Ethics in Accounting & Finance: Notes | Corporate & Other Laws for CA Intermediate PDF Download

 Page 1


12 
Ethics In Accounting And Finance 
Learning Objectives 
After reading this chapter you should be able to understand, 
? the importance of ethics for a finance and accounting professional; 
? the various principles which need to be adhered to by finance and accounting 
professionals; 
? the concept of ethical dilemma and conflict resolution; 
? the various threats which can be faced by a finance and accounting professional while 
working as an auditor, consultant or an employee in an organisation; 
? the various safeguards which need to be adopted to counter threats. 
“A business that makes nothing but money is a poor kind of business.” 
HENRY FORD 
12.1  Introduction 
Finance and Accounts is perhaps the only business function which accepts responsibility to act in 
public interest. Hence, a finance and accounting professional’s responsibility is not restricted to 
satisfy the needs of any particular individual or organisation While acting in public interest, it 
becomes imperative that the finance and accounting professional adheres to certain basic ethics in 
order to achieve his objective. 
Until recently, various surveys conducted globally had ranked finance and accounting professionals 
very high in terms of professional ethics. However, various accounting scandals witnessed during 
the past few years have put a serious question mark on the role of the finance and accounting 
professional in providing the right information for decision making, both within and outside their 
respective organisations. In companies such as Enron, World Com, Tyco, Global Crossing, 
Adelphia, Quest, Xerox and most of the late dotcoms, the accounting information used by the 
Finance Department was false and manipulative.  
What was the role of finance and accounting professionals in all these high profile failures? Of 
course there were a few professionals who were directly involved in fraudulent activities, however, 
the majority, at most of the times, refused to challenge what they had already known.  
Page 2


12 
Ethics In Accounting And Finance 
Learning Objectives 
After reading this chapter you should be able to understand, 
? the importance of ethics for a finance and accounting professional; 
? the various principles which need to be adhered to by finance and accounting 
professionals; 
? the concept of ethical dilemma and conflict resolution; 
? the various threats which can be faced by a finance and accounting professional while 
working as an auditor, consultant or an employee in an organisation; 
? the various safeguards which need to be adopted to counter threats. 
“A business that makes nothing but money is a poor kind of business.” 
HENRY FORD 
12.1  Introduction 
Finance and Accounts is perhaps the only business function which accepts responsibility to act in 
public interest. Hence, a finance and accounting professional’s responsibility is not restricted to 
satisfy the needs of any particular individual or organisation While acting in public interest, it 
becomes imperative that the finance and accounting professional adheres to certain basic ethics in 
order to achieve his objective. 
Until recently, various surveys conducted globally had ranked finance and accounting professionals 
very high in terms of professional ethics. However, various accounting scandals witnessed during 
the past few years have put a serious question mark on the role of the finance and accounting 
professional in providing the right information for decision making, both within and outside their 
respective organisations. In companies such as Enron, World Com, Tyco, Global Crossing, 
Adelphia, Quest, Xerox and most of the late dotcoms, the accounting information used by the 
Finance Department was false and manipulative.  
What was the role of finance and accounting professionals in all these high profile failures? Of 
course there were a few professionals who were directly involved in fraudulent activities, however, 
the majority, at most of the times, refused to challenge what they had already known.  
12.2 Business Law, Ethics and Communication 
 
 
Enron is a classic example of such behaviour. Months before Enron Corp declared 
bankruptcy, an employee of the name of Sherron Watkins sent the company’s top executive 
(Kenneth Lay) a message which had detailed information of the accounting hoax in the form of 
the now famous ‘off the book liabilities’. However, instead of taking note of what was 
mentioned in the message, the management of the company demoted Sherron. It is well 
known now, that, like Sherron, hundreds of finance and accounting employees at Enron knew 
about the happenings but preferred to remain silent. Hence, most of them did not lie, but 
neither did they disclose the truth nor did they attempt to correct the misleading and confusing 
information. Shouldn’t they have blown the whistle the way Sherron did? Was the behaviour of 
these employees un ethical? Cases like Enron exist in plenty, example World Com, Global 
Crossing, Xerox, Qwest and many other companies have been known to have created 
accounting entries with the sole purpose of making their financial statements look attractive 
thereby inviting further investments from unsuspecting individuals and organisations.  
