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International Journal of & Society (IJES) Journal homepage: www.ijethics.com Vol. 1, No. 2 (2019)

(Review Article) Ethics

Sahar Sepasi

Dept. of Accounting, Faculty of & , Tarbiat Modares University, Tehran,

Abstract

Background: Accounting information has many users, which comprise holders, managers, inves- tors, and the government for and regulatory resolves. A businessman use financial statements to define particular information that will guide him in making vital business decisions. Accounting impacts a wide range of parties in society. From this point of view, accounting’s codes of ethics are important. Conclusion: Ethical codes are the essential principles that accounting professionals choose to abide by to enhance their , preserve public trust, and reveal honesty and fairness. Proper ethics and ethical behavior are tremendously important in accounting for a variety of motives. In the same way it is important that the industry itself does not become pilloried as an unethical one, something that could potentially de- struction business for all accounting firms. Ethics and integrity are valued features in an . They must know right from wrong and always parade integrity in his or her accounting and deeds.

Keywords: Ethics, Accounting, Ethical cods

Downloaded from ijethics.com at 2:13 +0330 on Saturday October 2nd 2021 Introduction

What is ? is the study of moral values and judgments as Accounting ethics is among important topic be- they apply to accountancy: an example of profes- cause are the key personnel who can sional ethics. Accounting introduced by Luca reach the information of three Financial State- Pacioli, and later developed different groups, pro- ments (the , the , fessional , and independent associa- and the statement of flows). These three tions (1). Ethics is taught in accounting courses at statements are linked to each other. Accounting higher education institutions as well as by com- ethics is primarily a field of applied ethics and is panies training accountants and auditors. The part of and human ethics, which nature of the duty carried out by accountants and

 Corresponding Author: Email: [email protected] Received: 10 Oct 2018, Accepted: 7 Jan 2019

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auditors requires a high level of ethics. Share- petence and technical standards"; "responsibilities holders, , and other users of the finan- to clients"; "responsibilities to colleagues"; as well cial statements rely heavily on the annual finan- as "other responsibilities and practices". Each of cial statements of a company to use this infor- these divisions gave guidelines on how a Certified mation to make an informed decision. They rely Public Accountant (CPA) should react as a pro- on the opinion of the accountants who prepared fessional. Failure to fulfill with the guidelines the statements, as well as the auditors that vali- could have caused an accountant to be pent from date it, to present a true and fair view of the practicing. When developing the ethical princi- company (2). Having knowledge of ethics can ples, the AICPA also considered how the profes- help accountants and auditors to prevail; ethical sion would be viewed by those outside of the ac- dilemmas, allowing for the right choice that will counting industry (4). benefit the public who focus on the - ant/auditor's reporting. Accounting ethics has been considered tough to History resistor as accountants and auditors must consid- , the "Father of Accounting", has er the of the public (which relies on the written on in his first , information gathered in ) while ensuring geometria, proportioni, et proportionalita, published in that they endured active by the syndicate they are 1494 about accounting ethics. Ethical codes and auditing. They requisite contemplate how to best standards from since have been developed smear accounting standards even when faced through different groups, professional and inde- with issues that could cause a company to face a pendent organizations. These various groups had significant loss or even be discontinued (5). Due lead accountants to follow several rules and to several accounting scandals within the profes- codes of ethics to perform their duties in a pro- sion, critics of accountants have stated that when fessional way and in a professional work envi- asked by a client "what does two plus two equal?" ronment (3). Accountants must follow these rules the accountant possible to respond "what you named the code of ethics set out by the profes- alike it to be?" This thought course along with sional. other criticisms of the profession's issues with In , in 1887, the American Associa- , have led to various increased tion of Public Accountants (AAPA) was created; standards of competence while stressing ethics in it was the first step in developing professionalism the work situation. Downloaded from ijethics.com at 2:13 +0330 on Saturday October 2nd 2021 in the United States accounting. By 1905, the The role of accountants is grave to society. Ac- AAPA's first ethical codes were derived to edu- countants serve as financial reporters and media- cate its members. During its twentieth bicenten- tors in the capital markets and owe their primary nial assembly in October 1907, ethics was a major compulsion to the public interest. The infor- topic of the conference among its members. As a mation they provide is crucial in assisting manag- , a list of professional ethics was used into ers, investors and others in making critical eco- the 's bylaws. However, because nomic decisions. Therefore, ethical indecorums membership to the organization was voluntary, by accountants can be detrimental to society, re- the association could not put a must on individu- sulting in distrust by the public and disruption of als to conform to the suggested behaviors. The efficient operations. AAPA was retitled several times throughout its From the 1980s to the existing there have been history, before becoming the American Institute numerous accounting scandals that were widely of Certified Public Accountants (AICPA) as it's reported on by the media and resulted in named today. They extended five divisions of charges, protection requests, and the ethical principles that its members should follow: closure of companies and accounting firms. The "independence, integrity, and objectivity"; "com- disgraces were the result of , 2 Available at: www.ijethics.com Sepasi S. International Journal of Ethics & Society (IJES), (2019) Vol. 1, No. 2

