Ethical Issues in Accounting

A Group Assignment

Course: ACT 4218 – Contemporary Issues in Accounting

Course Facilitators:
Dr. Nuradhi K. Jayasiri
Ms. Anuruddhika Wanninayake

Level IV Semester VII

17th May 2024

Department of Accounting
Faculty of Management and Finance
University of Colombo
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Work load matrix

Name Registration Contribution Signature

Number
K.K.M.S Dasanayaka 2020ms9227 Factors contributing to
ethical issues in
accounting
W.M Jeewanthi 2020ms9407 Consequences of ethical
issues in accounting

M.D Madushan 2020ms9496 Conclusion

K.K.D.J Nawodya 2020ms9534 Efforts to address ethical

issues in accounting

A.L.L Sandaruwan 2020ms9689 Introduction

B.P.C.P Sandaruwan 2020ms9690 Types of ethical issues in

accounting
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Table of content

Work load matrix ................................................................................................................ ii

Table of content .................................................................................................................. iii

1. Introduction ............................................................................................................. 1

1.1 Introduction to the ethical issues in accounting .................................................... 1

1.2 Background of the company ................................................................................ 1

2. Types of ethical issues in accounting ....................................................................... 2

2.1 Fraudulent financial reporting .............................................................................. 2

2.2 Misappropriation of assets ................................................................................... 2

2.3 Conflict of interest ............................................................................................... 2

2.4 Lack of objectivity and independence .................................................................. 2

2.5 Lack of confidentiality ......................................................................................... 3

2.6 Professional Conduct ........................................................................................... 3

2.7 Professional competence ...................................................................................... 3

3. Factors contributing to ethical issues in accounting ............................................... 3

3.1 Pressure to meet financial targets ......................................................................... 3

3.2 Lack of oversight and regulation .......................................................................... 4

3.3 Ethical culture of the organization ........................................................................ 4

3.4 Individual characteristics of accountants .............................................................. 5

4. Consequences of ethical issues in accounting ......................................................... 5

4.1 Legal consequences ............................................................................................. 5

4.2 Reputational damage............................................................................................ 6

4.3 Financial consequences ........................................................................................ 6

5. Methods of addressing ethical issues in accounting................................................ 7

5.1 Create an ethical culture....................................................................................... 7

5.2 Ethical training and education .............................................................................. 8

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5.3 Compliance with government regulations ............................................................ 8

5.4 Whistleblowing protections.................................................................................. 9

6. Conclusion................................................................................................................ 9

7. Annextures ............................................................................................................. 11

7.1 Confirmation letter get from company ............................................................... 11

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1. Introduction
1.1 Introduction to the ethical issues in accounting

In the corporate world, we can see corporate scandals from time to time. Most of those
scandals have arisen due to fraudulent financial reporting and misstatements. In some cases,
the auditors were found guilty of those scandals. So, the main reason for this is the unethical
practices of both auditors and accountants. Also, the ethical behaviour of accountants reflects
the responsibility, honesty, integrity, and objectivity of their profession.
The ethical behaviour of accountants and auditors relies on their intentions and actions
therefore, it may not navigate through any software or hardware even though the accounting
process becomes automated. Hence the ethical issues in accounting are considered just as
contemporary concerns in accounting.
1.2 Background of the company
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2. Types of ethical issues in accounting

2.1 Fraudulent financial reporting

The misstatement of the financial statements by the management of the company is

known as fraudulent financial reporting. Accountants with low moral standards may engage in
fraudulent activities. In order to identify and stop fraud in their clients financial statements,
accountants and other finance professionals need to use extreme caution. They also have an
obligation to notify the proper authorities of any suspected fraud.
For Example, Incorrect financial reporting almost always has negative long-term
implications, even though it may temporarily raise the company's stock price.
2.2 Misappropriation of assets