12.2   Ethics and Ethical Dilemma 
The word Ethikos (Ethics) imbibes within itself both individual behaviour and community 
culture.  Various iIndividuals would be having different opinions on the same subject because 
of which what is perceived as right by one may be considered wrong by the other. Hence, 
doing what one thinks is right, may not always be the right thing to do! This is the essence of 
the term ‘Ethics’ which may be defined as ‘those moral principles which guide the conduct of 
individuals’ irrespective of the differences of opinions amongst individuals. Ethical behavior 
implies such course of actions which are taken after giving due thought to their impact on the 
society and other stake holders. Hence when accounting and finance professionals at Enron 
did not report of the wrongs which they believed were being done at the top, their behaviour 
amounted to being unethical in spite of the fact that they were not directly involved in any of 
the fraudulent or manipulative activities. In contrast, when Cynthia Cooper, Vice President – 
Internal Audit of World Com found wrong accounting entries resulting in inflated profits, she 
immediately reported the matter to the Board of Directors, this, in spite of the fact that she was 
reporting against seniors whom she had come to admire over the past so many years of 
working together. These two examples mentioned above provide an insight into the meaning 
of Ethical dilemmas. Ethical Dilemmas exist when finance and accounting professionals need 
to choose from amongst alternatives and there are (1) significant value conflicts among 
differing interests, (2) actual alternatives which can all be justified and (3) significant 
consequences to all stakeholders. Let us consider an example of a finance and accounting 
professional who has been asked to provide a profit forecast which needs to be given to a 
banker for a much wanted loan to be utilised in launching a new product. The company has 
not been doing well for the past few years and without this loan there is a likelihood of its 
closing down. However, the loan can only be availed if the banker is convinced that the 
projected profitability shall be at least ` 50,00,000 per annum. A optimistic projection of the 
profits shows that if everything goes extremely well the company may be able to make profits 
of ` 50,00,000, however, a realistic assumption provides a much lower figure. In such a 
situation the concerned professional will need to resolve the dilemma of the type of profit 
Page 3


12 
Ethics In Accounting And Finance 
Learning Objectives 
After reading this chapter you should be able to understand, 
? the importance of ethics for a finance and accounting professional; 
? the various principles which need to be adhered to by finance and accounting 
professionals; 
? the concept of ethical dilemma and conflict resolution; 
? the various threats which can be faced by a finance and accounting professional while 
working as an auditor, consultant or an employee in an organisation; 
? the various safeguards which need to be adopted to counter threats. 
“A business that makes nothing but money is a poor kind of business.” 
HENRY FORD 
12.1  Introduction 
Finance and Accounts is perhaps the only business function which accepts responsibility to act in 
public interest. Hence, a finance and accounting professional’s responsibility is not restricted to 
satisfy the needs of any particular individual or organisation While acting in public interest, it 
becomes imperative that the finance and accounting professional adheres to certain basic ethics in 
order to achieve his objective. 
Until recently, various surveys conducted globally had ranked finance and accounting professionals 
very high in terms of professional ethics. However, various accounting scandals witnessed during 
the past few years have put a serious question mark on the role of the finance and accounting 
professional in providing the right information for decision making, both within and outside their 
respective organisations. In companies such as Enron, World Com, Tyco, Global Crossing, 
Adelphia, Quest, Xerox and most of the late dotcoms, the accounting information used by the 
Finance Department was false and manipulative.  
What was the role of finance and accounting professionals in all these high profile failures? Of 
course there were a few professionals who were directly involved in fraudulent activities, however, 
the majority, at most of the times, refused to challenge what they had already known.  
