A Study of Professional Ethics in Accounting and Auditing: Evidence from an Asian Country

Transcription

1 International Research Journal of Applied and Basic Sciences 2013 Available online at ISSN X / Vol, 6 (1): Science Explorer Publications A Study of Professional Ethics in Accounting and Auditing: Evidence from an Asian Country Yahya Kamyabi 1, Hossein Haghshenas *2 and Seyedeh Zahra Noushabadi 3 1. department of accounting, University of Mazandaran, Babolsar, Iran. *2. Islamic Azad University-South Tehran branch, Tehran, Iran. 3. Islamic Azad University,Amol branch, Amol, Iran Corresponding Author h.haghshenas1@yahoo.com. ABSTRACT: During the last two decades and following the notable scientific and technical developments, the appearance of ethical issues of business institutions led the world to lose trust in the ability of accounting and auditing in keeping the investors benefits. Therefore, this study aims to provide necessary guides on professional behavior -including general rules and basic principles- which need to be observed by all professional accountants to reach the favorable goals of accounting. In Iran, the term of the professional accountant refers to members of Iranian Association of Certified Public Accountants (IACPA) and the partners of accounting firms with valid practice certificates who can hold themselves out as CPAs, and set up firms providing accounting, audit, tax and other services (Kamyabi and Devi, 2012). Keywords: accounting, auditing and professional ethics INTRODUCTION All professions like medicine, law, or engineering have their own ethics. The key purposeof ethics is to provide useful guidelines for members to gain professional way of thinking and to promote the quality of their profession rules. Professional ethics determines the most significant policies of the profession and warrants its survival. It not onlycontains conceptual ideas, but also it includes feasible goals and practicable rules. Professional ethics assures managers and society that the profession wants to have good behavioral standards which every member of the profession is obliged to observe (Kamyabi and Devi, 2012). Accounting and auditing deal with one of the most critical issues related to people, i.e. their property. People s trust in accountants has the main rule in their profession(kamyabi and Devi, 2011). Lack of trust in managers is the scourge of accounting profession and systems (Kamyabi and Devi, 2011). Unethical behaviors by accountants and auditors not only damages people trust, but also disrupts the performance of capital markets (William and Ellson, 2010).During the 20 th century accounting profession was inferred as a profession tied with ethics, but this claim by regulators, legislators, and investors is doubted. The ethics was included in Professional behavioral rules by the American Institute of Certified Public Accountants (AICPA) in In the Legal Charter of Iranian CPA, compiling the principles and rules of accounting and auditing was enacted as a part of Iranian Auditing on the 8 th of September The principles and rules of accounting and auditing consist of accounting standards, auditing standards, as well as professional ethics and gridlines. Accounting and auditing principles and rules enacted by qualified authorities will be imperative. The validity of the commandments of professional behavior is the same for all accountants unless the contrary is stipulated. Literature review The nature of ethics The existence of professions named accounting and auditing is the consequence of economical and investment activities. Managers are the motivators of economical cycle. Sowinning their confidence in accounting and auditing is the duty of all accountants and those involved in this profession to warrant the future of accounting. The future of accounting profession, thus, relies upon honesty and expertise. Since accounting profession has not been able to find a position in Iran and the officials, distrust in accountants will have a harmful impact on sustainable development of this profession (Kamyabi and Devi, 2012; Keen, 2004). Therefore, confidence and

