The ethics of a company is presently a prominent issue attributable to staggering corporate embarrassments and scandals that had occurred in numerous nations resulting in major consequences to the economy and society. These corporate scandals underline the ethical quality of businessmen with specific focus on accountants. It is contended that the accountants have been the primary supporters of the decrease in moral and ethical benchmarks of a business. The major cases in recent memory, including the factors leading to the global economic meltdown of 2007/ 2008 show just how unethical behavior on the side of managers, and in particular, accountants can have disastrous consequences not just to the company and its customers, but to entire economies and the entire global financial system. An analysis of the situations have concluded that the recently experienced financial crises and scandals were symptoms of deep rooted problems and determined that an improvement in the ethical (and moral) standards adequate and sound financial management principles, the quality of audit, mechanisms for financial reporting, and strengthening the regimes of governance are some of the means by which public confidence in financial reporting can be improved.
The responsibility towards meeting these requirements lies with the accounting professionals, whose shortcomings have resulted in corporate / economic scandals and collapses (Ritholtz, 2008). The 2007/2008 financial crisis assessment began as evaluation of internal systems such as too much leverage, poor risk controls, and poor management decisions. However, these are not satisfactory to explain the financial crisis; something else was cooking. The identified issues such as poor risk control are just symptoms of something more sinister; the gradual and eventually, the total collapse and degrading of ethical behavior in the financial sector, perpetrated, or helped in a big way, by accountants (Ver, 2013) As such, the ethical aspects of how accountants conduct themselves has become a topical and hot issue. In the context of the aforementioned, this research article discusses the concept of professional ethics in accounting, its impact, its theoretical concepts, and reviews existing and past literature on the same topic before discussing some of their findings in the context of this research, before drawing conclusions. The scope of this research paper is on the value of ethics upon the accounting profession and how this impacts business performance
Ethics in accounting basically is an applied filed of ethics and forms a component of human and business ethics; it studies moral values and judgments and their application to the filed of accountancy and business in general. Ethics in accounting is a form of professional ethics . Ethics refers to the conduct principles that govern the individual or group behavior and are the moral principles that govern the behavior of people while conducting an activity. The financial crisis and cases of corporate collapses or near collapses highlight the extreme important that finance and accounting professionals to be ethical as they need to perform their duties and jobs with the highest level of integrity and accuracy. In recent years, discussions on ethics in accounting has faded as the major examples where unethical behavior led to serious ramifications; this is in the context of the Worldcom and Enron cases. Other events too, such as criticism of the Wall Street crowd have conspired to push ethics in accounting out and away from the public eye. However, there is still need for accounting practitioners to be ethical and the wider population to be kept informed on the topic. Accountants have, more than ever before, understand the importance of accurately and fairly representing the financial performance of their organizations hen presenting results to the public. Presently, the sheer scale and complexity of corporate transactions are so massive that the need for transparent and fair financial reporting have become even more important (Ritholtz, 2008).
The accountants need to engaged in reviewing and assessing sensitive financial information; people working in the financial and accounting field in the present world face significant issues of ethical dilemma where two choices, that don’t really seem to solve the problem are available. Several examples highlight the occurrence of corporate scandals and collapses with evidence pointing to ethical issues among professionals in the accounting field. In a fast and increasingly competitive business world where new challenges keep coming everyday and with the desire to remain afloat, the challenges have gone in the way on differentiating between what is ethically and morally wrong or right. These reasons highlight the importance of ethical standards in the accounting profession. However, the direct correlation between the quality of reporting and ethical standards in accounting and how they impact financial performance needs further clarity.
A lot of attention has focused on ethical standards and the quality of accounting; however, the focus on the relationship between accounting ethics and financial performance of a company. Studies have been done for industries, such as By (Vieira, 2013). This paper will ad to the existing knowledge in the filed of accounting ethics. This study will provide important insights to accounting students, decision makers, and managers on the impact that ethical accounting and reporting standards will have on the business and financial performance of an organization. It will provide company decision makers and managers with an evidence based motivation to enforce ethics in accounting. It will also shed light and provide new dimensions on the relationship between ethical principles in accounting and financial performance. The findings of this research paper will also highlight the groups of people and other stakeholders are impacted by the ethical standards in accounting. The findings will also provide insights on the motivators of unethical behavior and how this can be changed in organizations to promote ethical behavior as part of their overall organization policy.
