When is an Accounting Practice Ethical?

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When is an Accounting Practice Ethical?
Jane Mulder
Do you agree that if an accounting practice is not explicitly prohibited, or is only a slight deviation from the rules, it should be considered an ethical practice? Why?

It Depends on the Implications of the 'Error'
Jagdish B Acharya, Premium Member
There is a hierarchy in accounting "errors" along following lines:
1. Minor error of omission - impact is negligible on share value
2. Error of commission - here it becomes serious. Even if it is for window dressing, it may be considered unethical. The penalty may depend on its impact on share value.
3. Wrong classification of assets and stocks - it can have big impact on share value and will be taken as unethical. In some cases it may escape as error in accounting practice or judgement.
4. Misclassification of current assets or withdrawal of money by such means. - may be considered fraud and dealt with accordingly.
By adding one additional team of independent governmental auditors risk of such practices may be minimised.

Earnings Management Practices
Mauricio Crippa, Member
Managing earnings, although not illegal, I believe is always an unethical practice, as whether improving, reducing or smoothing financial numbers, they all aim to mislead investors (major or minor shareholder, debt funders, credit agencies etc.) decisions.
Any discretionary decision reduces market information symmetry, increases transaction costs and negatively impacts outside traders' profitability.

Ethical Accounting Practices
Mahmoud Al-Fayyad, Member
Accounting practice is ethical when it doesn't harm individuals, groups or institutions. If a practitioner intends to harm or manipulate instructions, he will behave unethically.
In this case, institutions could educate followers religiously, because religions enforce ethical considerations and imply heavy sanctions in the other life.

Impartial Audit Comittees
Andana, Member
There should be some controls in place by audit committees to examine and compare the company’s reported operating profit with the cash flow and disclose if the management is using creative accounting / earnings management techniques to obscure the true financial position of the company.
The conformity with GAAP in all material respects, having them impartially demonstrated probably is a good way to draw the line to differentiate legitimacy from fraud.

Ethical Accounting Practices
Broli, Member
Unfortunately too many people and corporates hide behind the courts to test unethical behaviour in todays world. I am very much in favour of the voluntary professional institutes setting ethical standards and 'policing' these, where possible. This across all professional disciplines.
IFRS and GAAP can also play an important role. However, I understand that the rules have been modified post the 2008/9 market crash to accomodate softer share portfolio and other valuations. Mark to market changed? Too big to fail? Can anyone advise if this 'hearsay' is correct?
We need to all remain alert to powerful institutes and other parties setting the agendas, where such abuse may arise.

Noisy accounting statements
Noisy accounting statements have been with us since a long time and I guess they are here to stay.
Accouncy firms know, very well, what level of noise they can put in the statements.
On the other hand, users, or analysts (not readers) of accounting information are aware of noise in accounting information.
The objective of earning management is to avoid getting significant accounting bias that could be catastrophic to the firm and the management. Enron is a case in point.
Economics is defined as a "game", and one has to play it fairly in the long run!

Materiality and Intent Matter
Sandi Farkas, Member
If the accounting practice is misleading for users of the financial statements and/or results in a material misstatement of the financial stability or standing of the organization, then it is unethical.
The financial scandals of the last decade were based in justifications that were often rule-based loopholes. While the rules can be useful as guidance, the principles of honestly reflecting the financial position of an organization should be the foundation for accounting practices.

When is an Accounting Practice Ethical?
Raymond J. Wennier, Member
Ethics is a system of right or wrong. It is not a "slight deviation". Ask ex Exxon executive!

Ethical Accounting
Dilip Khanal, Member
Rules are made by people and should be flexible to accommodate good intents. I opine that a slight deviation from rules might be ethical, provided that it is meant for good intention.
Even in judiciary, a killing is judged ethical if this is capital punishment. A killing in self defense is also permitted. The same killing might be unethical if it is done with different motive.
So, ethics can not be absolute and it has to be viewed from the context. I think the why part of Jane Mulder's query is addressed.

When is an Accounting Practice Ethical?
Raymond J. Wennier, Member
Thank you for your comments. The system of right or wrong these days has accommodated itself... It is hard to distinguish whether there are good intentions, it is the individual's conscience. We would have to enter a field of societal values that influence each individual.

Don't Confuse Information and Knowledge!
Users of accounting statements must be aware of the distinction between data, information and knowledge. Ethics is a necessary, but insufficient condition for good data.
What matters is a strong training in the accounting and management fields. In business, ethics is more talked about than applied...
Ethical accounting is difficult to measure, isn't it?


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