956
prohibits the insider trading.
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45. Need for Prohibition of Insider Trading
• Fair and Transparent.
• To have a Level Playing Field for all the
participants in the market.
• For free flow of information and avoid
information irregularity.
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46. HLL-BROOKBOND LIPTON INDIA LTD
• The case primarily involves 4 parties namely
Unit Trust of India(UTI),Hindustan Lever
Limited(HLL),Brooke Bond Lipton India Limited
(BBLIL)and Securities &Exchange Board of
India (SEBI).
• EBI , suspecting insider trading, conducted
enquiries.
• In August 1997 , SEBI charged HLL of insider
trading by using Unpublished Price-Sensitive
Information.
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47. • HLL bought 8 lakh shares of BBLIL from UTI at
Rs.350.35 per share (At a premium of 9.5% of
ruling market price of Rs.320) just two weeks
before the formal announcement knowing
that the HLL and BBLIL were going to merge.
• SEBI penalized HLL with Rs. 34 million in
compensation, and also initiated criminal
proceedings against the five directors of HLL
and BBLIL.
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48. Campaign financing
• Campaign finance refers to all funds raised in
order to promote candidates, political parties,
or policies in elections, referendums,
initiatives, party activities
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49. Whistle Blowing
• Release of information by a member or former
employee of an organization that is evidence
of illegal and or immoral conduct in the
organisation or conduct in the organisation.
• Whistle Blowing can only be done by an
member in the organisation not a witness of a
crime or a reporter.
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50. • Whistle Blowing is something that can be
done only by a member or former member of
an organisation
• It must be an Information that is not available
for public
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51. Types
• Internal Whistle- Blowing - When an individual
advocates beliefs or revelations within the
organization.
• External Whistle Blowing - When and
individual advocates beliefs or revelations
outside the organization.
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52. Conditions of Justified Whistle Blowing
• Situation of sufficient moral importance:
• Situation when all facts of information are
properly understood with their significance:
• Best way to Blow the Whistle :
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53. WHISTLE BLOWERS PROTECTION ACT
2011
• Act of the Parliament of India which provides
a mechanism to investigate alleged corruption
and misuse of power by public servants and
also protect anyone who exposes alleged
wrongdoing in government bodies, projects
and offices.
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54. Benefits
• Benefit in learning mistakes and problems in
early stage itself.
• Shows companies commitment towards good
ethics and ethical corporate climate.
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55. Dangers
• Legitimate complaints sends wrong signal to
other employees to whistle blow in case of
tension or strike.
• Employee may go outside of normal
communication channel which is undesirable.
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56. Ethics in IFRS
• In Financial reporting it ensure that all users
of financial systems must know the generally
accepted accounting principles (GAAP).
• Ethics in financial reporting is basic
requirement
• It creates credibility with public and
employees
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57. • Most accounting scandals have taken place on
fraudulent financial reporting. It means that
the management of company presents the
misstatement of the financial statements
• It is carried out with the intention of
misleading investors and maintaining the
company's share price
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58. ETHICAL ISSUES IN ACCOUNTING AND
FINANCIAL REPORTING
• Financial reporting is deceitful –
The management of company is an intentionally
misapplication of amount with intent to
deceive the investors and showing fake the
company's share price.
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59. • Assets misappropriation –
Assets Misappropriation by use of company
assets other than company interests for any
other purpose.
• Full Disclosure:
Sometime information is not disclosed in a
prescribed way with GAAP and accounts are not
prepared with honesty then it is to be
considered financial reporting is a fraudulent
activities
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60. SOLUTION ETHICAL ISSUES RELATING TO
FINANCIAL REPORTING AND ACCOUNTING
• Proper evidenced based approach:
• Significance of consistency:
• Involvement in information technology
system:
• Management and internal supports:
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61. Case Studies
• Freddie Mac - Misstated Earning - $5 Billion
• TYCO - $500 Million Inflated Income $150
Million
• Health South - Inflated Earning $1.4 billion
• Bernie Madoff - Ponzi Scheme of $64.8 Billion
• Satyam IT - Falsely Boost Revenue $1.5 billion
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