This paper aims at evaluating past research on ethics in accounting; it will review situations where unethical accounting behavior and standards have been used and what the result has been. The paper also aims to understand the various factors that influence ethical (and unethical) behavior among employees and what can be done. The paper will also evaluate the impact of ethical accounting on the financial and business performance of a business and make recommendations. Focus will be placed on unethical behavior in accounting
There are several reasons why accountants and finance professionals can act unethically; typically, the most common reasons are tied back to financial reasons and motivations, such as the motivation for the unethical behavior due to stock price reasons, or even personal motivation, such as theft of cash. Many past accounting scandals such as the Enron and Worldcom cases resulted in people gaining vast amounts of money by using unethical standards of accounting. Yet the question remains, why do they do it, knowing very well that the money trail will be exposed and their actions exposed? Many companies and businesses come under pressure form boards and shareholders to deliver positive results or to avoid making losses (actually, to be seen not to be making losses) can cause accountants to use poor, or even illegal accounting practices and ethics while making decisions. Such reasons are also financial, so the company can avoid job loss among employees or being penalized by the markets. A very small group (accountants) are required to remain ethical every time, but who polices them? Several accounting bodies have their own accounting ethics committees responsible for putting in place ethical guidelines and enforcing them (the guidelines). These differ by region or country and act with authorities at the State level to enforce these practices and guidelines. Legal bodies, such as the SEC in the USA also ensure accounting principals are followed (Ritholtz, 2008).
Ethics and how it is understood is shaped by societal, personal, and professional values, all of which can be difficult to specify. Some schools of though stress the importance and significance of society’s interests while others stress on individual interests. These opposing points of view have dominated the discourse on accounting ethics over time and this is likely to continue. Ethics refers to character mated to customs, and so define the interaction of people with each other; ethics, therefore, is a more about choices. Ethics defines the behavior of people as they make ‘right’ choices and generate ‘good’ behavior. It includes the examination of values and norms, principles, consideration of available choices in order that the right decision is arrived at and the strength of character of individuals to base their actions and decisions upon ethical standards. Ethics, therefore, requires moral knowledge to be acquired as well as the skills to apply such knowledge properly in daily life situations.
Making decisions based on personal feeling and intuition does not always result in the right choices and as such, ethical decision making must be based on a criteria to arrive at the ‘right’ decision. The leading philosophical ethical theories include utilitarianism, justice, and rights; they are normative theories on ethics that offer a standard or principle on how people should behave considering the wrong and right of any action (Senatrane, 2008).
Utilitarianism theory: This theory posit that the ethical alternative is one that results in the maximization of good consequences over those of bad consequences. Utilitarianism is the greatest principle of happiness . The utilitarian theory takes a common sense and pragmatic approach to ethics such that actions are right only to the extent that they benefit individuals.
Theory of rights: This theory posits that good decisions are those that respect other people’ s rights as it is driven by the logic that human beings posses an inherent worth that has to be respected, among them being the right to the truth (Senatrane, 2008)
Justice theory: This is based on the distributive justice principle; justice is fairness that relates to contribution and reward, but justice alone cannot define fairness. Other forms of justice exist, and include equality, procedural justice, and compensatory justice.
Ethics in accounting has more to do wit the theory of justice of ethics; how does the fairness of an individuals decisions and actions distribute burden and benefits to members of the group? Due to the nature of their profession, accountants have to be very careful with ethics in their professional practice. The financial crisis the world endured post 2007/2008 has often been termed as an ethical crisis. However, a different school of though posits that the crisis was not contributed t by the failure of ethics alone; there are other institutional failures that led to it. This is because these issues of ‘ethics’ were in existence before, and some countries where such practices were rife ended up not being affected by the crisis. The crisis of leadership and governance, which reflects a bigger problem of social and economic model that has essentially failed (Argandoña, 2011) ; this social and economic model that has failed is grounded on certain anthropological and ethical assumptions, and it is the assumptions that have failed.