misleading , as well as corrup- Ethics and the Code of the Conduct tion. Numerous companies had matters with dis- Ethics and ethical behavior advert more to gen- honest accounting practices, including Nugan eral principles such as honesty, integrity, and Hand Bank, Phar-Mor, WorldCom, and AIG. morals. However, the code of professional con- One of the most widely reported violation of ac- duct, is a specific set of rules set by the governing counting ethics involved , a multinational bodies. Although the rules set out by diverse company, which for several years had not shown bodies around the world are each unique, some a true or fair view of their financial statements. rules are universal (8). One of the key rules set Their auditor , an accounting out by professional accounting bodies is the in- firm considered one of the "Big Five", signed off dependence. This is auditors must be totally ob- on the rationality of the accounts despite the in- jective and must be without concerns to or rela- accuracies in the financial statements. When the tionships with the client since that could poten- unprincipled activities were described, not only tially impair their judgment and impair the overall did Enron disband but Arthur Andersen also course of the work. went out of business. Enron's shareholders lost There are two forms of independence: $25 billion as a result of the company's bankrupt- Independence in fact recourses to any factual in- cy (6). Although only a fraction of Arthur Ander- formation such as whether auditors own any son's employees were involved with the scandal, shares or other investments in the client firm, the closure of the firm resulted in the loss of which is usually easy to determine. 85,000 . Independence in attendance is more subjective. Following these scandals a rule named Sarbanes– In order to solve a potential conflict of interest, a Oxley act was set. Sarbanes–Oxley was named reasonable observer’s test is used – i.e., what after U.S. Senator Paul Sarbanes and U.S. Repre- would a reasonable observer say about the situa- sentative Michael G. Oxley. As a result of this tion that the auditors may have benefit form rela- act, top management must by discrete affirm the tion with client (9). of financial information. Additionally, Some other rules themed by professional ac- penalties for fraudulent financial acts are much counting bodies include the following: harsher (7). In addition, this act has increased the  Contingent fees are not allowed: e.g., audit omission role of boards of directors and the in- fees that are based on a percentage of the net dependence of the outside auditors that review income figure or a percentage of a bank the validity of financial statements. received Downloaded from ijethics.com at 2:13 +0330 on Saturday October 2nd 2021 This act, which contains eleven parts, was depict  Integrity and due care: work must be done as a reaction to a number of major corporate and thoroughly, diligently, and in a timely manner. accounting scandals, including Enron, Tyco In-  Professional competence: must be compe- ternational, Adelphia, Peregrine Systems, and tent, which means he/she must have both WorldCom. Not to mention that these scandals the necessary academic knowledge and expe- investors billions of dollars, since the share rience in the relevant industry. prices’ of affected companies crashed and tremor  Duty to report a breach of rules: the whistle- public confidence in the US securities markets. blower rule. If a CPA detects a associated The act contains eleven titles, ranging from addi- CPA disrespectful any of these rules, he/she tional corporate board responsibilities to criminal has a responsibility to report it. penalties, which requires the Securities and Ex-  Confidentiality: must not reveal any infor- change Commission (SEC) to comply rulings on mation regarding the client to outsiders. requirements to act with the law. Since it is dis- tinct that: the mission of the SEC is to protect Code of Ethics in Accounting investors, preserve fair orderly, and efficient mar- The International Ethics Standards Board for Ac- kets, and facilitate capital formation. countants, itself an independent agency, has devel- 3 Available at: www.ijethics.com Sepasi S. International Journal of Ethics & Society (IJES), (2019) Vol. 1, No. 2

oped a code scheming the principles at play in ethi- time, subsequent through on commit- cal accounting (10). These principles cover many ments and only compliant expenditures facets of ethical behavior for accountants, although for services that have been condensed. unique situations may need judgment calls that In Iran, Iranian Association of Certified Public aren't explicitly evoked in these principles. Accountants (IACPA) is regulating and promot-  Integrity: Integrity isn't a set of guidelines ing accounting and auditing profession and over- or a development of achievement, but ra- sight of the work of members by: ther a state of awareness oriented near  Organizing CPAs honesty, honesty and a obligation to act-  Enhancement and development of pro- ing succeeding principle rather than for fessional services through preparation, the sake of personal gain. compilation, publication and promotion  Objectivity: To the degree that it is physi- of accounting, and eth- cally possible, accountants shouldn't be ics standards; prejudiced by the or outlooks of  Enhancement of professional knowledge the individuals or companies who hire of certified public accountants through them. An accountant also shouldn't let development and improvement of train- individual biases or benefits influence ei- ing, and issuance of specialized ther the numbers that go into an and professional publications bookkeeping system or the fallouts that  Safeguarding the professional interests of come out of it. Facts and should members. be taken at face value and should deter-  with regional and interna- mination assumptions and decisions. tional professional bodies and becoming a  Professional Competence and Due Care: member thereof with the goal of ad- The arena of accounting isn't a still body vancement of professional connections. of gen but rather an evolving frame of situation that changes as and History of Iranian Association of Certified best practices are redefined over period. Public Accountants It is the duty of an ethical accountant to Audit of and non-profit entities, a system stay well-informed of these expansions of professional accounting, establishment and and provide clients with up-to-date mate- domain of non-governmental auditing were left