12.2 Business Law, Ethics and Communication 
 
 
Enron is a classic example of such behaviour. Months before Enron Corp declared 
bankruptcy, an employee of the name of Sherron Watkins sent the company’s top executive 
(Kenneth Lay) a message which had detailed information of the accounting hoax in the form of 
the now famous ‘off the book liabilities’. However, instead of taking note of what was 
mentioned in the message, the management of the company demoted Sherron. It is well 
known now, that, like Sherron, hundreds of finance and accounting employees at Enron knew 
about the happenings but preferred to remain silent. Hence, most of them did not lie, but 
neither did they disclose the truth nor did they attempt to correct the misleading and confusing 
information. Shouldn’t they have blown the whistle the way Sherron did? Was the behaviour of 
these employees un ethical? Cases like Enron exist in plenty, example World Com, Global 
Crossing, Xerox, Qwest and many other companies have been known to have created 
accounting entries with the sole purpose of making their financial statements look attractive 
thereby inviting further investments from unsuspecting individuals and organisations.  
12.2   Ethics and Ethical Dilemma 
The word Ethikos (Ethics) imbibes within itself both individual behaviour and community 
culture.  Various iIndividuals would be having different opinions on the same subject because 
of which what is perceived as right by one may be considered wrong by the other. Hence, 
doing what one thinks is right, may not always be the right thing to do! This is the essence of 
the term ‘Ethics’ which may be defined as ‘those moral principles which guide the conduct of 
individuals’ irrespective of the differences of opinions amongst individuals. Ethical behavior 
implies such course of actions which are taken after giving due thought to their impact on the 
society and other stake holders. Hence when accounting and finance professionals at Enron 
did not report of the wrongs which they believed were being done at the top, their behaviour 
amounted to being unethical in spite of the fact that they were not directly involved in any of 
the fraudulent or manipulative activities. In contrast, when Cynthia Cooper, Vice President – 
Internal Audit of World Com found wrong accounting entries resulting in inflated profits, she 
immediately reported the matter to the Board of Directors, this, in spite of the fact that she was 
reporting against seniors whom she had come to admire over the past so many years of 
working together. These two examples mentioned above provide an insight into the meaning 
of Ethical dilemmas. Ethical Dilemmas exist when finance and accounting professionals need 
to choose from amongst alternatives and there are (1) significant value conflicts among 
differing interests, (2) actual alternatives which can all be justified and (3) significant 
consequences to all stakeholders. Let us consider an example of a finance and accounting 
professional who has been asked to provide a profit forecast which needs to be given to a 
banker for a much wanted loan to be utilised in launching a new product. The company has 
not been doing well for the past few years and without this loan there is a likelihood of its 
closing down. However, the loan can only be availed if the banker is convinced that the 
projected profitability shall be at least ` 50,00,000 per annum. A optimistic projection of the 
profits shows that if everything goes extremely well the company may be able to make profits 
of ` 50,00,000, however, a realistic assumption provides a much lower figure. In such a 
situation the concerned professional will need to resolve the dilemma of the type of profit 
 Ethics in Accounting and Finance 12.3 
forecast to be provided to the banker. In case he gives a realistic projection the company may 
not get the loan and perhaps may need to close down. On the other hand if he makes a 
optimistic projection, he may be misleading the banker. There is no right answer to such a 
situation. Both actions proposed have got there own risks.  
12.3 Potential Conflicts 
For a finance and accounting professional working as consultant or auditor 
A finance and accounting professional in public practice should take reasonable steps to 
identify circumstances that could pose a conflict of interest. Such circumstances may give rise 
to threats to compliance with the fundamental principles. For example, a threat to objectivity 
may be created when a professional accountant in public practice competes directly with a 
client or has a joint venture or similar arrangement with a major competitor of a client. More 
examples of such threats are discussed later. 
For a finance and accounting professional working as an employee 
A finance and accounting professional has a professional obligation to comply with certain 
fundamental principles which have been detailed below. There may be times, however, when 
their responsibilities to an employing organization and the professional obligations to comply 
with the fundamental principles are in conflict. Ordinarily, a finance and accounting 
professional should support the legitimate and ethical objectives established by the employer 
and the rules and procedures drawn up in support of those objectives. Nevertheless, where 
compliance with the fundamental principles is threatened, a finance and accounting 
professional must consider a response to the circumstances. As a consequence of 
responsibilities to an employing organization, a finance and accounting professional may be 
under pressure to act or behave in ways that could directly or indirectly threaten compliance 
with the fundamental principles. Such pressure may be explicit or implicit; it may come from a 
supervisor, manager, director or another individual within the employing organization. A 
finance and accounting professional may face pressure to: 
? Act contrary to law or regulation. 
