Ethical Governance Issues in Accounting and Reporting

Dilemmas of the Accountant

Dr. Manoj S. Kamat#

Dr. Manasvi M. Kamat*

Abstract

The duty of preparation and the extent of "fairness" in accounting data are a corporate
responsibility. Companies today are becoming more aware of ethical programs and practices
in accounting and reporting that have hitherto been considered as softer sides of doing
business. The paper deliberates on various ethical governance issues in accounting and
reporting including the development of ethical thought, critical issues involved and the
expected responses from the stakeholders in resolving ethical dilemmas. The accountant in
today’s world are expected to enhance their value addition through every role he performs
and thereby rise to the expectations of the public, because the integrity of an accountant is
cornerstone of sound accounting and reporting practices.

Keywords: Ethics, Accounting and Reporting, Governance, Accountants, Stakeholders

Regular Faculty Members at the Department of Commerce# and Economics*

VVM’s Shree Damodar College of Commerce and Economics, Margao-Goa
Correspondence: mskamat@gmail.com

Electronic copy available at: http://ssrn.com/abstract=1987917

 Ethical Governance Issues in Accounting and Reporting
Dilemmas of the Accountant

Dr. Manoj S. Kamat

Dr. Manasvi M. Kamat

1. Introduction
I know what is right and wrong.
I know not why I am driven always to do the wrong.
Duryodhana in the Mahabharata

It is common knowledge that profit is the basic goal of business activity, but nano-second technology
has brought about a revolution in the way we conduct business. This spurt is also evident in the
activities of evaluation and validation of goals, concepts and practices of business. Efficiency,
competitiveness and quality are what are demanded today by the stakeholders. The extent to which
accounting data is objective, reliable and unbiased is substantially under the control and influence of
corporate management. The duty of preparation and the extent of "fairness" in accounting data are a
corporate responsibility. Companies today are becoming more aware of ethical programs and
practices in accounting and reporting that have hitherto been considered as softer sides of doing
business. What makes these companies visionaries is that while they seek profits, they are also guided
by core ideology, i.e. core values and a sense of purpose beyond just making money {Collins and
Porras (1997)}.

The quality of corporate financial accounting and reporting is constantly evolving over time in
response to informational needs, expectations and demands of financial information users. The role of
an accountant becomes invaluable both, ethically and functionally as he plays a dual role in an
organization, one as the supplier of information for Managers inside the organization and second, as
the supplier of information for the stakeholders outside the organization {Ijiri (1975)}. The accountant
is expected not to display his overzealous righteousness to strengthen his hold on the organisation to
achieve personal career goals but to ensure that the same information is available to everyone
correctly and fully {Sekhar (1997)}.

1.2 Ethical Behaviour Defined

The dictionary definitions of the word 'Ethics' are a bit vague. The Oxford Dictionary defines the term
as "Set of principles or morals, moral principles or rule of conduct". The Webster Dictionary defines it
as "study of standards of conduct and moral judgement", whereas the American Heritage Dictionary

Electronic copy available at: http://ssrn.com/abstract=1987917

defines Ethics as "The rules or standards governing the conduct of members of a profession". The
word seems to have been derived from "Ethikos" the adjective of ethos-moral behavior in Greek. The
word Moral in Greek is the adjective of "mos" -customs, and 'mores'- morals. This word is again
defined by the American Dictionary as "concerned with the judgement principles of right or wrong in
relationship to human actions or characters". The meaning of the word Moral concerns itself with
personal responsibilities for the effect of decisions on other people and organizations. It hints at the
system of rules or laws or judicial system. A closer look at the definition of ethics, thus suggests the
achievement of goals and personal responsibilities for decisions.

1.3 Development of Accounting Ethical Thought

Without attachment do your duties always,

for a man who works without attachment attains the highest
Bhagwad Gita, Chapter 3, Shloka 13

As seen above, Accounting Ethics are the desired norms of behaviour exclusively dealing with
commercial transactions, not only among persons within organizations but also among political
processes that regulate such transactions. Such values and ethics guide individuals and society to
behave decently. The concepts of ethics find deep roots in the history of religion, since ethical codes
aim at realizing higher levels of character and values. Lessons on ethics cannot be complete without a
moral - religious framework. More often not, ethical standards are built upon the foundations of
religious concepts of righteousness. In the latter period of development of ethics, the Anuvrat
Movement1 in India emphasized righteousness and refinement of human traits and impulses for the
good of an individual's present and future {Baid (1999)}. The concept of Ethics in Accounting
emerged freely out of the crosscurrents and positive developments of society. Kautilya, in his
Arthashastra, had held Accounts Officers responsible2 for rendering the accounts in full for their
sphere of activities without any internal contradictions {Rangarajan (1992)}. Karl Marx, through his
analysis of capitalism, made a systematic attempt to blend wage slavery, production for profit and
creation of surplus value with ethics. Capitalism as an economic system based on credit creation first
appeared in Italy {Schumpeter (1939)}. It should also be remembered that the system of modern
accounting was developed in Italy3. Thus we can claim that the primary concept of Accounting is set
from Ethics of Capitalism.