Downloaded from ijethics.com at 2:13 +0330 on Saturday October 2nd 2021 rial and the highest eminence . undecided for the first 10-15 years after the revo-  Confidentiality: Accountants switch sensi- lution. The 'Use of Specialized and Professional tive information, and it is an accountant's Services of Qualified Accountants as certified ethical charge to exhortation from dis- Public Accountant Act' (the Act), enacted in closing any of this information to outside 1993, was a desirable response to this need. Ac- parties who may stand to advance from it. cording to the Act, government may utilize the Likewise, an accountant shouldn't use any specialized and professional service of Certified information gotten while acting profes- Public Accountants (CPAs) as it thinks proper sional services for the sake of individual and fit, to monitor financial affairs of manufac- gain, such as vending stock in a business turing, trading and service entities and also, to whose appear doubtful. ensure the reliability of their financial statements  Professional Behavior: As with any living, in order to maintain investors, other interested an accountant should achieve tasks and parties and the public interests. According to tasks with an eye to the highest personal sub-section 1 to the Act, the "Recognition of and specialized standards. These include Qualification of Certified Public Accountants" completing tasks methodically and on procedural manual was ratified in 1995 by the

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Council of Ministers and in early 1996, Minister fixed and variable membership fees; and prepara- of Economic Affairs and introduced the tion of directives necessary for execution of duties. first group of CPAs as founders of Iranian Asso- ciation of Certified Public Accountants to devel- Supreme Oversight Board op the association's Articles of Association. The Supreme Oversight Board comprises one chief Articles of Association was ratified by the Coun- and two members, all CPAs, appointed from cil of Ministers in September 1998. The first gen- within the members of the Association by the eral assembly of CPAs was convened on August Minister of Economic Affairs and Finance for a 24, 2001, to elect High Council members. High tow year term. The Board has the duties of exam- Council members were duly elected by direct ining and expressing an opinion on the fairness vote of CPA members and the Association was of information reported by the Board of Direc- duly established. tors, annual financial statements of IACPA, per- The governing bodies of IACPA are as follows: formance of the Association and its members, and also to render regular reports of its activities High Council to the Minister of Economic Affairs and finance, High Council comprises 11 experienced and ex- High Council and the as nec- pert CPAs elected from within the members by essary. the members for a three year term. One delegate appointed by the Minister of Economic Affairs Conclusion and Finance, one by the Stock Exchange Council, and one by the High Council of Banks also attend Ethical codes are the fundamental principles that the meeting without voting right. High Council is accounting professionals have chosen to abide by the highest governing body, and is responsible for to increase their profession, maintain public trust, matters such as setting the strategy and approval and demonstrate honesty and fairness. . Sadly, of plans, manuals, annual , financial state- not everyone whose task is in the accounting ments of IACPA, appointment of the board of field is trustworthy. Accounting ethics is original- directors and disciplinary board members. Ap- ly a field of applied ethics and is part of business proval of specialized committee members compe- ethics and human ethics, studying the moral val- tency, determining entry fees and performance of ues and judgments as they apply to accounting. professional oversight through specialized com- Accounting first introduced by Luca Pacioli, and mittees are part of High Council duties. later prolonged by government groups, profes- Downloaded from ijethics.com at 2:13 +0330 on Saturday October 2nd 2021 sional administrations, and independent firms. It Board of Directors interconnects a lot of the information that own- Board of Directors comprises 3 or 5 CPAs select- ers, managers, and investors requisite to appraise ed from within the members and appointed by the a company's financial enactment. In fact, the res- president for three years. The High Council ap- olution of accounting is to help investors make points one of the members of the board as Chief better business resolutions by providing them and General who will with financial information. Many negative signifi- handle the Association's affairs on a fulltime basis. cances can result from poor ethics in accounting Implementation of High Council directives; plan- applies. The first result is generally a holdup in ning; organizing; preparation of manuals, annual business. Accounting rely seriously budget, financial statements and execution of on word-of-mouth for campaign, and it's all too plans are among the duties of Secretary General easy for a few bad stories about unethical per- and the Board. Each member of the board is re- formance to expert prospective clients away from sponsible for part of the activities of the Associa- a precise firm. There can also be serious legal tion. Other duties of the board include establish- outcomes for those who are found to be disre- ing specialized committees; recommending entry, spectful legal codes and standards for their au- 5 Available at: www.ijethics.com Sepasi S. International Journal of Ethics & Society (IJES), (2019) Vol. 1, No. 2

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