? Act contrary to technical or professional standards. 
? Facilitate unethical or illegal earnings management strategies. 
? Lie to, or otherwise intentionally mislead (including misleading by remaining silent) others, 
in particular: 
? The auditors of the employing organization; or 
? Regulators. 
? Issue, or otherwise be associated with, a financial or non-financial report that materially 
misrepresents the facts, including statements in connection with, for example: 
Page 4


12 
Ethics In Accounting And Finance 
Learning Objectives 
After reading this chapter you should be able to understand, 
? the importance of ethics for a finance and accounting professional; 
? the various principles which need to be adhered to by finance and accounting 
professionals; 
? the concept of ethical dilemma and conflict resolution; 
? the various threats which can be faced by a finance and accounting professional while 
working as an auditor, consultant or an employee in an organisation; 
? the various safeguards which need to be adopted to counter threats. 
“A business that makes nothing but money is a poor kind of business.” 
HENRY FORD 
12.1  Introduction 
Finance and Accounts is perhaps the only business function which accepts responsibility to act in 
public interest. Hence, a finance and accounting professional’s responsibility is not restricted to 
satisfy the needs of any particular individual or organisation While acting in public interest, it 
becomes imperative that the finance and accounting professional adheres to certain basic ethics in 
order to achieve his objective. 
Until recently, various surveys conducted globally had ranked finance and accounting professionals 
very high in terms of professional ethics. However, various accounting scandals witnessed during 
the past few years have put a serious question mark on the role of the finance and accounting 
professional in providing the right information for decision making, both within and outside their 
respective organisations. In companies such as Enron, World Com, Tyco, Global Crossing, 
Adelphia, Quest, Xerox and most of the late dotcoms, the accounting information used by the 
Finance Department was false and manipulative.  
What was the role of finance and accounting professionals in all these high profile failures? Of 
course there were a few professionals who were directly involved in fraudulent activities, however, 
the majority, at most of the times, refused to challenge what they had already known.  
12.2 Business Law, Ethics and Communication 
 
 
Enron is a classic example of such behaviour. Months before Enron Corp declared 
bankruptcy, an employee of the name of Sherron Watkins sent the company’s top executive 
(Kenneth Lay) a message which had detailed information of the accounting hoax in the form of 
the now famous ‘off the book liabilities’. However, instead of taking note of what was 
mentioned in the message, the management of the company demoted Sherron. It is well 
known now, that, like Sherron, hundreds of finance and accounting employees at Enron knew 
about the happenings but preferred to remain silent. Hence, most of them did not lie, but 
neither did they disclose the truth nor did they attempt to correct the misleading and confusing 
information. Shouldn’t they have blown the whistle the way Sherron did? Was the behaviour of 
these employees un ethical? Cases like Enron exist in plenty, example World Com, Global 
Crossing, Xerox, Qwest and many other companies have been known to have created 
accounting entries with the sole purpose of making their financial statements look attractive 
thereby inviting further investments from unsuspecting individuals and organisations.  
