Ethical Considerations in Finance and Accounting
Admin 29 Dec, 2023 Introduction
Ethics in financial accounting is concerned with making morally correct choices in preparing, presenting, and disclosing relevant financial information when being associated with the public sector or private practice as a financial accountant. The responsibilities of an accounting professional are not limited to the employers but also to the clients and the public in general. The information they provide has to be trusted by the public, apart from the stakeholders, clients, and others involved in receiving financial information.
What are some ethical issues in accounting and finance?
Knowing some of the ethical issues in accounting and finance can help you understand the implications of the unethical actions of an accountant.
- Inaccurate Financial Reporting
Manipulating and misrepresenting financial information to a layman is one of the most unethical actions as per financial and accounting principles, as it violates the code of trust between the accountant and the others dependent on him for such confidential financial information. Some may do this to mislead stakeholders and investors and maintain the company's share price. While it may still work in the short term, the effects of misreporting financial information may soon catch up.
- Disclosure Violations
Disclosing too much or too little has consequences that must be faced. It is unlawful and has dangerous consequences. If there is a loss and the accountants try to hide it from the investors and stakeholders, it will negatively impact the actual business of the organization. Failure to disclose financial information can also be considered inaccurate financial reporting. Additionally, intentionally recording transactions in a manner that does not follow the generally accepted accounting principles is also considered unethical and misrepresents financial information.
- Executive-focused Organizational Environment
In an organization where the executive is given a lot of power, he can influence the decisions and reporting of financial analysis. They may force the manipulation of numbers, trying to get more investors to rise in power and money. Due to this, the real picture of the company's finances may not be shown, which may harm the organization in the long term.
- Misappropriation of Assets
Using the resources of the company for purposes other than the interests of the company is termed as misappropriation of assets. It can happen at any level of the organization. Still, accountants may help fish out the discrepancies with the help of accounting and financial analysis tools and techniques conforming to financial principles. But if the accountant is involved in the embezzlement issue, it will negatively affect the organization's business.
- No Direct Chain of Command
Every organization requires a well-specified chain of command to ensure proper and efficient financial decision-making and analysis reporting. Without efficient communication and collaboration between departments and relevant employees, essential financial information may remain unreported to the accountant, leading to discrepancies in reporting and disrupting accounting principles.
What are the principles of financial accounting?
To prevent harm to the business, every organization must have certain ethical principles to abide by as a benchmark of their professional practice. There may also be other more specific principles of financial accounting pertaining to the company's specific needs.
Here are some of the ethical considerations in the principles of accounting and finance.
- Objectivity
Avoiding bias and objectivity towards financial representation is a principle to stand by. Presenting financial information without personal bias or outside pressure is essential for the organization's business.
- Integrity
Being honest, truthful, and abiding by the correct rules and laws for providing analysis and representation of financial information is important. It is also implied in being able to handle pressure, people, and situations with fairness and impartiality. The accountant is also expected not to provide misleading or incorrect information while reporting financial information.
- Confidentiality
Maintaining the confidentiality and legal compliance of financial matters on the company's behalf is crucial to preventing sensitive information from getting leaked. It can cause confusion, discontent, and mistrust among employees and shareholders, as well as become leverage for competitors. It is extremely important to involve only those in the financial analysis process who have the right to know and are an indispensable part of the process.
- Professional Competence
It relates to the personal working standards of the accountant in being competent and skilled enough to handle the responsibilities of financial and accounting analysis while maintaining the required level of competence to undertake professional duties.
- Professional Behaviour
Every company has a code of ethics and standards for practices that everyone must follow. Accountants are expected to follow such codes of standards and company laws to avoid violations of trust and any action that may be brought against them if discrepancies are detected.
Why is ethics (financial principles) important in financial accounting?
Ethics act as a guide and standard benchmark for all financial accounting professionals on how to approach actions subject to the analysis and reporting of financial information to the layman. Ethics is also necessary to teach the essential moral values and principles of financial accounting that accounting professionals should apply during their practice. Ethics can also impose penalties on offenders to deter further unethical practices in the future.
FAQs
Q1. What are the basic accounting principles?
The basic principles of financial accounting include the matching principle, revenue recognition principle, consistency principle, materiality principle, objectivity principle, etc.
Q2. What are the principles of finance?
The financial principles include:
- Cash flow principle
- Principles of risk and return
- Diversity principle
- Time value of money
- Hedging principle
- Profitability and liquidity
Q3. What are the three fundamental steps of accounting?
The three fundamental steps of accounting include
- Accrual basis
- Consistency
- Concern
Q4. What are ethical and professional considerations to be considered in finance and accounting?
Ethical principles of financial accounting to be considered include objectivity, integrity, confidentiality, and professional competence.
Q5. What are the ethical issues in finance?
There can be many ethical issues in finance, such as conflict of interest, inaccurate reporting, incompleteness, fraud and tax evasion, confidentiality breaches, and a lack of transparency in accounting and financial decisions, among many others.
Conclusion
A strong ethical character, as well as an environment for encouraging moral practices as per the financial and accounting principles, is essential for the success of a business. Ethics in financial statement analysis are important for financial planning as well. You can get financing literacy and training through a dedicated accounting course pursued by the top accounting certifications like the US CMA, CPA USA, ACCA, etc., with help from a reputed accounting and finance training institute, like NorthStar Academy.
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Remember to always conform to the principles of financial accounting when you tread the path of an accounting and financing expert.