ACT 4193 CURRENT ISSUES IN ACCOUNTING AND AUDITING “ETHICS”

ACT 4193CURRENT ISSUES IN ACCOUNTING AND AUDITING“ETHICS” • LEONG YIT KHER 110776 • CHUA SHOK KENG 110827 • TAN KIM MOY 110673 • NG SHIAU CHUEN 110803

Definitions of Ethics • “a set of moral principles especially those of a religion, school of thought or leader” • “ethics are the norms and beliefs that are construed as the accepted moral standards” • “inquiry into the nature and grounds of morality where the term morality is taken to mean moral judgments, standards and rules of conduct”

MIA By-Laws (On Professional Conduct and Ethics) set out the following Fundamental Principles, which they refer to as the “basic tenets of ethical and professional conduct of all members”: (1) Integrity, objectivity and independence (2) Technical standards and competence (3) Courtesy and consideration (4) Professional behavior

Issues Against Ethics • As seen through corporate corruptions such as Enron, without an ethical foundation, organizations collapse. • The purpose of ethics in business is to direct individuals to abide by a code of conduct that help increase and maintain public confidence in their products and services. • Today, individuals in management accounting and financial management constantly face ethical dilemmas.

In this paper, our group has addressed three main issues in ethics as follows: 1. Ethical Dilemmas In Accounting and Auditing 2. Ethical Standard or Accounting Standards for Developing Countries. Which one Should Be Come First? 3. The Ethics of Creative Accounting

Issue 1 Ethical Dilemmas In Accounting and Auditing

Enron case has brought into sharp focus a broader issue – the need for higher ethical and professional standards among auditors. • One of the global ‘big five’ audit firms seems to have connived, as statutory auditors, at the misleading financial engineering of Enron. Moreover, the same firm appears to have been associated with this client as a consultant and also in its internal audit for substantial financial benefits, thus raising questions about conflict of interest.

Unethical of Enron’s Board • Enron’s board appears to have fallen short in many respects. They were not fully briefed on the extent of the partnerships, allegedly taking only fifteen minutes to review some of the more dubious transactions underlying the surge in earnings.

In June 1999 at an hour long meeting that also dealt with other business, they allowed the Code of Ethics to be set aside for Andrew Fastow to manage the partnerships. • In October 1999 they waived the ethics code again to allow a lager partnership to be set up.

Unethical of Enron’s Audit Committee • The committee did not apparently involve itself in any activity connected to risk assessments, either by Buy’s department or the auditors. Nor did it follow up on the Board’s requirement for scrutiny having waived the Code of Ethics for Fastow despite its remit to review ‘compliance with Enron’s policies regarding business conduct’.

There are questions about membership, tenure and geographical diversity of the committee and the independence of its members from the management of Enron.

Unethical of Enron’s Auditor • Andersen acted as auditors for Enron. They also undertook the internal audit and consultancy work, giving rise to the question of conflict of interest and loss of independence.

Andersen had a policy of document shredding, keeping only formal audit papers. This was formulated following Andersen being found guilty based on its own papers in a previous case, Waste Management.

Andersen failure to act according to their own professional ethics, to comply with the requirement of giving an opinion based on ‘fairly stated’ accounts and to follow the spirit of accounting regulation has destroyed the firm.

Issue 2 Ethical Standards or Accounting Standards for Developing Countries: Which One Should Come First?

“Should the focus of international accounting bodies with regard to the needs of developing countries be on harmonization or standardization of accounts in the coming decade, or should it be on developing the proper and ethical environment for sound business practices?”

Accounting standard setting: • flexible and acceptable to a vast body of constituents in different countries • major countries such as the UK, France, Germany, Sweden, The Netherlands make distinction between the standard • other countries have positioned themselves and identified their systems along the lines of one of the major countries identified above

at the end of each period ,the entrepreneur is most interested in how much money was generated as a result of all activities rather than how is the financial report shows • the attention of the international accounting community should be on bringing about a change in attitude in how the various government and private institutions and the world are viewed by developing countries’ élite, entrepreneurs, and present and future accountants

the developing and underdeveloped countries need at this stage is not a detailed set of standards and rules but is the foundation, a change in orientation, and a change in attitude

International Community of Scholars in Accounting • through their writings, their seminars, and their presence is go to the fundamentals of why accounting is needed • the use of accounting information • how good accounting can be viewed as good management

Issue 3 The Ethics of Creative Accounting

The Term ‘Creative Accounting' Can be Defined as: 'a process whereby accountants use their knowledge of accounting rules to manipulate the figures reported in the accounts of a business'

Michael Jameson, writing from the perspective of the accountant, argues: The accounting process consists of dealing with many matters of judgment and of resolving conflicts between competing approaches to the presentation of the results of financial events and transactions... this flexibility provides opportunities for manipulation, deceit and misrepresentation. These activities - practiced by the less scrupulous elements of the accounting profession - have come to be known as 'creative accounting'. (1988: 7-8)

To the professional accountant creative accounting generally seems to be regarded as ethically dubious In the USA , senior partner of Price Waterhouse observed :

When fraudulent reporting occurs, it frequently is perpetrated at levels of management above those for which internal control systems are designed to be effective. It often involves using the financial statements to create an illusion that the entity is healthier and more prosperous than it actually is. This illusion sometimes is accomplished by masking economic realities through intentional misapplication of accounting principles. (Conner 1986: 78)

Note the term 'fraudulent' used here to describe creative accounting In Australia Leung and Cooper (1995) found that in a survey of 1500 accountants the three ethical problems cited most frequently were as shown in following table:

Three most frequently cited ethical problems

Merchant and Rockness also found a difference in accountants' attitudes to creative accounting depending on the motivation of management Creative accounting based on explicit motives of self-interest attracted more disapproval than where the motivation was to promote the company

An accountant, or other manager, who takes a stand against creative accounting faces the same pressures as any other whistleblower In extreme cases failure to act could ruin a reputation. As one company accountant who took a firm stand put it 'It cost me my job, but I don't think I would have gotten another job had I been unethical' (quoted by Baldo 1995)

Conclusion • The Enron situation has caused all of us to look closely at business structures and at the ethics of business • Accountants are increasingly concerned with the ethical conduct of those in the profession

Practitioners of management accounting and financial management have an obligation to the public, their profession, the organization they serve, and themselves, to maintain the highest standards of ethical conduct • Accountants along with the corporations should avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflicts

THANK YOU !!!

ACT 4193 CURRENT ISSUES IN ACCOUNTING AND AUDITING “ETHICS”