Asset misappropriation is the most common ethical issue in accounting. The use of
corporate resources for objectives other than advancing business objectives is known as asset
misappropriation. It impacts the company's reputation and employee morale both directly and
indirectly.
For example, a senior level accountant may charge a family travelling and food
expenses to the company as a company expense.
2.3 Conflict of interest

A member may be in a conflict of interest if they provide professional services to a

client while they or their company are involved with another individual, organization, good, or
service. Professionals in accounting and finance are required to abstain from all conflicts of
interest and to refrain from letting personal or financial ties cloud their judgment.
For example, an accountant intends to advise a client to invest in a company in which
the accountant has a financial stake as part of a personal financial planning engagement.
2.4 Lack of objectivity and independence

Being impartial and holding independence opinions is crucial for accountants,

particularly when handling the company's financial information. Accountants and finance
professionals should also refrain from doing anything that can jeopardize their independence,
like taking gifts or favours from client and related parties. Even with new advanced technology,
accountants still need to remain impartial and independent in their profession.
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2.5 Lack of confidentiality

Unless you have special authorization or are required by law or professional association
to do so, you should not disclose professional information. Information leaks could lead to
negative press and even the defamation of a firm or individual. sensitive financial information
is accessible to accountants and other finance experts, and it is their responsibility to maintain
the confidentiality of this information.
2.6 Professional Conduct

Professionals in accounting and finance are expected to uphold the highest standards of
behaviour and abstain from any actions that can harm their own or the industry's reputation.
2.7 Professional competence

To effectively carry out their duties, accounting professionals need to stay updated on
best practices, laws, and emerging technologies. If you don't, you can end yourself giving out
bad advice or giving poor service.

3. Factors contributing to ethical issues in accounting

The introductory remarks effectively set the stage for a discussion on the ethical issues
of accounting, emphasizing its critical role in maintaining the integrity of financial data. By
highlighting the multifaceted nature of ethical challenges in the field, from pressures to achieve
financial objectives to conflicts of interest and organizational culture issues. The emphasis on
the importance of recognizing these factors for preserving ethical conduct and public
confidence lays a strong foundation for the subsequent analysis.
The factors which contribute to ethical issues in automated accounting processes adds
depth to the discussion. By emphasizing the inherent reliance on human judgment in navigating
ethical dilemmas, the response underlines the constant relevance of ethical issues in accounting
practice, irrespective of technological advancements. The discussion on factors contributing to
ethical issues in accounting provides valuable insights into the complexities of ethical decision-
making in practice.
3.1 Pressure to meet financial targets

In today business world, pressures often stand as stakeholders pursue specific financial
objectives. These pressures can stem from various sources, such as the drive to meet profit
targets, encourage shareholder confidence, or ensure long-term financial stability. While these
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goals are fundamental to business success, the insistent pursuit of them can sometimes lead to
ethical problems and questionable practices.
For instance, consider a scenario where senior management pushes for overstated
bonuses in the financial statements, despite no corresponding justification in the company's
financial performance. This pressure on accountants to manipulate figures to accommodate
unjustified bonuses not only eliminate the accuracy of financial reporting but also sets a
precedent for deceiving practices. Additionally, external pressures can mark when clients
attempt to cover financial irregularities by offering lavish gifts to auditors or withholding
relevant information. Moreover, junior auditors may find themselves caught in the conflict,
facing ethical dilemmas and professional conflicts when pressured to work with incomplete or
misleading information
3.2 Lack of oversight and regulation

Inadequate monitoring regulatory frameworks within a specific industry or sector can

lead to significant challenges. Take the financial sector, for instance; without strong oversight,
there's a sharp risk of misconduct, fraud, and ethical breaches slipping through the cracks. This
lack of oversight exposes stakeholders to potential risks.
Understanding the consequences of insufficient oversight is vital for identifying areas
in need of improvement and establishing effective governance systems. Consider a scenario
where two accountants, each following their own standards, produce financial statements for
their respective organizations. Since accounting is mostly base on judgements; the response
rightly emphasizes the significance of considering all relevant sources and evidence in
accounting judgments. Without a standard and established regulatory framework, stakeholders
are left unable to compare these statements effectively, hindering their ability to make informed
financial decisions.
3.3 Ethical culture of the organization

