INTERMEDIATE ACCOUNTING I

ETHICS & INTEGRITY IN ACCOUNTING

WHAT IS ETHICS AND INTEGRITY? Ethics is a set of values that guide the conduct and the behavior of individuals, enabling them to differentiate between right and wrong, good and bad, and between what should be done and what cannot be done. Another important concept is integrity. As defined by the oxford dictionary of current English, it is moral excellence and honesty. Integrity can be seen as a matter of the heart because it has to do with ones conscience. In other words, integrity means doing what is right even when no one is watching. Ethics and integrity are interrelated where ethical behavior can be seen by ensuring there is integrity in the financial information required for decision making. The accounting profession has an obligation to provide sound information that the recipients of the information can trust. INTEGRITY AND ETHICS IN PREPARING AND REPORTING FINANCIAL STATEMENTS The integrity of the financial record of any given company is critical to its successful long-time operation and meaningful survival. Additionally, it is important for the reputation and trust of its employees and other stakeholders. When companies demonstrate integrity in the development of financial records and reports, the company as a whole promotes trust with all of its stakeholders and enhances its reputation. Basically, integrity and ethics are important in preparing and reporting financial statements due to following reason: Prevent financial reporting fraud from occurring as in the case of Parmalat, Enron, WorldCom, etc. Reduce cost of information as users do not have to invest extra time to verify the accuracy of the financial information provided by companies. Ensure smooth running of the capital markets as stakeholders rely heavily on the financial information for investment decision making. Reduce cost of monitoring by companies as they need to implement a system of monitoring and punishing unethical employees. Increase the trust of investors as they can rely on accountants that what is disclosed in the financial statements really depicts the actual condition of the companies. This will lead them to have a sense of security that investments made in the companies are worthwhile.

RESPONSIBILITY FOR INTEGRITY AND ACCURACY OF FINANCIAL STATEMENTS It is important to understand that the process of preparing and reporting financial information involves many players. These players are involved in the financial reporting chain and thus, are responsible to make sure that financial reports are prepared with utmost integrity. Key players Directors Roles Set the tone at the top, ensuring integrity of the financial statements Uphold the trust of creating value for stakeholders and protecting stakeholders interests Provide resources to ensure the appropriate financial reporting structure while practicing strict self-regulation and high ethical values Monitors the integrity of financial information Understands complex and unusual accounting transactions Can assess going concern Has the power to request auditors to prevent findings on internal control weaknesses Initiates appropriate intervention where the quality of financial information has been compromised Evaluate financial reporting readiness Needs to practice high ethical values Ensure that financial statements are prepared in accordance with applicable financial reporting standards and comply with regulatory requirements Ensure adequate human resources, including continuous education and training They are knowledgeable and skilful Maintain high professional standards and ethical values Produce independents audit reports, comply with regulatory requirements (including whistle-blowing), professional conduct, proper procedure and high ethical values Their jobs is to indentify risks, and need to have sufficient staff who have appropriate industry knowledge and experience Need to have high ethical values

Audit Committee

CEO/CFO/Prepares

Auditors

ASSURING FINANCIAL INTEGRITY A point to ponder is whether financial statements can be assured of its integrity of figures, estimates and underlying assumptions. A common solution to assure financial integrity is by appointing external auditors. Their main duty is to provide assurance on the financial statements so that shareholders and stakeholders can be satisfied that the financial statements show the true picture. The following points elaborate various methods to assure financial integrity in companies: Maintain a system of internal control to assure appropriate authorization, recording and accountability of assets. Ensure business records are complete, accurate and reliable because employees are involved with documents and records including preparing expenses reports, operating reports, inventory reports, approving invoices or signing for the receipts of materials. Ensure all transactions be supported in reasonable detail, recorded in the proper account and accounting period. Ensure cash and other assets must not be maintained in any unrecorded or ofthe books fund for any purpose. Ensure not false entry in any company record or mislead, hide or disguise any financial or non-financial transaction for any reason-falsifying business record is a serious offence that may result in criminal prosecution and disciplinary action. Accounting officers and managers have fiduciary responsibility to ensure finance and accounting practices support the full, fair, accurate, timely and understandable disclosure of companys financial results and condition. Any use of alternative accounting treatment possible under the Malaysian Financial Reporting Standards must be properly justified and approved by top management (i.e. Board of Directors). Maintain good working relationship between internal audit term, Audit Committee and external auditors. Continuous discussions and meetings should be held to discuss and identify solutions to problem faced by company in preparing and reporting financial information. Discussions should also identify internal control weakness and provide cost benefit solutions. Top management implements an ethics and integrity programmer to educate staff on the important of ethics and integrity in preparing financial statements. Implement on ethics and integrity enforcement procedure and made known to staff so that they are aware of the punishment they have to face when acting unethically or without integrity this includes disciplinary action and termination of employment.

 Implement and manage an ethics hotline to encourage employees to report any unethical/ lack of integrity behavior and doings in preparing and reporting financial information. CHALLENGES TO INTEGRITY AND ETHICAL BEHAVIOR If financial statements are properly prepared, then fraud and other kinds of financial wrongdoing would be difficult to commit, and detection would be easy. Accountants sometimes face ethical dilemmas that may cause them to either behave ethically or without integrity when preparing financial statements. Some of the challenges faced by accountants when upholding integrity and ethics are discussed below. Accountants usually face intense pressure to achieve the financial picture that top executives want to convey. The pressure often relates to meeting earnings expectations in order to maintain a companys stock price or allow executives to make bonus or stock option targets. This earnings management is possible because accounting rules allow some extent of flexibility in their application. Therefore, there is possibility that accountants perform accounting treatments that give an inaccurate or misleading picture of the companys financial condition but serve managements interest. Accountants working in accounting firms may be face conflict of interest in various situations as below; They have financial relationship with the company being audited, for example, owning stock in that company. Accounting firms provide both auditing and consulting services to a client. Advancements in technology can either help the accountants to perform duty efficiently or can also open opportunities and avenues for fraudster to misuse technology in preparing fraudulent reporting. Global business and competition also poses challenges to companies to excel in their business to attract more investors. And investors usually rely on financial information published by companies. Consequently, accountants might be forced or influenced to portray a rosy or good performance in order to attract additional investments. In a nutshell, it is not always easy to be consistently ethical and act with integrity as they are situations that require accountants to make a decision of whether to benefit the company, individual or society at large.