Business ethics is an important subject for students preparing to become accountants and finance professionals. The manipulation of financial standards and code of ethics fall within the wider framework of business ethics, and is especially important among auditors of financial statements and records (Filos, n.d.). CSR (corporate social responsibility) has been utilized as an indicator of ethical practice and performance. Research indicates a significant correlation between the return on assets (ROA) of an organization as a measure of financial performance and ethical performance. However, the correlation between the profit margin of an organization and ethical behavior is not significant https://iconline.ipleiria.pt/bitstream/10400.8/1128/1/MNI_%20Ermelinda%20Vieira_%202013.pdf
This research , based on the objectives, and guided by the research questions will use a qualitative approach using secondary data and research from past research on related topics. This is because measuring financial performance in the present business environment, in terms of ROA/ PM in the context of ethics can be challenging; further, different companies in different industries are affected differently by ethics. Using qualitative research approach, the how and why of the research topic can be evaluated, and not just the issues of where and when or by whom. It allows fro the exploration of the subject matter in totality to allow for a better understanding of the situation or phenomenon. This research will entail the qualitative review and evaluation of statistical and other scientific findings to predict occurrences and help answer the research questions of this paper. Qunatitative methods were deemed unsuitable for this research because ethics is a sociological construct that is defined by groups, personal, and corporate viewpoints, and therefore, cannot be quantified per-se. However, empirical data can be used qualitatively, to discuss the effect of ethics in accounting on the performance of businesses. For this research, information was obtained from various sources, with searches in data repositories like Google Scholar and Emerald Insight to find peer reviewed documents and articles, as well as other scholarly publications such as PhD Dissertations and white papers on the link between accounting ethics and financial performance of businesses.
Qualifying criteria for the chosen articles
|
Criteria |
Explanation |
|
Criteria 1 |
The articles were published from 1997 to 2017 |
|
Criteria 2 |
The articles were in the fields of accounting or finance |
|
Criteria 3 |
The articles are scholarly and/ or peer reviewed |
|
Criteria 4 |
Te articles used related to ethics, accounting practices and standards, CSR reporting, and business/ financial performance |
Using the criteria above, articles were collected and their abstracts/ and or findings evaluated before being used for this study.
Research on the Link between the financial performance of a corporation and its commitment to ethics (Verschoor, 1998) established that the financial performance of an organization has a significant and positive correlation with the compliance with ethical codes of conduct and report their ethicals standards in reports to shareholders; this level of significance was higher than for companies that do not. The corporate social reporting was on SEAAR (social, and ethical, accounting, auditing and reporting). An industry specific study on the correlation corporate ethical reporting/ social responsibility and the financial performance of the company, taking into account social and environmental factors found a negative correlation between financial performance and ethical performance. However, the research established that the prior financial performance had a positive correlation with the subsequent period ethical and social performance (Moore, 2001). A study on te association between ethics and disclosure on firms in the seasoned equity market on the the performance of post-issue equity offering. By studying the relationship between ethical disclosure and the risk of unethical behavior by these firms established a negative correlation between the risk for unethical behavior involving aggressive manipulation of earnings. The study also established that these firms, because of transparency in disclosure and ethical practices gave shareholders and stakeholders greater confidence, and opened them to greater scrutiny. Further, these firms had no information problems and hence had positive performance in the long, post issue.
The study also established that long term post issue under performance was significantly less for firms with extensive ethical disclosure and less management and manipulation of earnings. As such, ethical financial reporting and efforts at incorporating CSR into decision making result in better financial performance as capital markets value ethical reporting and disclosure over just impressive financial returns that could have been managed and manipulated (Jo and Kim, 2008). A survey on accounting ethics and the financial reporting quality on Nigerian oil firms used the indices of ROI (return on investment), DPS (dividend per share), and EPS (earning per share). The ethical parameters were set as independence, integrity, and objectivity, as well as accountability and competence using a questionnaire established a strong positive correlation between accounting ethics and financial performance as measured by the EPS, ROI, and DPS metrics (Eginiwin & Dike, 2014). An empirical assessment of the impact that CEI (corporate ethical identity) on the financial performance of a firm was done using information from instrumental and normative stakeholder theory. The results established that firms having a strong ethical identity, entailing ethical accounting and financial reporting achieved a higher level of stakeholder satisfaction, that in turn influenced the firms’ financial performance positively (Berrone, Surroca & Tribo?, 2007).
Overall, using empirical measures and literature reviews, the afore reviewed studies show that there is a positive correlation between the financial and business performance of organizations with their ethical financial reporting, where ethical standards are followed in accounting. The studies also established that for financial markets firms, those that had ethical principles in its reporting also experienced less or no under-performance in its financial performance after SEO / public issuances. Except for one case of an industry in the UK in which there was a negative correlation between financial performance and ethical financial reporting, the studies demonstrate that ethical financial reporting results in positive financial performance by organizations. Companies having strong ethical identities in their financial reporting and information disclosures suffer little or no information problems. They also maintain a higher level of stakeholder satisfaction and this influences heir financial results and performance positively. O the other hand, a lack of professional ethics and integrity in financial reporting results adverse, or even negative financial returns as shown by the collapse of Wall Street firms.