12.2   Ethics and Ethical Dilemma 
The word Ethikos (Ethics) imbibes within itself both individual behaviour and community 
culture.  Various iIndividuals would be having different opinions on the same subject because 
of which what is perceived as right by one may be considered wrong by the other. Hence, 
doing what one thinks is right, may not always be the right thing to do! This is the essence of 
the term ‘Ethics’ which may be defined as ‘those moral principles which guide the conduct of 
individuals’ irrespective of the differences of opinions amongst individuals. Ethical behavior 
implies such course of actions which are taken after giving due thought to their impact on the 
society and other stake holders. Hence when accounting and finance professionals at Enron 
did not report of the wrongs which they believed were being done at the top, their behaviour 
amounted to being unethical in spite of the fact that they were not directly involved in any of 
the fraudulent or manipulative activities. In contrast, when Cynthia Cooper, Vice President – 
Internal Audit of World Com found wrong accounting entries resulting in inflated profits, she 
immediately reported the matter to the Board of Directors, this, in spite of the fact that she was 
reporting against seniors whom she had come to admire over the past so many years of 
working together. These two examples mentioned above provide an insight into the meaning 
of Ethical dilemmas. Ethical Dilemmas exist when finance and accounting professionals need 
to choose from amongst alternatives and there are (1) significant value conflicts among 
differing interests, (2) actual alternatives which can all be justified and (3) significant 
consequences to all stakeholders. Let us consider an example of a finance and accounting 
professional who has been asked to provide a profit forecast which needs to be given to a 
banker for a much wanted loan to be utilised in launching a new product. The company has 
not been doing well for the past few years and without this loan there is a likelihood of its 
closing down. However, the loan can only be availed if the banker is convinced that the 
projected profitability shall be at least ` 50,00,000 per annum. A optimistic projection of the 
profits shows that if everything goes extremely well the company may be able to make profits 
of ` 50,00,000, however, a realistic assumption provides a much lower figure. In such a 
situation the concerned professional will need to resolve the dilemma of the type of profit 
 Ethics in Accounting and Finance 12.3 
forecast to be provided to the banker. In case he gives a realistic projection the company may 
not get the loan and perhaps may need to close down. On the other hand if he makes a 
optimistic projection, he may be misleading the banker. There is no right answer to such a 
situation. Both actions proposed have got there own risks.  
12.3 Potential Conflicts 
For a finance and accounting professional working as consultant or auditor 
A finance and accounting professional in public practice should take reasonable steps to 
identify circumstances that could pose a conflict of interest. Such circumstances may give rise 
to threats to compliance with the fundamental principles. For example, a threat to objectivity 
may be created when a professional accountant in public practice competes directly with a 
client or has a joint venture or similar arrangement with a major competitor of a client. More 
examples of such threats are discussed later. 
For a finance and accounting professional working as an employee 
A finance and accounting professional has a professional obligation to comply with certain 
fundamental principles which have been detailed below. There may be times, however, when 
their responsibilities to an employing organization and the professional obligations to comply 
with the fundamental principles are in conflict. Ordinarily, a finance and accounting 
professional should support the legitimate and ethical objectives established by the employer 
and the rules and procedures drawn up in support of those objectives. Nevertheless, where 
compliance with the fundamental principles is threatened, a finance and accounting 
professional must consider a response to the circumstances. As a consequence of 
responsibilities to an employing organization, a finance and accounting professional may be 
under pressure to act or behave in ways that could directly or indirectly threaten compliance 
with the fundamental principles. Such pressure may be explicit or implicit; it may come from a 
supervisor, manager, director or another individual within the employing organization. A 
finance and accounting professional may face pressure to: 
? Act contrary to law or regulation. 
? Act contrary to technical or professional standards. 
? Facilitate unethical or illegal earnings management strategies. 
? Lie to, or otherwise intentionally mislead (including misleading by remaining silent) others, 
in particular: 
? The auditors of the employing organization; or 
? Regulators. 
? Issue, or otherwise be associated with, a financial or non-financial report that materially 
misrepresents the facts, including statements in connection with, for example: 
12.4 Business Law, Ethics and Communication 
 
 
The financial statements; Tax compliance; Legal compliance; or Reports required by 
securities regulators. 
12.4 Creating an Ethical Environment 
In light of the various corporate scandals mentioned above, the following three points need to 
be addressed for creating a sound ethical environment in any company. They are, 
1. Ensuring that employees are aware of their legal and ethical responsibilities. 
Ethical organisations would have policies to train and motivate employees toward ethical 
behaviour. This would require initiation from the top. A number of companies, both in the West 
and in India have been known for their quality and soundness of their Ethics programmes. 
Companies like Raytheon make ethics training compulsory for everyone. Similarly Texas 
Instruments has a well drafted Ethics programme from as long as 1961. In India Wipro was 
amongst the pioneers to establish an organised set of beliefs which would guide business 
conduct. This was done as early as 1970s. In the process the company has established an 
Integrity manual which helps employees take ethical decisions when faced with choices.  
2. Providing a communication system between the management and the employees so that 
any one in the company can report about fraud and mismanagement without the fear of 
being reprimanded. 