2 responsibility have essential roles in accounting and auditing and that s why ethics is of great importance in this field. Ethics is a knowledge which tells us how to live a worthy and sacred. So it deals with how to be and how to live.accordingly, we need to find a source of guidance or a guide to teach us how to live and what to be. In the Holy Koran it is written: Certainly Allah conferred a benefit upon the believers when He raised among them a Messenger from amongst themselves, reciting to them His communications and purifying them, and teaching them the Book and the wisdom, although before that they were surely in manifest error (The House of Imran, 164). In addition, Prophet Mohammed (PBUH) says: Certainly I was sent to you to complete the ethics. Ethics can be defined as a branch of philosophy which evaluates human behavior and actions according to their wrongness and rightness, good or devil intentions, and their consequences (Lee and Smith, 2009). Ethics, in a broader definition, is a set of moral principles or values which at times are noticed by us and sometimes they are ignored. Philosophers, religious institutes, and other groups define ideal moral principles and values differently. Business ethics is one of the different parts of applied ethics. In the relevant culture, it means unbiased, fair, and right behavior in the world of business. Professional ethics is a component or subset of business ethics which consists of virtuous commands and methods used in a profession. From a long time ago, investors rely on auditing financial statements to make decisions related to investment. They have always been dependant on auditors to examine the accuracy, authenticity, and completeness of information included in financial statements (Keen, 2004). Ethics was introduces in accounting following the collapse of Enron in 2001 which was one of the biggest economic collapses during the last decade. It was the wellspring of great changes in corporate governance all over the world. It also had a huge impact on auditing profession. One of the main factors of Enron collapse was weaknesses in internal control and financial statements which is the result of unethical behaviors of auditors. This study is done using document mining and reviewing literature. Enron collapse in 2001 astonished the world. This worry spread throughout the world like a virus and contaminated every firms and shareholding institutions. Minor shareholders were worried and financial markets were shocked (HasasYegane, 2004).As a result, World has also witnessed financial scandals of some more big companies like Tyco, Worldcom, Adelphia, and Global Crossing. Recent scandals of some big companies resulted from financial frauds led society to lose trust in the abilities of auditing profession or their trend to keep shareholders interest decreases(kamyabi and Devi, 2012). Consequently, auditors lose their credit and status in public view (Collinan, 2004). Paine believes that accounting profession is based on accounting accepted principles and accountants and auditors need to follow accepted ethical rules to regain the lost confidence of public (Hoof, 2003). Accounting profession has increasingly motivated managers to involve in actions like profit management, delay in disclosure or concealing bad news. Additionally, auditors are always under pressure; because they do not want to lose their managers. They also are obliged to offer them some non-auditing services unwillingly (Hoof, 2003). On the other hand, despite of increasing emphasis placed on auditors dependence, passing laws, establishing new regulatory institutions, and framing additional standards for auditing institutions, it seems that decision making on how to observe professional ethics in auditing is a kind of inter-organizational decision which needs to be made along with careful inspecting of different ethical approaches. Ethical approaches can give us valuable information, because several interpretations about rules-based approaches can be misleading. Accounting and auditing During the thirteenth and fourteenth century, at the same time of industrial, business, and banking growth, there was a noticeable development in account keeping. The matter of developing balance sheets as well as gain and loss statements was introduced and become popular in Following the industrial revolution, the scope of productive operations in capital markets extended. Accounting profession gained more significance following separating corporations ownership from management and emerging stock companies. Iranian Business Laws related to companies commissars were ratified on April Iranian institute of certifies accountants compiled a Disciplinary and Professional Ethics Code for the first time in Goals of accounting profession According to professional ethics, the goals of accounting profession include: reaching the best professional principles and laws, performing the operations with the highest possible quality according to the above mentioned principles and laws, and in general accomplishing public interests. Realization of these goals demands: Reliability: Society needs reliable and safe information and information systems. 25

3 Professionalism: Managers and other involved people must identify qualified professional accountants easily. High quality services: Users need to reassure that services offered by accountants are of high quality. Validity: Users need to reassure that there is a regulatory framework for accountants work. Principles of accounting ethics To attain the goals of accounting profession, professional accountants need to be bound to the following principles: Trustworthy: A professional accountant must be honest at offering services Impartiality: A professional accountant must be impartial. prejudice, partiality, interests, and others influence should not have any impact on his impartiality Competence and Carefulness: A professional accountant must be accurate, competent, and hard working. He is obliged to update his knowledge to reassure that his services are in conformity with the laws and rules as well as the latest revolutions in profession Confidentiality: A professional accountant must be aware of the secrecy of information he find out during the process of offering services. He is not allowed to disclosure information without the clear permission of manager or steward Professional behavior: A professional accountant s behavior must not be in contrary to his reputation. He must avoid actions which may ruin his reputation Professional laws and principles: A certified accountant must offer his services according to accounting professional laws and principles. The needs and orders of managers need to be fulfilled according to the above mentioned principles Commandments Although the current goals and basic principles are general and do not deal with specific cases, Commandments come up with guidelines on how to apply goals and basic principles to possible situations professional accountant may face. Commandments fall into three category: Enforceable to all certified accountants, except for special exempted cases; Enforceable to all CPAs, and Enforceable to all employed CPAs, which, in special cases, may be generalized and include employed public certified accountants working in professional institutions. International standards of teaching No. 4 and its obligations International standards of teaching discuss values and professional trends which need to be acquired by accountants during their education to improve their knowledge quality. Among the reasons of proposing standards by International Federation of Accountants (IFAC) is that accounting profession works in a culturally diverse environment embracing different laws and principles. Paying attention to such issues as values, professional and ethical trends assist development the profession and improving its abilities to high quality services in convergence with public interests. Such standards entail developing educational programs which help accountants with values, ethical trends, and professional judgment, and work in convergence with public interests. Enforcing these standards bring accountants following obligations and commitments: Responsibility for all the society and fulfilling public interests; Sustainable and lifelong knowledge learning; Reassuring customers; and Observing rules and principles of the profession. Generally the proposed standards to improve values and professional ethics include teaching programs with the following headlines: The nature of ethics; Differences between law-centered approaches and framework-centered approaches concerning to ethics as well as their pros and cons; Professional skills and conformity with technical standards; Independence, due professional care, accountability, and public interest; Ethics, profession, and social responsibility; Ethics and law including relations between laws and public interest; Outcomes of unethical behaviors by people, profession, and society; Ethics related to business and government; 26

