Accounting Ethics

accounting ethics

Ethical Reasoning: Implications for accounting


Integrity provides moral courage to resist temptation to standby as a company misstates their financial statements


Integrity: The basis of accounting

Integrity means a person acts on principle even against pressure

Principle- conviction that there is a right way to act


Should never let loyalty to a client to cloud judgment

Key to maintaining integrity and ethical perspective is to not start down slippery slope


Golden rule- do onto others…


What is ethics


Ethics is moral philosophy

-how people ought to act

Values are beliefs that guide our actions

Values are concerned with how a person behaves, ethics is how a moral person should behave


Moral point of view- being willing to not act in self interest to promote interests of stakeholders


Ethical relativism- morality is relative to one’s culture

-even if practices are different, fundamental principles often are not


6 pillars of character






– word about whistleblowing


-conscience- motivation deriving logically from principles that govern one’s actions






accounting ethics

accounting ethics





Principles of the AICPA Code


Public interest


Objectivity and independence

Due care- continued improvement in skill

Scope and nature of services-quality controls


Need to depend on moral principles to guide decision making


Teology- act is ok if any desirable result is obtained

Egoists- should maximize ones self-interest

Utilitarians- actions that provide greatest benefits

-bentham and mills

-act utilitarian and rule utilitarian

Deontology- focuses on the rights and intentions. Duty


Rights- justified claim

Justice – referenced with standard of rightness



Virtue ethics- focuses on the acts

Stresses the importance of developing good habits


Institute of Management Accountants





Accountants ethical decision process and professional judgement

Kohlberg stages of moral development



Individual is very self-centered

Stage 1 obedience to rules, avoidance of punishment

Stage 2 satisfying owns needs

Conventional level

Individual becomes aware of the interests of others.

Stage 3: fairness to others

Stage 4: law and order

Postconventional level

Stage 5: social contract

Stage 6: universal ethical principles




Ethical Domain of accounting and auditing

Client organization

Accounting firm

Regulatory bodies

General public


Rest’s Four Component model of morality

Moral sensitivity- requires individual interpret a situation as moral

Moral Judgment- what ideally ought to be done to resolve an ethical dilemma is called

prescriptive reasoning

Moral Motivation- reflects one’s willingness to place ethical values over nonethical ones

Moral Character- better able to withstand pressures


3 characteristics of skepticism

Questioning mind, suspension of judgment, search for knowledge


10 step model for decision making

Frame the ethical issue

Gather all the facts

Identify the stakeholders and obligations

Identify relevant accounting ethics standards

Identify operational issues

Identify the accounting and auditing issues

List all the alternatives

Compare and weight alternatives

Decide on a course of action

Reflect on your decision




Corporate governance- includes internal controls that ensure proper business


Stakeholder perspective

Stakeholder management requires diff perspectives be considered


5 ethical issues in business

Honesty and fairness

Conflicts of interest








4 pillars of corporate governance






Agency Theory

Align behavior of managers with the desires of the owners



Stakeholder Theory

Managers must tend to stakeholders desires


Independent directors enhance governance accountability

Separate meetings between audit committee and external auditors


External auditors rely on support from the audit committee to resolve differences


Internal controls as a monitoring device

Control environment

Risk assessment

Control activities

Information and communication systems



Values are the foundation of ethical decision making



AICPA Code of Prof Conduct


Can nonaudit services impair independence

The need for management to report on internal controls

Importance of techniques to prevent/detect fraud


Metcalf (moss) report investigated accounting profession

Establish a self-regulatory organization of firms that audit public companies

Limit types of management services to those relating directly to accounting


Opinion shopping- when a client seeks accountants with views that matches what they desire


Treadway Committee- study and report on the factors that lead to fraudulent reporting

Tone at the top sets the ethical tone


State board is a high authority’


PCAOB establishes standards for public

AICPA is for private companies


Independence in fact- defined as the state of mind that permits performance of an attest service without being affected by influences that compromise professional judgment


Sec and independence

Proscribing certain financial interests with the audit client

Restricting non audit services with audit client

Subjecting all auditor


Auditor cannot function as a manager

Cannot audit their own work

Cannot advocate for client


Due care says that if you cannot do the work you suggest it to someone else that can

Auditing firms cannot do taxes too


audit responsibilities and accounting fraud


Audit is an examination of the financial statements


Content of audit report

Intro paragraph

–          Identifies the financial statement being examined

–          Clarifies management’s responsibilities for the statements

–          States the auditor’s responsibility to express an opinion


Financial statements are prepared under the direction of the controller that reports to cfo


Scope Paragraph- defines auditors responsibilities

-auditor followed gaas

Audit provided reasonable assurance the statement is free of material misstatement

-auditor assessed accounting principles used to evaluate statement presentation

– audit provided a reasonable basis for the opinion


Audit opinions

Unqualified opinion means the financial statements are fine

Qualified means there is an issue with fairness


If a company changes accounting practice:

Practice must be generally accepted

Conforms to GAAP

Justification for change is reasonable


Averse Opinion- not in conformity with GAAP

Opinion paragraph- disclaimer

Disclaimer – issued when they cannot form an opinion

Happens rarely, like when a company does not take inventory


GAAP is established by FASB

GAAS is established by AICPA and PCAOB


GAAS requirements

General standards related to auditors

Adequate technical training

Independence in mental attitude

Due care in the performance of the audit and preparation in the report


Standards of fieldwork

Establish criteria for judging whether the audit has met quality requirements

  1. Adequately plan the audit work and supervise assistants to detect misstatements
  2. Obtain sufficient understanding of an entity and internal control
  3. Gather sufficient competent evidential matter through audit procedures

Standards of reporting

Determination of whether statements conform to GAAP

Identification of situations where principles are not consistent between periods

Discussion in the report of any situation id’ed in the footnotes where disclosures are not adequate


Audit Procedures


Limitations of the audit report

Reasonable assurance


Present fairly



Capital lease criteria (requires 1)

Transfer of ownership to the lessee at the end of the lease term

Bargain purchase option for the lesee

Lease life of 75%+ of the economic life of the leased asset

PV = 90%+ of the fair value of the leased asset


Expectations gap


Errors-unintentional misstatements or omissions


Illegal acts


Fraud triangle

Incentives, rationalization, opportunity




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