Ethical organisations need to provide facilities for employees through which they could 
communicate with responsible positions for reporting frauds, mismanagement or any other 
form of non routine detrimental behaviour. In India Wipro has introduced a helpline comprising 
of senior members of the company who are available for guidance on any moral, legal or 
ethical issues that an employee of the company may face. 
3. Ensuring fair treatment to those who act as whistle blowers. 
This is perhaps the most important and sensitive issue. When Sherron had raised questions at 
Enron, she was demoted. Similar fate would have met all those who had followed Sherron. 
Fair treatment to whistle blowers is a basic necessity to check fraud. It is re assuring that two 
of the three persons of the year, selected by the popular Time magazine were accountants 
from Enron and World Com who had dared to blow the whistle, however, needless to say that 
the appreciation is much more needed from within the company rather than outside. 
12.5 Reasons for Unethical Behaviour 
A creation of a proper ethical environment requires a proper understanding of the reasons 
which lead to un ethical behaviour. Four such reasons are discussed below-., 
1. Emphasis on short term results. This is one of the primary reasons which has led to the 
downfall of many companies like Enron and WorldCom. Manipulating accounting entries 
to depict good profitability can help companies raise further capital from the market  
Page 5


12 
Ethics In Accounting And Finance 
Learning Objectives 
After reading this chapter you should be able to understand, 
? the importance of ethics for a finance and accounting professional; 
? the various principles which need to be adhered to by finance and accounting 
professionals; 
? the concept of ethical dilemma and conflict resolution; 
? the various threats which can be faced by a finance and accounting professional while 
working as an auditor, consultant or an employee in an organisation; 
? the various safeguards which need to be adopted to counter threats. 
“A business that makes nothing but money is a poor kind of business.” 
HENRY FORD 
12.1  Introduction 
Finance and Accounts is perhaps the only business function which accepts responsibility to act in 
public interest. Hence, a finance and accounting professional’s responsibility is not restricted to 
satisfy the needs of any particular individual or organisation While acting in public interest, it 
becomes imperative that the finance and accounting professional adheres to certain basic ethics in 
order to achieve his objective. 
Until recently, various surveys conducted globally had ranked finance and accounting professionals 
very high in terms of professional ethics. However, various accounting scandals witnessed during 
the past few years have put a serious question mark on the role of the finance and accounting 
professional in providing the right information for decision making, both within and outside their 
respective organisations. In companies such as Enron, World Com, Tyco, Global Crossing, 
Adelphia, Quest, Xerox and most of the late dotcoms, the accounting information used by the 
Finance Department was false and manipulative.  
What was the role of finance and accounting professionals in all these high profile failures? Of 
course there were a few professionals who were directly involved in fraudulent activities, however, 
the majority, at most of the times, refused to challenge what they had already known.  
12.2 Business Law, Ethics and Communication 
 
 
Enron is a classic example of such behaviour. Months before Enron Corp declared 
bankruptcy, an employee of the name of Sherron Watkins sent the company’s top executive 
(Kenneth Lay) a message which had detailed information of the accounting hoax in the form of 
the now famous ‘off the book liabilities’. However, instead of taking note of what was 
mentioned in the message, the management of the company demoted Sherron. It is well 
known now, that, like Sherron, hundreds of finance and accounting employees at Enron knew 
about the happenings but preferred to remain silent. Hence, most of them did not lie, but 
neither did they disclose the truth nor did they attempt to correct the misleading and confusing 
information. Shouldn’t they have blown the whistle the way Sherron did? Was the behaviour of 
these employees un ethical? Cases like Enron exist in plenty, example World Com, Global 
Crossing, Xerox, Qwest and many other companies have been known to have created 
accounting entries with the sole purpose of making their financial statements look attractive 
thereby inviting further investments from unsuspecting individuals and organisations.  