The positive financial performances observed in firms where ethical accounting and financial reporting are done is due to positive business performance in terms of attracting new clients and general investor and stakeholder confidence. Because such firms are already managed ethically, the investment decisions and its efficiency levels increase resulting in better financial performance as ,measured in terms of ROI and EPS. This happens because the firms avoid unnecessary risks; firms exist in the modern capitalist economy to generate and maximize profits, with focus being on short term profits. The investment comes from the private sector; however, if investors lose confidence in management, the investment by stakeholders tend to be limited and hence adversely affecting financial performance. Ethics related news has a significant impact on the share price of a company, either positively or negatively, on a range between 0.5% and 3%. Long term success can only be assured through accurate and non-manage financial records as announcing impressive performances due to manipulated results will eventually result in issues that adversely hurt the performance of firms and hence, their business and financial performance.
Conclusion:
This paper investigated the effect that accounting ethics has on the performance of a business, with a specific focus on both financial and business performance. Using a qualitative research study with secondary data, and evaluation of past empirical and evaluative research from academic/ scholarly articles undertaken and published in the past 20 years show that firms that have had issues with ethics in their financial reporting were adversely affected in their business and financial performance. Studies show that firms that had corporate governance issues suffered adverse effects, including legal investigations, being placed into receivership, jailing of officials, and in cases, collapse or bankruptcy as the cases of Worldcom and Fannie Mae showed. However, organizations that engage in ethical corporate and financial reporting/ accounting behavior recorded positive financial and business performance in the longer term, as it gave stakeholders and investors confidence, after evaluating past empirical and cross-sectional studies. This paper therefore concludes that generally, ethical financial reporting has a positive and strong correlation with good business and financial performance.
References:
Argandoña, A. (2011, November 11). Three Ethical Dimensions of the Financial Crisis. Retrieved
May 20, 2017, from https://pdfs.semanticscholar.org/6c3f/b7b88566baefeea144442c0bb4e0da51c1c2.pdf
Berrone, P., Surroca, J., & Tribo?, J. A. (November 01, 2007). Corporate Ethical Identity as a
Determinant of Firm Performance: A Test of the Mediating Role of Stakeholder Satisfaction. Journal of Business Ethics, 76, 1, 35-53.
Eginiwin, J. E., & Dike, J. W. (January 01, 2014). Accounting Ethics and the Quality of Financial
Reporting: A Survey of Some Selected Oil Exploration and Producing Companies in Nigeria. Iosr Journal of Business and Management, 16, 7, 26-36.
Jo, H., & Kim, Y. (2007). Ethics and Disclosure: A Study of the Financial Performance of Firms in
the Seasoned Equity Offerings Market. Journal of Business Ethics, 80(4), 855-878. doi:10.1007/s10551-007-9473-6
Moore, G. (January 01, 2001). Corporate Social and Financial Performance: An Investigation in the
U.K. Supermarket Industry. Journal of Business Ethics, 34, 299-315.
Ritholtz, B. (2008, December 11). The Financial Crisis and the Collapse of Ethical Behavior.
Retrieved May 20, 2017, from https://ritholtz.com/2008/12/the-financial-crisis-and-the- collapse-of-ethical-behavior/
Senaratne, S. (2008). The role of ethics in accounting. Retrieved May 20, 2017, from
https://www.cimaglobal.com/Pages-that-we-will-need-to-bring-back/Old-site-pages1/Old- site-pages/Thought-leadership/Newsletters/Regional/The-CIMA-Edge-South-Asia-and- Middle-East/20111/July—August-2011/The-role-of-ethics-in-accounting/
Ver, E. W. (2013). Ethical reflections on the financial crisis 2007/2008: Making use of Smith,
Musgrave and Rajan. (Ethical Reflections on the Financial Crisis 2007/2008.) Heidelberg [u.a.: Springer.
Verschoor, C. C. (January 01, 1998). A Study of The Link Between a Corporation’s Financial Performance and Its Commitment to Ethics. Journal of Business Ethics, 17, 13, 1509-1516.
Vieira, M. (2013). The effects of ethical behavior on the profitability of firms – a study of the Portuguese construction industry (1st ed.). Leiria: Instituto Politécnico de Leiria. Retrieved from https://iconline.ipleiria.pt/bitstream/10400.8/1128/1/MNI_%20Ermelinda%20Vieira_ %202013.pdf
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