The Industrial Revolution in the middle of Eighteenth Century saw involvement of shareholders as
institutions and the separation of the financing function from the managing function. This period also
gave an impetus to the development of systematic financial accounting practices. To provide outside
investors with desired information, the British Government promulgated several changes in its

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Companies Act in 1884, 1865 and 1925 so as to enable them to evaluate the efficiency of
management. There was increasing pressure to bring about change in the objective of accounting from
that of presenting information to management and creditors to that of provision of complete
information to investors and stockholders {Ripley (1915)}. At this time a strong plea was also made
for providing adequate and understandable information in financial statements presented to
stockholders so as to aid them in determining the true value of their investments {Hoxey (1930)}.

The concept of efficiency of business is often interpreted as maximization of business or

maximization of wealth. Ethics, in terms of social decency, civic responsibility, justice, fair play,
integrity, concern for the environment etc. are taken into account only as a means to maximize
corporation wealth {Kristol (1978), Novak (1978), Gilder (1981)}. The ethical approach to
accounting recognizes that companies' activities have economic as well as social impacts'. This is
based on the concept of Social Welfare i.e. in terms of the effects on all groups (stakeholders) in the
free enterprise system.4

1.4 Ethical Practices and the Duty of Accountants

Accounting as a service activity rendered by the accountant provides interested parties with
quantitative information that helps them to make decisions about deployment and use of resources in
the economy. As a custodian of information, the accountant measures and communicates financial
information about economic activities to society. Significant changes in the structure of society,
redistribution of wealth, leveling of income, stiff competition, etc., have brought about equally
significant changes in the expectations and attitudes of society. In this turbulent environment, the
accountant finds himself increasingly materialistic. Further, the environment in which the accountant
has to undertake his functions is governed by complex rules, procedures, formal codes of practices on
the one hand, and the need to meet the responses, demands, perceptions and expectations of the
information users on the other. The accountant may aim at fulfilling the expectations of the financial
information users through sets of accounting disclosures that are not explicitly illegal and may be
judged acceptable, but this is deceptive. As such, ethics in accounting relates to how the accountants
should have accounted and reported the dealings of the firm with other entities and people, when
choices are to be made that have the potential of hurting others. For an accountant to act in an ethical
way is to choose an action that the decision maker believes to be morally correct, i.e. to choose what
is believed to be right over what is believed to be wrong. In this sense it is the ultimate duty of the
accountant to serve primarily those users having limited authority, ability and resources to obtain
information and who rely on financial services as a potential source of information about economic
activity. Users should be able to predict, compare and evaluate potential cash flow with regards to
their amount, timing and certainty.

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1.5 Value Propositions of Ethical Accounting
Ethical accounting and reporting practices correspond to a basic human need and they create
credibility with the public and employees. The general public wants to be part of an organisation that
they can respect and be publicly proud of, because they perceive its purpose and activity to be
beneficial to society. Secondly, values upheld by an organization also provide a common language for
defining a company's leadership and people {Haas (1980)}. Thirdly, the values or moral / professional
standards of behavior of executives affect formulations of business enterprises {Heller (1971)}. An
appropriate climate of managerial values and leadership styles is a prerequisite for a successful
implementation of strategy {Khandwalla (1997)}. The credibility thus gained by the top management
of an ethical company and the trust generated among the employees, finally produces the feeling that
the company does not exclusively belong to the shareholders but to all stakeholders.

2. Unethical Practices in Accounting & Disclosures

Listed below are some Accounting / Reporting decisions having potential for an ethical conflict. They
indicate how deception is perpetrated in the accounting system. Several works like those of
Thingalayya and Shenoy (1985), Merchant (1987), Dasgupta (1993), Kamath (1991), Irvine (1993),
White (1993), Thomas (1998), Rajpurohit (2000) and others have reported many such unethical
practices and cases dealing with ethical conflicts.
Abhorrence Not accepting responsibility for decision-making
Budgeteering Manipulation of Budgets

Overproning Making impractical commitments

Turf Guarding Hoarding Reserves

Risk Avoiding Taking safe positions even when wrong

Window Dressing Showing a better position than what really is

Inadequacy Not complying with provisions with regard to "Statutory Minimum"

Insider Information Disclosure of confidential information of clients to outsiders.