12.2   Ethics and Ethical Dilemma 
The word Ethikos (Ethics) imbibes within itself both individual behaviour and community 
culture.  Various iIndividuals would be having different opinions on the same subject because 
of which what is perceived as right by one may be considered wrong by the other. Hence, 
doing what one thinks is right, may not always be the right thing to do! This is the essence of 
the term ‘Ethics’ which may be defined as ‘those moral principles which guide the conduct of 
individuals’ irrespective of the differences of opinions amongst individuals. Ethical behavior 
implies such course of actions which are taken after giving due thought to their impact on the 
society and other stake holders. Hence when accounting and finance professionals at Enron 
did not report of the wrongs which they believed were being done at the top, their behaviour 
amounted to being unethical in spite of the fact that they were not directly involved in any of 
the fraudulent or manipulative activities. In contrast, when Cynthia Cooper, Vice President – 
Internal Audit of World Com found wrong accounting entries resulting in inflated profits, she 
immediately reported the matter to the Board of Directors, this, in spite of the fact that she was 
reporting against seniors whom she had come to admire over the past so many years of 
working together. These two examples mentioned above provide an insight into the meaning 
of Ethical dilemmas. Ethical Dilemmas exist when finance and accounting professionals need 
to choose from amongst alternatives and there are (1) significant value conflicts among 
differing interests, (2) actual alternatives which can all be justified and (3) significant 
consequences to all stakeholders. Let us consider an example of a finance and accounting 
professional who has been asked to provide a profit forecast which needs to be given to a 
banker for a much wanted loan to be utilised in launching a new product. The company has 
not been doing well for the past few years and without this loan there is a likelihood of its 
closing down. However, the loan can only be availed if the banker is convinced that the 
projected profitability shall be at least ` 50,00,000 per annum. A optimistic projection of the 
profits shows that if everything goes extremely well the company may be able to make profits 
of ` 50,00,000, however, a realistic assumption provides a much lower figure. In such a 
situation the concerned professional will need to resolve the dilemma of the type of profit 
 Ethics in Accounting and Finance 12.3 
forecast to be provided to the banker. In case he gives a realistic projection the company may 
not get the loan and perhaps may need to close down. On the other hand if he makes a 
optimistic projection, he may be misleading the banker. There is no right answer to such a 
situation. Both actions proposed have got there own risks.  
12.3 Potential Conflicts 
For a finance and accounting professional working as consultant or auditor 
A finance and accounting professional in public practice should take reasonable steps to 
identify circumstances that could pose a conflict of interest. Such circumstances may give rise 
to threats to compliance with the fundamental principles. For example, a threat to objectivity 
may be created when a professional accountant in public practice competes directly with a 
client or has a joint venture or similar arrangement with a major competitor of a client. More 
examples of such threats are discussed later. 
For a finance and accounting professional working as an employee 
A finance and accounting professional has a professional obligation to comply with certain 
fundamental principles which have been detailed below. There may be times, however, when 
their responsibilities to an employing organization and the professional obligations to comply 
with the fundamental principles are in conflict. Ordinarily, a finance and accounting 
professional should support the legitimate and ethical objectives established by the employer 
and the rules and procedures drawn up in support of those objectives. Nevertheless, where 
compliance with the fundamental principles is threatened, a finance and accounting 
professional must consider a response to the circumstances. As a consequence of 
responsibilities to an employing organization, a finance and accounting professional may be 
under pressure to act or behave in ways that could directly or indirectly threaten compliance 
with the fundamental principles. Such pressure may be explicit or implicit; it may come from a 
supervisor, manager, director or another individual within the employing organization. A 
finance and accounting professional may face pressure to: 
? Act contrary to law or regulation. 
? Act contrary to technical or professional standards. 
? Facilitate unethical or illegal earnings management strategies. 
? Lie to, or otherwise intentionally mislead (including misleading by remaining silent) others, 
in particular: 
? The auditors of the employing organization; or 
? Regulators. 
? Issue, or otherwise be associated with, a financial or non-financial report that materially 
misrepresents the facts, including statements in connection with, for example: 
12.4 Business Law, Ethics and Communication 
 
 
The financial statements; Tax compliance; Legal compliance; or Reports required by 
securities regulators. 
12.4 Creating an Ethical Environment 
In light of the various corporate scandals mentioned above, the following three points need to 
be addressed for creating a sound ethical environment in any company. They are, 
1. Ensuring that employees are aware of their legal and ethical responsibilities. 
Ethical organisations would have policies to train and motivate employees toward ethical 
behaviour. This would require initiation from the top. A number of companies, both in the West 
and in India have been known for their quality and soundness of their Ethics programmes. 