It is about the shared principles, values, and actions that shape how individuals behave
within a company or institution. In the absence of a well-established ethical culture within an
organization, a countless of negative consequences can unfold. Without clear guidelines on
acceptable behaviour, trust among employees and between employees and management
declines, paving the way for ethical misconduct such as fraud and corruption which will be a
vast problematic situation.
As the speaker emphasizes, if senior-level auditors are uncertain about handling
particular situations, it creates a concerning scenario for junior staff who may lack guidance.
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Without a clear process in place to address issues, regardless of their size or risk level, ethical
lapses are more likely to occur. It's shows that employees are not only aware of ethical standards
but also equipped with the knowledge and resources to uphold them effectively. For instance,
without transparency, auditors might be tempted to misuse client assets for personal gain or
demonstrate bias towards certain clients or managers. Accepting gifts beyond a certain
threshold, for example, can compromise objectivity and integrity. By neglecting to follow
established codes of conduct, organizations risk fostering an environment where unethical
behaviours are tolerated or even endorsed.
3.4 Individual characteristics of accountants

The discourse on the accountants underscores the human aspect within accounting and
its profound consequences for ethical concerns within organizations. It affectingly underscores
that the absence of these traits, when not cultivated effectively within an organization, can
quick a flow of issues, risking its integrity and efficacy.
The recognition that auditors, as human beings, may face challenges related to
independence and bias underscores the complexity of ethical decision-making in practice. The
example provided, concerning the misuse of client resources for personal gain, effectively
illustrates how ethical lapses can arise from compromised independence and integrity. By
highlighting the potential influence of personal relationships or conflicts of interest on auditor
behaviour, the response sheds light on the ethical dilemmas faced by professionals in the field.
The reference to factors such as familiarity with clients or personal connections underscores
the need for forceful ethical guidelines and safeguards to mitigate risks of bias or undue
influence.

4. Consequences of ethical issues in accounting

Accounting ethical issues may be extremely problematic for both individuals and
businesses. People might lose their trustworthiness and damage their reputations when they act
improperly. It occasionally may even result in legal issues. Additionally, this may cause
investors to lose trust in the business, which would lower its worth. Eventually, these problems
damage a company's accounting as well as the credibility of the accounting system as a whole.
4.1 Legal consequences

In the company, the relationship between accounting and ethics is very important since
it affects stakeholders' confidence and the accuracy of financial reporting. Serious legal
consequences for the individuals and organizations involved might result from ethical issues
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in accounting methods. These consequences could include fines, civil penalties, court costs,
and harm to one's image. If audit firms' ethical standards are compromised, they may be sued
for negligence, breach of contract, or fraud by customers, shareholders, or regulatory agencies.
Additionally, unethical accounting practices may give rise to criminal accusations,
which can end in jail for those proven guilty. Regulatory bodies such as the Securities and
Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) enforce
strict guidelines and standards to mitigate such ethical issues and uphold the credibility and
transparency of financial information. Therefore, maintaining ethical conduct in accounting
practices is not only essential for fostering trust but also for avoiding legal consequences that
can have lasting consequences.
4.2 Reputational damage

Accounting-related ethical issues can have serious, far-reaching effects, frequently

causing a company's reputation to suffer greatly. Investors, creditors, employees, and the public
all lose faith when ethical issues like false financial reporting, false financial statements, or
conflicts of interest arise. This lack of confidence can result in a damaged reputation, which
can affect a company's capacity to draw in capital, get financing, and keep clients. Furthermore,
bad press about unethical behaviour can lead to regulatory and legal scrutiny, fines, and
litigation, all of which can worsen the company's reputation and accounting standing.
An audit firm's reputation can be damaged by ethical problems, which can result in a
decline in clients and business opportunities. Furthermore, the consequences of ethical issues
can harm not just the company in question directly but also the sector as a whole and erode
public trust in the integrity of the accounting system. As a result, upholding strong ethical
standards in accounting procedures is crucial for the general stability and well-being of the
corporate environment as well as for any organization.
4.3 Financial consequences