Different items of significance bundled together as a "single item". Violation of

Non-Comparability
Homogeneity grouping of items to be distributed over different locales

Potential inversion of privacy through unauthorized access and frauds / thefts

Hacking
via electronic means

Deliberate non-disclosure of one's own interest / involvement in any financial

Self Involvement
transaction

Not mentioning any important facts (of which he is aware) in the financial
Omission
statements.

Creation of false documentary evidence: making unauthorized changes in the

Falsification / Alteration
same.

Failure to record the effects of the completed transactions from records /

Suppression
documents.
Unsubstance Creation of fictitious transactions.

Misapplication Misapplying accounting policies and rules guiding accounting frameworks.

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Gray areas for unethical practices will arise as long as corporate management expects to derive some
economic benefits from deceptive financial accounting and reporting. There is also increasing
criticism that accounting professionals and many accounting firms are involved in infringement of
ethical standards

2.1 Critical Issues Involved

Studies by the Financial Executive Research Foundation (1987), Touch Ross & Co. (1988), Firn et al
(1988) and others have looked into common situations that threaten the ethical behaviour of
accountants. Listed few are the issues relating Ethics and Accountants.

1. Ethical choices in accounting and reporting involve more than merely determining whether
treatment of a particular transaction is in conformity with accepted norms, principles, laws etc. Most
of the time these are not clear and the issues involved go beyond the determination of GAAP or
provisions of the Companies Act.
2. Implementation of an ethical framework in corporate culture will be successful only if the top
management is convinced of the importance of interaction between Stakeholders and the enterprise.
3. Change in the nature and extent of competition within the profession have highlighted conflicts
between professional attitude and current economic realities.
4. Modern organizations are complex institution having their own rights and are governed by rules
set by markets, stakeholders and regulators. These institutional factors; considerably limit the scope
for ethical endeavours.
5. Conduct of business in a multinational environment and pressures like economic Volatility,
strains ethics. There is increased emphasis on short-term earnings, outcomes and consequences, which
exert significant pressures to meet unrealistic performance goals.
6. Adequate financial internal control systems that could identify and deceptive reporting are
absent.
7. Paucity of affirmative measures by auditor in detection and evaluation of the potential for
fraudulent financial / reporting as part of normal audit and examination.

2.3 Approaches to Ethical Accounting / Reporting

In the formulation of accounting theory, Prof Scott regards Justice, Truthfulness and Fairness as the
three basics of Accounting / Reporting.

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 Figure 1. Approaches to Ethical Accounting / Reporting

Justice:
 Practices should meet the expectations and data requirements of all the participants and not of
an individual or a group / groups of individuals.
 It is also important to incorporate some specific information that is essential in order to enable
different groups or external parties to take proper decisions.

Truthfulness:
 Accounting practices should not present wrong facts, misrepresent figures, or omit any
material fact.
 Established rules and procedures do not always provide an adequate foundation for measuring
truthfulness {Hendriksen (1984)}. Thus in case there exist a number of alternative accounting
treatments, utmost care should be taken to select the best alternative, considering the nature of
the problem and also the fundamental validity of the accounting treatment selected.

Fairness:
 Accounting practices should convey unambiguous, impartial, and adequate information
without serving any special interest in the company's financial position and operational
concepts.
 Financial Statements should be fair from the viewpoint of all the parties.

3. Role of the Stakeholders

3.1 Role of Accountants

Give full measure and full weight in Justice....

Do justice even though it may be against a kinsman
Quran, Surah VIII B

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The growing complexity of business and recognition of the importance of ethical governance issues
has drastically changed the traditional role of accountants. There is a growing demand that Ethics in
Accounting should be pad and parcel of the learning process one has to undergo in acquiring a formal
accounting education. In the wake of demand of good corporate governance from every quarter, there
is a need for redefining their role, as the quality of procedures maintained in accountancy and
disclosure practices are vital to corporate transparency and long-term support from stakeholders.

