What Are the Advantages of Financial Accounting Ethics?
Companies rely on the financial reports prepared by their accountants to be true and accurate to make sound business decisions. Inaccurate financial reporting caused by the unethical or deceptive practices of a company's accountants can lead to loss of revenue through an exposed accounting scandal, or worse, corporate collapse.
The purpose of financial accounting ethics is to ensure that certified public accountants (CPAs) conduct their duties objectively and with integrity. Financial accounting ethics form the basis for legal and regulatory requirements and include issues realted to maintaining public trust. Professional organizations such as the American Institute of Certified Public Accountants (AICPA) and the Institute of Management Accountants (IMA) have codes of ethical conduct to which their members must adhere.
Maintaining Public Faith
In the wake of the numerous accounting scandals in the early 2000s, transparency regarding a company's accounting methods and practices has become increasingly important to the general public. A company that provides a clear explanation of the accounting methods used to prepare its financial statements appears to be more ethical and trustworthy than companies that do not provide such information. Often, the more ethical and trustworthy a company appears, the more likely it is to attract new investors.
Avoiding Regulatory Investigations and Sanctions
If a company's financial reports contain suspicious accounting methods, it can lead to a regulatory investigation such as a Securities and Exchange Commission (SEC) investigation or an IRS audit. If regulatory bodies find any accounting malfeasance on the part of the company and/or on the part of the accountant, they can levy costly fines or sanctions against the company and the CPA could lose his license. An example of corporate malfeasance is if the company failed to report all of its earned income. Accounting malfeasance can include actions such as the accountant knowingly using false information provided by the company or accepting cash or other incentives outside of his regular pay to prepare the company's financial statements; for instance, if the accountant knew the company was not reporting all of its income but prepared the financial statements anyway and accepted cash or other incentives to do so.
Avoiding Stock Price Volatility
When companies are accused of, or under investigation for, unethical accounting practices, investors begin selling off their shares in an attempt to avoid a total loss on the investment. This leads to a decline in the price per share. However, as some investors are selling their shares, market speculators and high-risk investors may be purchasing the shares at the lower price, causing a temporary increase in share price. Constant share price volatility can lead to investor panic and induce a large selloff of the company's shares, driving the share price down. If the price per share drops low enough for a long enough time, the company is delisted from its respective stock exchange, its credit rating can go down and it will have a difficult time obtaining the money it needs to continue operation. Banks and other creditors to which the company owes money may call in their loans. If the company cannot obtain the funding to pay its creditors, bankruptcy and corporate collapse could follow.
Sue-Lynn Carty has over five years experience as both a freelance writer and editor, and her work has appeared on the websites Work.com and LoveToKnow. Carty holds a Bachelor of Arts degree in business administration, with an emphasis on financial management, from Davenport University.