The financial consequences of accounting ethics can be profound and extensive. A

breach of ethical issues may result in fraudulent financial reporting, false representations of
one's financial situation, and even legal repercussions. Financial statement manipulation, for
example, can be used to conceal losses or exaggerate earnings, misleading stakeholders and
investors and eroding their confidence. This may lead to legal action, penalties from authorities,
and harm to the company's image, all of which could hinder its capacity to draw in capital and
obtain funding.
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Furthermore, dishonest accounting practices can damage staff confidence and morale
inside the company, which can result in lower output and higher turnover. Growth prospects
and revenue streams for the audit company may be restricted if prospective customers and
business partners are put off by ethical concerns. In summary, unethical accounting issues can
have detrimental financial effects that can jeopardize a company's long-term stability and
viability.

5. Methods of addressing ethical issues in accounting

Jayasinghe & Co. is more responsible for identifying and mitigating ethical issues as
an audit firm. They are practitioners bound by a code of ethics issued by Institute of Chartered
Accountants Sril Lanka (ICASL). Maintaining the independence of professional works is the
main ethical principle that we could consider in the code of ethics of professional accountants.
They also believed that adherence to ethical principles and compliance with ethical standards
is the core thing of mitigating ethical issues in accounting.
In addition to compliance with the code of ethics and ethical principles, they implement
many methods to address ethical issues and maintain ethical behavior in the firm. These are as
follows,
5.1 Create an ethical culture

Creating an ethical culture within an audit firm involves several key steps to ensure the
maintenance of ethical behaviour. Firstly, it's essential to establish clear ethical values and
expectations, which should be communicated to all employees. This can be achieved through
the development of a code of conduct that outlines the firm's ethical standards and expectations
for employee behaviour. Jayasinghe & Co. is managing its business within the applicable
framework through which they have achieved credibility within the society.
Moreover, fostering open communication and transparency within the firm is crucial.
Employees should feel comfortable discussing ethical concerns and seeking guidance when
faced with ethical dilemmas. Encouraging discussions about ethical behaviour and providing
platforms for employees to raise concerns can contribute to developing an ethical culture. All
audit trainees, audit managers, and staff maintain strong relationships and make an effort to
reduce mistakes and errors stemming from a lack of awareness about ethical behaviour. Our
interviewer highlighted this: "We are aligned with all of our values, as each trainer works under
a senior member in the organization and consistently communicates our ethical culture and
expected ethical behaviour."
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Additionally, leadership plays a pivotal role in shaping the ethical culture of an audit
firm. Leaders should lead by example, demonstrating a commitment to ethical conduct in all
aspects of their work. Leaders can influence employees to uphold similar standards by
promoting and embodying ethical behaviour. Furthermore, integrating ethical considerations
into performance evaluations and recognizing and rewarding ethical behaviour can reinforce
the importance of ethical conduct within the firm.
Overall, creating an ethical culture in an audit firm involves a combination of clear
communication, open dialogue, leadership by example, and systems that incentivize and
reward ethical behaviour.
5.2 Ethical training and education

Ensuring ethical conduct through training and education involves transmitting a

thorough understanding of ethical standards, professional codes of conduct, and pertinent laws
and regulations to all staff members. This encompasses regular training sessions, workshops,
and awareness programs to guarantee that everyone is knowledgeable and prepared to uphold
ethical guidelines. Moreover, cultivating a culture that values integrity, accountability, and
ethical decision-making is crucial for promoting ethical behaviour within an organization.
Consistent reinforcement of these principles through continuous education and training can
greatly support the maintenance of ethical conduct.
Maintaining ethical behaviour in the audit firm is largely dependent on ethical
education and training. Everyone working as an auditor should be aware of the applicable rules
and regulations, professional codes of conduct, and ethical standards. They thought they could
encourage an honest and accountable culture in this way. Additionally, Jayasinghe & Co.
regularly organizes yearly awareness campaigns to educate its employees. The company
expects that by taking a proactive approach, better results will be obtained.
5.3 Compliance with government regulations

