Ethical Considerations in Modern Accounting

Pennsylvania CPAs and accountants have the duty to carefully monitor their firms to ensure that the highest level of ethics is maintained. Since accountants handle the finances of individuals and companies that put food on the table and ensure ongoing employment and economic stability, people need to be confident that accountants are following strict ethical procedures. We need only to look back at the Enron scandal of 2001 and the Lehman Brothers collapse of 2008 to see how unethical financial behavior can shake the economy and cause harm to many people. PSTAP offers a wide variety of courses that touch on ethical concerns around technology and security, taxation and auditing, conflict of interest, and more.

Every accountant learns the three pillars of ethics: integrity, transparency, and accountability. As accountants, we are expected to hold ourselves to the highest standards of honesty and truthfulness; to accurately disclose all financial activities; and to take personal responsibility for our actions. These principles must be applied in every aspect of our work and in every professional interaction.

Conflict of interest is a concern as old as accounting. Not only do obvious conflicts need to be avoided, but in order to maintain the integrity of the entire profession, even the appearance of conflict must be avoided. Conflicts of interest can be difficult to spot; be vigilant in identifying any connections or conflicts that might compromise your independence or objectivity.

Integrity in financial reporting is crucial. There are times when a client might request an accountant to misclassify expenses or accelerate revenue recognition in order to benefit stakeholders or make a weak company’s performance appear stronger than it is. Occasionally, an individual taxpayer may also ask for some sleight of hand, either to avoid taxes or to protect assets in a divorce. The client is not the expert and may not even realize that what he or she is asking is unethical. You, as the financial advisor, may need to explain why it cannot be done.

A new area of ethical concern is Artificial Intelligence (AI). AI applications are growing at a staggering rate. The problem with this is that, although it can make us more productive and help us to sift through mounds of data at incredible speed, AI has its own set of problems and cannot be used without oversight. Some of the issues of AI include:

Making ethical decisions takes continual monitoring of one’s own biases, reviewing procedures, and protecting all data from breach or misuse. Develop a company culture in your firm that puts accuracy and ethics at the core of all your principles. Be a leader for your team in the area of ethics.

Following accounting standards such as Generally Accepted Accounting Principles (GAAP) and Financial Accounting Standards Board (FASB) is a sure way of avoiding many potentially unethical situations. Another example of not following GAAP in financial reporting was the 2002 WorldCom scandal. From 1999 to 2002, WorldCom, the second-largest long-distance company in the U.S., inflated its earnings by reporting $3.8 billion as capital expenses rather than operating costs in order to maintain its stock price. The fraud was actually uncovered by its own internal audit department, which worked secretly to investigate and finally report the fraud. This was a triumph of ethics for the accounting profession.

Ensure that your firm is following all governmental and overseeing bodies’ regulations, especially in the areas of financial privacy and appropriate disposal (shredding) of documents and cybersecurity. Review any regulations your business clients may be bound to and help them develop policies to remain compliant.

Be sure to create clear policies and procedures, which include guidelines for communication if any of your team is unsure whether or not a situation may be a conflict or may be potentially unethical. Create an atmosphere of transparency and encourage open discussion around ethics.

PSTAP’s community of members is always ready to help other accountants and CPAs improve their knowledge and answer any questions. If you’re not a member, sign up to receive many benefits, including access to our active member collaboration network, PSTAPexchange.