The Evolution of Ethics in the Accounting Profession
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Accounting is one of the oldest professions in the world. In its primitive form it existed more than seven thousand years ago in ancient Babylon, Assyria and Sumeria. At that times people did not use any complicated numbers and formulas. They needed merely to keep a record of crops and cattle. Simple accounting methods were also used in trading. However, early commerce existed in the form of bartering, without usage of money.
A huge step forward in the accountancy field was connected with the invention of bookkeeping. At first, all financial transactions, such as sales and purchases, were recorded with the help of clay tokens. Later, traders started to use money and to keep their accounting records in numbers. The accounting system developed in the course of history and a plenty of financial structures and organizations appeared eventually.
Nowadays we have a considerably different world and a new economic reality. Nevertheless, accounting still plays a crucial role in everyday life of millions of people. Undoubtedly, accounting system has greatly changed and now it has to deal not only with mathematics and calculations. Due to modern technologies, it has become a profession of communication.
It is obvious that any human interactions are regulated by some ethical rules and norms. Accounting profession is not an exception. The kind of work done by auditors and accountants is rather delicate, since it deals with fairness and justice. However, ethical problems that appear in this field vary greatly from year to year.
In the ancient times accounting ethics was not yet a field of scientific study. However, it existed in a latent form and regulated the trading process. According to certain moral rules, the value and quality of products exchanged in a barter had to be equal. What is more, the early system of accounting ethics was applied while solving the loan and debt arguments, as well as other transaction problems.
According to Murphy Smith (2008), accounting ethics as a field of professional ethics was first introduced by an Italian mathematician Luca Pacioli, whose understanding of the problem was described in his work named Summa de arithmetica, geometria, proportioni, et proportionalita, written in 1494. Later, the ethical norms of accounting became popular among numerous organizations and companies.
An important period in formation of professional accounting ethics started in the nineteenth century. A number of organizations dealing with moral principles and rules of the profession appeared at that time. Their goal was to force the accountants to follow certain codes of ethics while performing their duties. What is more, such organizations were aimed at helping the accountants and auditors to make the right decisions and to solve ethical dilemmas in their professional work environment.
Namely, the American Association of Public Accountants was established in 1887. It was one of the first organizations in the United States dealing with professionalism and morality in the accounting business. In 1905 the association had already a considerable number of members and formulated its first list of ethical norms. Two years later the AAPA organized a conference for its members, where the main topic of discussions was the application of professional ethics. As a result, a set of ethical rules was included in the corporate charter. However, AAPA could not require the overall obedience to its ethical codes because the organization membership was not obligatory.
Throughout its history, the American Association of Public Accountants changed its name several times. Today it is known as the American Institute of Certified Public Accountants. According to James H. Sellers (1981), the members of AICPA have to follow ethical principles of five divisions: "independence, integrity and objectivity", "competence and technical standards", "responsibilities to clients", "responsibilities to colleagues" and "other responsibilities and practices". These five groups of principles were officially used for preparation of the certified accountants in the United States. Eventually, if a professional failed to keep to these guidelines, he could be discharged.
By the end of the twentieth century the accounting ethics has left the limits of separate organizations and became generally accepted. The courses of business ethics were first introduced into university studying programs in the 1980s. Today almost all accounting courses and manuals include ethical issues. Although some critics question the use of teaching professional ethics at colleges and universities, most accounting firms and professional organizations confirm the necessity of such courses.
Nowadays the topic of ethics in the accounting profession seems to be particularly important. Like many other professions, accounting is a kind of work that many people rely on. What is more, it has lately become a profession of constant dilemmas. Due to modern economic instability, accountants often face tricky situations. On the first hand, their primary commitment is to consider the interests of the public and reveal the valid information. On the other hand, they have to ensure the financial competence of their company. As a result, sometimes the accountants need to expose the company to major losses or bankruptcy. Otherwise, fraudulent accounting can arise and cause financial scandals.
It needs to be said that in the last thirty years a number of major accounting scandals happened. Among others, such companies as Nugan Hand bank, WorldCom, Xerox and AIG were accused of fraud at their accounting practices lately. The major reasons for such scandals included incorrect financial analysis, bribery and unfair accounting.
One of the most notable accounting scandals took place in 2001 in the United States. An international company Enron had not revealed its real financial statements for years. Nevertheless, their head auditor proved the validity of the financial documents and signed off the inaccurate accounts. As a result of such unethical activities, the company went bankrupt and its shareholders lost more than twenty five billion dollars. Eventually, the firm was closed and eighty five thousand former employees were left jobless.
After a number of similar cases the question of accounting ethics arose even more directly. It was noted by critics that one of the major reasons for fraud was the emergence of advertising in accounting business in 1977. Before that time the ethical codes prohibited advertising for the auditing firms. Promotion and business activities of the companies overstepped their professionalism. In other words, the accounting firms started to be more interested in profits, which resulted in the conflict of interests.
Apart from advertising, nine more important factors of fraudulent accounting were named in the article of Managerial Auditing Journal (2007). The article describes the results of a survey conducted at the International Federation of Accountants. Not surprisingly, personal interest and lack of objectivity were named the most significant reasons for ethical failures. When a conflict of interests appears, very often personal benefits and profit prevail over professional values and morality. Besides, such factors as incorrect professional decisions, insufficient ethical education, incompetence, insufficient support were included in the list of important factors.
In order to reduce the probability of unethical accounting, new regulations and rules were introduced. Namely, studying of professional ethics became obligatory at most universities and colleges. In addition, some companies have organized a specific training for accountants and auditors before they start to work. Therefore, a lot of auditing companies and accounting organizations established the collaboration with educational institutions in order to prepare highly professional and ethical workers.
One more important step towards improving the ethical standards of the profession was made by the Corporate Law Economic Reform Program Act 2004, established in Australia. A similar Sarbanes-Oxley Act was developed in 2002 in the US.
It regulates the activities of the accounting firms and limits the fees. This way, the companies' income is not totally dependent on a concrete firm and the danger of unethical behavior is minor.
The International Federation of Accountants studied the collapses of international companies caused by accounting problems. Consequently, it recommended the development of more effective ethical codes for the companies. In addition, the possibilities of training for the accountants were named crucial in handling ethical dilemmas in the professional environment.
One of the most recent innovations in the field of accounting ethics was introduced in 2010 by the US President Obama, when he signed the Consumer Protection Act. This reform resulted in the advanced system of warnings and also protection of investors. What is more, it facilitated the integrity and transparency of the US markets. What is more, the Office of the Whistleblower was established in order to provide the possibility for the early identification of unethical behaviors and fraud.
To summarize the evolution of ethics in the accounting profession, it needs to be said that every historical era brings its own realities and challenges. However, some problems continually follow our society from the ancient times till today. Human possessions and profit is one of the brightest examples of the eternal global issues. The temptation of getting rich with the help of immoral behavior is named among the main challenges of the accounting profession. Consequently, ethical norms and morality play a vital role in the development of fair and just business interactions in this field.