We can maintain ethical behaviour in compliance with government regulations. This

can be achieved by ensuring that organizational policies and practices align with government
regulations and ethical standards. For that, as an audit firm, they are aligned with a lot of
regulations made by ICASL, Inland Revenue Department, and primarily with The Companies
Act No. 7 of 2007, Sri Lanka Accounting and Auditing Standards Act, No. 15 of 1995.
Additionally, implementing effective oversight, monitoring, and reporting systems can
help identify and address ethical issues promptly. Moreover, providing ongoing training and
education to employees about both ethical standards and government regulations can further
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support the maintenance of ethical behaviour. By integrating ethical considerations into

compliance efforts, organizations can proactively address ethical issues while ensuring
alignment with government regulations.
5.4 Whistleblowing protections

Whistleblowing protection can be used to maintain ethical behaviour by providing a

safe and confidential mechanism for employees to report any unethical conduct or violations
within an organization. When employees feel assured that they can report misconduct without
fear of retaliation, it creates a culture of transparency and accountability. Jayasinghe & Co. also
provides a safe and confidential environment to reveal unethical matters and behaviours of
their auditor. Through that, they ensure their work efficiency and quality in the industry.
This, in turn, deters unethical behaviour and promotes a workplace environment where
ethical standards are upheld. Additionally, the existence of whistleblowing protection can serve
as a deterrent to potential wrongdoers, contributing to the overall maintenance of ethical
behaviour within the entity.
In conclusion, addressing ethical issues in accounting is crucial for maintaining trust
and integrity within audit firms. By creating an ethical culture, providing ethical training and
education, ensuring compliance with government regulations, and implementing
whistleblowing protection, firms like Jayasinghe & Co. can uphold ethical behaviour and
mitigate ethical issues effectively. These methods not only contribute to ethical conduct within
the firm but also enhance the reputation and credibility of the organization in the wider business
community.

6. Conclusion
In general terms, we could say that automated accounting processes improve the quality
of accounting, and there may be no more errors or issues arising in accounting. But the reality
is not that. Some frauds and misstatements occur in accounting due to the unethical behaviour
of practitioners. Also, there is no specific hardware or software to navigate the ethical issues in
accounting because those rely on humans. Therefore, ethical issues in accounting are
considered a contemporary concern in accounting.
Several types of ethical issues arisen in accounting, and fraudulent financial reporting,
misappropriation of assets, conflict of interest and independence, and familiarity are a few of
them. According to the company’s judgment, independence becomes the most prominent
ethical issue in accounting because it comes from the judgment of the practitioners. If an auditor
loses his independence, the expected outcome of that profession may be questionable.
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Also, the document has revealed the factors contributing to ethical issues in accounting.
So, in their interviewed organization, the age and professional qualifications of employees, the
pressure of meeting deadlines, and the varying legal environment are considered the main
factors causing ethical issues in accounting.
The main objective of accounting is to give the right information to users who seek to
make accurate and effective decisions based on that information. Therefore, while we practice
accounting, we are accountable for being ethical. If the practitioners not been ethical, the
objective of accounting may not be delivered. Also, they may have to face legal consequences,
build up trustworthiness, financial losses, and reputational harm for the organization.
The document highlighted that ICASL plays a vital role in managing ethical issues in
the accounting field and provided the Code of Ethics to mitigate those issues. Also, the
organizations responsibility of formulating and communicating ethical guidelines to employees
and conducting training sessions is adhered to. Further, it mentions that the effort put into
compliance with government rules and regulations also helps mitigate ethical accounting
issues.
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7. Annextures
7.1 Confirmation letter get from company