The following ethical test check can be applied to bring out the elements of credibility and ethics in
accounting practices
1. Is the accounting / reporting practice reliable to the extent that users can depend upon the
information provided?
2. Is this information unbiased and not intended to attain a predetermined result or induce a particular
mode of behaviour?
3. Is the practice / procedure illegal (explicitly or implicitly), or does It violate or ignore any accepted
standards?
4. Is the action of the accountant in the above regard intended to provide a particular personal benefit
to him or to the organization he represents?
5. What are the intentions of the accountant in the following a particular accounting / reporting
practice?
6. Who are the parties whose interest can be injured on the basis of the accountant's actions?
7. Will the position taken by the accountant today be as valid over a long period of time as it seems
now?
8. Is the matter disclosed in correspondence in agreement between the measure or description and the
phenomenon that it purports to represent?
9. Is the accountant intending to please his superior, board of directors, particular groups or all
stakeholders, while implementing a particular action/decision?
10. Will such action build goodwill for the company the accountant represents and create a win-win
relationship between the company and the society?

3.2 Role of the Company

Whatever a great man does, others will do the same;
what standards he sets up-those are followed by the world.
Bhagwad Gita, Chapter lll, Shloka 21

There is an increasing recognition that enterprises have an impact on the physical, social, cultural and
political environment of the countries in which they operate, there is also an increasing intolerance of
those negative impacts that indicate a lack of corporate ethical responsibility and call for a more

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proactive role in ethical matters (Carol Adams (2000)). While corporate seek profits, they should be
equally guided by core ideology. Corporate leaders may consider the following ways to overcome
cynicism.

1. Understand the pressures operating on and the dilemmas of the accountant. Companies should
encourage discussion and provide on-site support.
2. Demonstrate the company's commitment to ethics and recognize it in the employees by
harmonizing ethical initiatives throughout the organization, and not in the Accounting/Finance
department alone.
3. Adopt a foolproof compliance procedure in conjunction with installation of effective internal
control systems.
4. Provide incentives for long-term investments and achievements rather than emphasize short-term
performance targets. Conventional measure of corporate performance and accountability must be
reformed to incorporate long-term trends and forecasts.
5. Periodic activities like stakeholders' reports, ethical audit by peer groups, audit quality assurance
program's peer review etc. should be encouraged along with other affirmative steps in detection and
evaluation of fraudulent accounting and reporting practices. This will ensure greater transparency.
6. The Board of Directors should enhance its value adding capability in every role it performs by
accepting the responsibility for reliability of accounting and reporting practices.

4. Conclusions
The accountant should practice morality not only in his duty, but also in his behaviour with
shareholders, employees and all those with whom he comes into contact. Since he works within a
complex set of rules, principles and practices, he has to face not only formal or legal rules of
behaviour, but also many ethical dilemmas that he must resolve. The Working Group on the
Companies Act, 1997 observed that the integrity of the accountant, accounting procedures and the
quality of financial disclosures are fundamental to corporate transparency and stakeholder support on
a long-term basis. The accountant should try to enhance his value addition through every role he
performs and thereby rise to the expectations of the public, because the integrity of an accountant is
the cornerstone of sound accounting and reporting practices.

Notes
1. Anuvrat means small vows to be taken to practice righteousness. Lord Mahavira is the founder of the Anuvrat and Acharya Tulsi
started the Anuvrat Movement in1949. Its detailed moral code of conduct consist of a) Ahinsa Anuvrat (Non-violence) b) Satya Anuvrat
(Truth) c) Acharya Anuvrat (Non stealing) d) Brahmacharya Anuvrat (Continence) and e) Aprigrah Anuvrat (Non-Possession).
2. Kautilya In his treatise (2.7.21-23, 29, 30) states that the Accounts Officer should be ready for audit whenever asked for, should
not lie about accounts and should not try to interpolate an omitted entry as if it were inadvertently forgotten. Failure to conform to any of the
regulations was punishable.

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 3. The first professional organization of Accountants was founded in Venice in 1581. Luca Pacioli is considered the Father of
Modem Accounting because his "Method of Venice" became the model for textbooks for over 200 years {Most (1982)}. In 1494, Pacioli
published Summa, which contains two chapters describing the double-entry bookkeeping system.
4. Although free enterprise is considered to be the most efficient economic system, it is not immune to selfishness and greed.
{Adam Smith in his Theory of Sentiments}. Its ability to foster compassion, care for the environment and concern for the poor is
questionable, and this can destroy the very system of capitalism. Thus development of ethics is essential for the progress of such a society,
since regulation alone cannot protect the common interest. {Pope John Paul in his social encyclical letter titled Centesimus Annus (One
Hundred Years).
5. See Dr. Bhabutosh Bannerjee (1993) Ethics in Accounting: Need for Integration in Accounting Curriculum, The Management
Accountant, October. Also see Rathore Shirine (1996).

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