4 Ethics and public accountants such as interest controversies. Ethical guidelines in accounting and auditing Revolutions in political, social and economical structures, international business relations and management have brought changes in accounting too. The final goal of accounting and auditing is still providing users with reliable information, and remained unchanged. So the definition of accounting is still comprehensive and perfect. Professional moral guidelines include two parts: basic principles and commandments. Principles pertain to professional responsibility against society, manager and other colleagues. Here are the most important principles in professional ethics in accounting and auditing: Considering the interest of people: professional accounting must consider the interests of society, manager, creditor, and employees; Responsibility: understanding the professional, ethical, and legal responsibilities is very crucial; Trustworthy: accountants must be bound to moral principles; Impartiality: accountants must not be under the influence of others. Neither is he allowed to prejudge or prejudice; Independence: independence means the ability of accountant to act impartially. Account must not have any significant director indirect interest in the entity; Confidentiality: information related to manager must be kept secret. He is not allowed to disclosure information without the clear permission of manager or steward; Considering the limits and the type of services: limits on offering services and work must be observed by the accountant; Professional competence: accountant must know methods and techniques thoroughly. He needs to be knowledgeable, skillful, and experienced; Observing the technical principles and rules: observing accepted accounting and auditing standards is necessary. Professional accountant needs to look after the professional care, such as observing the laws, the form of the report, developing timely reports, accuracy in numbers, appropriate work methods, quality standards and other standards; and Observing professional behavior: the status of profession and the accountant personality are of great importance. Accountant s behavior must not ruin the credit of profession. DISCUSSION AND CONCLUSION Ethics is rooted in human nature. In accounting and auditing, professional ethics is the measure of suitable behavior. It is a tool to determine true and false relations. Moving to international accounting standards require changes in educational systems in universities. Such change does not take place unless society feels the need for it. Changes in courses and educational headlines are among the most important changes needed. Entering a profession calls for knowing the related professional ethics. Additionally, familiarity with such ethical issues as independence, interest controversies, profit management, secret transactions, fraud, etc is another necessity. These issued have been among the most crucial in researchers, accountants, and auditors. Observing and applying ethical principles, thus, reassure that accountants can deal with their historical role that is to develop economical opportunities, wealth, and farewell in society. According to proposed standards by IFAC, accounting students need to know moral principles and laws. Studying relevant statements, students must define a framework to reassure society. A way to create a matching framework is to study ethical approaches which are utilized in other fields and professions. REFERENCES Almutaghi A, Aladin ABH, Kanz-ul-amal. Volum 13, 151p. Baghomian R Auditing Culture and Professional Ethics: the Necessity of reviewing Basic Principles of accounting and Auditing. No. 178 Barnett T, Cheryl V The Moderating Effect of Individuals' Perceptions of Ethical Work Climate on Ethical Judgments and Behavioral Intentions. Journal of Business Ethics. 27: Collinan C Enron as Symptom of Audit Process Hreakdown: Can the Sarbanes- Oxley Act Cure the Disease?" Critical Perspectives on Accounting. 15:6-7. Hassas Y, Collapsing Professional Ethics and Collapsing Enron. Audit Magazine. No 27. Imhoff EA Accounting Quality, Auditing, and Corporate Governance, Accounting Horizone, 17. Kamyabi Y, Devi S Using Transaction Cost Economics and Resource-Based views in Management Accounting Outsourcing: An empirical study of Iranian SMEs. Middle East Journal of Scientific Research. 10(1): Kamyabi Y, Devi S The impact of advisory services on Iranian SME performance: An empirical investigation of the role of 27

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