Companies like Raytheon make ethics training compulsory for everyone. Similarly Texas 
Instruments has a well drafted Ethics programme from as long as 1961. In India Wipro was 
amongst the pioneers to establish an organised set of beliefs which would guide business 
conduct. This was done as early as 1970s. In the process the company has established an 
Integrity manual which helps employees take ethical decisions when faced with choices.  
2. Providing a communication system between the management and the employees so that 
any one in the company can report about fraud and mismanagement without the fear of 
being reprimanded. 
Ethical organisations need to provide facilities for employees through which they could 
communicate with responsible positions for reporting frauds, mismanagement or any other 
form of non routine detrimental behaviour. In India Wipro has introduced a helpline comprising 
of senior members of the company who are available for guidance on any moral, legal or 
ethical issues that an employee of the company may face. 
3. Ensuring fair treatment to those who act as whistle blowers. 
This is perhaps the most important and sensitive issue. When Sherron had raised questions at 
Enron, she was demoted. Similar fate would have met all those who had followed Sherron. 
Fair treatment to whistle blowers is a basic necessity to check fraud. It is re assuring that two 
of the three persons of the year, selected by the popular Time magazine were accountants 
from Enron and World Com who had dared to blow the whistle, however, needless to say that 
the appreciation is much more needed from within the company rather than outside. 
12.5 Reasons for Unethical Behaviour 
A creation of a proper ethical environment requires a proper understanding of the reasons 
which lead to un ethical behaviour. Four such reasons are discussed below-., 
1. Emphasis on short term results. This is one of the primary reasons which has led to the 
downfall of many companies like Enron and WorldCom. Manipulating accounting entries 
to depict good profitability can help companies raise further capital from the market  
 Ethics in Accounting and Finance 12.5 
2. Ignoring small unethical issues: It is a known fact that most of the compromises we make 
start are small however they lead us to large problems. Similarly, companies need to 
develop an environment where small ethical lapses are taken seriously so that they do 
not repeat in the future. Otherwise, toleration of such small lapses could lead to larger 
problems. 
3. Economic cycles: When Enron was doing well, no one had bothered to understand its 
actual financial position. There were no question marks on its financial statements. 
However, when the economy took a downward turn, finance and accounting managers 
took decisions which were compromises over the established code of conduct. This was 
done to reflect a financial position which would keep the investors in the market satisfied. 
All this resulted in a huge crisis and the ultimate fall of this US Giant. Hence, to prevent 
disclosure of ethical problems in times of depression, company need to be extremely 
careful and vigilant during good times. 
4. Accounting rules: In the era of globalisation and massive cross border flow of capital, 
accounting rules are changing faster than ever before. The rules have become more 
complex and it is difficult to identify deviations from these complex set of requirements. 
The complexity of these principles and rules and the difficulty associated with identifying 
abuse are reasons which may promote unethical behaviour. 
12.6 Fundamental principles relating to Ethics 
Certain fundamental principles need to be adhered with for behaving in an ethical manner. 
These principles have been summarised below; 
1. The principle of Integrity: The dictionary meaning of integrity is veracity. Accordingly, the 
principle calls upon all accounting and finance professionals to adhere to honesty and straight 
forwardness while discharging their respective professional duties. In addition the following 
acts of responsibility would help comply with the Integrity principle, 
? Avoid being involved in activities which would impair the goodwill of the organisation 
? Communicate adverse as well as favourable information with those concerned 
? Refuse any gift or favour which could influence actions taken or to be taken 
? Refuse to get involved in any activity which would adversely affect the achievement of an 
organisations objective. 
? Avoid conflicts and advise related parties on apparent conflicts which could arise in the future. 
2. The principle of objectivity: This principle requires accounting and finance professionals 
to stick to their professional and financial judgement. They should not allow bias, conflicting 
interests or undue influence of others to override their business judgements . They should 
communicate information fairly and objectively in such a way that the communication with the 
end user is complete and transparent.